Q2 2022 Freshworks Inc Earnings Call

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Yeah.

And welcome to fresh works second quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

I'd now like to hand, the call over to Vice President of Investor Relations Joon Huh.

Please go ahead.

Thank you good afternoon, and welcome to fresh water second quarter 2022 earnings Conference call. Joining me today are garage matter with them Fresh works, Chief Executive Officer, and other slope <unk> Chief Financial Officer. The primary purpose of todays call is to provide you with information.

Guarding our second quarter, 2022 performance and our financial outlook for our third quarter and the full year 2022.

Some of our discussion and responses to your questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

These forward looking statements are based on <unk> current expectations and estimates about its business and industry management's beliefs and certain assumptions made by the company as of the date hereof, all of which are subject to change. These statements are subject to risks uncertainties and assumptions that could cause actual results to differ materially.

From those projected in the forward looking statements.

For a discussion of material risks and other important factors that could affect our results.

Please refer to today's earnings release.

Most recently filed Form 10-Q, and our other periodic filings with SEC.

<unk> assumes no obligation to update any forward looking statements in order to reflect events or circumstances that may arise. After the date of this presentation, except as required by law.

During the course of today's call, we will refer to certain non-GAAP financial measures reconciliations between GAAP and non-GAAP financial measures are included in our earnings release for our second quarter 2000 to 2022 results, which we issued earlier today and is available on our Investor Relations website at IR Dot <unk> Dot com.

Encourage you to visit our Investor Relations site to access our earnings release periodic SEC reports, a replay of today's call or to learn more about pressure and with that let me turn it over to rich.

Thank you Joan and thank you everyone for joining us this afternoon.

I will start the call with a recap of our results.

And then highlight our latest product updates.

And close with what we are seeing in the current market environment.

Overall, we had a solid second quarter.

We continue to grow efficiently and came in ahead of our expectations on both revenue and non-GAAP operating line.

Q2 revenue grew 40% year over year adjusting for constant currency our.

37% on a reported basis.

Our net dollar retention was 115% on a constant currency basis.

And it has remained steady in the 115% to 116% range for the last five quarters. If you look at it adjusted for constant currency.

In Q2, we added nearly 800 net new customers.

Angie home services, Florida, Sterling Bank and Thomas Cook, just a few of the brands we are proud to work with.

We also saw healthy expansion rates among existing users and multi product adoption continues to climb.

Today, 23% of our customers use more than one <unk> product.

Overall, I am really proud of our team and the progress we made in Q2, continuing our mission to deliver business software that people love to use.

On the product front, let.

Let me start with Chris service that continued demand in the mid market is creating sustainable growth for our business.

Companies like Toshiba diner trees, and WD 40 are using our easy to use <unk> solution to support their global Workforces.

Our partners continue to contribute to our mid market growth.

Largest for service deal this quarter was sourced by a regional channel partner in Africa, and this was closed alongside the rest of <unk> to our technology partner for enterprise asset management that we announced last quarter.

In Q2, we also strengthened our enterprise grade <unk> operations management capabilities.

Enhanced <unk> management and on call management features.

Using these new service capabilities large bank in southeast Asia.

<unk> 4000 employees.

Was able to cut down their <unk> related alerts by approximately 60%.

The bank's <unk> now have used that time to resolve actual incidents.

Than wasting time on thousands of false positive I'll, let Chris.

Chris serviced saves our customers time and money.

We're also seeing customers expand for service usage to other departments for internal employee support.

For example.

<unk> global business travel the publicly listed global travel management company.

Was this first service for both debt and HR departments to deliver exceptional support to over 13000 employees.

We're proud to help companies of all sizes create a great employee experience that first service.

Now, let's shift to the customer side of the business that conversational engagement is a key part of our strategy to help companies reach and retain their customers wherever they are.

In Q2, we brought back our first Chad, Brian previously known as <unk> messaging.

Better communicate our ability to create a seamless conversational experience, combining bot and live agent experience to our customers.

With this chat businesses can use bought to automate transactional first level of support and gratefully handover to human agent for more complex use cases without sacrificing customer experience.

<unk> is a strong first entry point into consumer companies, who often expand to fish desk a fresh market.

After the launch of CRM for E Commerce in Q1 <unk>.

We took our conversational engagement strategy a step further by re Architected, our Standalone flash chat product to work on top of our unified customer record platform, our UCI, along with prestige and fish market.

Today brands.

Brands sell more and more through digital channels and their customers expect.

Since the ball on these third party messaging apps like Whatsapp or Apple business chat for example.

With the addition of <unk> to the ECR.

We can now sell.

So the marketing sales our support organization first and then expanding to the other departments by showcasing the power of unified customer communications.

Our new platform also gives us the flexibility to quickly add on messaging channels in Q2, we added integrations for Instagram and Google business messages.

Leveling conversational messaging across multiple channels is creating new growth opportunities for us and our customers.

A leading digital bank and payments company.

Millions of customers and a longtime fresh looks customer.

Expanded their use of Chris chat in Q2 and increased overall customer satisfaction.

Wins of agents are now armed with live messaging capabilities that go beyond the website.

<unk> customers with a seamless experience across a message and then mobile app.

Conversational messaging capabilities are also important for our <unk> customers in Q2.

We built new desk omni.

Omnichannel integrations with telephony providers like finite to optimize agent productivity and supporting customers across chat E mail, social and weis seamlessly.

Our new integration with workforce management software company in pixel.

Also helps larger companies better manage their contact center team staffing scheduling and workload.

Thomas Cook.

Couple of global travel company as our customer operations team of ADP.

Ansible for managing over 20000 contacts every week.

Workforce management features integrated.

Integrated with Fitbit enable Thomas Cook to forecast team workloads and could you the right number of support agents to provide a great customer experience throughout the year.

Companies of all sizes are realizing the importance of streamlining and automating customer communications across all channels to help customer facing sales marketing and support team understand and serve their customers better.

I am confident.

Our vision of a unified customer record and the progress we have made in Q2 will provide the long term growth opportunities for fresh books going forward.

Overall.

We had a solid quarter, despite the changing macro environment.

Let me talk about what we're seeing in the market.

In Europe .

We are pleased that we improved our execution and achieved higher close rates compared to Q1, we.

We continue to monitor the region as it feels the pressure of rising inflation and an ongoing water.

Among our global customer base, we are seeing varying degree of impact across segments.

<unk> customers are feeling the macro pressures and.

And we are seeing this translate to highest churn, especially at the lower end of SMB and companies with fewer than 50 employees.

In contrast, our largest customers in mid market enterprise are showing more resilience and they continue to grow that investment with us.

That's our business has moved more up market our largest customers today represent the majority of our business at approximately 57% of our add on.

As a result, our overall churn rates for the company roughly the same quarter over quarter as the higher SMB churn was offset by improvement in mid market and enterprise segments.

Additionally, we are seeing steady increases in the average revenue per account, reflecting our ongoing customer expansion and larger deal sizes.

We have a global business with a very diverse customer base across multiple products and industries.

In an environment, where companies are spending more conservatively I am confident that fresh look affordable products will continue to deliver incredible value to our customers around the world and continue our long term growth.

<unk>.

Over to you Tyler.

Thanks, Jay and thanks to all of you for joining on the call and via webcast.

As Jim mentioned, we're pleased with our solid execution in the second quarter.

We maintained our strong expansion motion with 115% net dollar retention adjusting for constant currency, while adding new business and customers across our three broad product categories and customer support.

Sales and marketing and <unk>.

Although the negative revenue impacts from FX increased throughout the quarter, we beat expectations for revenue non-GAAP operating loss and billings growth in Q2, demonstrating the resiliency of our business model and a changing macro environment.

In fact Q2 revenue growth would have been approximately 1% higher if currency rates remain the same from our Q1 earnings call.

With FX volatility increasing over the past several quarters.

Spend more time on the call today talking about constant currency comparisons both year over year and compared to our prior estimates last quarter Joe.

Youll get a better view of our underlying business fundamentals.

As I normally do I'll review, our financial results from the recent quarter provide background on key metrics and close with our expectations for the upcoming quarter Q3, and full year 2022.

I will focus most of my financial results discussion around non-GAAP numbers, which.

Which exclude the impact of stock based compensation and related expenses payroll taxes unemployed stock transactions amortization.

<unk> of acquired intangibles and other adjustments.

So starting with the income statement revenue grew 40% adjusting for constant currency or 37% as reported to $121 4 million in Q2.

We maintained a healthy expansion rates for our products similar to Q1 with additional agents receipts being the largest driver of this expansion.

We're also seeing a steady increase in our multi product adoption up 1% again to 23%.

These customers now represent nearly half of our business.

From a product line perspective fresh service continues to deliver strong growth and was the largest contributor to <unk> growth in the quarter.

