Freshworks Q2 earnings beat expectations: 5 takeaways on what's next

Expect more AI features, larger customer wins, but also an entrenched macro slowdown through the rest of the year

By Harichandan Arakali Forbes India Staff

Published: Aug 2, 2023 05:56:14 PM IST

Updated: Aug 3, 2023 09:52:37 AM IST

Girish Mathrubootham, Founder and CEO, Freshworks

Freshworks beat street expectations on Tuesday for its fiscal second-quarter earnings, prompting some analysts to say the “fundamentals are stabilising”, and continued to narrow its losses on a non-GAAP basis, which excludes certain expenses.

The company reported more large-customer wins, additional features on its Freddy Copilot AI assistant, and a plan to soon monetise some of it. Founder and CEO Girish Mathrubootham called his AI push a “rolling thunder” approach in getting more customers to adopt the new tech in the coming quarters and “not a big bang” one-off jump.

Here are five takeaways from the company’s latest earnings results and plans.

1. The numbers—better than expected

“Our revenue exceeded the high end of our financial outlook range, coming in at $145.1 million for the quarter,” Mathrubootham told analysts in a conference on August 1. That represented a 20 percent growth from a year ago. Not quite the high of a year ago, when it grew twice as fast, on a slightly smaller base, but strong growth in a tough environment.

The company made a number of operational changes at the beginning of the year to go after larger customers and target a more profitable segment of the market, and “we are starting to see the benefits in our results”, he added.

Earnings and earnings per share exceeded expectations too, on a non-GAAP basis, according to reports including Seeking Alpha and Investing.com, which track Street expectations.

The company has also expanded the number of customers who account for $50,000 or more in annual recurring revenue.

2. Stubborn NDRR still trending lower

Net dollar retention rate, however, stubbornly stayed at about the same as the previous quarter, at 107 percent in constant currency, which eliminates the impact of currency rate fluctuations, versus 115 percent a year earlier.

This metric gives us a sense how the company is doing, after considering factors including customer churn, and changes in billing to existing customers.

CFO Tyler Sloat told analysts he expects this rate to be lower for the rest of the year, in the range of 105-106 percent, based on factors including greater pressure from customer churn.

3. Freddy Copilot: A monetisation plan

During the quarter, Freshworks unveiled its AI assistant, with generative AI features and functions. Its flavours include Freddy Self Service, Freddy Copilot and Freddy Insights to make artificial intelligence more accessible to every workplace, building on the Freshchat and Freshmarketer beta programs from earlier in the year, the company said in a press release.

In addition, “we plan to introduce at a later date a Freddy Copilot add-on that provides access to our AI capabilities starting at a price of $29 per agent per month,” Mathrubootham told analysts on Tuesday. He added later that the exact contours of this monetisation plan are yet to be worked out.

Also read: Why the slowdown is good for India's SaaS companies

4. More money—non-GAAP profits rise

Freshworks reported income from operations at $11.7 million, on a non-GAAP basis, compared to a loss from operations of $15.8 million in the second quarter of 2022. GAAP stands for generally accepted accounting principles—a set of standards widely followed internationally.

The non-GAAP version excludes certain expenses and adjustments. Freshworks also improved its free cash flow to $18.1 million at the end of the latest Q2, versus a loss of $10.2 million a year earlier. Overall, the company has cash reserves of $1.16 billion.

5. Better outlook

The stronger performance in Q2 is matched by a slightly stronger forecast as well, for the full year 2023. Freshworks raised its full-year revenue estimate to the range of $587 million to $595 million, representing a growth of 18 percent to 20 percent year on year.

That compares to the estimated range of $580 million to $592.5 million in May 2023, which represented a 17 percent to 19 percent growth.

“We're starting to realise some of the benefits of the strategic go-to market decisions we made earlier this year,” Freshworks President Dennis Woodside said in the conference call with analysts. “We are seeing that our actions that set us on a path to win bigger deals, expand within existing accounts, and improve our operating efficiency are working to drive profitable growth for Freshworks.”