Freshworks Inc. (FRSH) Earnings Call Transcript & Summary

All right. Let's get started. Good morning, everybody. My name is Stan Zlotsky from the Morgan Stanley software equity research team. And with us this morning, we have the pleasure of hosting Freshworks and the CEO of Freshworks, Girish, good morning. How are you doing?

Good morning, Stan. Good morning, everyone. I'm good. Thank you.

Awesome. Well, thank you so much for spending your time with us today. So before we get started, a couple of quick notes. Research disclosures, all important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. And also Freshworks would like to remind you that today's discussion may contain forward-looking statements about their expected financial and operational performance. Please refer to the various risk factors included in the 10-K and other SEC filings relative to any forward-looking statements.

Okay. With that out of the way, Girish, maybe just to kick off the discussion, you guys are a relatively new company to the public markets. I think a lot of investors are familiar with you, but just for those who might be a little bit newer to the story, just kick off with a brief overview of what Freshworks does.

Sure. So at Freshworks, our vision is to make it fast and easy for every business to delight their customers and their employees. So we do that by offering modern customer engagement and employee engagement software. So we have 3 product lines in 3 really large markets. Freshdesk is our first product when we started the company and today it's the largest product in the customer service space. Freshservice is our second product in the ITSM enterprise service management space. It's north of a $100 million business for us. Freshdesk is north of $200 million. So these are the 2 primary large products. We also have a third product in Freshsales and Freshmarketer. So we sell it together. And it's an early play into sales and marketing automation. It's still early days for us in that market, but we believe -- like we believe that there's a huge disruptive opportunity in CRM moving forward in the years to come.

Got it. Well, it's certainly a broad portfolio. Maybe just to start digging in. What prompted you to expand from customer service software into ITSM and then subsequently expand again into Freshsales and Freshmarketing (sic) [ Freshmarketer ].

Yes. So in the early years of Freshdesk, so we saw that almost 1 out of every 4 customers were using Freshdesk, the external customer service help desk, as an internal IT help desk. And primarily, the reason for that is our go-to-market motion. Our dominant go-to-market motion was online acquisition. When people search online for help desk software and then they come in, they started using Freshdesk as an internal IT help desk. Now we knew that there is a market for this, I'm an ITIL service manager myself. And we also knew that this was not the product that customers needed. So we took some of the core components of ticketing knowledge base and self-service portal, but custom-built a product for IT service management complete with asset management, change problem management and all the modules and we launched Freshservice, basically following customer demand. Over the journey in the customer service world, we have always looked at what our customers -- what trends were emerging in our customers. So we went from -- we added chat and bots and cloud telephony in the customer service market. In 2016, we unveiled our Customer 360 vision, where we realized that we could help customers engage with the entire life cycle of their customers. So that's when we launched Freshsales in 2016 and Freshmarketer in 2017. But in 2020 Q4, we rearchitected the Freshsales, Freshmarketer product when we launched our vision of unified customer record. So we relaunched those products with the same underlying unified customer account.

Got it. Got it. And I believe you guys are also working on an HR product, right? So what, or at least starting to, what's the thinking about moving into that space?

So we have a product in incubation called Freshteam. It's not material today in terms of revenue contribution. But the thinking is, as I said, our vision is to make it fast and easy for every business to delight their customers and their employees. So what's happening in the customer world today? We are seeing the lines between sales, marketing and support blurring, where the business wants to understand everything about their customer. Over the long term, we think that the same thing is going to happen in the world of employees. Like today, businesses are buying IT software or HR software. And in order to service the employees, you need to buy different pieces of technology, but we truly believe that helping businesses understand everything around their employees from hire to retire so would actually make sense, like to be able to enable every department in the company to engage with employees better to empower them to get what they want. So that's our vision. It's a longer-term play. So that's what we want to accomplish.

Got it. Got it. If we go back to Freshsales and Freshmarketer for a second, of the 3 main product areas that you have between Freshdesk, Freshservice and Freshsales and marketing it's one of the smaller ones, right? So in order to really spur adoption of that product, is there anything that you need to do across whether it's building out more product, building out the go-to-market team? What could prompt that to get bigger?

