Good morning, everyone. So look, we're just delighted to have Freshworks joining us at the Citizens JMP Technology Conference here at the Ritz-Carlton Hotel in San Francisco. Sitting to my left is Tyler, the CFO, and thanks for coming, Tyler.
Yeah, thanks for having me.
Yeah, yeah, yeah. How was your commute?
The commute was okay. It's a little rainy, too. I didn't expect that, but yeah, it was good.
How long did it take to get here? What time did you leave?
45.
45?
Yeah.
Yeah.
Yeah.
Isn't it funny? Is there actually traffic again?
I'm not in the city very much anymore, so -
How was it when you came in? Did it seem like it was the apocalypse, or-
No-
San Francisco seemed okay.
... it actually seemed okay. Okay.
Yeah, it's shocking!
Yeah.
It's actually, so, you know, despite what you might read-
Yeah
... San Francisco's coming back to life.
Yep.
All right. So, our framework for today's conversation is that I'm going to ask: How's business? And then we're going to go back to September 2023, when Freshworks laid out a three-year plan, and they broke that down by their three product categories. So we'll talk about that. And then we'll talk about AI a little bit, and then we'll open up to questions.
Awesome.
All right, so starting at the top. Well, by the way, just for anyone who doesn't know, tell us about your professional background-
... prior to Freshworks.
So I'm four years at Freshworks. Before that, I was almost 10 years at Zuora. So I joined Zuora, we're about 40 people, something like that. About-
That's 2010. Was it that?
Yeah.
When you joined?
Yeah.
Wow, I didn't realize.
Exactly. And kind of went through a journey with them, which was great. And took them public. Left about two years after we went public. My first CFO job was with a mobile payments company called Obopay, which was really fun, actually.
Oh, I do remember Obopay. What happened to Obopay?
They eventually kind of sold piece parts.
Yeah.
But it was a great thing. It was just too early. But that was a lot of fun. I was at a company called Decru before that, running all finance. We were a hardware and encryption business.
Oh, I don't know.
We sold that to NetApp. I was a controller of emerging products group at NetApp. Before that, I was, did a little while at Siebel Systems, running finance for their on-demand division that they formed with IBM.
Mark Barrenechea, was that... Who was the guy who ran that?
Well, there was-
It was an acquisition, right? It was an acquisition of-
Well, we bought Upshot.
You bought Upshot.
Right?
Yeah.
And Keith Raffel was one of the founders of Upshot, and Rob, who ended up becoming the CEO-
Oh, that's who it was.
... of Intacct.
Yeah.
Right. But then there was actually, like four different leaders. Mike Betzer was another guy, so we bought a company called Ineto. Mark Sunday was the CIO. He ran it for a while, and Bruce Cleveland, we brought back in to-
Oh, yeah
... to run it. So yeah, it was a, it was like a swinging door of different leaders. And before that, my private experience was at POET Software in the late 1990s.
Oh, my gosh.
I was a controller. We took that public. Really interesting deal. We had half our money from Europe, so we took it public on the Neuer Markt, but we're a U.S. company, so we had to file with the SEC as well. And then I started at Coopers & Lybrand early.
Tom Siebel was sitting there yesterday.
Oh, yeah?
Yeah, he's landed on his feet.
Yeah.
Tom's doing just fine. Okay, so this, you know, it's actually you look younger than you are, apparently. So one, two, three, four, five. So this is your sixth company in a fairly significant-
Yeah, it's my fifth private.
Yeah.
Three of them got public. We sold one, which was Decru, and then Obopay was a fun experience.
Yeah. Okay, so that raises the question: Why did you pick this one? Because you-
Yeah
... had plenty of reps, right?
Yep.
So you kind of-
Yep
... probably knew what you were looking for.
I actually didn't think I was going to jump into a new gig after leaving Zuora. I thought I'd take some time off. But got introduced to G. First of all, he's just an amazing human being with an incredible vision. But I've always thought about looking at really, really big markets that are either, you know, broken or ripe for disruption.
Let me stop you. How were you introduced to G?
I, I-
G, for anyone who doesn't know, is the founder of G.
Yeah, Girish, sorry. Our CEO. I had a friend who's actually a recruiter call me and said, "We've got a really special one.
At the time, Freshworks was literally in the building next door to Zuora, and so I just walked next door.
Oh, they were?
Yeah.
In that building.
