Freshworks Inc. (FRSH) Earnings Call Transcript & Summary

Hey, everyone. Thanks for the patience. I'm Pinjalim Bora Smith Cap analyst at JPMorgan. I blame the elevators on this one.

We were at 36, so we -- every floor coming down.

Yes. But delighted to have Dennis Woodside here, President of Freshworks. Dennis, welcome to the conference.

Thank you. Thanks for having us.

Yes, why don't we start with just an introduction about yourself when you joined the company and maybe a few words on what is...

Sure. So I'm Dennis Woodside. I spent about 25 years in technology. I spent quite a bit of time at Google, Dropbox, joined in September. Freshworks, as many of you know, is a business software company. We have about 65,000 customers worldwide, about 5,400 employees, founded in India.

Yes. I'm just silencing my phone.

Yes.

So you joined in September. I'm sure you had some expectations coming into the company. Talk about where were you positively surprised looking back now in whatever, 9 months or so? And were there -- are there some room for improvement that you have figured out at this point?

Yes. So coming in from the outside, my impression of Freshworks was that it was primarily an SMB business, that most of our customers were SMB, and that's just not true. Freshworks was started in the CX space. We compete today in CX, IT and CRM. Our first product was called Freshdesk, and that was targeted for smaller businesses, and we grew a very big business, using a product-led growth motion that drove customers in to try a free trial of our products, which we've later converted. And that allowed us to then continue to invest in the product. We invested in an IT set of products that does ITSM, today ITOM and ESM as well. And as those products matured, more and more larger companies, mid-cap companies, midsized companies, have been attracted to the platform. So we automate workflow for both employees and for customers. And increasingly, we have moved into bigger and bigger deployment. So a couple of examples. S&P Global, a large global organization. I want to say, about 10,000 to 15,000 employees. They have adopted our platform for all of their interactions with their customers. Their customers tend to be financial institutions, of course. Bridgestone Tires, more of a B2B use case. They have adopted us as well for their interactions with their customers on customer support. So these are big sophisticated IT buyers. And the reason that they're attracted to us is our software is user-friendly for their agents, for the people actually interacting with the software every day. And it's very fast time to implement. So unlike a lot of legacy software, which requires lots of consultants, and a lot of expense to implement and to run, our products tend to be simpler, easier to use, but still scale to these large organizations. So coming in, I thought that most of our opportunity, most of our business was more in the smaller end of things, been very pleasantly surprised that we're already making a lot of traction in these larger markets. And a lot of that is because the product is quite mature and ready. And we're getting pulled more and more into these deployments.

Where -- what about the second part of the question? Any areas that you think are lagging behind your expectations that you think you can improve?

Yes. I've spent a lot of my time focused on the go-to-market side of things. So if -- both from a sales and marketing standpoint, I think we historically have played a little bit under our actual weight in terms of our ability to get in, get in front of the right decision makers at the right time. So we made quite a few changes to how we go to market in the last 9 months, brought in a new set of leaders. So our CRO was previously an entrepreneur as well as a longtime Microsoft exec. He's new in role, brought in a new Head of Sales Ops who was the Head of Sales Ops for AWS. We brought in new sales leaders in Asia Pac, in Southern Europe, and a number of other places across the company. And I think talent really matters and getting the right talent, people who've been at Salesforce and Zendesk and some of these other companies that have scaled up. We've also clarified our go-to-market motion to ensure that we have teams that are focused just on new business acquisition. And we've done actually quite well despite the macro economy in acquiring new business and winning new logos every single quarter and separating those from more of the account management and customer success teams, whose job is to grow our existing customers. That's really important because historically, those 2 things have been melded together. Most of the focus or a lot of the focus was on growing our existing accounts, and we have lost a little bit of focus on new business. And then we've really taken advantage of India. 4,000 of our 5,200 employees are in India, and we -- and which gives us a huge cost advantage, but all of our engineering is in India. We have focused all of our customer-facing resources in market but moved as much into -- or kept as much in India as we can, which has helped us drive efficiency. And as you saw last quarter, non-GAAP profitability, free cash flow generation, those sorts of things. So those are some of the things that we've done to try to adjust the selling model and continue to follow our customers up into the mid-market.

