Freshworks Q2 numbers show revenues continuing to rise, but an increased rate of churn among SMB customers as the wider macro-economic environment takes its toll.
Revenues came in at $121.4 million, up 37% year-over-year, but losses increased from $7.429 million for the comparable quarter last year to $69.753 million this year.
Other stats of note from the post-results earnings call:
- 1,800 customers added during the quarter, taking the total to 59,900.
- New customers include Angi Home Services, Cloudera, Sterling Bank, and Thomas Cook.
- Customers contributing more than $5,000 in ARR rose to 16,212, up 22% year-on-year.
- Customers contributing more than $50,000 in ARR rose to 1,648, up 42% year-on-year.
- Some 23% of customers use more than one Freshworks product.
CEO Girish Mathrubootham said it had been a “a solid quarter despite the changing macro environment”, citing rising inflation and the Ukraine conflict as factors. The firm is also noticing increased levels of churn in certain areas of the customer base:
Our SMB customers are feeling the macro pressures, and we are seeing this translate to higher churn, especially at the lower end of SMB in companies with fewer than 50 employees.
But that’s being balanced out elsewhere, he said:
In contrast, our larger customers in mid-market enterprise are showing more resilience and they continue to grow their investment with us. As our business has moved more upmarket, our largest customers today represent the majority of our business at approximately 57% of our ARR (Annual Recurring Revenue). As a result, our overall churn rates for the company were roughly the same quarter-over-quarter as the higher SMB churn was offset by improvement in mid-market and enterprise statements. Additionally, we are seeing steady increases in the average revenue per account, reflecting our ongoing customer expansion and larger deal sizes.
The macro-environment does impact on all businesses, Mathrubootham admitted:
Conversations continue with customers where people are talking about being more conservative in their spending, etc…But I think we are seeing that our Freshservice business is actually more resilient. And the enterprise and mid-market larger customers are becoming more are resilient and we are seeing this across product lines as well.
That said, Europe has felt a heavier impact from those macro-pressures, although Mathrubootham said the region has performed better:
Specifically on Europe, we invested last quarter in ongoing training and sales enablement of our reps. All of that is on track and we saw that translate into a better execution, resulting in higher conversion rates in the field in Q2 when compared to Q1. We are continuing to ramp and improve productivity in the field….We are closely monitoring the region and the macro. Because we are multi-product, we have the ability to kind of adjust the levers that we have with our control and control the spend accordingly.
Freshworks has a competitive differentiator that comes into play particularly in recessionary environments, he argued:
One of the key value propositions of Freshworks is that we are not just easy to use and easy to set up, but we are also more affordable compared to expensive enterprise vendors. And anecdotally, we have seen that businesses come to us when they want to save costs.
Having said that, as we look at the recessionary environment and as we look at the different parts of our business, we are clearly seeing areas where we could channel our investments better. We are clearly looking at ITSM as one area where we could invest more. Conversational engagement is another. So, we are prioritizing our go-to-market investments for the short-term. Longer term, our priorities haven't changed because we believe that there is enough growth left in each of our three large markets.
He concluded that overall it is a case of ‘business as usual’:
Nothing much has changed. It is similar to prior quarters. If you look at the value proposition of why people choose us or the competition, it continues to be the same - rapid time to value, easy to use, easy to onboard and more affordable pricing. We actually have some recent wins that are encouraging, especially in the CX space. Also, we have seen the larger enterprise vendors actually reporting like longer sales cycles and so on. We are not seeing anything like that.
Keep calm and carry on.