Good morning. Can you hear me? Okay, we'll try this again. My name is Brent, Brent Bracelin. I'm the co-head of tech here at Piper Sandler. Thank you all for joining us in Nashville.
This is. We're now awake. Yes.
Okay. It's a wake-up call. Really pleased here to have Freshworks. We're gonna kick off the fireside discussion today after the state of AI presentation and discussion. Very insightful this morning, but pleased to have Tyler, CFO of Freshworks. Tyler, welcome to Nashville.
Brent, thanks for having me.
Absolutely.
Yeah.
So you just came off your first, I think, Analyst Day since the IPO a couple of years ago.
Yep.
Maybe we'll start with the highlights. What were some of the key messages and disclosures that you provided investors last week?
Sure. Yeah, we did our first Analyst Day last week in San Francisco, almost at the two-year anniversary of our IPO, which I think is next week. One of the things we knew there had been a strong appetite to kind of get a little bit more insight into the product-level data on ARR and whatnot, and so we did disclose that. With that back up, you know, as a reminder, we're, you know, about a 13-year-old software company. We're really playing in three massive TAMs. Our biggest product, which we say is about $300 million, is Freshdesk. It's our customer service product.
And that was really playing from the SMB all the way up to kind of the low enterprise, doing it on a global basis, across, you know, kind of three go-to-market motions, which is true for all of our products. An inbound SMB motion, which is a high-velocity motion, where, you know, a potential customer will land on the website. They'll start a trial process and convert. We have a field motion, which we've kind of built out over the last couple of years, but it's really still...
I'd say we're still tweaking it as we learn, and that motion is there because we've learned that we've earned the right to go engage with larger customers, which was another theme of our Investor Day, kind of disclosing some of the data around our larger customers and the customers paying us greater than $100,000 is what we put out there. And then we have a partner motion. So Freshdesk, our customer service product, about $300 million. Freshservice is our fastest-growing product. It's playing in the ITSM space. It's about $260 million in ARR, growing very fast and just positioned really, really well. And then we have a sales and marketing product that we disclosed the numbers. It's still new for us. It's still small.
We're very excited about it. We're working on it, and that one is what we believe can be our next $100 million product in the coming years.
If you look at the software industry as a whole, we've kind of been in this deceleration mode. We look at the cloud tracker, hundreds of software publicly traded companies. Growth rates across the industry have kind of basically been cut in half in the last two years, but we're starting to see some stabilization. One of your products has just been a growth engine, that's Freshservice, right? You kind of gave some specific ARR numbers there last week. $260 million ARR business, growing 40% year-over-year. How has that business done so well?
Mm-hmm.
It seems to have bucked some of the slowdowns and moderating growth trends we've seen across the broader software market. What, what's happening there?
Sure.
What's driving that?
The genesis of Freshservice was we actually saw, you know, a bunch of our Freshdesk customers using it for internal use. And we said, "Okay, that's great, but that's actually not what you need. You need a purpose-built solution." And so we built it ground up. And GR, our founder, he had already built ITSM solutions in the past. Built it ground up to serve, you know, customers' needs for internal use, and it starts with IT and IT ticketing. And we've recently announced Freshservice for Teams, which is actually for other functions within an organization.
By building it ground up, purpose-built, and really, you know, SaaS first and just, you know, focused on modern technologies, which is also injecting AI and everything else into Freshservice, is just really competitively positioned very, very well in a market that's dominated at the top end by ServiceNow, and then has a whole bunch of legacy players on the side, which still a ton of on-prem. And then you've got kind of Atlassian with their JSM product and ManageEngine, kind of at the bottom. And so we're regarded as kind of the number 1 SaaS alternative under ServiceNow in that space. And we've just been innovating really, really quickly. So to you know, right when we went public, we actually talked about it kind of as our second product.
We didn't have, you know, we didn't say a ton about it because the reality at that time, the product wasn't quite there yet. And just the, the pace of innovation we've been able to do has really earned us the right to go engage with a lot, larger companies. And so that is truly playing in kind of that low end of enterprise, so we call it kind of the 5,000-10,000 employee businesses, and squarely in mid-market as well, which is up to 5,000 for us, and doing incredibly well.
So if you think about that Freshservice opportunity, clearly capitalizing on that, number one alternative, ServiceNow, what about the core? The core has slowed. The core customer service product, has slowed. You've got the macro headwinds, a little lower, end customer base-
Mm-hmm.
A little more churn in that market. What are the levers that could maybe re-accelerate growth in the core?
