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Freshworks Q2 revenue jumps 37% YoY, will prioritise go-to-market investments in short term

Freshworks CEO Girish Mathrubootham says they are witnessing higher churn among their SMB customers who are facing macro pressures

August 03, 2022 / 01:09 PM IST

Business software maker Freshworks' revenue grew by 37 percent year-on-year to $121.4 million for the second quarter ended June 30, 2022. On a constant currency basis, it grew by 40 percent year-on-year, the company said on August 2.

Operational losses, however, widened to $67.4 million in the quarter from $6.4 million loss in the year-ago period, primarily due to a rise in stock-based compensation expense.

Excluding stock-based compensation expense, payroll taxes on employee stock transactions and amortization expenses, the operational loss stood at $15.8 million for the quarter, compared to $5.4 million loss in the same quarter last year.

The company follows January 1-December 31 financial year.

During the company's earnings conference call, Freshworks CFO Tyler Sloat said its annual merit cycle takes effect during the second quarter every year, which resulted in higher personnel costs that drove the majority of the increase in their expenses.

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In addition, the company saw an increase in travel activity for sales and marketing purposes along with field marketing initiatives and in-person events that contributed to the higher expenses on a quarterly basis, he said. Rising inflation also resulted in elevated supply costs and travel expenses for the business.

"In a changing macro environment, I’m confident that our products will continue to provide incredible value to our customers around the world and drive our long-term growth," CEO Girish Mathrubootham said in a statement.

During the call, Mathrubootham said the company is prioritising go-to-market investments for the short-term amid a recessionary environment.

"We are clearly seeing areas where we could channelise our investments better... ITSM is one area where we could invest more. Conversational engagement is another" he said.

Mathrubootham, however, added there is "enough growth left in each of our three large markets" on a long-term basis.

Operating cash flow was a negative $6.8 million for the quarter compared to a positive $0.9 million in the same period last year. Free cash flow was negative $10.2 million and the company expects it to be negative $20 million for the full year of 2022.

Freshworks expects its revenue to be in the range of $124.5-126.5 million in the September quarter.

Also read: I don’t look at price of my house every day, markets will self-correct in long term: Freshworks CEO Girish Mathrubootham

Customer mix

Freshworks added nearly 1,800 customers during the quarter, taking its overall customer base to 59,900. New customers include Angi Home Services, Cloudera, Dynatrace, Sterling Bank, Thomas Cook, and World Market.

The number of customers contributing more than $5,000 in annual recurring revenues (ARR) grew by 22 percent year-on-year to 16,212, accounting for about 86 percent of the company's ARR.

The number of customers contributing more than $50,000 in ARR grew by 42 percent to 1,648, representing 43 percent of the company's ARR. On constant currency terms, these cohorts grew by 25 percent and 48 percent respectively.

Twenty-three percent of the company's customers are now using more than one Freshworks product, up from 22 percent in the previous quarter, Mathrubootham said.

A lot of multi-product adoption is coming from its omnichannel solution but they are starting to see it now on the ITSM (IT service management) business as well as they add new modules that people can adopt, CFO Sloat said.

"We don't see macro pressures actually slowing that down. We would actually see probably the opposite if we're entrenched there that we will continue to see more adoption of those products," he said.

Increased churn in SMBs

Mathrubootham said they are witnessing higher churn among their small and medium-sized business (SMB) customers who are facing macro pressures, especially among those with fewer than 50 employees. These customers account for over 40 percent of the company's ARR.

This churn, however, is being offset by an improvement in the mid-market and enterprise statements, he said, adding the company is seeing steady increases in the average revenue per account. Sloat said they are "squarely in the high teens from an overall churn rate as a company".

Also ReadWe wouldn't be where we are today without the IT boom: Girish Mathrubootham

Europe impact

Mathrubootham said they continue to monitor Europe as it continues to feel the pressure of rising inflation and the Russia-Ukraine war, however, the company improved its execution in the region with better conversation rates and closing more larger deals compared to the previous quarter.

Bringing Freshdesk to the unified CRM solution

On April 26, Freshworks launched a unified CRM solution that combines marketing automation, conversational support, sales and customer support.

The solution targets direct-to-consumer brands and online retailers, enabling them to offer a personalised experience for buyers on modern messaging channels including WhatsApp. The solution is built on the Freshworks Neo platform, which enables a unified customer record with an ecosystem of thousands of apps and shared services.

Mathrubootham said the new platform provides Freshworks the flexibility to quickly add messaging channels to the solution. In Q2, the company added integrations for Instagram and Google Business Messages.

"We are working on moving Freshdesk, which is our largest business, onto the platform. It's a very important priority for us" he said.
Vikas SN
first published: Aug 3, 2022 01:09 pm
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