Yes. Understood. Now taking a step back, I wanted to ask you a more broader kind of vision question, right? You have dominated the mid-market, SMB space. You are playing in both the front office and the back office, right? When you look forward, and I hear that you might have some HR products at some point, you have IT covered, you have support -- customer support covered, sales marketing, obviously. As you look forward, what is the vision? Is Freshworks trying to be kind of the one -- one-stop shop for SMBs? This is the thing that you need to run new business. Is that kind of the vision? How are you thinking about the longer term?

Well, if you think about -- every company, regardless of size in the world is struggling with some of the same issues. How do I make my employees more productive? How do I make my interactions with my customers more productive, better for them? How do I apply AI and ML and bots to automate work that is lower value, so my employees can focus on higher-value interactions? That's not a problem that's confined to the largest companies in the world. And the competitors in the space have tended to gravitate towards those mega customers, top 2,000 companies in the world. We think that's a problem that -- these problems are experienced by every business in the world, and that is our opportunity. So we're focused on automating the work -- the kind of work that either is being done inside a company. So think about IT, you mentioned ESM. So ESM allows us to go beyond the IT department to solve problems for HR. Think about requesting a proof of employment, right? That's a fairly automatable task, but you need software to do that. Finance departments, legal departments, all of those can use our -- our -- what is fresh service for business teams, which is our ESM product. On the other side of the equation, every interaction with customers, we have software that can support, whether that's a customer support interaction or sales and marketing interaction. So our vision is, every company is going to need to automate all of these interactions, and we provide a platform that allows them to do that. That's easy to use out of the box.

Yes. Understood. You brought up AI. So let's go there, right? Generative AI is topic that you know it is. How is Freshworks kind of thinking about generative AI across its platform?

So we've offered AI functionality since 2018 through a product we call Freddy AI. Now what we do today is we can do things like summarize interactions. So if I'm a customer support rep and I'm going back and forth with a customer in a complex quarry, let's say, it's S&P Global with one of their institutions, we can summarize that interaction using AI, so that a manager or the agent attrits the next agent can see exactly what happened over the course of many, many back-and-forth interactions. So that's a functionality that's available now. If you're on the marketing side, we can suggest campaigns. As you're creating a campaign, what is the -- how do you describe your product, what is the offer that you're making, all of those things can be automated with AI as well. So we think AI is -- it's very much like where bots were a couple of years ago, where it's obvious that everybody is going to want some AI functionality to improve the interaction with our customers. We view our job is to create those products that plug into the platform that we've already built and enable our customers to take advantage of AI, whether that's generative or whether that's AI that's proprietary to their data set or proprietary to our collective data set at Freshworks. So that's what we're building.

How much is kind of the incremental generative investments at this point? Freddy has been there for some time, you've been investing. How much is the incremental -- are you leaning in on generative at this point?

Yes, we are. So we view generative as a functionality that can augment what the agent is actually doing. We don't view it today as something that's really ready for prime time for the customer. So an example -- another example would be, if I am an agent and I'm in an interaction, let's say I'm working at Blue Nile, which is one of our customers. I'm in an interaction with the customer and that customer is having a problem with a product, we can suggest the answer using generative AI in a way that makes the agent more productive, but the agent doesn't need to use that answer if for whatever reason, the answer is not appropriate or the agent can edit that answer in a way that's more appropriate for the customer. So those are some examples. Another example is tone, right, ensuring that your agents are using a similar tone across all their interactions with customers that through what we call rephrase. That's a really important way of improving the interaction with customers and ensuring some level of consistency in how your team is communicating with their customers. So we think it's -- we think there's a lot of application for generative and a lot of our investment is going there.

And how are you -- if you look under the covers, how are you kind of training the models? Is that -- the data is -- obviously you have a lot of customer data, which is -- there's a private aspect of it. How are you kind of segmenting that?

So there's 3 different data sources. So think about data that's proprietary to the customer, data that's proprietary to our overall platform. So we -- and that's what Freddy has been based on so far is those 2 things with a little bit of the predecessor to ChatGPT-4. What we are not going to do though is allow that data to be used for training the external models, right? So we're ensuring that, that data remains protected in a sense because we don't want the models to learn from what they're being asked, which they could.

Yes. Yes, understood. So I'll ask one more on AI and move on. But this there's a debate around the productivity gains that AI brings and kind of the pressure on seats, especially around call center seats, contact center seats and all that, right? You obviously play in that domain. But there's a counterargument that as humans are replaced or number of seats go down, you have the ability to capture part of the value that AI is providing. How are you kind of thinking through all of that from a pricing point of view? Help us understand that?