Yeah. So we highlighted a bunch of levers that we're focused on for growth kind of going forward. But if I describe what's gone on with our Freshservice products, really two things. At the end of our 2022 Q1 call, we talked about, you know, starting to see something happening in kind of the market. And it was kind of the theme all last year, which is really that, you know, companies just weren't growing, right? And they weren't hiring, in some cases, they were downsizing. This actually impacted our Freshservice product the most. If you think about that, it's servicing companies who have large, you know, potentially large support groups, and could rapidly grow as those companies, you know, did well.
As such, you know, what would happen in Freshservice, I mean, in Freshdesk, we would typically land smaller and grow with our customer base. We actually highlighted this in last week's Investor Day, where we talked about customers greater than 5,000 were landing there consistently, but our customers greater than 50,000 and 100,000 were really growing into that more than we are landing. And it's a lot of that's driven by our customer service product. What happened over the last 18 months is that, you know, the impact to our upsell motion was really impacted by companies not growing. And so that is actually what's also driven our net dollar retention down.
And so we said, "Okay, we're gonna have to figure out a way to grow with our customer base outside of agent addition." And so there's, you know, a couple of things we're doing. First of all, really making sure we stay in line with what the market wants. And the first thing is that everything's moving to more conversational messaging as opposed to traditional ticketing. And so we re-released our customer service suite recently, which is really bringing a ton of the traditional desk functionality and really anchoring it around chat. And that Freshchat product is now really built for, you know, WhatsApp, Apple Business Chat, everything else, to bring kind of this common view and template to our customers. And so that's the core of it.
Outside of that, it is really thinking about, okay, how do we inject growth across not just, Fresh, our customer service product, but our sales and marketing product? So we talked about a PLG 2.0, and so PLG is a product-led growth motion. Really, you know, I talked about, you know, the first thing is a high-velocity inbound, and something we really haven't kind of, you know, touched much in the last, let's call it, seven years. So really revamping, the entire trial process and how, customers land. Specifically because, you know, you have two... You know, you have a customer who could be very sophisticated who lands, who really understands, versus the very small SMB, and they actually have to have different journeys, and so we're working on that. Working on cross-sell of our products.
Only 25% of our customers use more than one of our products, and that is actually mainly driven by add-ons as opposed to our core products, and so having prescriptive motions to increase the cross-sell amount. Looking at our new AI products that we have out there and really ensuring that, number one, we do it right first, but then actually, how do we increase, probably starting with bot, you know, usage, which will lead to monetization as well as the copilot product we have, and really focus on making sure that we're, that's gaining traction. New products, as well, and continuing to introduce new products, and we're continually innovating as fast as we can to think about that. Freshservice for Business Teams is a great example.
And then lastly, it would just be, you know, broader economic stabilization, which we're not really counting on, to be honest, and that one is kind of the last on the list of what would have impact.
The disclosure on the top 20, I think, or top 25, I think there was, you know, 10 customers that had Freshdesk and Freshservice, and then I think two of the 20 that had all four products, Freshservice, Freshdesk, and Freshsales, and Freshmarketer. As you think about that multi-cloud opportunity, we hear a lot about vendor consolidation. You have a very compelling ease-of-use story and a compelling cost story as well, as I think about the value of Freshworks. When do you see or are there catalysts that could accelerate multi-cloud adoption, or are there certain things that you think you can control to drive broader adoption?
Yeah. So Brent was talking about, we did have a slide up there which highlighted our top 20 largest customers, and then what products they use, and every single one of them actually was a customer service product owner, and then a lot had also Freshservice. One of the catalysts that we see is that, okay, Freshservice has increased so much, that and it's incredibly well received, that's selling to the head of IT, often a CIO or a VP of IT. Now that we have that mind share, we need to leverage it more, which I can't say we've done an incredible job on. And the reason we need to leverage that is that individual often has a lot of decision power on other software things, purchases being made.
And so I think that's gonna be one thing that we're gonna be focused on, specifically in our field motion. But the other area is really with our, our customer service suite, adjacent to our Freshsales and Marketing product. And that is just a natural, add-on, thinking about, you know, from the lead all the way through to support, being able to provide our customers this seamless, journey for their customers, and that's something we're very focused on as well.
The Freshservice CIO seems like it's a more important buying center. As that becomes more important part of the business, growing 40%, is that really the insertion point that you're gonna sort of tactically focus on to cross-sell? Is it easier to cross-sell land with Freshservice, or is it easier to land and expand with Freshdesk?
I think I don't know if one's easier than the other. I think what's what I think we're doing, and I said we're just continually tweaking the field motion, is that we're realizing it's probably unrealistic to think that our reps can be experts on both that they could have, you know, deep knowledge on, say, support, but also deep knowledge on IT. 'Cause IT is now broadened not just to ticketing, which is, you know, kind of ITSM, but it's ITIL, it's ITOM, it's ITAM, and now, you know, other functions. And you have to have an understanding of that. So you'll see us, you know, creating probably experts, right? And we've done a little bit of that this year. It's kind of new on overlays, but I think that'll continue to evolve.
