Freshworks posts 37% rise in Q3 revenue at $128.8 million, reduces growth forecast

Mathrubootham, who hails from a middle-class background in Trichy, has often said he was always an average student, but had an unquenchable thirst to learn and teach, qualities that honed his skills as a master story teller.

Nasdaq-listed SaaS major Freshworks reported a consolidated revenue of $128.8 million - up around 37 percent year-on-year - for the third quarter ended September 2022 on the back of improved operating efficiency and customer additions.

“Overall macro pressures led to slower expansion activity in Q3, however, our customer mix from SMBs to enterprise-level continued to be durable even in this tougher macro environment,” the company’s chief financial officer Tyler Sloat said during the earnings call.

The firm’s operational loss was recorded at $58.3 million during the quarter under review, which has come down from $67.4 million recorded in the previous quarter on the back of undertaking cost efficiency measures during the third quarter.

Freshworks’ net loss was recorded at $57.8 million which has come down from the loss of $107.4 million in the same quarter last year. Freshworks' revenue on a quarter-on-quarter basis was around 5 percent, indicating the impact of the recession in the US market.

Global macroeconomic pressure 

During the company’s earnings call,  Girish Mathrubootham, CEO and founder of Freshworks said that the company is staying cautious of the slow growth in the economy.

“While we have reported a strong quarter, we are not immune to this slower economy. While new businesses picked up, expansion slowed down even as we reduced our growth forecasts and headcount needs,” he said.

Mathrubootham added that despite the slow economic growth, the firm witnessed steady growth in markets like North America, in the mid-market in the enterprise segment. “However, In Q3, we continued to deliver on our promise of modern, powerful, easy-to-use software for everyone with new updates to our product suite.”

The company follows January 1-December 31 as its financial year.

The firm’s operating cash flow was a negative $4.2 million, compared to net cash used in operating activities of $2.0 million in the third quarter of 2021. In the previous quarter, the company’s operative cash flow came in negative at $6.8 million.

Freshworks’ Free cash flow was a negative $7.2 million, compared to $4.2 million in the third quarter of 2021. Its cash, cash equivalents, and marketable securities were recorded at $1.2 billion as of September 30, 2022.

Customer mix and retention rate 

In the earnings call, Mathrubootham said that the company's churn rate remained the same from the previous quarter, and its Small and Medium Business (SMB) churn rate stabilised in the quarter.

“We are seeing that the mid-market and enterprise businesses are focussed on value and managing their software costs towards the end of the year. Our models and affordable solutions are well-poised for this segment of customers,” he said.

Freshworks’ number of customers contributing more than $5,000 in annual recurring revenue (ARR) was 16,713, an increase of 19% year-over-year and 23 percent adjusting for constant currency.

The firm defines the number of customers contributing more than $5,000 in ARR as the number of business entities or individuals, represented by a unique domain or a unique email address, with one or more paid subscriptions to one or more of our products.

The SaaS firm’s Net dollar retention rate was 107 percent in the third quarter of 2022 and 113 percent adjusting for constant currency, compared to 111 percent in the second quarter of 2022 and 117 percent in the third quarter of 2021.

“We have welcomed new customers to the Freshworks community including, Altasciences, Clark College, Dwyer Instruments LLC, Dynata, HelloFresh, Media.Monks, Plume, Viessmann, and more to our portfolio,” the firm said in a prepared statement on Wednesday.

Product enhancements 

During the company’s earnings call, Mathrubootham said that the firm’s total customer base grew to 61,000 even as it added new features and product enhancements across all its businesses. “Specifically in customer experience product (CX) we continued to make enhancements to the product to help support companies enhance their customer conversation through FreshChat. We also added new auto-response features,” he said.

The company has also added AI-powered features to its products to increase its customer base and offer a better experience to its existing customers.

Outlook for the fourth quarter of 2022

Freshworks forecasts to record a fourth-quarter revenue in the range of $129 - $131 million with full-year earning expectations at $494 million - $496 million. Previously, the company earlier charted a growth rate of $493.0 - $497.0 for the whole year.

The firm also expects to record an operating loss of $8.5 million - $10.5 million for the fourth quarter.

The revenue growth rates are only adjusted for constant currency to provide better visibility into the underlying business trends, the statement said. “With the dollar strengthening, we saw a negative impact of approximately $1.5 million for our full-year 2022 revenue forecasts compared to our previously provided estimates,” Sloat said.

On expansion, the macro environment is impacting our expansion activity, especially for smaller customers. “Higher costs and downsizing of workforces in our customers lead to adjusting our headcount needs going forward,” he added.