Release Date: May 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Freshworks Inc (FRSH, Financial) reported a 20% year-over-year revenue increase to $165.1 million in Q1 2024, demonstrating solid profitable growth.
- The company achieved a strong free cash flow margin of 23%, significantly surpassing its free cash flow estimate with $38.7 million in Q1.
- Freshworks Inc (FRSH) announced the acquisition of Device42, enhancing its Freshservice offering with advanced IT asset management capabilities, expected to strengthen its position in enterprise-grade solutions.
- The company saw robust adoption of its AI innovations, including Freddy Self Service and Freddy Copilot, which have significantly improved customer and agent productivity.
- Freshworks Inc (FRSH) continues to see momentum with larger customers, with those paying over $50,000 in ARR growing by 29% to 2,593, representing nearly half of the business.
Negative Points
- Despite overall growth, Freshworks Inc (FRSH) experienced pressure on expansion rates in Q1, particularly due to a challenging macroeconomic environment impacting customer decisions.
- The company observed a slowdown in the SMB segment, attributed to macroeconomic pressures and internal challenges in improving the inbound digital motion for customer acquisition.
- Freshworks Inc (FRSH) reported a modest increase in overall churn, although specific figures were not disclosed, indicating potential volatility in customer retention.
- The company's guidance for calculated billings growth in Q2 2024 is set at 12%, indicating a potential deceleration from Q1's performance.
- There are ongoing operational changes and strategic shifts, including a significant leadership transition with the CEO moving to an Executive Chairman role, which could lead to uncertainties in execution during the transition period.
Q & A Highlights
Q: Dennis, congrats on the move to the CEO role. I believe it was Dennis who called out the kind of softness in the CS market, especially downstream in the SMB segment. Are you seeing that impact your business at all in the quarter?
A: Dennis M. Woodside - Freshworks Inc. - President & Director: Thanks, Scott. It's Dennis here. So we see Q1 on SMB really more as a continuation of some of the trends that we called out in Q4, where throughout last year, we had seen SMBs under pressure from the macro environment for sure, rising interest rates that are limiting their ability to expand their business and that directly impacts their investment and customer support. So that trend continue -- you saw that trend in terms of our net adds, which have come down quite a bit over the last year or so. And that's been offset by strength in IT and by strength in larger customers. You see that on the continued growth of the $50,000 and up cohort.
Q: G, you're moving into the Executive Chairman role. Like some are going to see this as kind of a surprise and a little bit sudden given the way the announcement was worded, at least, without a kind of formal transition. Why is the time right today to make this change?
A: Rathna Girish Mathrubootham - Freshworks Inc. - Co-Founder, CEO & Chairman: Thanks, Scott. So I think first thing is this is not -- this was something planned as part of my succession even when we hired Dennis 18 months ago. Like our expectation was that he would eventually be my successor. And so we have been working in a similar fashion where Dennis was helping Freshworks get the operational rigor, put in place a world-class team and focus on go-to-market excellence, while I was actually focusing on all the AI stuff that you are seeing right now with Freddy and the product strategy.
Q: One question on the performance on the low end of the market. Is it possible to delineate between how much of the underperformance there is because of the worsening macro environment versus some of the changes in the go-to-market side that you put into place earlier in the year?
A: Dennis M. Woodside - Freshworks Inc. - President & Director: Yes. Thank you, this is Dennis, for the question there. So the changes that we've made on go-to-market over the last year were primarily, not exclusively, but primarily in the field. So that didn't really affect the SMB performance. We called this out before where our -- we have an effort underway to try to drive increased conversion of leads in SMB by taking a different approach to how we service those leads and sell those leads. We've made strides there, and we expect that, that will bear fruit over time, but that is also fighting against a bit of a headwind that the macro is causing in that segment.
Q: This is Ethan Bruck on for Alex Zukin. I just want to ask -- I appreciate the color on the CS side. I'm just curious, did the ITSM outperform or also unperforming, I guess, your internal expectations?
A: Tyler R. Sloat - Freshworks Inc. - CFO & Principal Accounting Officer: I'll take the guidance part and then I can hand it to Dennis for the ITSM piece. But I think you're asking a further clarification. What we did call out is like guidance for the year, obviously, it's based on what we see today and how we expect to perform. Nothing from the Device42 acquisition is in there.
Q: Dennis, congrats on your new role. I was just curious to your thoughts on the 1 or 2 things that you want to focus on in your new role. And just a quick follow-up. I know a number of vendors have been commenting in SMB concerns. But I think historically, there has been some separation between macro and internal execution. And I'm curious, do you feel the internal execution is where you'd like it to be?
A: Dennis M. Woodside - Freshworks Inc. - President & Director: Yes. Thanks for the question. So I think on the first question, the area that I'm very much focused on is driving execution of the business that we have now. And that relates to your point around SMB. Can we do more? And do we need to do things differently in that space?
Q: Great. I'll add my congratulations, Dennis, to you, and G, to you as well. Dennis, my question is for you. And I know you commented that it's too early to say that generative AI is the reason for the agent weakness in Q1, but maybe harking back to Scott's question at the outset. You also said that you're seeing early signs of Freddy monetization. So I'd be curious to hear what sort of impact that is having within your accounts in terms of, I guess, seat and agent activity as well as this came up in conjunction with Klarna.
A: Dennis M. Woodside - Freshworks Inc. - President & Director: Yes. So on AI, every sale or every renewal that we're involved with, AI is at the center. Every customer wants to talk to us about our AI capabilities, our AI road map, how that can help them. They want to see examples. And we have 2 paths to monetize today. We have Freddy Self Service, which is L1, and then we have the Copilot, which assists the agent. Different pricing models, one is consumption, one is price per seat. Both are getting tremendous interest and both are involved in sales in different ways.
Q: This is Dan Reagan on for DJ. First, I just wanted to ask if you could elaborate on the expected synergies from the Device42 acquisition. So you've historically partnered with Device42 on large enterprise opportunities. So I'm just wondering how you're thinking about the go-to-market synergies from here beyond what you've been seeing. And then sort of how it positions Freshworks with your upmarket ambitions. Maybe any nice cross-sell opportunities with its 800 customer base?
A: Dennis M. Woodside - Freshworks Inc. - President & Director: Thanks for the question. So we see Device42 in a couple of ways. First of all, we've been partnering with them for the last 18 months. So we have a product integration that allows an ITSM customer to easily flip into the Device42 environment. We've been co-selling with them to large customers. We called out one of the customers last quarter was a large apparel retailer. Device42 was integral to that sale. I was in Europe earlier last week and one of our larger customers, we are now up-selling Device42 in. And so we know
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