So I'll start with a simple question for any business, right? So should a business really care about like which e-mail software or e-mail campaign software is delivering their e-mail, which social media software is listening to the customer tweets. So what truly matters for a business is the ability to understand their customers better. So today, what we have in our Freshsales and Freshmarketer products is we have already integrated sales, marketing, chat, telephony, all of these modules into a single product operating with a single customer record. And you have to understand in the CRM world many businesses are struggling with siloed data stacks. So to answer your question on what else is needed there, so we know that there is tremendous value if we move our Freshdesk product onto the Unified Customer Record. So we are working on that and we hope to bring that to market later this year. So when we have that, we would have truly broken down the silos of sales, marketing and support to truly help businesses understand their customers better across the entire life cycle. I think that's when we would see more adoption of Customer 360 in the product format.

Got it. So the concept of Customer 360, if you talk to a number of other companies, a lot of it is kind of predicated on having almost like a CDP underneath it. So do you guys actually have like a CDP built out underneath? Is that in the plans? Again, how are you thinking about it?

It's a great question. And if you look at the large enterprises today because they have a legacy of the sales cloud and a marketing cloud and the service cloud, the approach that we have to take today is buy a CDP, hire an SI and try to pull all these data sources together to construct the 360 profile. So what we have done is we have an out-of-the-box CDP. So when people buy Freshsales or Freshmarketer, we are not selling the CDP to the customer, but the CDP comes packaged as part of the product. So it's for companies that don't have a legacy of all the sales, marketing clouds or for companies that are starting fresh, new. They don't need to go through the legacy route. So they can start with buying Freshsales or Freshmarketer, and they will automatically have the CDP. CDP makes the integration automatic. Like they don't have to do anything to connect sales, marketing support or chat data. But our CDP will also have APIs to bring others like third-party systems into it, but more of the work is automatic. That's what we call as a product experience to Customer 360.

Got it. So with that kind of underlying CDP almost that you built out, which is just native functionality within Freshworks, how does that apply to customers who may already have some kind of internal like in-house CDPs that they've built out, their investments that they've made? How painful is the process for moving from that on to the intrinsic CDP of Freshworks?

Yes. So today, if you look at -- most of the CDP investments are going in the really large enterprises. So at Freshworks, we always say we are not hunting for elephants, we are hunting for deer and rabbit. So our core target market, SMB and mid-market companies, they don't have large CDP projects today. And we are actually saying that they don't -- they will never need to start from scratch. So again, it's a question of do you really want to have 5 different tools and a CDP and an SI project running? Or do you want something automatic? And this is why I'll say, we all had a Nokia phone and a SanDisk mp3 player and a Canon camera, but we all switched to an iPhone so...

Correct. Okay. Got it. So just thinking about your entire product portfolio, right? It's literally -- it's a very broad portfolio. It's been created organically. So when you think about the future growth of the product, right, how are you thinking about balancing, making small tuck-in acquisitions perhaps to add additional functionality, maybe even to build out the HR product versus continuing to build that organically?

See, we've always been open about M&A and we don't have to acquire companies to grow revenue. So first thing I will start off by saying in our -- each one of our markets, these are really large markets and we are still an early player in customer service or ITSM, so we can continue to grow organically. So having said that, our approach to M&A is more opportunistic and we look at acquiring tech or talent, not revenue. And usually something that's more forward-looking, that's harder for us to build out first. Default thought process is let us build in-house because we have access to a large talent pool in India. We have more than 5,000 employees globally, but the vast majority of them are in India. So we like to build. But having said that, if something interesting shows up, we will not be averse to buying, but it will be more small technology tuck-ins. People or talent or tech.

Got it. So the similar type of zoom-out question, if you similarly look at your current product portfolio and you kind of stack it up against the IDC global software spend buckets, essentially, your products today are really aimed at the largest buckets of -- some of the largest buckets of software spend that are out there between customer service, sales and marketing, ITSM, right? HR is obviously a huge bucket as well. So as far as investors trying to think through where could be the new product category that you guys might enter into, is that like a good proxy for them to look at? Just, hey, like here are the big buckets of spend that Freshworks would go after?

Our -- the best way to understand our future product road map and vision is to start with our vision, right? So we -- our guardrails are customer delight and employee delight. So whatever trends emerge in those areas, so we actually will build or have solutions there. So I'll take an example of customer service, for example. So today, we are seeing a trend where every consumer business wants to engage with their customers digitally, like whether it's WhatsApp in India or Apple Business Chat or text messaging in the U.S. or Instagram in developed countries. So customer support is moving on to digital channels. There's also self-service and automation through bots that's happening on these channels. Like -- so we are making investments there. Similarly, in ITSM, we are seeing that providing a modern employee experience, it's not just for IT, but all teams, whether it's HR, finance, legal. They are all dealing with a hybrid workforce where people are working from home, how do you get them what they want, giving them a modern employee experience. So we are moving into ESM, making investments in ITOM and ESM. So the best way to think about future is look at these spaces of customer delight and employee delight. So we will continue executing on filling those gaps.