To be honest, we're agnostic as to where we land, right? The question is, once we land, can we be super successful with our customers and make sure they understand that we do have these other product offerings? That's, I think, the area that we haven't been great at. If we go query our customers, oftentimes they don't even know that we might have, some of the other products out there.
Let's spend some time talking about the demand environment. I would love to compare, contrast the demand visibility you're seeing, you know, today versus a year ago. I think a year ago, you started to see cracks, right?
Mm-hmm.
You started to see churn pick up a little bit. You started to see net retention rates slow down. The expansion specifically were challenging. Maybe compare the environment one year ago versus the demand environment you're seeing, you know, right now.
Yep. Yeah. So our net dollar retention, when we went public, were in the mid-teens, and at the beginning of last year, we were kind of, let's call it 110-ish, low teens. And we've said, "Hey, we're gonna go down to 105, 106, this next quarter, and then we think it's gonna stabilize." To be clear, our churn, actually, we've done better at, and so we've actually, reduced churn, kind of every single quarter, or it's remained stable. And so when you think about that, if you have a, you know, tailwind on the churn side for net dollar retention, really, the downside is really coming from expansion.
That expansion was already—that's almost all of it is really being driven by the lack of agent addition, a lot of it on the customer service side. We're not seeing that come back right now. It's not like, okay, this was a temporary thing, and it's coming right back. And I said in that, in the levers for growth, broader economic stability, I think, is that last thing that we're saying we can't count on. And if companies go back to hiring, that's fantastic, but I don't see it happening right away. I do think we're in a new normal. It's just the way we also run our business, which is all of my CFO peers are doing the same thing, right?
We're being very prudent about hiring and making sure that we're hiring the right people in the right places. We're still hiring a ton of people. We are at Freshworks, but it's not at the pace that we were previously. And so in general, I think we are kind of living in a new world, so to speak, and that companies need to adjust. And if they were reliant on a ton of their customers just rapidly expanding, they need to figure out how to grow outside of that.
Near term to the environment, kind of feels like we're in this new normal.
Mm-hmm.
No real change on the expansion opportunity, agent expansion opportunity that's been challenged for a while, continues to be a challenge. As you think about just the business model, though, you are seeing a mix shift to this Freshservice-
Mm-hmm
... ITSM opportunity that it seems like you have a lot of momentum. Will that change your NRR, have any impact in three years from now, just as you think about mix shift? And if not, what does change the model with that mix shift to Freshservice?
Yeah, I'm not sure it'll change. We do think we should be 110 kind of net dollar retention business, and so the focus is how do we get back there? And that's kind of what we talked about when we went public. You know, think about us as kind of this 110 net dollar retention. Freshservice has actually great, like, churn characteristics. It's got what I would consider enterprise-grade kind of, you know, retention. But we also tend to land larger there and not expand as much. So there's, you know, six of one, half a dozen of the other, and from that impact. We are focused on the new products within Freshservice, but mainly Freshservice for Business Teams.
That is really the first new add-on product we have there, and that is, you know, kind of. It's six months old, if I describe it. And so the expectation is that we'll get traction, and we would be able to upsell our customer base off of that. And so I'm not like, I'm not sure how it'll change our, our net dollar retention going forward, but I think it, you know, we, we do look at that across the entire spectrum of the customer base. I think the real change there is, if you have a very happy customer and it's a pretty sticky product, you know, can we get more engagement on the other products with those customers?
So, you know, obviously, it's been a challenging couple of years for all of the software companies from a valuation perspective. Feels like we're kind of bottoming. As I think about your business model, $1 billion in net cash, you talked about a new CS suite potential lever, you talked about PLG 2.0 potential lever for next year, you talked about these new AI products, you have obviously some changes to the sales team that you've made there with some new leadership. Sounds pretty good, in my view, outside looking in.
Mm-hmm.
What keeps you up at night as you think about kind of going into next year? You know, what, what, what are the things you're worried about?
Yeah, I don't know if it's what I'm worried about. I mean, we have to go execute, right? That's just it. We've laid out a kind of a plan, and with a bunch of different growth levers. What we did say last week is, you know... First of all, we're going through this three-step process on what I would consider the whole business model. First step was to get to sustainable free cash flow positive. The second was to get to non-GAAP operating margins, and the third is the GAAP, to get to GAAP. I think we've knocked off the first two this year, and we kind of leveraged some efficiency muscle coming into this year, and it wasn't. We didn't have to do anything dramatic.
