Freshworks Inc. Q2 FY2023 earnings

Freshworks reported second quarter revenue of $145.1 million, up 19.5% from $121.4 million in the prior-year quarter. Growth was 20% after adjusting for constant currency. Subscription services produced the bulk of the total, with professional services a small remainder. Year-to-date revenue reached $282.8 million, up 19.8% from $236.1 million. Management credited the increase to a mix of expansion within existing accounts and new customer additions, with the larger share coming from customers acquired over the trailing twelve months.

Gross profit rose 23.4% to $120.2 million, and gross margin climbed to 82.9% from 80.2%. The operating loss narrowed to $43.3 million from $67.4 million, a 35.7% improvement, and operating margin improved to -29.8% from -55.5%. Net loss narrowed 48.9% to $35.7 million. Diluted loss per share was $0.12, compared with $0.24 a year earlier. For the first six months of 2023, the operating loss narrowed 20.2% to $91.4 million and the net loss narrowed 34.1% to $78.3 million.

Cash generation turned positive. Operating cash flow was $19.9 million in the quarter, up from an outflow of $6.8 million a year earlier, and $31.4 million for the six months. Capital expenditures fell 83.4% to $0.3 million. Free cash flow, a non-GAAP measure, was $18.1 million versus negative $10.2 million. Non-GAAP income from operations was $11.7 million, compared with a non-GAAP loss of $15.8 million a year ago, and non-GAAP net income per share was $0.07. Non-GAAP gross margin was 84.1%, up from 82.1%.

Customer metrics softened at the margin. The number of customers contributing more than $5,000 in annual recurring revenue reached 19,105, up 18% year over year. Net dollar retention rate slipped to 108% from 111% a year earlier, and management tied the decline to lower expansion within existing customers under macroeconomic pressure. That metric stood at 107% in the first quarter of 2023. Monthly subscriptions accounted for 19% of ARR, down from 22%. ARR from customers contributing more than $5,000 represented 88% of total ARR, up from 86%. Deferred revenue rose 28.2% to $234.4 million, and remaining performance obligations rose 31.5% to $350.8 million. On the product side, the company unveiled Freddy Self Service, Freddy Copilot and Freddy Insights, and added Frank Pelzer, chief financial officer of F5, to its board.

Guidance points to slower growth. For the third quarter of 2023, Freshworks expects revenue growth of 16% to 18%, or 15% to 16% adjusting for constant currency, and non-GAAP income from operations of $6.0 million to $9.0 million. For the full year 2023, the company guides to revenue growth of 18% to 19%, or 18% to 20% on a constant currency basis, and non-GAAP income from operations of $24.0 million to $32.0 million, a midpoint of $28 million. Non-GAAP net income per share is guided to $0.04 to $0.06 for the third quarter and $0.18 to $0.22 for the full year. Those per-share estimates assume 300.2 million weighted-average shares for the third quarter and 299.8 million for the full year.

Risks remain. Roughly 27% of second quarter revenue carried exposure to the Euro and British Pound, and management flagged inflation, geopolitical developments and continued foreign currency volatility as factors that could weigh on demand. The company has a history of net losses, and the falling net dollar retention rate signals softer expansion. Monthly contracts have generally renewed at lower rates than the overall customer base. Because revenue is recognized ratably over subscription terms, management warned that macroeconomic effects may not show up in reported results until future periods.