A growth glitch for Freshworks amid stalling economy, class action suit

In September 2021, Freshworks became the third Chennai-based tech company to get listed on Nasdaq after Cognizant and Sify. It also became the first Indian software as a service (SaaS) company to do so. What initially caught everyone’s attention was the code name of the initial public offering, Project SuperStar.

This was named after idol Rajinikanth, whom the founder Girish Mathrub­ootham called maanaseega guru, which roughly translates to mean mentor or role model that lives in your mind, in his IPO filing. “Superstar is a man who is loved and worshipped by millions of fans globally. He is immensely successful yet humble and down to earth. Thank you, Thalaivaa!” he wrote. The story after the IPO, however, was not as exciting as a Rajinikanth movie.

The Nasdaq listing offered 28.5 million shares at $36 a share. On listing day, Freshwork’s stock closed at $47.55. Since then the stock price has fallen by as much as 70 per cent to $14.32. On the operational front too, the company was facing a crisis — December last year, it had to lay off around 90 people, 2 per cent of its total workforce “to fuel business growth”. Out of this, 60 of the affected employees were based in India. The company explained that it had downsized some roles in product, marketing and sales.

According to industry experts, though the company had reported a strong quarter in Q3, it was not immune to this slower economy. While new businesses reportedly picked up, expansion slowed down.

The company’s woes did not end there. Now multiple legal firms in the US are in the race to become the lead plaintiff in a class-action suit against the company alleging that it made misleading statements to the market. The law firms include Schall Law Firm, Scott + Scott Attorneys at Law, Levi & Korsinsky and Kirby McInerney LLP. The legal firms are battling to recover losses on behalf of Freshworks’ investors who were affected by the company’s poor stock market performance. Kirby McInerney said in a statement that a class-action lawsuit has been filed in the US District Court for the Northern District of California on behalf of those who had acquired Freshworks stocks. The deadline for the appointment of lead plaintiff is January 23.

“It is anticipated that multiple law firms seek to be lead counsel for class action suits. Freshworks will vigorously defend itself against these firms, or any others, and seek dismissal of the suit at the earliest opportunity,” Freshworks said in response to questions from Business Standard.

Does Freshworks, an eight-year-old start-up that initially started out as Freshdesk before being rebranded to its current name in 2017, have a case? Industry experts think so, not least because the Indian SaaS sector, which basically offers “on-demand software”, is expected to stay on the growth track.

Freshworks’ problem is that it is subject to a reporting discipline that may not necessarily reflect the long-term potential embedded in its core business proposition. “Being a listed organisation, the metrics that matter most is ability to deliver margins quarter on quarter. It doesn’t actually mean that your business is going down. It may be that you may not have added as many consumers as you have projected,” said Abhinav Johri, partner, cloud and digital transformation, EY India.

According to Johri, the Indian SaaS sector will continue to grow mainly on the back of rising demand from untapped small and medium businesses (SMBs) that, post-Covid, are starting to understand the need to go digital to survive. Globally, too, India is one of the most sought after markets. “India is the third largest SaaS ecosystem after the US and China. From a value proposition perspective of a SaaS product, we are the third choice. The growing need of domestic SMBs is an added advantage,” he added. According to reports, India is expected to leapfrog China and become the second-largest SaaS player by 2026. A Motilal Oswal report predicts that India may increase its share of global SaaS to 4-5 per cent (from 1 per cent at present), translating into a massive $50-70 billion revenue opportunity by 2030.

Experts are also indicating the drop in share prices is not an isolated case for Freshworks; the entire sector is affected by the downward trend. “Stock prices of almost all companies, such as Salesforce (dipped by 41 per cent in the last one year), Toast (39 per cent), Atlassian Corporation (62 per cent) and Hubspot (47 per cent) fell in the past one year (all are Nasdaq listings). By that reckoning, Freshworks, whose stock dropped 35 per cent in value over the year, is hardly an outlier.

“The difficulties are on account of the global economic situation and not for any lack of revenue growth in the company,” said another industry source on condition of anonymity. This is proven by the numbers too. In the first quarter of 2022 — the company follows a calendar year — revenue increased by 42 per cent, followed by 37 per cent in Q2 and 33 per cent in Q3. During Q3, the number of customers contributing more than $5,000 in annual recurring revenue (ARR) was 16,713, an increase of 19 per cent compared to last year.

Indicating a larger industry issue, Freshworks’ job cuts are coming in a year in which global tech majors such as Meta (Facebook’s parent), Twitter, and Amazon also opted for layoffs. In the Indian SaaS ecosystem, companies like Clear (formerly Cleartax) reportedly laid off 190-200 employees, Chargebee around 142 employees and FarEye around 250 people. Despite this, experts like Johri are hopeful about Indian players like Freshworks due to the rise in demand from SMBs and global customers, driven by “SaaSification”.

It is this belief in growth that Mathrubootham expressed in Rajinikanth style in one of his interviews, “Singa nadai potu sigarathil yeru. Sigarathai Adainthal vaanathil eru:”(Walk like a lion to scale the peak. Once you reach the peak, aim for the sky). Despite bumps on the route, insiders believe that the company is still aiming for the sky.