Yeah
... where is it? In San Fran- not San Fran-
Yeah, Bays hore.
Bay Meadows.
Yeah, right there. Just started talking to him-
That's really funny.
... and just hearing about his vision and what he was building.
Had you seen him, like, in the elevator or something, or in the lobby before?
No, it was in separate buildings.
Okay.
Actually, the thing about Freshworks is, which is still to this day, we are not incredible at brand marketing. And so I'd actually never heard of Freshworks-
... I thought it was the most kind of Bay Area SaaS companies. And we actually used them at, at Zuora, and we used them for internal IT, Freshservice. The product, we, you know, we had a small implementation of that. And then you start asking around, it's like: Oh yeah, we use them too, and we use them. And then you, you start realizing they're, they're much bigger than, than what I thought. But it wasn't Freshworks that was known, it was Freshdesk or Freshservice-
Yeah
... or, or something else. But really, the reason that, that I got there, culture was one, but two, the capability to go attack a global SMB and building products for, the end user, which is really building it for the SMB, which means it has to have an incredible user experience, has to be really, really, easy to get, implemented and then, you know, has to be affordable. And if you build your products that way from the beginning, and then over time, you add feature functionality, all of a sudden you kind of wake up and you're, you're, have the right to go engage with larger companies.
Yeah.
But you've still-
It doesn't work the other way.
No, you can't do it. We tried to at Siebel.
I know, yeah, yeah.
It didn't work. That's the way Freshworks was built, and we stayed true to that DNA, and that's kind of the evolution that we've gone through.
And so what are the characteristics to be able to move upmarket? It has to be affordable, easy, real-
A great user experience.
Great UI, yeah.
We say we build our products for the end user.
Yeah.
We don't build them for the C-suite.
Yeah.
We build them for the actual agents and everything else who are actually using the products. The second, they have to be really easy to implement. And so you have-
Right
... great, you know-
Right
... easy to onboard. Still to this day, you know, even though we're starting to engage with larger customers, our implementation times are, you know, kind of in months, not in quarters-
Yeah
... in some cases, years, for really heavy products. Third, has to provide great value.... right? We have to, and we, we do, try to build great software and, deliver great products at a great value, and that's true to our DNA as well. And so those three things, you stay true to that, it really is the capability to add feature functionality over time while you do it, and then you get pulled into deals. Because, you know, mid-market, low enterprise customers say, "Well, you have everything I need, and it's, you know, a great value, and it's really easy to implement. Will you please come, you know, engage with us?
Yeah. Do you know this company, DigitalOcean?
Mm.
Yeah.
Mm-hmm.
So I've had people ask, “Well, I don't understand. Why would you use DigitalOcean when you can use Amazon Web Services?”
I had one CEO say, "I don't know, Pat, why would you buy a Honda Civic instead of a tank?
Okay, well, the Honda Civic will get you around, you know-
Yeah
... if I want to shoot things-
Yeah
... then I need the tank, but I don't need to shoot anything, right? So yeah.
And it's going to work, and it's-
It works great.
Yeah.
They work great. They work great. Okay, so, it's actually a helpful little framework for us as we think about other companies.
Yeah, but that's what attracted me-
It's helpful. It's helpful.
It's great.
It's great. Okay, so then next question, how's business? What would you say?
I think business is going exactly as we thought, and is actually doing well. We're really proud of what we accomplished last year.
Yeah.
First, kind of just in our, our, kind of more shift, I say upmarket, but it really is getting pulled into more mid-market, low enterprise deals. It's really being led by our Freshservice product, which is really regarded as the number one ITSM solution, kind of underneath ServiceNow, for that, that lower enterprise space. And that continues to do really, really well. The AI capabilities that we built in, you know, both into Freshservice, but really into Freshdesk. You know, we've got thousands of customers who are using our beta product of kind of Freddy Copilot towards the back half of the year, and that's now, you know, just flipped to GA. And so our sales folks are, you know, out selling it and starting to convert those customers.
And then lastly, kind of, you know, what we were able to do on the efficiency side. There's, you know, always been a culture of efficiency in the company. We are, you know, founded out of, India, and by far, the majority of our folks are in India. It allows us to, you know, have, number one, access to highly technical talent at a really efficient rate, but also, sell globally, really efficiently. And we were able to flip to, you know, producing a decent amount of cash last year, as well as bringing, some non-GAAP operating profit. And that was a journey that we had talked about, and, you know, we were able to accomplish it.