We maintained steady non-GAAP gross margins at 82%, which was in line with the prior quarter and continued to be at robust levels as we scale the business.

In Q2, non-GAAP operating expenses increased to $115 4 million.

As we mentioned last time, our annual Merit cycle. It takes effect during the second quarter each year, resulting in higher personnel costs and this drove the majority of the increase in all three expense categories.

Additionally for sales and marketing we had increases in travel activity fueled marketing initiatives and in person events, including our global Jam events, which contributed to the higher expenses quarter over quarter as.

As you would expect rising inflation, resulting in elevated supply cost and travel expenses for the business.

Our revenue combined with effective cost management led to a non-GAAP operating loss of $15 8 million.

And $1 $7 million ahead of our expectations for Q2.

So I'm pleased with our ability to execute toward our financial goals in the in the current market.

Moving to our operating metrics net dollar retention was 111%.

115% on a constant currency basis in the quarter.

The consistency of net dollar retention or MBR adjusting for constant currency over the past five quarters reflects the ongoing expansion activity in the business and also our ability to effectively manage churn over this time.

Now as we look forward into Q3, we expect FX rates and a slowing economy to impact our overall expansion rates, resulting in a reported MBR ticking down to about 110%.

Turning to our customer metrics customers contributing more than $5000 and <unk> grew 22% to 16212 in the quarter and continues to represent 86% of our IRR.

With a meaningful number of customers falling below the threshold of $5000 in the IRR because of FX moves. We're also providing the growth of this metric on a constant currency basis for Q2, which was 22, 5% year over year.

For larger customers contributing more than $50000 in the IRR. This customer count grew 42% to 1648 and now represents 43% of our era.

Adjusting for currency this customer cohort grew at 48%.

Lastly, our total customers grew to over $59 9000, with a net add of nearly 800 customers in Q2.

As our average revenue per account continued to increase in the quarter.

Turning to billings.

Q2 calculated billings outperformed outperformed our expectations as this metric grew 33% year over year, despite a negative 5% impact from FX movements.

Other factors also impacting this growth rate include billing duration mix and reserve activity each at positive 1%.

Adjusting for these factors our normalized calculated billings growth rate was approximately 36% in Q2 up slightly from the prior quarter.

Given that calculated billings growth can fluctuate quarterly due to these factors we are providing a preliminary view for Q3 billings.

We estimate our reported calculated billings to grow approximately 25% in Q3.

Moving to our balance sheet and cash items, we ended the quarter with cash and marketable securities of approximately $1 2 billion.

Similar to the prior quarter.

Free cash flow was negative $10 2 million for Q2 and in line with our expectations.

We continue to net settle vested equity amounts and used approximately $18 million under financing activities for Q2.

As a reminder, this financing activity is excluded from free cash flow.

We expect to continue net settling vested equity amounts for the foreseeable future result.

Resulting in quarterly cash usage of approximately $16 million at current stock price levels.

For free cash flow expectations, we are maintaining our prior estimates.

We expect free cash flow to be negative $20 million for the full year of 2022.

Estimates of negative $10 million for Q3 and slightly positive for Q4.

We feel good about our cash balance and we are well positioned for durable growth.

We expect to use less than 2% of our cash balance this year and reach positive free cash flow by Q4 with no debt.

We have a strong balance sheet and an improving financial model and we'll continue to drive operating efficiencies as we scale the business.

Looking at our share count for the quarter, we had approximately 322 million shares outstanding on a fully diluted basis using the treasury method as of June 32022.

The fully diluted calculation consists of 286 million shares outstanding and approximately $36 million related to Unvested <unk> mpr's use.

Now turning to our forward looking estimates.

Let me go through the numbers initially and I'll provide background commentary afterwards.

For the third quarter of 2022, we expect.

Revenue to be in the range of $124 5 million to $126 5 million growing 29% to 31% year over year.

Adjusting for constant currency this reflects growth of 31% to 33% year over year.

non-GAAP loss from operations to be in the range of $14 5 million to $12 5 million.

And non-GAAP net loss per share to be in the range of seven to five assuming weighted average shares outstanding of approximately $286 7 million.

For the full year 2022, we expect.

Revenue to be in the range of 493 million to $497 million growing 33% to 34% year over year.

Adjusting for constant currency this reflects growth of 35% to 36% year over year.

non-GAAP loss from operations to be in the range of $42 5 million to $38 5 million and.

non-GAAP net loss per share to be in the range of 18 to 16 <unk>.

<unk> weighted average shares outstanding of approximately $284 6 million.

These estimates are based on FX rates as of July 29, 2022.

As you know we're trying to provide our best view of the business as of today and have taken all of the following items into account and arriving at our estimates a.

A few notable items to keep in mind.

First on FX.

We have approximately 25% of revenue exposure related to the euro and British pound.

As the dollar has strengthened versus these currencies. This has resulted in a negative impact of approximately $4 million to our full year 2022 revenue compared to our previously provided estimates.

Second on Europe .

While we improved our execution quarter over quarter with higher close rates and productivity from our Philippines.

This region is feeling a greater impact from the current macroeconomic environment.

Third on SMB smaller customers are feeling the macro pressures. So we're seeing slower growth in this segment, especially on the very low end of F&B.

We are planning for similar trends in the second half of the year.

And fourth on operating loss, we are maintaining our operating loss estimates for the full year, while we may see higher costs in certain areas. We plan to manage the business overall to deliver on our fishing efficiency goals for the year.

Let me close by saying, we delivered a very solid quarter results in Q2, we.

We are delivering real value to our customers with our products in this changing macroeconomic environment.

We remain confident in our long term growth opportunities.

And with that let's take your questions operator.

As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of Brad Sills with Bank of America.

Okay.

Oh, Great Hey, guys. Thanks for taking my question.

Wanted to ask.

The macro impact you talked about in the very small end of the business.

Some churn there potentially and thats factored into slight growth there factored into the guide what about in the upmarket business. It sounds like you had some real good results there that enterprise customer cohort growth at 25% constant currency holding very nicely there.

How much of that would you attribute to the effort to move up market productivity on some of the hires <unk> had.

So just a two part question there one.

How has the productivity ramp of the enterprise going and then two any macro that youre seeing impact in the enterprise and very small end of the market.

Thanks, Brad.

I'll take this question.

So broadly I think.

Macro seems to be impacting all businesses right, but as we called out specifically.

We are continuing to see demand and the mid market and enterprise is continuing to.

Expand and grow with us so.

The in the really low end of the SMB is where we saw an increased chunk.

Conversations continue with customers, where people are talking about being more conservative in their spending et cetera, but.

Overall, I think we've not done anything significantly new too and close more enterprise deals or anything like that we have both motions continue to grow but I think we are.

Seeing that offer service business is actually more resilient.

Enterprises mid market larger customers are becoming more resilient and we are seeing this across products and anticipate.

That's great to hear and you called out the fresh services relative areas of strength and I noticed that you've got more modules there.

Can you kind of project management virtual agents SaaS management.

Are you seeing customers coming in at different entry point now that you've kind of round it out that suite for Ikea salmon fresh service. Thank you.

So we have all those modules, but we don't land with those modules. So the value proposition focused services to have a unified product experience. So the primary land.

Through ideas Tim.

People use SaaS.

SaaS license management project management. There are also planning to add on enterprise service management and <unk>, but we don't have separate land products about each one of those in general the land to the unified product.

Thanks, so much.

Thank you.

Thank you our next question.

Come from the line of Keith Weiss.

Morgan Stanley .

Your line is open for taking my question it was actually Ryan <unk> on for Keith.

Just first quickly is can we just dive into your comments about multi product adoption you call that about 23% I think customers are doing multi product.

How do you view that moving forward is the risk that it budgets come under greater scrutiny that maybe.

When we see the headwinds or will that accelerate as customers try to consolidate spend with fewer vendors. Thank you.

Thanks, Brian .

If I can take that Ryan this is Tyler so.

Our commentary we've just seen.

Steady progression and that multi product number I mean, it ticked up 1% this past quarter from 22% and it's just steadily been growing.

I just think it's a factor mainly.

As customers land they are adopting just like as Jean said additional products right.

Lot of it is coming from our Omnichannel solution still on our fresh desk side, but we're starting to see it now on the <unk> side as well as we add new modules that people can adopt.

We don't see macro pressures actually slowing that down.

We would actually see probably the opposite if we're entrenched there that we will continue to see more adoption of those products. The expansion motions on agents, where we would probably see more pressure if companies aren't adding.

More employees and Thats, where we would see the pressure on the expansion side.

Got it. Thank you maybe just one more quick.

When you speak of the weakness in Europe or is that some thing consolidated or region or has it started to spread into other areas yet.

Yes, I can take the Brian So I think Europe .

We are seeing a little bit more pronounced macro impact than the rest of the regions, especially.

I think North America and.

We have ethylene out because Asia is weak middle East Africa, that's not.