Understood. Understood. So underneath the entire portfolio of Freshworks products, right, is your Neo platform, right? What's unique about the Neo platform and -- both for supporting your current product portfolio, but also the ability to stand up additional product suites on top of it?

So Neo is our enterprise-grade platform that primarily serves 3 key business benefits for us. One, for our own developers of Freshworks products, Neo offers a set of foundational services, whether it's security like e-mail processing, chat processing, user management and so on. There are a bunch of foundational services that helps our product developers to not have to reinvent the wheel again and again. So that gives us a lot of velocity in terms of bringing new innovation to market. Second, for our customers, Neo offers a set of services that provide a unified customer experience, like whether it's sign-on or Unified Customer Record or billing or if you take any customer who's using more than 1 product, centralized notification, collaboration between the products. So Neo offers a set of services that power this unified customer experience. Third, for SI partners and app developers, even citizen developers within companies, we offer a robust marketplace where today there is more than 1,100 public apps and customers can also build private apps. So these apps can extend the power of Freshworks products and this enables the rapid customization, and extension and interoperability needs for customers is satisfied through Neo. And that is really one of the key differentiators in our model compared to a traditional enterprise software vendor where you do a heavy-duty preferred services. So this is more rapid configuration and app building. So I think these 3 are key aspects of Neo, which continue to help us innovate more.

Got it. And the interesting thing about Neo and also similar kind of underlying platforms that we've seen in software is they've become really interesting entry points for partners, right, to build out custom functionality, really extend existing functionality. So walk us through your partner strategy. How does Neo fit into that partner strategy? And maybe let's just stick with the technological partnerships and then we can touch on your go-to-market partnerships as well.

Great. So our partner strategy is like a multi-tiered strategy. So from a -- we have SI partnerships who help customers build extensibility. We have ISV partnerships where people build apps to integrate with Freshworks ecosystem where we have more than 56,000 customers today, paying customers. So there's a lot of technology ISV partnerships to make these sure that systems are interoperable. So we also have like Tier 1 vendor partnership with like Amazon and Google and Facebook to enable go-to-market where we get preferential treatment at their events or sometimes their salespeople also try to promote our products. So our -- we have reseller partners. That's the -- that's where we started the whole partnership program, where especially in non-English-speaking markets. So these partners can help us close customers, provide level 1 support. And we have an in-house partner support team to help all these different kinds of partnership programs.

Got it. And when you work with these partners and especially with your focus on moving upmarket, how do these partnerships help you to get into those larger engagements potentially?

So I think our partnership model is slightly different from what you would see as an enterprise motion, right? Like our partners are not the kinds where they would sell a $1 million deal for BMC Remedy and probably get a $200,000 commission. So this is more partners who understand the SaaS business model of recurring revenue. So they know that they have to build a portfolio of companies. So it's not one large deal. But a recurring revenue stream for our partners, which is actually attractive for many small partners because they have a recurring revenue stream built over the years. And we also provide them augmented revenue services like whether it's building apps, portal customization, training and a set of other services. So it is a high-velocity partnership model.

Got it. So maybe just taking a step back on there's a broader motion to go into enterprise, right? And maybe it's almost a definitional thing, right? Maybe it's not necessarily in enterprise, but more like mid-market, right, where you just have like moving upmarket away from the SMBs. As far as how you're looking into 2023 -- 2022, 2023, are there changes that you need to be making on your go-to-market or maybe the product side to really step up that upmarket motion?

So let me first clarify that we are not moving away from SMB. So SMB is a very crucial part of our business and it's one of our differentiators with our inbound motion where 55% of our new business today comes from the inbound motion. And inbound feeds 100% of our SMB revenue and we're able to close all of that business from India today. So it is a differentiated business model, which we plan to continue. Now having said that, we are getting pulled more and more into mid-market and larger enterprise companies. Especially with Freshservice, we are seeing that we are able to replace or compete better with ServiceNow. In Freshdesk, we have a very heterogeneous set of customers. The top customers of Freshworks are all Freshdesk customers, scaled B2C companies. So these larger companies are driving a different revenue shift, but we have no plans to abandon the SMB. If you look at our 56,000 customers, so this is a long tail of customers that keep growing with us, right? And in the IPO S-1, we actually showed that every cohort of customers since 2012 is actually positive in their contribution. We have customers paying us more than $5,000, which is 14,000 customers; and then customers paying us more than $50,000 is around 1,400-plus customers, if I remember correctly, and that is growing at 60%. So we don't have to do anything significantly different, and we are not planning to go after the traditional Fortune 500. So we like to stay focused on making sure Freshworks is built for the Fortune 5 million, as we call it.