Yeah, so that's a lot of the past. How's business today?
I think it's similar. We came to this realization that, okay, we now have two, you know, kind of separate businesses in, in some respects, from a go-to-market perspective. We have the inbound business that, you know, is really top-of-funnel lead, and top of funnel, meaning like, you know, we're driving to the website, through paid, organic. And really getting customers, prospective customers, to start trials and then converting. That feeds 100% of our SMB business. But the realization that we also have this field motion-
Yeah
... that, you know, is still relatively new for us, a couple of years, that is completely different. And so part of what we did the back half of the year, kind of led by Dennis, is bringing on Mika Yamamoto as our Chief Customer and Marketing Officer.
So she runs all of inbound now. And then bringing Abe Smith on, in the last, you know, we announced him a couple of weeks ago, to run our field, and he's, you know, kind of a proven field leader. Field for us is still, you know, it's not big enterprise sales. We're talking about, you know, sweet spot of $100K-$200K deals there. But that is, you know, something that we've been building out and something that is still driving the majority of our growth. And so making that realization, kind of hiring those two leaders, to really go to run those businesses.
Yeah. Were you guys, you know, satisfied with the performance of the sales organization in Q4?
Yeah, I mean, yes.
They hit their number, right?
Yeah, they-
Yeah.
We actually came into the quarter. We, so the SMB is-
The reason I ask, 'cause the stock is off, and it's perplexing to me.
Oh.
But we-
Yeah
... we'll get there.
Yeah.
But that's where that's the context.
Yeah.
Yeah. It was a good quarter, right?
It was a really good quarter.
Yeah, yeah, yeah.
It really was. You know, the caveats there is that we've been talking about pressure on SMB for a while, and so there's still pressure on SMB.
But that motion is going. We have a couple of initiatives. One of them is called, we call it PLG 2.0, in terms of product-led growth 2.0, which is a lot around the trial process, so it's a mix of product and SaaS and sales engagement for that inbound. The biggest pressure we've seen over the last couple of years is really kind of a drop-off in our expansion motion, and for years and years, really, you know, when I got there four years ago, we looked back, you know, five years before that, it was incredibly predictable. I mean, we'd land with a small customer, and the weighted average of all those customers, you just add agents over time as those customers grow. You know, some churn, but the majority add, and it was incredibly predictable.
At the beginning of 2022, that started to fall off, and we started talking about it, and, you know, that, you know, was the, has been the main pressure we've seen in the business, and that, that expansion motion, driven by agent addition, started to, to decline. And it's kind of in motion with, you know, broader economic pressures, and companies stopped growing and started laying off at the beginning of 2023. At the same time, though, we've been shifting to, you know, more field and, having a lot of success there, as our products have then earned the right to and go engage in those markets, and so it's really kind of offset some of those pressures. Lastly, we've been focusing-
For context, Net Dollar Retention constant, Chris, I'm just looking at this chart you guys have, right?
Q4 2022 was 110%... Right?
And then what was Q3, 106%, and then it popped up again?
Q4.
Like what was Q3?
Yeah.
Where did it bottom?
106%, 107%.
Yeah.
Then essentially 107%. We were calling 105%.
Yeah.
Almost all of last year, we were calling it, "Hey, we think it's going to go down to 105%.
Yeah.
It didn't.
Yeah.
And now we're saying in Q1, we think it's going to be 106%.
Yeah.
But we do think it's going to stabilize at that point. It's the reason it didn't go down as much as we thought is partially expansion motion, actually, specifically for CX. We had a really good quarter in Q4 on expansion, but also we've been doing really well on churn.
Yeah.
You know, since we went public, you know, churn at that time was kind of low 20s gross churn %. We've got that down to kind of mid-teens.
And so we've got seven—you know, 6-7 points of tailwind on Net Dollar Retention on churn improvement. But at the same time, you know, since we went public 2.5 years ago, our Net Dollar Retention number has gone from kind of, let's call it 113%-115%, based on constant currency, down to that 106%.
Even though we've got seven points of tailwind, that, that drop has all been on the expansion motion on agent addition. It will come back at some point, but we're just not counting on it, right?
Yeah.
We have to figure out how to grow without that, and that's what we've been doing.
Yeah. Okay, I guess we better talk about agent addition then, because this plays right into the whole-
... AI worry, right?