We cannot say this at the same level of impact across all regions. I think also because of the ongoing loss the.

Currency effects.

And we did call out that compared to last quarter, we actually felt that our teams executed better be closed more larger deals yet, but the conversion rate.

But however, we are monitoring the situation because the macro is a little bit more.

Pronounced in Europe compared to other regions and I think we have factored all of that into the guidance.

Got it very helpful. Thank you.

Thank you our next question.

Comes from the line of Patrick Wall fragrance.

JMP Securities. Please go ahead, Patrick cooperate great. Thank you.

Hey, Gee do you guys price your products.

In dollars.

Buying fresh works in France are the prices listed in dollars or in euros.

So.

We for Euro.

British pounds, we have multiple currencies, particularly the bigger currencies that we have exposure to dollar GBP in Europe . So.

We have about 25% of revenue exposure to euro and pound.

Yes, because I am on with you Brian .

So dollar site just confused me.

Yes, I think that the sites will have you land based on where you are logging in from.

Okay. So here's my real question. So my real question is.

Understand.

The impact of the stronger dollar in terms of the difference between constant currency growth.

Reported revenue growth what I'm wondering is is the stronger dollar, resulting in an effective price increase for customers, let's say in EMEA.

And does that affect the price increase reduced the demand for your products.

No not necessarily because.

That would be true if we had a.

Dollar price and we are constantly adjusting the euro and pound based on that dollar price right, but our euro and pound prices have stayed consistent right. So to the customers there the price looks the same.

Except as we translate it back obviously, we're getting less USD for it.

Okay, Great alright, thank you.

Thanks Pat.

Thank you. Our next question comes from the line.

Brian Peterson of Raymond James Brian Peterson. Your question. Please hi, gentlemen, thanks for taking the question. So first one I.

I wanted to follow up on a prior comment on the number of seats or users as we're thinking about the macro this year.

A lot of moving parts in here or is that something that you guys. You guys have seen broadly across your customer base, yet or how can we think about that trend line as we get through 2022.

Spansion motion so Brian Tyler our expansion motion has still been driven primarily by a number of agents and seats that are that are coming up. We also have our cross sell motion that adds to that and then customers moving up. The addition chain that theyre using product now going forward.

When we look at the back half of the year happy.

The adjustment we made to revenue was on FX. The other half, we kind of attribute to macro and we could.

See pressures from expansion definitely anecdotally if companies are not hiring right. We would expect that they would not be adding more agents and so that just kind of makes sense. So we do think there might be some pressure on the expansion side.

Understood. Thanks, and maybe just a follow up I'd be curious obviously the closer it in Europe .

It sounded better but as we think about the linearity through the quarter is there anything that you'd call out on trends in the quarter and maybe what you've seen so far in July thanks, guys.

Yes, no we're not commenting on July specifically, where the quarter beyond what the guidance we gave in obviously.

We're talking about our expectations today. So we're kind of building on what we think is going to happen. This quarter based on what we know as of today.

So Europe in general I think there are a combination of things going there, but theres also historical seasonality in Europe for summer months right.

We're seeing the normal sees there as well.

Thanks, a lot.

Thank you. Our next question comes from pendulum Bora.

Jpmorgan Your line is open go.

Go ahead pension Limbaugh.

Thank you hey, guys congrats on the quarter.

Rich.

<unk> chat and overall on the unified customer architecture. It seems like you have now three products.

And have Architected that way what are you hearing from from customers on that point is there is that a big factor.

That people are kind of cleaning onto and when do we see such desk I guess is that the plan as well to be to get that re architected under the unified customer architecture.

Thanks can you limit yes, absolutely that does the data thing, which you are growing I think our entire vision thought the customer side of the business is built around the fact that we want to help businesses understand everything about their customers. So with the latest move of the Standalone first chat product onto the UCI platform.

Now we have.

Okay.

Marketing sales and conversation with support and box all integrated.

No single customer record and we are working on moving finished goods, which is our largest business onto the platform.

We will.

Quickly a bit on that soon as soon as its ready but.

Making progress on that.

It is.

Many important priority for us.

Understood. Thank you for that and one for Tyler.

The billings guidance for next quarter, I know everybody's favorite subject, but it seems like a big T cell.

From $33 at least in USD 225 help us understand maybe some of the assumptions there. It seems like revenue it seems you're assuming about a one point headwind for next quarter, maybe Dr has has a bigger impact from FX.

But is there what else are you assuming you mean close rates to deteriorate sequentially going into Q3 anything else.

Help us kind of understand that diesel.

Yes, I mean, what we've built in is kind of what we talked about in terms of the macro stuff. So we are seeing on the SMB side right. We said, we're churn has picked up a little bit to that.

That impacts here your billings number there Europe , we're expecting it to.

We're cautious right as we go into Europe , and we're looking at it right now.

Again, the 25% we're talking about is going to be the as reported number.

What we have done every single quarter is kind of done these adjustments we.

We don't like billings as a proxy for how we're doing necessarily because there's so much noise in it. So we have been providing these adjustments. These adjustments typically include.

Some FX stuffs, some reserve activity duration of activity.

So we're kind of.

The number we can speak to now is kind of what we see what would be in the system and then what we would see based on historical trends.

But they haven't been perfect, but that is a preliminary view of what we see today.

Yes.

Understand are you expecting the macro environment to deteriorate from what you saw in Q2 and that billings number.

Well I think what we're saying that the macro environment I think the macro environment from a quarter ago. FX has continued to move against us right.

Consider that macro SMB I do think is getting impacted from three to six months ago.

Europe is still just kind of a little bit of an unknown.

And so we're building all of that and as we have to obviously our guidance.

Got it thank you very much.

Thank you once again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question. Our next question comes from the line of Alex Zukin of Wolfe Research.

Alex Zukin your line is open.

Hey, there guys you got Alan on for Alex and again. Thank you for taking the question I'm glad to see the execution improved in the quarter I was wondering if you could call out specifically, maybe the top things that you saw improved in the quarter.

A quarter ago, we were talking about.

So let me go to market issues in Europe , and so forth. So wanted to start with a quick follow up thanks.

Yes, I'll take that so I think so.

Particularly on Europe .

Invested.

Last quarter as we said in.

Ongoing training and sales enablement of our reps. So 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.

Quickly on the other areas of improvement.

I think that we are also looking at.

What are the more efficient places in which we could channel investments like for example.

Looking at investing mode in for service for the short term as it brings more mid market customers. So that's an area that we are currently working on so so we are closely monitoring the region and the macro trend because we are a multi product we have the ability to kind of adjust the levers that we have at our control.

Those expense cutting.

Got it. Thank you and then just as a quick follow up I wanted to touch on gross retention understanding that gross retention Scott as you called out seeing more pressure in that sub 50 cohort.

And this has been something that has kind of been in the region of high teens low Twenty's can you just talked about how that was for your over 50 employee cohort and maybe the overall business relative to the prior quarter.

Yes, we haven't we haven't broken out the kind of the churn rates by cohorts. What we've said is that we're squarely in the high teens from an overall churn rate as a company.

And then what we just kind of indicators that hey, we actually have seen.

<unk> pick up a little bit on the SMB side. So it has actually picked up for all of the F&B, but actually.

Worse in that zero to 50 bucket that being said our mid market enterprise business has proven to be even more resilient and it's kind of outweighed any of the negative impacts of that turns so we're still kind of our overall churn rates have stayed roughly the same.

Thank you.

You bet. Thanks al.

Thank you. Our next question comes from the line of DJ Hynes of Canaccord.

Your question. Please hey, this is Luke on for Vijay Thanks for taking the question.

So I'm curious in a recessionary environment do you change your go to market or marketing playbook at all whether thats prioritizing certain product.

Messaging around ROI and time to value or specific product use cases.

Sure I'll take that so first of all I would like to start off by saying one of the key value propositions of fresh works is.

We are not just easy to use and easy to sell them, but we are also more affordable comparatively expensive interface understand anecdotally, we have seen that business has come to us when they want to save cost. So so now having said that as we look at that efficiently and without wind and as you look at the different parts of our business.

We are clearly seeing areas that we could.

Channelize, our investments better and ones that <unk> clearly.

We are clearly looking at ideas.

One area that you could invest more conversational engagement is another so we are reorganizing our go to market investments for the short term longer term our priorities haven't changed because we believe that there is enough growth lift in each of our larger markets.

Okay.

Got it thats great to hear.

And then just quickly on the billing guidance for Q3 does that assume a different exchange rate currency impact relative to what you saw in Q2.

No we kind of assume the same.

Okay. Thanks.

Thank you. Our next question comes from the line.

Brent price Lynn Piper Sandler.

Please go ahead.

Thanks for taking my question and I actually had three topics I wanted to touch base on churn competition and cash let's start with churn.

You talked about seeing an uptick in churn, but if I look at the mix of the business relative to let's say F&B.