Got it. Got it. And so when you think about 2022 and the kind of investments that you're really focused on, where are your main investment priorities coming into the year?

So on the product side, we already covered in Freshservice, we continue to sharpen our mid-market capability in the ticketing market. We are investing in conversational agent experience across digital channels and bot experience self-service automation. In ITSM, in the back office side, we are investing in ITOM, IT operations management, to help IT teams proactively solve for outages and infrastructure outages rather than waiting for employees to complain about them. We're also expanding into ESM to help other teams like finance, legal, HR provide a modern employee experience. Last but not the least is our unified CRM project, where we are working on moving Freshdesk on to the Customer 360. So that's an area of priority. So all these are the 3 most important areas of product prioritization.

Got it. Let me throw out one more question then we'll open up the floor to questions. When you think about your development and your growth going forward, I believe something around 80% of your head count is in India, right? When -- how is that a potential area of differentiation and an area of leverage, frankly, that you can get on both speed of developments as well as, frankly, cost of development of your product portfolio?

Yes. So we started our company in Chennai, and I'm super proud of our Chennai roots and our India heritage. So I think it's a very strong advantage. India is a strategic advantage for Freshworks not just because we have R&D there, of course, having access to a high-quality talent pool in India, where Freshworks is one of the preferred employers to work for, it's a big differentiator in terms of -- and that's why we have been able to like build so much innovation and launch so many new products over the years. But more than R&D, we also have our entire SMB go-to-market teams closing a business. So SMB business is today, I think, slightly -- approximately 40% of our revenue comes from companies with less than 250 employees. So we are able to close all of that from Chennai. We have hybrid marketing teams. Our inbound engine is entirely -- the marketing team is entirely in India. So I think we are able to leverage India as a talent pool not just for R&D, but also for go-to-market initiatives.

Got it. All right. Well, let's see if there are any questions from the audience. No? All right. I'll just keep going. Let's maybe shift gears to international, right? It's -- because of your roots in Chennai, for a business your size, you actually have a very big international exposure. How are you thinking about growing your international presence going forward versus really building out your U.S. presence as well?

So at Freshworks, we were international from day 1, right? And what you call as international from U.S. is very different from what we used to call as international from India. So our revenue mix is, I think, 40-40-20 approximately if you look at U.S., Europe including U.K. and then the rest of the world. So I think that -- I don't expect that to change moving forward because it's broadly reflective of the market sizes for overall software itself. And we believe that it's actually a well-differentiated, well-diversified spread in terms of not being reliant on any one market. Unlike other companies, which start off with a 60%, 70% revenue in the U.S. and then branch out, I think we are more diversified.

Got it. From a vertical perspective, are there verticals that you're more -- where you're more concentrated than others? And as you think about growth going forward, are there some verticals that you're focused on more so than others?

So each one of our product categories are very horizontal. So we have customers across verticals. So we are not focused on any particular vertical.

Got it. Awesome. Maybe just last one. Coming into 2022, right, do you feel like the business' growth is constrained in any way, whether it's the ability to hire more on the product side or more -- hire more aggressively on the sales side? Or is it just, look, this is the natural cadence of business growth going forward and there's not like almost like a throttling of some sort that's happening?

If I have to start or talk about the constraint, I think globally, everybody understands the macro of the Great Resignation and talent is very hard everywhere. So that's the only constraint. But on the contrary, how we feel about Freshworks in 2022, if you really zoom out, we are in 2 really large markets at scale: the Freshdesk and Freshservice products. The competition dynamic is also favorable. You see Salesforce and ServiceNow as a large enterprise player. In CX you have Zendesk. And in ITSM, we have Atlassian trying to acquire 3, 4 companies and making a play. These 2 markets are really large, and we can continue to execute and go for a very long time, and I think we feel really confident about the business in 2022. The macro is the macro, but we are not worried about that. We can -- our focus is focus on our opportunities, keep our heads down and execute.

Awesome. All right. Girish, this is a great session. Thank you so much for joining us today. And I hope you have a great rest of your day.

Thank you. Thank you, Stan. Thank you all.