It really was as a result of the fact that we were hiring so fast in the last couple of years, that we slowed that down and really focused on efficiency. So we have flipped to producing cash, which is great. Second thing, we said, okay, we're very focused on Rule of 40, and we're gonna, you know, get ourselves there. And we said, we'll be Rule of 40 by 2025. Right now, we're essentially Rule of 30, with, you know, 19% growth for this year on the top side and 10% free cash flow margin. By 2025, we expect it to be half-half. And then we also said we'll be $1 billion in revenue by 2026. And, you know, what we, we laid out what we'll look at, what we'll look like in 2026.
You know, a lot of the growth is gonna be on the back of our service. It's gonna be continued increase in ARPA across our customer base, and larger deals, which is the trend that we've seen. We built that entire model based on what we see today, and then those growth levers that we laid out would be on top of that. The thing that, you know, keeps me up is the execution against those growth levers and making sure we're on track to go do those things. Which it's, it's a good spot to be in. I think we are in control of our own destiny. We just need to go execute.
Before we dive into kind of an AI-specific discussion, we've gone 20 minutes without AI, so that's probably-
Mm-hmm. That's good, yeah.
A good approach.
I even threw it out once for you, and you didn't pick it up.
No, no, I'm not going there. Save that for the end. Any questions from the audience here before I go into my last two questions on AI? Okay. Let's spend some time talking about AI, but not the AI products you have, but how you're thinking about using AI internally to lower costs.
Well, we use our own products, so that'll be the first thing that we do, right? By using our own products.
Where's the biggest area internally that using your own products has helped you save money? Is it in support? Is it in engineering?
I don't think it's in engineering. Yeah, I don't think that stuff's been rolled out as much. It has to be in support, would be my guess. I don't actually have a clean answer to that in terms of the quantification of it all, but I'm assuming it's in support. Even if I look at our margin structure, I think we're really pretty healthy on margins, which support flows through, and so that's got to be the area. I think as a CFO, we're all looking at how do we build, whether it's AI or just automation, into as much stuff as possible.
That's just gonna be a continued theme through kind of if you think about all your operational tracks, how you kind of drive those tracks to be as efficient as possible, while also reducing kind of human intervention where possible, which reduces errors and increases your capability to do things faster, more accurately. And so we're looking at across the whole business.
Internal use cases sounds like it's still TBD, but like definitely feel like part of the automation strategy. Externally, as you think about growing revenue, what's been the feedback on the AI feature that seems to be resonating the most?
I think what we've highlighted two things. What we did in the Investor Day last week is we actually did demos of the products, but the demos were live, and so they're actually all stuff that is live, either in GA or beta right now, and we have thousands of customers beta in our products. Specifically, we've announced, you know, kind of, Self Service and Copilot, and we call it Freddy, is our internal moniker for our AI products. The thing is, we've always had Freddy. I mean, we've talked about Freddy when we went public, and so now we're kind of like Freddy Plus, which is really, you know, kind of supercharged with large language model, you know, built to be able to take care of all those capabilities.
The one thing we came out already, and we changed our bot pricing. And so it's not. It's tangential to AI, but the AI is now built into a lot of the bot capability. And, you know, previously we had entitled customers who bought Freshchat with, you know, a bunch of included number of bot sessions, and then the packs, the charge for packs was lower, and so we increased the additional packs, and we actually reduced the entitlements. The exciting thing there is not just about the capabilities within the bots that is really, you know, AI driven, but also the Bot Builder that we've come out with, which, you know, one of the biggest hurdles was that a company. We had the bot capability, but they had to build the bots.
You know, not every company could go do that or had the expertise to go do that. Now, you don't really need technical expertise internally to be able to do that because there is a Bot Builder that, you know, Freddy helps you build the bots you need to build, which we're pretty excited about.
Expose data to the bot. The bot builds the bot for you.
Yeah. One of the quotes from last week is, you know, "Bots building bots," which is pretty neat. The other is Freddy Self Service, which is really focused on... So, or Freddy Copilot. Self Service is really bots, which is really how do we actually, you know, create the capability for our customers to engage with their customers and solve problems without human intervention? Freddy Copilot is how do we help the agents actually do their jobs better? And we announced a bunch of products there. They're all out right now. They're all in beta, and it's pretty exciting, and they're using it. We've got some incredible feedback from customers. We're gonna make sure that it's tested a ton, and then we roll it out and actually start charging for it, because it has to be accurate.
You have to prove value if you wanna charge, and the more it gets used, the smarter it gets. And so that's what we're doing right now.
We're out of time here.
Right.
-But thank you so much, Tyler, for sharing your thoughts here this morning and hopefully you have some great-
Thanks for having me. It was great.
Absolutely.
Thanks.