70% plus of the logos.

Totaling 14% of our Sam as you think about churn in the smaller customer cohort.

How much would that actually impact the overall revenue.

Only less than 15% of the business from a revenue perspective.

The logos, but yes.

It could be a huge material impact unless you saw churn creep up in the mid market large enterprise space.

Yes so.

So one thing Brent is that the.

The stratification of the greater than five K in the greater than 50, <unk> customers doesn't necessarily align with what we define as SMB and mid market enterprise right. So we definitely have SMB customers to us.

One to 250 employee businesses.

And we definitely have customers in there that are paying us greater than 50, K. So it's not it's not quite.

Aligned that way now of our of our <unk> base that we would say is SMB, it's just over that 40% number.

And in that yes, we are seeing a little bit the churn pick up a little bit and then what we highlighted is in that 1% to 50, which is kind of the low end of SMB.

It's even a little bit more that being said you're right that the broad the majority of our <unk> coming from that mid market enterprise and that base has remained really resilient.

Is kind of offsetting any negative pressure right now that we're seeing from the SMB side.

Got it so think of SMB as a kind of more 40% of our base and and that's really where you're starting to see some churn picked up very helpful color there and then on competition.

Obviously as things start to get tough.

Environment.

Have some private companies.

You compete against that obviously funding might be common issue.

You have larger competitors, that's all in the process of being acquired are you seeing any sort of irrational behavior on the competitive side either on pricing.

For this.

Discounting a large deal just wondering if you've seen any sort of.

Unusual behavior on that.

No bad or good behavior on the competitive front.

Last let's say three months.

Okay.

I'll take that.

I think nothing much has changed it is similar to prior quarters. If you look at the.

The value proposition of why people choose us over competition, it's continues to be the same.

Rapid time to value easy to use easy to onboard and.

Mono February pricing.

We actually have some recent wins that are encouraging, especially in the CX space also we have seen the largest enterprise vendors actually report.

Noting like longer sales cycles, and so on we are not.

Scene.

Any anything like that so.

But I won't call out.

Okay, we have not seen any impact on private funded companies doing any irrational behavior yet.

Yes.

Okay.

Helpful Color and then last question here.

Enviable position to have over $1 billion of cash and investments.

Obviously, if I think about the track record of the business you've been.

Generating positive free cash flow in fiscal 2020 in.

In 2021, it looks like you'll burn a little bit of cash flow this year or so.

Youre not going to consume much of that $1 billion in cash that you have so.

What's the plan as you think about.

The current environment valuation reset.

What are the plans to put some of that cash to use to either broaden the product portfolio would you consider kind of M&A as a path to ask.

Accelerated product development love to better understand how you view that.

$1 billion in cash as a strategic opportunity to enhance the business. Thanks.

Yes.

No.

We have a row.

Good map to where do we want to go in terms of our product portfolio and we have.

Okay.

Corporate development team that's constantly looks at.

Any opportunity that may come up on which is we want to look at.

But especially given the private market.

Clean like really.

Super High I think the valuation research.

Probably take some more time for the founders to kind of adjust to the new break, but we're not in any hurry. We continue to look at opportunities if something interesting comes to us which gives us a technology advantage on our go to market advantage, we may consider that but we don't have to acquire revenue it's more like.

And anything that is really good teams deck.

Our.

Our go to market advantageous way be looking at it it'll be usually they're not looking at making large acquisitions.

Any opportunity that may come up on Richard Yes, we want to look.

Okay.

But especially given the credit market.

Like really.

Super High I think the valuation research.

Probably take some more time for the founders to kind of adjust to the new break, but we're not in any hurry.

Do you have to look at opportunities if something interesting comes to us which gives us a technology advantage on our go to market advantage. We may consider that but we don't have to off platform revenue it's more like.

And anything that is really good teams deck.

Our.

Our go to market advantageous way be looking at would you be usually they're not looking at making large acquisitions.

Totally makes sense I appreciate the color on those three topics. Thank you come from the line Brent Jeffs.

Jefferies Brent.

Brent Thill your line is open.

On Europe , you mentioned the execution improves I'm curious if you strip out the macro and just rated the execution now are you back to 80, 90% or are you still at 70, how would you characterize your your health meter in the European execution acts the macro.

Thanks.

I think from a.

Hey, Brett it's Tyler.

Conversion rates were actually really happy with in Q2 and there is there are a lot better in Q1 in Q1, we talked about how we had.

Some deals we werent, we didnt close and quite push right and so we kind of looked at it. That's why it was execution basin in Q2, our conversion rates are really good. We also have seen attrition come down and so that means we will get to ramping.

Reps, who are ramped quicker and so yes, we do feel pretty good about execution right now and then obviously, it's hard to parse out these banks right.

These broader masked macro things and to really remove all the variables. So thats why we are still calling out because Europe is in general is still under some pressure.

So that's why we've called it out.

Thanks Tyler.

Thank you. Our next question comes from the line of Ryan Macwilliams of Barclays.

Mcwilliams. Please go ahead.

Sure Brian Thanks for taking the question.

You mentioned your expansion motion, primarily being driven by our seats.

Is there any more color you can give around the net retention to split between seats versus cross sell and if this is shifted over time as you build out your product suite.

Yes, we have not broken out the kind of the percentages of west expansion is coming from but it is.

By far the majority of our expansion does come from agent and seat expansion.

And so that is still the majority of cross sell second and then I think addition upgrades is third.

Yes.

Alright, thats it from me thanks.

Okay.

Thank you. Our next question comes from Scott Berg of Needham Scott Berg. Your line is open.

Hi, Gene Taylor, congrats on a really nice quarter.

Thanks Scott.

Yes.

One is kind of a follow up to I think Vince brings Dan's question on the competitive environment you had a competitor in the service desk environment recently, you've taken private obviously the transaction has not closed yet, but how do you think about those opportunities obviously, it's a well known vendor in the space for sure. We're all familiar with what is.

You can get some new opportunities or new opportunities.

That transition progresses.

Okay.

So Scott we have always.

<unk> been competing with <unk>.

So it's like pretty.

Pretty much every deal.

We go head to head and most of the time I think customers are still not reacted.

Major it, but I think having said that.

Quite recently, we saw some like to encouraging wins.

London, the Fintech space.

Both are not the kind of build so weak.

Kind of are starting to see that and I think.

We would hope that if they do.

<unk> taken private.

We are doing everything that we can in order to kind of execute better and feel to it.

Great helpful.

Follow up question Tyler one of the questions I've received.

<unk> shareholders in different stocks over the last couple three months pretty heavily is on share based compensation and expectations going forward for a variety of reasons, whether it's where stock prices are right now or or other maybe company specific reasons, but your share based comp in the quarter as a percentage of revenue trended at about 40%.

Which is higher than the typical SaaS company.

Do you expect that to trend down to kind of more normal ranges that most of the industry sees her heart.

For maybe extended periods.

Yes.

Overtime, we do expect it to trend down we did have.

Grants last year and even grants this year that.

That we're taking that expense and a lot of thats taken over a four year kind of straight line method.

And so it's still going to run at kind of current rates for the foreseeable future, but yes over time, we would expect that to come down.

Okay.

Great Thats, all I have congrats on a really good quarter. Thanks.

Thanks, Scott Thanks, Craig.

Thank you. Our final question comes from the line of Nick Altmann of Scotia Bank.

Your line is open.

Great. Thanks, guys.

Just to kind of go back to.

Some of the go to market tweaks you alluded to.

Just given the strength youre seeing in mid market and what the <unk> service.

I'm just wondering if you could put maybe a finer point on the go to market tweaks. There as you start to lean in some of the stronger areas is it allocating more reps to the U S is it allocating more reps away from SMB to mid market. Just if you could put a little bit of a finer point on that I think that would be super helpful. Thanks.

So let me take the question and then welcome Nick.

Yeah.

So to the fresh with courage and so <unk> is clearly.

Okay overall.

Longer term, we are continuing to do a lot more than Chris. So this is what we specifically called out.

Can we do more in the short term and a lot of that.

Boils down to.

Like digital.

So that is what can help us drive a little bit more in the short term right. Because you know mid market enterprise deal pipeline Jenn. If we start today it may take at least one of them.

Two quarters.

For it to build we are doing a mix of everything but primarily the most important priority is in addition to the R&D investments that we have done.

But primarily the most important.

Most immediate thing that they're considering as how can we do more in the digital SMB segment.

<unk>.

Got it thank you.

Thanks.

Thank you at this time I would like to turn the call back over to fresh works for closing remarks.

Great. Thank you so much for joining us if you have any questions. Please feel free to reach out and we'll talk to you next time. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly.

As Johan during Q&A, you can dial one one.

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Yes.

Okay.

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Okay.

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Yeah.

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Okay.

