Freshworks stock’s wild week & a $500-mn sale bonanza

Freshworks’ stock had quite a week. The share price hit a new high on New York-based Nasdaq, helping the software startup surpass the market capitalisation of long-time rival Zendesk, before falling to its lowest point.

Shares of Freshworks were down by nearly 25% during the week, ending at $38.29 after recovering from a low of $36.05 on Friday (November 5), close to the IPO price of $36. The 52-week high of $53.36 had preceded the slump.

The trends were linked to two developments: the announcement of a new pool of shares that will be available for trading and the company’s third-quarter results.

The big cashout

• On Thursday, Freshworks shared a list of senior executives and staff who are selling 13.5 million company shares. The top name is founder and CEO Girish Mathrubootham, who is cutting his stake from 6% to 5.1%. Over 3,300 employees and consultants are also selling their shares.
• At $500 million overall, this will be one of the largest single ESOP cashouts by a new-economy company in India. The only other bigger deal was when Walmart initiated a $800-million buyback programme from Flipkart in 2018, after agreeing to acquire 77% stake for $16 billion.
• After Freshworks’ stellar listing in September this year, investors such as Tiger Global, Accel and Sequoia have not sold shares despite sitting on huge gains. Freshworks’ entire offering was a primary share sale of $1.1 billion.
• No. of shares linked to post-listing performance: The dip in Freshworks’ share price comes as about 20% (58 million shares) of the stock is now unlocked for sale. The stock has consistently traded at 10% more than the IPO price. Had it traded up by 25% or 50%, 30-40% of shares would have been unlocked for sale.

The Q3 Cue

The company announced its results on Friday: net loss stood at $107.4 million on revenue of $96.61 million, which showed a growth of 46%. For the first nine months of the fiscal, revenue increased by 50% to $265.5 million and losses more than doubled to $117.3 million.

Interestingly, the business from customers billing more than $50,000 a year grew much faster, at 73%, compared to that from the grouping of clients contributing over $5,000, which was up by 31% compared to the same period last year. The bigger customers now account for 39% of Freshworks’ recurring revenues.

A large part of the losses in the third quarter was driven by a one-time expense — $138 million for stock-based compensation (SBC) related to its IPO.