NASDAQ-listed software-as-a-service (SaaS) firm Freshworks Inc reported a 44 percent increase in revenue to $105.5 million in the three months ended December, the first time it exceeded the $100 million mark in a quarter.
Freshworks made a dream debut on the Nasdaq late last year, but the stock has since fallen 60 percent amid a wider selloff in tech stocks in the US. Chief executive officer CEO Girish Mathrubootham is not perturbed for now. "The stock market is something we cannot control. I have always focussed on things that you can control," he said.
He spoke to Moneycontrol after Freshworks reported earnings for the fourth quarter, in which it reported a $56.4 million loss based on Generally Accepted Accounting Principles (GAAP), set back by stock-based compensation, among other things.
Founded by Mathrubootham and Shan Krishnasamy in 2010 in Chennai, Freshworks became the first Indian SaaS firm to list on US stock exchanges in September. The company competes with the likes of salesforce.com Inc and Zendesk Inc.
In the interview with Moneycontrol, Mathrubootham spoke about the company’s growth and path to profitability, what it means to be a listed company, and the war for talent. Edited Excerpts:
You have crossed the $100 million quarterly revenue milestone, but you posted a $56.4 million GAAP loss. Could you take us through the company's performance in this quarter?
We had a pretty solid quarter and a very good finish to the year. So if you look at revenue for the year, we grew 49 percent compared to 2020. If you look at Q4, it was 44 percent growth and revenue was $105.5 million. It was the first-ever quarter as a company where we crossed the $100 million mark. Now on the loss, you are talking about a GAAP loss versus non-GAAP. Because of the stock-based compensation and other stuff, it's more of an accounting term. But when you look at the operational metrics, we were actually free cash flow-positive, and I think we generated free cash flow. I think it's $2.8 million for the quarter and then the overall year was $2.3 million free cash flow positive. Non-GAAP is what most investors look at. Because that's what says the true picture of how we are running the business. So that is the clarification on that question.
What is your path to consistent profitability?
If you look at the guidance that we spoke about today, we expect this year to be burning around $25 million. Primarily, the major factors are the cost of being a public company, with travel and offices opening up. But the way we are guiding towards the end of this year in Q4, we expect to be cash-flow positive, and then expect to be positive going forward. We were cash flow positive in Q4, and for the whole year of 2021. So it's more like we see an opportunity to invest in growth. And we are taking a conscious call to invest in growth in 2022. And even after that, and factoring in all the costs of being a public company, we expect to become cash flow positive at the end of the year.
Demand from the enterprise side is definitely picking up. From Freshworks's point of view, can you take us through where you see demand coming from and what your pipeline is like?
If you zoom out, we see massive opportunity in three of our core markets in which we play. If you take the Customer Support Market, we started off as a helpdesk ticketing play. But today, every consumer business is looking to support or engage with customers through digital channels like WhatsApp, text messaging, Instagram and Facebook. We have several large B2C brands like Discover card or Klarna Europe, or a PhonePe or Paytm in India, who are using either our Bots to automate customer service or our conversational agent experience to support customers on those digital channels. We are enhancing that capability with the addition of more channels and enabling businesses to engage more with customers. That is a massive trend that happened during COVID-19.
Now on the ITSM (information technology service management) side, we are truly a credible alternative to ServiceNow, which is focusing on large enterprise customers. So we are solidly focused on the mid-market, and we are expanding beyond the core ITSM market into adding IT operations management and enterprise service management, moving beyond to other departments like HR (human resources), legal, and finance, to offer the same employee engagement experience. So, these two are massive trends that we are investing heavily in this year. We are seeing that continue to drive demand for us.
And of course, last but not the least, our vision of delivering a unified view of the customer will open up disruptive play in the CRM (customer relationship management) market. It's still early days for us. But that is where we are driving towards. It's a top priority. And we feel super bullish on that opportunity.
Can you also talk about the talent equation? Because the war for talent is pretty much still there. And the attrition continues to be high, especially in tech firms.