Yep.
Historically, what drove agent addition? That's definitely softball.
Organic. Organic. I mean,
Companies are growing, they're adding more customers.
Yeah, it's actually one of the things I liked about-
... Promotion as an SMB business. You can't convince a small company to buy more than they need.
Yeah.
Right? They buy exactly what they need, and as they hire another person, they add another agent. At the same time, if you're landing in the mid-market, you're landing maybe in a small division, and then you get to go cross-sell to another division, and that would be, you know, essentially agent addition there as well. But it really was just truly organic growth that just happened, right?
Yeah.
As companies, you know, stopped hiring, that's what slows down agent addition.
Yeah. Sorry, I'm trying to decide which direction I want to go. I think, let's do the AI thing.
Sure.
So, who was it? It was... Sherry, are you in here? The lights are blinding me. What was the article? What was the-
It was just the Klarna.
Klarna, yeah.
You just talk about the context in which they would be relevant to the customer service area. Obviously, Freshworks is a lot broader than what they're doing.
Sure, and I'll give-
And-
Yeah
... I'll give folks context.
Give a little context.
I'll give folks context.
Yeah, thank you. Thank you.
Klarna is a customer that's one of our very large customers that we've highlighted on calls in the past. They came out last week with a press release, and I might get some of it wrong, that they have built some of their own AI capabilities straight into ChatGPT for level one support. And so the clarification is that Klarna has never used us for level one support.
They use us for level two support, and nothing there has changed. In fact, they renewed in January, and we're super happy with that renewal, and they're still a really important customer to us. And the improvements that they're making on that level one, they've been working on that for a while, is our understanding, and there's nothing really new there. And so I think in that regard, if they were using us for level one, as we have a lot of other customers using us for level one, our Freddy AI products, really, Freddy Self-Service is the first, and think about that as kind of direct to customer engagement through bots and kind of issue resolution without human intervention. Then there's Freddy Copilot is our second. That is the one that just flipped to GA.
Freddy Copilot is about making your agent more productive. So once something does come through, making them more productive. And then there's Freddy Insights, which is about the management layer behind the agents, providing the company tools to go manage all of the agents better. Freddy Self-Service, we actually don't sell in itself. That's gonna, the monetization of Freddy Self-Service is going to come through increased bot usage. And so when we released our AI capabilities on Freddy Self-Service in the middle of last year, we also changed the entitlements and the pricing for our bots. And that is, we're starting to see that slowly come through, right? So what happens, we go sell. Companies have to build the bots, we go help them build the bots, and then as they are doing issue resolution through bots, through chat, mainly, right?
And that could be through Apple Business Chat, WhatsApp, any type of the chat kind of mediums that are being used. Our customers will have to buy more bot packages. Freddy Self-Service, the way we've priced it, and, you know, I think a lot of companies are going to figure out pricing over time. But the way we've priced it, we've made assumptions based on what we know around what we think the agent productivity is going to be. And that agent productivity theoretically should allow our customers to have fewer agents. So allows them to save money on headcount. But at the same time, they're going to have to add Freddy Self-Service, Freddy Copilot capabilities, and we're going to charge them for that. The ideal is that it's a win, win, win.
It's a win for the very end customer. They get their issue solved, you know, faster, better, with better resolution. It's a win for our customers. They get to save money with fewer headcount costs on the agent side, and it's a win for us as we get to monetize to a higher degree, even though there might be slightly lower agent count, the increase of the Freddy Copilot. It's still very early, right? Freddy Copilot just went GA, and we're starting to see it come through on deals, and so now we have to get the usage and actually increase that. So Freddy Self-Service is interaction-based, so it's bot packages, right? And one, you know, kind of bot instance is kind of a conversation within 24 hours with an end customer.
Freddy Copilot is an add-on to a seat. Yeah.
The pricing is roughly what?
Depends on the thing, but $29-$49 add-on.
The seat that you're adding on to is roughly?
List prices could be $79-$100. Something like that, I think. Looking at Joon to validate that.
That's a big uplift.
Yes.
Right? That's-
Yep.
I mean, what are 40%-50% uplift?
Mm-hmm.
It's interesting, 'cause if you look, like Genesys's pricing is on its website, it's not that much.
Yeah, I mean-
There, yeah
... again, I think-
Yeah
... we will learn a lot over time.