Welcome to the fresh works second quarter 2022 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

I would now like to hand, the call over to Vice President of Investor Relations Joon Huh. Please go ahead.

Thank you good afternoon, and welcome to fresh water second quarter 2022 earnings Conference call. Joining me today are garage module with them Fresh works, Chief Executive Officer, and Tyler Sloat freshwater Chief Financial Officer. The primary purpose of todays call is to provide you with information regarding.

Our second quarter, 2022 performance and our financial outlook for our third quarter and the full year 2022.

Some of our discussion and responses to your questions may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

These forward looking statements are based on <unk> current expectations and estimates about its business and industry management's beliefs and certain assumptions made by the company as of the date hereof, all of which are subject to change. These statements are subject to risks uncertainties and assumptions that could cause actual results to differ materially.

From those projected in the forward looking statements.

For a discussion of material risks and other important factors that could affect our results. Please refer to today's earnings release, our most recently filed Form 10-Q, and our other periodic filings with the SEC.

<unk> assumes no obligation to update any forward looking statements in order to reflect events or circumstances that may arise. After the date of this presentation.

As required by law.

During the course of today's call, we will refer to certain non-GAAP financial measures reconciliations between GAAP and non-GAAP financial measures are included in our earnings release for our second quarter 2000 to 2022 results, which we issued earlier today and is available on our Investor Relations website at IR Dot <unk> Dot com.

I encourage you to visit our Investor Relations site to access our earnings release periodic SEC reports, a replay of today's call or to learn more about pressure and with that let me turn it over to Girish.

Thank you Joan and thank you everyone for joining us this afternoon.

I will start the call with a recap of our results.

Then highlight our latest product updates.

And close with what we are seeing in the current market environment.

Overall, we had a solid second quarter.

We continue to grow efficiently and came in ahead of our expectations on both revenue and non-GAAP operating loss.

Q2 revenue grew 40% year over year adjusting for constant currency.

37% on a reported basis.

Our net dollar retention was 115% on a constant currency basis.

It has remained steady in the 115% to 116% range for the last five quarters. If you look at it adjusted for constant currency.

In Q2, we added nearly 800 net new customers.

Angie home services, Florida, Sterling Bank and Thomas Cook, just a few of the brands we are proud to work with.

We also saw healthy expansion rates among existing users and a multi product adoption continues to play.

823% of our customers use more than one <unk> product.

Overall, I'm really proud of our team and the progress we've made in Q2, continuing our mission to deliver business software that people love to use.

On the product front.

Let me start with Chris service that continued demand in the mid market is creating sustainable growth for our business.

Companies like Toshiba diner trade and WD 40 are using our easy to use <unk> solution to support their global Workforces.

Our partners continue to contribute to our mid market growth.

One of our largest first service deals this quarter was sourced by a regional channel partners in Africa, and this was closed alongside debates project to our technology partner for enterprise asset management that we announced last quarter.

In Q2, we also strengthened our enterprise grade it operations management capabilities.

Enhanced <unk> management and on call management features.

Using these new service capabilities, a large bank in southeast Asia with nearly 4000 employees.

Was able to cut down debt related alerts by approximately 60%.

The bank's <unk> now have used that time to resolve actual incidents rather than wasting time on thousands of false positive outlet.

Chris serviced saves our customers time and money.

We're also seeing customers expect that for service usage to other departments, but internal employee support.

For example.

IMAX global business travel the publicly listed global travel management company used this fish service for both that and HR departments to deliver exceptional support to over 13000 employees.

We are proud to help companies of all sizes create a great employee experience that first service.

Now, let's shift to the customer side of the business that conversational engagement is a key part of our strategy to help companies reach and retain their customers wherever they are.

In Q2, we brought back our first Chad Brian previously known as finished this messaging.

To better communicate our ability to create a seamless conversational experience combining bought and live agent experience to our customers.

The dress shirt businesses can use box to automate transactional first level of support and gratefully handover to human agent for more complex use cases without sacrificing customer experience.

<unk> is a strong first entry point into consumer companies, who often expand the fresh desk of fish market.

After the launch of CRM for E Commerce in Q1.

We took our conversational engagement strategy a step further by re Architected, our standalone first chat product too.

The work on top of a unified customer record platform, our UCI, along with crystals and fish market.

To date.

Sell more and more through digital channels and their customers expect instant support on these third party messaging apps like Whatsapp or Apple business chat for example.

With the addition of <unk> to the ECR.

We can now sell.

To the marketing sales or support organization first and then expand into the other departments by showcasing the power of unified customer communications.

Our new platform also gives us the flexibility to quickly add on messaging channels in Q2, we added integrations for Instagram and Google business messages.

Enabling conversational messaging across multiple channels is creating new growth opportunities for us and our customers.

A leading digital bank and payments company.

With millions of customers and a longtime fresh looks customer expanded their use of chat in Q2 and increase overall customer satisfaction.

<unk> of agents are now armed with live messaging capabilities that go beyond the website to provide customers with a seamless experience across a message and then mobile app.

Conversational messaging capabilities are also important for our <unk> customers in Q2.

We built new desk, omnichannel integration with telephony providers like finite to optimize agent productivity and supporting customers across chat E mail, social and voice seamlessly.

Our new integration with workforce management software company in pixel also helps larger companies better manage their contact center team staffing scheduling and workload.

Thomas Cook.

Popular global travel company as our customer operations team of ADP.

Possible for managing over 20000 contacts every week.

First management features.

Integrated with Fitbit enable Thomas Cook to forecast team workloads and could you the right number of support agents to provide a great customer experience throughout the year.

Companies of all sizes are realizing the importance of streamlining and automating customer communications across all channels to help customer facing sales marketing and support team understand and serve their customers better.

I'm confident that our vision of a unified customer record and the progress. We have made in Q2 will provide the long term growth opportunities for <unk> going forward.

Overall.

We had a solid quarter, despite the changing macro environment.

Let me talk about what we're seeing in the market.

In Europe .

We are pleased that we improved our execution and achieved higher close rates compared to Q1, we.

We continue to monitor the region as it feels the pressure of rising inflation and an ongoing water.

Among our global customer base, we are seeing a varying degree of impact across segments.

<unk> customers are feeling the macro pressures and.

And we are seeing this translate to highest churn, especially at the lower end of SMB and companies with fewer than 50 employees.

In contrast, our largest customers in mid market enterprise are showing more resilience and they continue to grow that investment with us.

As our business has moved more of market our largest customers today represent the majority of our business at approximately 57% of I'd add up.

As a result, our overall churn rates for the company that roughly the same quarter over quarter as the higher SMB churn was offset by improvement in Midmarket and enterprise segments.

Additionally, we are seeing steady increases in the average revenue per account, reflecting our ongoing customer expansion and larger deal sizes.

We have a global business with a very diverse customer base across multiple products and industries.

In an environment, where companies are spending more conservatively I am confident that freshwater affordable products will continue to deliver incredible value to our customers around the world and continue our long term growth.

With that.

Over to you Tyler.

Thanks, Jay and thanks to all of you for joining on the call and via webcast.

As gene mentioned, we're pleased with our solid execution in the second quarter.

We maintained our strong expansion motion with 115% net dollar retention adjusting for constant currency, while adding new business and customers across our three broad product categories and customer support.

Sales and marketing and <unk>.

Although the negative revenue impacts from FX increased throughout the quarter, we beat expectations for revenue non-GAAP operating loss and billings growth in Q2, demonstrating the resiliency of our business model and a changing macro environment.

In fact Q2 revenue growth would have been approximately 1% higher if currency rates remain the same from our Q1 earnings call.

With FX volatility increasing over the past several quarters.

Spend more time on the call today talking about constant currency comparisons both year over year and compared to our prior estimates last quarter Joe.

Youll get a better view of our underlying business fundamentals.

As I normally do I'll review, our financial results from the recent quarter provide background on key metrics and close with our expectations for the upcoming quarter Q3, and full year 2022.

I'll focus most of my financial results discussion around non-GAAP numbers, which.

Which exclude the impact of stock based compensation and related expenses payroll taxes unemployed stock transactions amortization.

<unk> of acquired intangibles and other adjustments.

So starting with the income statement revenue grew 40% adjusting for constant currency or 37% as reported to $121 4 million in Q2.

We maintained a healthy expansion rates for our products similar to Q1 with additional agents receipts being the largest driver of this expansion.

We're also seeing a steady increase in our multi product adoption up 1% again to 23%.

These customers now represent nearly half of our business.

From a product line perspective fresh service continues to deliver strong growth and was the largest contributor to <unk> growth in the quarter.

We maintained steady non-GAAP gross margins at 82%, which was in line with the prior quarter and continued to be at robust levels as we scale the business.

In Q2, non-GAAP operating expenses increased to $115 4 million.

As we mentioned last time, our annual Merit cycle. It takes effect during the second quarter each year, resulting in higher personnel costs and this drove the majority of the increase in all three expense categories.