Yeah, so in the macro environment, I don't think we are immune to that. We all know that the two years of COVID, back-to-back meetings, and great resignation, are all real things. But at Freshworks, we take a lot of pride in the way we have built the company and culture. In the last interview after the IPO, you had asked us, ‘Hey, some of your competitors are getting BMW bikes, what do you think?’ I told what I thought and you can see now where those companies are. So I think good companies who value employees will always have the advantage. And I think the macro environment is tough. I'm not denying that. But I still think Freshworks is a great place for employees to build a career, especially people who have a long-term view and want to work on meaningful stuff. I think we are one of the best places to work in India.
What have been your learnings after the IPO? It was a dream listing for you. But since then, the stock has fallen 60 percent. This is a wider trend that we're seeing as far as tech stocks in the US are concerned. Is it a wider trend or was it a case of managing investor expectations well, not telling your story more effectively?
We had a fantastic IPO, had a great Q3 and Q4, and beat numbers in both quarters. But the stock market is something that we cannot control. My fundamental belief in life has always been focused on things that you can control. And that is the message for our employees. We will continue to execute and keep healthy growth. You can see that Freshworks is a company that is demonstrating durable growth, all of our data is out there in the public domain. If you look at the last six-eight quarters, you can see how quarter after quarter we are showing sustainable growth and that is all that matters. So I am not looking at the price of my house every day when I wake up. Markets will go up, markets will go down, and eventually, over the long term, things will automatically self-correct. So that is how I view this.
Now that you are public, you have to raise a new set of stakeholders, so to speak. How would you see the virtue of being privately held versus the pressures of being a listed company?
I think at the end of the day, private investors and public investors are both investors who are our partners. That is my viewpoint. People who have invested in Freshworks are people who believe in this story and who are part of the journey. They want to be part of the journey. Now the time frame could be different. A venture investor may be willing to take a longer-term idea of things and public investor, probably some of them, may have a shorter viewpoint. I have to deliver growth, whether it's a public or a private investor, and make sure we have the right channel, keep building the right products, and keep going. I think it's a different world. I'm learning a lot and we will keep executing.
I also wanted to understand whether from the business point of view you see any weakness in the coming quarters? In terms of mining larger customers, do you see more up-selling, cross-selling opportunities?
On the demand trend, we see really healthy demand across each one of our markets. In fact, we want to hire more people and grow more. On the multi-product, up-sell, cross-sell motion, we mentioned today in the earnings call that 21 percent of Freshworks customers actually use more than one product. We see that as a big upside because we can continue to sell more products to our existing customers and move that number even higher. We are making steady progress. During the IPO, if you remember, that number was at 18 percent. So we are growing our customers and that is a good thing. And if you look at our larger customers, who pay us more than $5,000 in annual recurring revenue, that number has grown 28 percent year-on-year in Q4. This cohort represents over 40 percent of our revenue. So we still think that it's a very healthy number. And it also represents the fact that Freshworks products are built for companies of all sizes. So we have really small SMBs to really large enterprises using our products. And that's how we want it to be.
Freshworks is a very different company compared to what it was even three years ago. A majority of your top leadership is in the US. So how do you really align culture between your US and India teams?
So my job as CEO is to find the best team possible to win. So last year, you saw that we had a fantastic IPO. And in order to do that, I had to assemble a world-class team, who will do all the work to make that happen. So we have always been a global company and the culture is the same. We don't have a different cultural code for every geography. And I think the beauty of Freshworks, and I've been talking about this internally, is between 2016 and now, what has changed? So we are learning the art of marrying or marrying the art of Indian entrepreneurship and the science of value scale. So the people that we have brought on board, the leadership in the last couple of years, are all people who have been there, done that in terms of scaling companies, and we obviously take a lot of pride in the way we have built our business, the products, the ethos of people and the culture. We learn from each other and it's exciting times for us.
Shares that were locked in during the IPO will now be eligible for sale. Do you anticipate more volatility?All shares are getting unlocked on Monday. I don't know anything about the volatility on the market. I can't comment on the market. But people who know and believe in our journey will obviously want to hold on and people who want to sell, it's up to them, so I don't have a comment.