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Freshworks turns in strong Q3 as new President Dennis Woodside outlines the growth plan

Stuart Lauchlan Profile picture for user slauchlan November 2, 2022
Summary:
Freshworks will be scaling up its customer prospect focus, but not chasing multi-million enterprise deals.

Freshworks execs
Mathrubootham and Woodside

A solid Q3 for Freshworks as revenue came in at $128.76 million, up 33% from $96.61 million for the comparable year-ago quarter, while the net loss was down 46% year-on-year from $107.4 million to $57.8 million.

That said, the wider economic slowdown has had an impact on growth rates, causing CEO Girish Mathrubootham to comment:

Like others in the tech sector, we are not immune to the slower economy. While our new business activity picked up, expansion slowed down as companies reduce their growth forecast and headcount needs. On a positive note, we saw good new business growth in North America, in the mid-market and enterprise. Our overall gross churn rate remains roughly the same, and we even saw SMB churn stabilize in the quarter.

Anecdotally, we are hearing that mid-market and enterprise businesses are focused on value and managing their software costs toward the end of the year. Our model affordable solutions are well poised for this segment of customers. 

Other stats of note from the post-earnings announcement conference call:

  • There are now 16,713 customers that contribute over $5,000 in annual recurring revenue (ARR), up 19% year-on-year and making up 86% of total ARR.
  • 1,7000 new customers added during the quarter, to bring the total to over 61,000.

Mathrubootham highlighted a number of customer use cases of various Freshworks offerings:

There are already thousands of companies who use Freshservice within HR, finance and legal teams to support their internal stakeholders. Databricks, for example. After using Freshservice to support the IT needs of 4,500 employees, Databricks expanded its deployment to HR, legal, security and learning and development departments to provide its employees with the same great experience when interacting with any team internally.

A large American HVAC manufacturer of more than 200,000 products chose Freshsales with Freshdesk to unify its new business and upsell processes. The new predictive lead scoring identifies buyers that are most likely to reorder and alert sellers, ensuring that they can stay on top of customer requests and orders. The unified Freshworks dashboard create alignment across sales, marketing and support teams ultimately helping the company deliver more value to their customers.

Viessmann, a German provider of climate solution with €3.4 billion in revenue…has 13,000 employees spread across 74 countries and their people organization and IT team use Freshservice to unify their internal teams with a single service management solution for a fast, easy and seamless employee experience.

The future

The company has most recently brought in Dennis Woodside, a SaaS sector veteran, to drive growth and assist in the scaling up of customer profiles. Now two months in situ, he said:

First, our customers love our products. I traveled around the world and met with customers like Viessmann and Internet stores in Germany, Sodexo in France and Frasers Group in the UK.  It's clear that Freshworks customers see an immediate value from our software and we continue to innovate fast to keep our customers happy. Second, we are set up to continue innovating at scale. You heard G talk about the differentiating features and new products we introduced in just one quarter. That's because we have a team of product and engineering veterans from the world's leading tech companies.

And finally, there is a huge opportunity to serve larger customers and to win more big deals. As G mentioned, I've been focused initially on our go-to-market operations. Over the last few years, Freshworks products have evolved to meet the needs of larger companies and I see this as a big opportunity for our growth. We have a great team and we're already making changes to our sales organization to meet that demand. I believe that, with a few adjustments, we can make our field sales even more efficient and effective.

He added that the firm has recruited a new (interim) Chief Revenue Officer (CRO) in the shape of Paddy Rathinam, replacing current CRO Jose Morales:

One of the big reasons I joined is that I see this huge opportunity with where we are, in having very clear product market fit across multiple very big TAMs [Total Addressable Market]…It’s very clear to me that we have an opportunity to, number one, participate in bigger deals.

This fact that the fastest-growing segment that we're going after are $50,000-plus deals. That's really important for us. Those deals tend to be in larger companies and those deals also tend to have the opportunity for multi-product sales from day one or through expansion.

So that will entail, as we press more in that direction. adjustments to the team, to the talent, to the way we go to market. I don't anticipate massive changes anytime in the near future. We're not going after $10 million deals. We're going after sweet spot $50,000, $100,000, $200,000 deals. So I don't think that we're going to have like a period of massive instability…It’s really more a refinement, and a focusing of the team on the deals that are going to move needle.

He concluded:

I think what's been really encouraging is how much progress has already been made in these larger and larger accounts…There’s a lot more opportunity in the US. I think we absolutely have to win in the US, for sure, but Europe also offers a pretty meaningful opportunity over time. And our home market of India is actually pretty interesting for us as a place where we can experiment and try things very close to the product team. So, I think all those things are positive.

My take

From the outside, I thought of Freshworks as more of a true SMB play.

That remark from Woodside is an interesting one in terms of what we might expect to see from Freshworks growth focus in the coming quarters as he stamps his experience of the US software sector on the company. We’d already seen the expansion of executive enterprise experience in other appointments, but Woodside is clearly going to have a major strategic impact on what comes next. It is equally significant that both Woodside and Mathrubootham emphasized that there are no plans to go after the $5 million plus type of deal and will ‘stick to the knitting’ when it comes to customer prospects. That’s setting expectations very clearly for Wall Street.

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