Yeah.
Right? You have to prove value to be able to charge price and, or charge it. With thousands of customers using it in beta over the last couple of months, we've gotten really good feedback.
Yeah.
You also need customers to use it to make the algorithms better, right?
Right.
That's what we've been focused on.
And so with, with the call center companies that we've been talking to, so like NICE and Genesys, the no-brainer use cases are Auto Summarization, right, and Agent Assist.
Mm.
So we hosted a fireside chat with Citizens IT team yesterday, and we have, I don't know, 1,700 agents, something like that. And I asked at one point, how many different... When they need to ask, answer a question, like a policy question or something, you know, sort of regulatory-
... in nature, how many different information sources do they have to go to, right?
Yep.
I thought the answer was gonna be, like, 10. It was dozens. So these poor people, right? So the knowledge solution, the Agent Assist, where an LLM summarizes that, right, and then they basically just read it off, is huge, a huge time saver.
Yeah.
The auto summarization at Genesys, on average, agents have gone from 3 minutes to 10-15 seconds, 'cause they just read it and approve. So what's the driving use case for Copilot?
It's everything you just said.
Okay.
I think summarization is actually a little bit more nuanced than that. If you look at our products, so we have Customer Service Suite is kind of our latest CX product. Before that, we had Omnichannel, and Omnichannel was introduced as kind of the realization that, hey, it's no longer just about ticketing, right?
Yeah, yeah.
This whole next generation of consumer is not writing emails, and they're not even calling that much. They do wanna do chat first. And so Omnichannel is bringing in chat and integrating chat, you know, caller, and ticketing all together. CSS is the next generation of that, which is really changing the entire UI and moving it to conversational first. And so when an agent kind of logs in, they are seeing everything in one pane, whether it came from a chat interface-
Mm
... from a call, or from a ticker. To be able to actually provide a summarization of that is really, really important.
Is huge, yeah.
Because you're looking across all of these different mediums, where a traditional call center might just be looking at the calls, right? So our product is looking; summarization is the first thing, and that's where an agent, if you've got somebody else coming in or it's being handed to someone else, as opposed to having a write-up, do a write-up of everything, being able to summarize it all there. Then, the recommended response is the next thing, right? And so looking at the summarization and then having a recommendation on response is also really, really important, and that is, you know, pulling in from all of our customers, you know, whatever their prior tickets could be and all of their facts and everything else, and then also, you know, combining it with, with other information. That's huge.
Third is the kind of the capability to then whatever that recommended response or if somebody actually tools it themselves and they write it themselves, to be able to read it and rewrite it, right? In natural English or in any, you know, kind of other language, but also to make that appear as if it's even a better response than the one that was just written. Those are, I think, the three, you know, first use cases. There's gonna be more and more added.
Okay, so sort of where this all comes to a head is if you're selling a bunch of Copilot licenses for, you know, 40%-50% uplift, your NRR should go up.
It should,
But it's offset by-
Could be offset by the agent.
... the Klarna kind of situations, right? So-
Yeah, Klarna, like again, that one, they're never using us for L1.
Yeah.
So the savings they have, we'll have to see if that filters through the amounts that are coming to L2. But typically, the L1 is gonna be remediated anyway. If things are gonna get promoted to L2, they'll get promoted.
Yeah.
So we're not as worried about the Klarna situation. But you're right,
NRR should go up.
... Net Dollar Retention, this is an upsell capability that we have now-
Yeah
... that we're gonna engage. I think it's gonna take some time, but we've been telling investors that hopefully by the middle of the year, we could be coming back with some stats-
Right
... right, on how things are going. I think this is very, very new still. But yes, we, we think it's gonna be a great tool for expansion. My gut tells me on new business, I would expect that it's not gonna be necessarily, you know, impactful to ARR. It should be, but I also think it's gonna be one of the reasons we win and win more.
Yeah.
That's my expectation. You know, I'm kind of would be surprised if you see a bunch of CX deals come through without Copilot on them. And, you know, I would encourage our reps to even give them a trial if they're selling a new deal on Copilot and try to get, you know, the customer to see the value there, even if they don't wanna pay for it initially, and then have it be a future upsell.
Yeah. Awesome.
Mm.
All right, well, we can't wait to find out.
Great.
Middle of this year is not that far away.
No, no, it's very soon.
All right.
It's soon.
Tyler, thanks so much for coming.