So we're pricing AI in a couple of different -- or any kind of automation in a couple of different ways. We've had bots for years, and that's a form of automation that potentially does impact seats. We price spots in our higher packages, you get more bot sessions. And then secondly, if you exceed those bot sessions, you basically move to a consumption model where you have to buy more sessions. So we think that kind of a model applies in AI as well. What we'll do initially though, is for access to the generative AI functionality, we are going to price that in addition to the seat license. So that will be an additional price. Does AI affect seat count? I think automation generally has affected seat count that's -- historically. We see a lot of our customers relying on automation so that their agents can do higher value activity. And we think that, that trend also will persist.

Understood. Okay. Let's talk about macro, right? That's topical again. You reported good results in early May. I'm sure you have spoken to a lot of customers. What's your view of kind of the macro environment at this point, the demand environment, the business sentiment from talking to customers?

So it's uncertain for sure. I think about our business in 2 ways. On the IT side, IT budgets are still going up. And there's still a large number of companies that are looking to automate workloads in IT that are either managed in a fragmented way, and they're looking to consolidate, not managed at all. So our ability there to win new business is actually quite strong as -- especially as the capability of the product expands. We've added in ITOM over the last year that allows IT departments to manage instances, which is super important. And we've added in the ESM capability as well. So on the IT side, we see less pressure. On the CX side, you do see companies that are not expanding their employment on customer support. And that obviously is affecting seat licenses. That said, our business is still -- our net dollar retention rate is still positive. We've -- it's come down over the last year. But our customers are still finding increasing value from our products. The other thing that we've been able to do over the last year is we have an increasing number of vectors of expanding our relationship with a single customer. So if you think about all these new features and functionalities, they open up entire new teams for us like ESM or ITOM. A lot of IT departments aren't going to buy an IT ESM solution unless ITOM is offered. When we -- now that we have ITOM, that opens up a whole new slew of customers that tend to be larger and gives us a vector of expansion. Consumption pricing is another vector of expansion. So think about bot sessions, think potentially about AI. And like I said, we think AI is another vector of expansion over time. So the macro is absolutely affecting everybody. But despite that, we've been able to grow through it, I think, because of the reasons that I have...

Can I double click on the ITOM part? I don't think it's well understood kind of what that -- use cases that drives. Maybe talk a little bit about that.

Yes, like very simply, if let's say that there is a security incident within one of our customers, you need to manage that incident actively. And what ITOM does, it allows the IT team to respond to the incident, manage it, basically work the problem until it's solved. So super important use case for IT departments.

Got it. Now as you came in, one of your obviously focus, as you were saying, is going upmarket and driving large deals, right? Talk about what that enables for the company? And is the product actually ready to go at this point to kind of scale up your -- it seems like you're adding some of these large customers already. Where do you sit in terms of your go-to-market motion at this point and the product?

Yes. So we're seeing more and more larger accounts bring us into deals because they're not satisfied with whatever prior solution they may have had, whether that's on the IT side or the CX side or even the CRM side. So every quarter, we're getting more swings at more deals. And these are sophisticated buyers. So think about a large industrial in Europe like Viessmann, right? Viessmann has been around a long time, very sophisticated IT department. We were in a competitive situation with a very large cloud competitor, where the customer was just not happy with the -- what the solution actually delivered versus what was sold to them. They were not happy with the cost of maintaining the solution over time and the cost of making changes to the workflow that, that solution was managing. So we get into the RFP, we win that kind of a deal or Carrefour in Belgium, right? So Carrefour Belgium interestingly came to us through a trial. So their IT department opened up a trial of our ITSM product. We saw that, we made the trial successful, which was a small trial, but ultimately, when we went in with our sales team and expanded that to a much larger deployment. So we have -- we still have this product-led growth motion that does get involved in larger deals, but we're also supplementing that by building out and we've built out a sales -- a field sales team that's capable of going out, getting into a competitive RFP process and winning. That has required us to, like I said earlier, like bring the right people in. We've made the investment that we think we need to make. So we don't foresee a massive investment going forward in sales and marketing to drive that upmarket motion. And we're being brought more into deals than we're having to push to get into deals because there is dissatisfaction out there with the current incumbents in all of these spaces.