Freshworks reports Q2 results today: 5 things to watch out for

Girish Mathrubootham, Founder and CEO, Freshworks
 
Freshworks reports its fiscal second-quarter results later today, for the three months ended June 30. The Nasdaq-listed company’s results and the accompanying commentary from Founder and CEO Girish Mathrubootham and his top executives will also, to some extent, show how India’s software-as-a-service (SaaS) sector as a whole is faring in the current global macroeconomic slowdown.

In recent times, Freshworks has been making a concerted effort to go more global, and win larger customers, while catering to the ‘Fortune 5 million’, while on the products front it is adding more generative AI features. Here are 5 things to look for from the latest earnings results.

1. The road to profits

Last quarter, that is, the three months ended March 31, Freshworks reported it was profitable for the first time since listing in September 2021, if certain expenses were not considered. These included expenses related to employee stock option plans, and some taxes and amortisations.

Freshworks generated its first quarter of non-GAAP operating profit as a public company at $3.9 million, it reported on May 2. The June quarter numbers will show if Freshworks has been able to build on that, narrow losses, and take another step towards being profitable without any conditions attached.

2. Net dollar retention rate

Net dollar retention (NDR) or retention rate (NDRR), expressed in percentage, is an important metric tracked by SaaS companies and the sector. Anything lower than 100 percent means the company lost business after taking into account factors including new customers, customer churn, and changes in spending on subscriptions by existing customers.

The overall macro slowdown has also hurt Freshworks’s business: It’s NDR at the end of the three months through March 31, 2023, was significantly lower at 107 percent compared to 115 percent a year earlier, according to the company’s filings with the US capital markets regulator, the Securities and Exchange Commission.

Look for how NDRR changed during Q2.

3. Large customer wins

Across India’s SaaS sector, companies are looking to go after enterprise customers, because the larger, more deep-pocketed clients can still pay for software subscriptions, as against small and medium businesses, especially in a downturn.

Even as Mathrubootham often refers to his motto of serving the ‘Fortune 5 million’, Freshworks is also, in parallel, aggressively going after larger customers. For example, companies such as Viessman in Europe and S&P Global, a major financial services company, are Freshworks customers. In India, the Mahindra Group is a customer. Look for more announcements on more such customer wins.

Also read: Tech Mahindra ends lower after tough misses. Five takeaways from Q1

4. Forecast and general outlook

The company’s first-quarter revenue grew 20 percent year-over-year, and 23 percent adjusting for constant currency, the company said in May. It raised full-year 2023 financial outlook midpoint for non-GAAP operating profit to $5 million.

Freshworks also forecast revenue for the June quarter in the range of $140 million to $142.5 million (16 to 18 percent growth from a year earlier in constant currency) and revenue for the full year 2023 in the range of $580 million to $592.5 million (17 to 19 percent growth in constant currency).

This time Freshworks’s forecast and Mathrubootham’s general commentary on the outlook for the company and the sector will be keenly analysed.

5. Will the stock pop?

Leading up to the earnings, a few more brokerages have added Freshworks stock to their coverage universe, as they call it. At Swiss bank UBS, analysts have started with a ‘Buy’ rating, and they are anticipating the stock price to rise to $21 as their first price target. The stock is currently at nearly $19 dollars.

This compares to more than $50 towards the end of October 2021, a month after the company’s listing, and well before a tech selloff took hold the following year as concerns about rising interest rates and slowing economic growth in the US hit gripped investors.

Ahead of Freshworks’s Q2 FY23 results, “SMB demand is stabilising”, wrote analysts in a report on July 19. Based on their checks and surveys, they’ve concluded that there is improving appetite for software in areas including customer experience and sales transformation.

“Names like FRSH might rebound faster in an improving macro,” the analysts write. (FRSH is Freshworks’s stock symbol on the Nasdaq exchange.) The analysts add that Freshworks is at a “discount to peers despite similar growth and could be an underappreciated play on front-office recovery”.