Additionally for sales and marketing we had increases in travel activity fueled marketing initiatives and in person events, including our global jab events, which contributed to the higher expenses quarter over quarter.

As you would expect rising inflation, resulting in elevated supply cost and travel expenses for the business.

Our revenue beat combined with effective cost management led to a non-GAAP operating loss of $15 8 million and.

At $1 $7 million ahead of our expectations for Q2.

So I am pleased with our ability to execute toward our financial goals in the core and the current market.

Moving to our operating metrics net dollar retention was 111%.

And 115% on a constant currency basis in the quarter.

The consistency of net dollar retention or MBR adjusting for constant currency over the past five quarters reflects the ongoing expansion activity in the business and also our ability to effectively manage churn over this time.

Now as we look forward into Q3, we expect FX rates and a slowing economy to impact our overall expansion rates, resulting in a reported MBR ticking down to about 110%.

Turning to our customer metrics customers contributing more than $5000 and <unk> grew 22% to $16 212 in the quarter and continues to represent 86% of our IRR.

With a meaningful number of customers falling below the threshold of $5000 in the IRR because of FX moves. We're also providing the growth of this metric on a constant currency basis for Q2, which was 20, 25% year over year.

For larger customers contributing more than $50000 in the IRR. This customer count grew 42% to 1648 and <unk>.

Now represents 43% of our era <unk>.

Adjusting for currency this customer cohort grew at 48%.

Lastly, our total customers grew to over $59 9000, with a net add of nearly 800 customers in Q2 as.

As our average revenue per account continued to increase in the quarter.

Turning to billings.

Q2 calculated billings out preferred outperformed our expectations as this metric grew 33% year over year, despite a negative 5% impact from FX movements.

Other factors also impacting this growth rate include billing duration mix and reserve activity each at positive 1%.

Adjusting for these factors our normalized calculated billings growth rate was approximately 36% in Q2 up slightly from the prior quarter.

Given that calculated billings growth can fluctuate quarterly due to these factors, we're providing a preliminary view for Q3 billings.

We estimate our reported calculated billings to grow approximately 25% in Q3.

Moving to our balance sheet and cash items, we ended the quarter with cash and marketable securities of approximately $1 2 billion.

Similar to the prior quarter.

Free cash flow was negative $10 2 million for Q2 and in line with our expectations.

We continue to net settle vested equity amounts and used approximately $18 million under financing activities for Q2.

As a reminder, this financing activity is excluded from free cash flow.

We expect to continue net settling invested equity amounts for the foreseeable future, resulting in quarterly cash usage of approximately $16 million at current stock price levels.

For free cash flow expectations, we are maintaining our prior estimates we.

We expect free cash flow to be negative $20 million for the full year of 2022.

With estimates of negative $10 million for Q3 and slightly positive for Q4.

We feel good about our cash balance and we are well positioned for durable growth.

We expect to use less than 2% of our cash balance this year and reach positive free cash flow by Q4 with no debt.

We have a strong balance sheet and an improving financial model and we'll continue to drive operating efficiencies as we scale the business.

Looking at our share count for the quarter, we had approximately 322 million shares outstanding on a fully diluted basis using the treasury method as of June 32022.

The fully diluted calculation consists of 286 million shares outstanding and approximately $36 million related to Unvested <unk> MPR seats.

Now turning to our forward looking estimates.

Let me go through the numbers initially and I will provide background commentary afterwards.

For the third quarter of 2022, we expect.

Revenue to be in the range of $124 5 million to $126 5 million growing 29% to 31% year over year.

Adjusting for constant currency this reflects growth of 31% to 33% year over year.

non-GAAP loss from operations to be in the range of $14 5 million to $12 5 million.

And non-GAAP net loss per share to be in the range of seven to five assuming weighted average shares outstanding of approximately $286 7 million.

For the full year 2022, we expect.

Revenue to be in the range of 493 million to $497 million growing 33% to 34% year over year.

Adjusting for constant currency this reflects growth of 35% to 36% year over year.

non-GAAP loss from operations to be in the range of $42 5 million to $38 5 million.

And non-GAAP net loss per share to be in the range of <unk> 18 to <unk> 16.

Assuming weighted average shares outstanding of approximately $284 6 million.

These estimates are based on FX rates as of July 29, 2022.

As you know we're trying to provide our best view of the business as of today and have taken all of the following items into account in arriving at our estimates.

Few notable items to keep in mind.

First on FX, we have approximately 25% of revenue exposure related to the euro and British pound.

As the dollar has strengthened versus these currencies. This has resulted in a negative impact of approximately $4 million to our full year 2022 revenue compared to our previously provided estimates.

Second on Europe .

While we improved our execution quarter over quarter with higher close rates and productivity from our Philippines.

This region is feeling a greater impact from the current macroeconomic environment.

Third on SMB smaller customers are feeling the macro pressures. So we're seeing slower growth in this segment, especially on the very low end of F&B.

We are planning for similar trends in the second half of the year.

And fourth on operating loss, we are maintaining our operating loss estimates for the full year, while we may see higher costs in certain areas. We plan to manage the business overall to deliver on our fishing efficiency goals for the year.

Let me close by saying, we delivered a very solid quarter results in Q2.

We are delivering real value to our customers with our products in this changing macroeconomic environment.

We remain confident in our long term growth opportunities.

And with that let's take your questions operator.

As a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from the line of Brad Sills with Bank of America.

Okay.

Oh, Great Hey, guys. Thanks for taking my question.

Wanted to ask on.

The the macro impact you talked about in the very small end of the business.

Seeing some churn there potentially and that's factored into slight growth there factored into the guide what about in the upmarket business. It sounds like you had some real good results there.

<unk> customer cohort growth at 25% constant currency holding very nicely there.

How much of that would you attribute to the effort to move up market. Some productivity on some of the hires you've had.

So just a two part question there one.

How has the productivity ramp of the enterprise going and then two any macro that youre seeing impact in the enterprise and very small into the market.

So thanks, Brad this is Gary.

I'll take this question.

So broadly I think.

Macro seems to be impacting all businesses, but as we called out specifically.

We are continuing to see demand and the mid market and enterprises continuing to.

Expand and grow with us so.

The in the really low end of the SMB is where we saw an increased chunk.

Innovations continue with customers, where people are talking about being more conservative in their spending et cetera, but.

Overall, I think we've not done anything significantly new.

Clothes more enterprise deals or anything like that we have both motions continue to grow but I think we are.

Seeing that offer a service business is actually more resilient.

Enterprises mid market larger customers are becoming more resilient and we are seeing this across the product transition.

That's great to hear and you called out fresh services and as a relative area of strength and I noticed that you've got more modules there.

Can you kind of project management virtual agents SaaS management.

Are you seeing customers coming in at different entry points now that you've kind of round it out.

For ITE as salmon fresh service. Thank you.

So we have all those modules, but we.

We don't land with those modules. So the value proposition focused services to have a unified product experience. So the primary land.

Through ideas Tim.

But the people use.

SaaS maintenance management project management, and also planning to add on Enterprise service management in them, but we don't have separate land products about each one of those in general the land to the unified product.

Thanks, so much.

Thank you.

Thank you our next question.

Come from the line of Keith Weiss.

Morgan Stanley <unk>.

Your line is open for taking my question. This is actually Ryan <unk> on for Keith.

Just first quickly is can we just dive into your comments about multi product adoption you call that about 23% I think of customers, we're doing multi product.

How do you view that moving forward is the risk that it budgets come under greater scrutiny that continues and maybe some headwinds or will that accelerate as customers try to consolidate spend with fewer vendors. Thank you.

Thanks, Brian .

And if I can take that right. This is tyler so.

Just a commentary we've just seen steady.

Steady progression and that multi product number I mean, it ticked up 1% this past quarter from 22% and it's just steadily been growing.

And I just think it's a factor mainly.

As customers land they are adopting just like as Jean said additional products right.

A lot of it is coming from our Omnichannel solution still on our fresh desk side, but we're starting to see it now on the <unk> side as well as we add new modules that people can adopt.

We don't see macro.

Pressure is actually slowing that down.

We would actually see probably the opposite of where entrenched there that we will continue to see more adoption of those products. The expansion motions on agents, where we would probably see more pressure right at the <unk>.

These are adding.

More employees, and that's where we would see the pressure on the expansion side.

Got it. Thank you maybe just one more quick one.

You speak of the weakness in a year.

Or is that staying consolidated a region or has it started to spread into other areas yet.

Yes, I can take the Brian So I think Europe we.

We're seeing a little bit more pronounced macro impact than the rest of the regions, especially.

I think North America and.

We have <unk> Asia Pacific Middle East Africa, that's not.

We cannot say at the same level of impact across all regions. I think also because of the ongoing large currency effects.

And we did call out that compared to last quarter, we actually felt that our team executed better we closed more larger deals.

Conversion rates.

But we.

We are monitoring the situation because the macro is a little bit more.

The announced in Europe compared to other regions and I think we have factored all of that into the guidance is good.

Got it very helpful. Thank you.

Thank you our next question.

Comes from the line of Patrick Wall Ravens of.

JMP Securities. Please go ahead Patrick Walsh.

Thank you.

Hey, do you guys price your products.

In dollars.

Buying fresh works in France are the prices listed in dollars or in euros.

So.

We saw euro.

And British pounds, we have multiple currencies, particularly the bigger currencies that we have exposure to dollar GBP in Europe . So we have about 25% of revenue exposure to euro and pound.

Yes, because I am on that Brian .

So im just confused me.

Yes, I think the sites will have you land based on where you are logging in from.

Okay. So here's my real question. So my real question is we all understand that.

The impact of the stronger dollar in terms of the difference between constant currency growth, adding <unk>.

Reported revenue growth what I'm wondering is is the stronger dollar, resulting in an effective price increase for customers, let's say in EMEA.

And does that effective price increase reduced the demand for your products.

No not necessarily because.

That would be true if we had a $8 price and we are constantly adjusting the euro and pound based on that dollar price right, but our euro and pound prices have stayed consistent right. So to the customers there the price looks the same.

Except as we translate it back obviously, we're getting less USD for it.

Okay, Great alright, thank you.

Thanks Pat.

Thank you. Our next question comes from the line.

Brian Peterson of Raymond James Brian Peterson. Your question. Please hi, gentlemen, thanks for taking the question.

First one I.

I wanted to follow up on a prior comment on the number of seats or users as we're thinking about the macro this year.

A lot of moving parts or is that something that you guys. You guys have seen broadly across your customer base, yet or how do we think about that trend line as we get through 2022.

Spansion motion so Brian Tyler our expansion motion has still been driven primarily by a number of agents and seats that are coming up. We also have our cross sell motion that.

That and then customers moving up the addition chain that theyre using product now going forward.

When we look at the back half of the year.

Half of the adjustment we made its revenue was on FX. The other half, we kind of attribute to macro and we could.

See pressures from expansion definitely anecdotally if companies are not hiring right. We would expect that they would not be adding more agents and so that just kind of makes sense. So we do think there might be some pressure on the expansion side.

Understood. Thanks, and maybe just a follow up I'd be curious obviously the close rates in Europe .

It sounded better but as we think about the linearity through the quarter is there anything that you'd call out on trends in the quarter and maybe what you've seen so far in July thanks, guys.

Yes, no we're not commenting on July specifically, where the quarter beyond what the guidance we gave in obviously.

We're talking about our expectations today. So we're kind of building on what we think is going to happen. This quarter based on what we know as of today.

So Europe in general I think there are a combination of things going there, but theres also historical seasonality in Europe for summer months right.

We're seeing the normalcy there as well.

Thanks Hello.

Thank you. Our next question comes from pendulum Bora.

J P. Morgan your line is open go.

Go ahead <unk>.

Thank you hey, guys congrats on the quarter.

Rich.

On fresh chat and overall on the unified customer.

So it seems like you have now three products.

Kind of architect the debt what are you hearing from from customers on that point is there is that a big factor.

That people are kind of cleaning onto and when do we see such desk I guess is that the plan as well to be to compete that re architected under the unified customer architecture.

Thanks can you limit, yes, absolutely that does that.

Ericsson, which they are growing I think our entire vision thought the customer side of the business is built around the fact that we want to help businesses understand everything about their customers. So with the latest move of the Standalone first jet product onto the <unk> platform. So now we have.

Marketing sales and conversation with support and box all integrated.

Into a single customer to go out and we are working on moving finished goods because it's our largest business onto the platform.

We will.

Quickly, we'll update on that as soon as soon as security but.

We're making progress on that.

Sure.

Many bunch of priority for us.

Understood. Thank you for that and one for Tyler.

The billings guidance for next quarter, I know everybody's favorite subject, but it seems like a big T cell.

From 30, <unk> at least in USD 225, and help us understand maybe some of the assumptions there. It seems like revenue it seems you're assuming about a one point headwind for next quarter, maybe Dr has has a bigger impact.

FX.

But.

What else are you assuming or do you mean close rates do deteriorate.

Going into Q3 anything else.

Help us kind of understand that diesel.

Yes, I mean, what we've built in is kind of what we talked about in terms of the macro stuff. So we are seeing on the SMB side right. We said, we're churn has picked up a little bit so that.

That impacts your your billings number there Europe , we're expecting it to.

We're cautious right as we go into Europe , and we're looking at it right now now again to 25% we're talking about is going to be the as reported number.

What we've done every single quarter is kind of done these adjustments we will.

We don't like billings as a proxy for how we are doing necessarily because there's so much noise in it. So we have been providing these adjustments. These adjustments typically include.

Some FX stuffs, some reserve activity duration of activity.

So we're kind of there.

The number we can speak to now is kind of what we see what would be in the system and then what we would see based on historical trends.

They haven't been perfect, but that is a preliminary view of what we see today.

Just just so I understand are you expecting the macro environment deteriorate from what you saw in Q2 and that billings number.

Well I think what we're saying that the macro environment I think the macro environment from a quarter ago. FX has continued to move against US right. As if you consider that macro SMB I do think is getting impacted from three to six months ago. It is Europe is still just kind of a little bit of an unknown.

And so we're building all of that and as we have to obviously our guidance.

Got it thank you very much.

Thank you once again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question. Our next question comes from the line of Alex Zukin of Wolfe Research Alex Zukin. Your line is.

Open.

Hey, there guys you got Alan on for Alex and again, Thank you for taking the question.

Good to see the execution improved in the quarter I was wondering if you could call out specifically, maybe the top things that you saw improved in the quarter.

A quarter ago, we were talking about.

So let me go to market issues in Europe , and so forth.

I will start with on the quick follow up thanks.

Yes, I'll take that so I think.

Particularly on Europe .

<unk> invested.

Last quarter as we said in.

Ongoing training and sales enablement of our reps. So all of that is on track and we saw that translate into.

Better execution, resulting in higher conversion rates in the field in Q2 and compared to Q1.

We are continuing to ramp and improve productivity in the fee.

On the other areas of improvement.

I think we are also looking at.

What are the most efficient places in which we could channel investments like for example, we have.

Looking at investing more in for service for the short term as it brings more mid market customers. So thats an area that we are currently working on so so we are closely monitoring the region and the macro trend because we are a multi product we have the ability to kind of adjust the levers that we have in our control and controlled expense cutting.

Got it. Thank you and then just as a quick follow up I wanted to touch on gross retention understanding that gross retention Scott as you called out seeing more pressure in that sub 50 cohort.

This has been something thats kind of been in the region of high teens low Twenty's can you just talked about how that was for your over 50 employee cohort and maybe the overall business relative to the prior quarter.

Yes, we haven't we haven't broken out the kind of the churn rates by cohorts. What we've said is that we're squarely in the high teens from an overall churn rate as a company.

And then what we just kind of indicators that hey, we actually have seen.

Churn pick up a little bit on the SMB side. So it's actually picked up for all of the F&B, but actually it's probably worse in that zero to 50 bucket that being said our mid market enterprise business has proven to be even more resilient and it's kind of outweighed any of the negative impacts of that turns so we're still kind of our overall churn rates have stayed roughly the same.

Thank you.

You bet. Thanks al.

Thank you. Our next question comes from the line of D. J Hynes of Canaccord.

P. J Hynes. Your question. Please hey, this is Luke on for DJ Thanks for taking the question.

I'm curious in a recessionary environment do you change your go to market or marketing playbook at all whether thats prioritizing certain product.

Messaging around ROI and time to value.

Specific product.

Basis.

Sure I'll take that.

So first of all I'd like to start off by saying one of the key value propositions of fresh works is.

<unk>.

We are not just easy to use and easy to set up but we're also more affordable comparatively expensive and debasement.

And then thirdly, we have seen that business has come to us Linda.

Wanted to save cost, though so.

Now, having said that as we look at the deflationary environment and as we look at the different parts of our business.

We are clearly seeing areas that we could.

Channelize, our investments better and once the JV is clearly.

Right.

We are clearly looking at ideas to them as one area that you could invest more conversational engagement is another so.

We are reorganizing our go to market investments for the shock them longer term our priorities haven't changed because we believe that there is enough growth lift in each of our key large markets.

Got it thats great to hear.

Then just quickly on the billings guidance for Q3 does that assume a different exchange rate our currency impacts relative to what you saw in Q2.

No we kind of assume the same.

Okay. Thanks.

Thank you. Our next question comes from the line.

Brent price Lynn Piper Sandler.

Please go ahead good afternoon.

Thanks for taking my question and I actually had three topics I wanted to touch base on churn competition and cash let's start with churn.

I know you talked about seeing an uptick in churn, but if I look at the mix of the business relative to let's say F&B wallets.

While it is 70% plus of the logos.

It's only 14% of our Sam as you think about churn in the smaller customer cohort, how much would that actually impact the overall revenue totaling less than 15% of the business from a revenue perspective.

The logos, but yes.

Feel like could be a huge material impact unless you saw churn creep up in the.

Mid market large enterprise space.

Yes so.

So one thing Brent is that the stratification of the greater than five K in the greater than 50, <unk> customers doesn't necessarily align with what we define as SMB and mid market enterprise right. So we definitely have SMB customers to us.

1% to 250 employee businesses.

And we definitely have customers in there that are paying us greater than 50, K. So it's not it's not quite.

Aligned that way now of our of our <unk> base that we would say is SMB. It's just over that 40% number and in that yes, we are seeing a little bit the churn pick up a little bit and then what we highlighted is in that 1% to 50, which is kind of the low end of SMB, it's even a little bit more.

That being said you're right that the broad the majority of our <unk> coming from that mid market enterprise and that base has remained really resilient.

And as kind of offsetting a negative pressure right now that we're seeing from the SMB side.

Got it so think of SMB as a kind of more than 40% of our base and and Thats really where youre starting to see some churn pick up very helpful color there and then our competition.

Obviously as things start to get tough.

<unk> you have some private companies that you compete against that obviously funding might be common issue you.

Have larger.

<unk> that's all in the process of being acquired are you seeing any sort of irrational behavior on the competitive side either on pricing or.

Discounting on large deal just wondering if you've seen any sort of.

Unusual behavior on that.

Bad are all good behavior.

Live front.

Last let's say three months.

Okay.

I'll take that.

I think nothing much has changed.

Melissa prior quarters, if you look at <unk>.

The value proposition of why people choose us over competition, it's continues to be the same.

Rapid time to value easy to use easy to onboard and.

<unk> pricing.

We actually have some recent wins.

Encouraging, especially in the CX space also we have seen the largest enterprise vendors actually reporting like longer sales cycles and so on we are not.

Seeing.

Any anything like that so.

But I won't call out.

We have not seen any impact on plywood funded companies doing any irrational behavior yet.

Neil.

That's helpful color and then last question here.

In the enviable position to have over $1 billion of cash and investments.

Obviously, if I think about the track record of the business you've been.

Generating positive free cash flow in fiscal 2020.

2021, it looks like you'll burn a little bit of cash flow this year. So.

Youre not going to consume much of that $1 billion in cash that you have so.

Whats the plan as you think about.

The current environment valuation reset.

What are the plans to put some of that cash to use to either brought on the product portfolio would you consider kind of M&A is the path to ask.

Accelerate product development love to better understand how you view that that $1 billion in cash as a strategic opportunity to enhance the business. Thanks.

Yes.

<unk>.

Okay.

Our roadmap to where we want to go in terms of our product portfolio and we have.

Our corporate development team.

Constantly looks at.

Any opportunity that may come up on which is that we want to look at.

But especially given the credit market.

Like really.

Super High I think the valuation resets.

We'll probably take some more time for the founders to kind of adjust to the new rate, but we are not in any hurry. We continue to look at opportunity if something interesting comes to us which gives us a technology advantage on our go to market advantage, we may consider that but we don't have to off platform revenue.

More like.

And anything that is really good teams deck.

<unk>.

Our go to market advantageous way be looking at it <unk>, usually they're not looking at making large acquisitions.

Any opportunity that may come up on which is we want to look.

Okay.

But especially given the private market.

Clean like really.

Super High I think the valuation research.

Probably take some more time for the founders to kind of adjust to the new bright, but theyre not in any hurry, we continue to look at opportunities.

Interesting compass, which gives us a technology advantage on our go to market advantage, we may consider that but we don't have to acquire phone revenue.

More like.

Anything that is really good teams deck.

Our.

Our go to market advantageous way to be looking at it it will be usually they're not looking at making large acquisitions.

Totally makes sense I appreciate the color on those three topics. Thank you come from the line.

Brent Thill of Jefferies.

Brent Thill your line is open.

On Europe , you mentioned the execution improves I am curious if you strip out the macro.

Just rated the execution now are you back to 80, 90% are you still at 70, how would you characterize your your health meter in the European execution acts the macro.

That's it thanks.

I think from a.

Hey, Brad its Tom.

Conversion rates were actually really happy with.

Jim There is there are a lot better in Q1 and in Q1, we talked about how we had.

There's some deals we werent, we didnt close and quite push right and so we've kind of looked at it. That's why it was execution basin in Q2, our conversion way to really good. We also have seen attrition come down and so that means we will get to ramping.

<unk> ramped quicker and so yes, we do feel pretty good about execution right now and then obviously, it's hard to parse out these banks right on.

These broader mass macro things and to really remove all the variables. So thats why we are still calling out because Europe is in general is still under some pressure.

And so that's why we've called it out.

Thanks Tyler.

Thank you. Our next question comes from the line of Ryan Macwilliams of Barclays.

Ryan Macwilliams. Please go ahead.

Ryan Thanks for taking the question. So you mentioned your expansion motion, primarily being driven by our seats.

Is there any more color you can give around the net retention to split between seats versus cross sell and if this is shifted over time as you build out your product suite.

Yes, we have not broken out the kind of the percentages of worse expansions coming from but it is by far the majority of our expansion does come from agent and seat expansion.

And so that is still the majority of cross sell second and then I think addition upgrades is third.

Yes.

Alright, thats it from me thanks.

Okay.

Thank you. Our next question comes from Scott Berg of Needham Scott Berg. Your line is open.

Hi, Gene Taylor, congrats on a really nice quarter.

Thanks Scott.

Yes.

One is kind of a follow up to I think Brent <unk> question on the competitive environment you had to.

Competitive or in the service desk environment recently get taken private obviously the transactions that closed yet, but how do you think about those opportunities obviously, it's a well known vendor in the space for sure. We're all familiar with who it is but do.

So you can get some new opportunities or gain some new opportunities.

That transition progresses.

Okay.

So Scott we have always.

<unk> been competing with <unk>.

So it's like pretty.

Pretty much every deal.

The go head to head and most of the time I think customers are still not reactive.

Major but I think having said that.

Quite recently, we saw some like to encouraging wins, London, the Fintech space.

Both are they're not that kind of been so weak.

Kind of are starting to see that and I think.

We would hope that if they can.

<unk> taken private.

<unk>.

We are doing everything that we can in order to kind of execute better and feel to it.

Great helpful.

A follow up question Tyler.

Questions I have received.

<unk> shareholders in different stocks over the last couple of three months pretty heavily is on share based compensation and expectations going forward for a variety of reasons, whether it's where stock prices are right now or or other maybe company specific reasons, but your share based comp in the quarter as a percentage of revenue trended at about 40%.

Which is higher than the typical SaaS company.

Do you expect that to trend down to kind of more normal ranges that most of the industry sees or does that one hot for maybe an extended period. Thank you.

Overtime, we do expect it to trend down we did have.

Grants last year.

And even grants this year that.

That we're taking that expense and a lot of that is taken over a four year kind of straight line method.

And so it's still going to run at kind of current rates for the foreseeable future, but yes over time, we would expect that to come down.

Okay.

Great Thats, all I have congrats on a really good quarter. Thanks.

Thanks, Scott Thanks, Scott.

Thank you. Our final question comes from the line of Nick Altmann of Scotiabank.

Your line is open.

Great. Thanks, guys.

Just to kind of go back to.

Some of the go to market tweaks you alluded to.

Given the strength youre seeing in mid market and what the press service.

Just wondering if you could put maybe a finer point on the go to market tweaks. There as you start to lean into some of the stronger areas is it allocating more reps to the U S is that allocating more reps away from SMB to mid market. Just if you could put a little bit of a finer point on that I think that'd be super helpful. Thanks.

Sure Let me take the question and then welcome Nick.

Yeah.

So to the thresholds current and so freight service clearly.

Okay overall.

Longer term, we are continuing to do a lot more than fish. So this is what we specifically called out was how can we do more in the short term and a lot of that.

Boils down to.

Digital.

And so that is what can help us drive a little bit more in the short term right. Because you know mid market enterprise deal pipeline Jen would you. Please start today it may take at least one or two quarters.

For it to build we are doing a big sum everything but primarily the most important priority is in addition to the R&D investments that we have done.

But primarily the most important.

Most immediate thing that we are considering as how can we do more in the digital SMB segment.

<unk>.

Got it thank you.

Thanks.

Thank you at this time I would like to turn the call back over to fresh works for closing remarks.

Great. Thank you so much for joining us if you have any questions. Please feel free to reach out and we'll talk to you next time. Thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.