All right. let's go ahead and get started. Look, we're just delighted to have Freshworks joining us today. Tyler is the CFO and COO. He joined Freshworks in 2020, so it's been six years.
Yeah
... definitely have your feet wet at this point.
Mm-hmm.
Before that, he spent, 10 years at another company that we knew quite well, Zuora. How are you doing?
I'm good.
Are you okay? Good.
Good to see you, Pat.
Good. Nice to see you, too. Nice to see you, too.
I was thinking, I think I've done this with you for almost like six...
I know.
... 16, since I've been
We should go count it up.
Yeah, exactly.
I'll bet it's like 15 times.
Yeah, I think so.
I'll bet it's like 15 times. Where do you live?
Rye Neck Peninsula.
Yeah.
Just-
How was it getting up here?
Easy.
Easy.
Yeah, yeah.
Yeah.
Big rainbow causing a lot of traffic, apparently.
Yeah.
Yeah.
Yeah. Okay. We're just gonna start off on the two big questions with you guys. First of all, how's business?
Business is great. We,
It is, right? Yeah.
Yeah, it really is. We had earnings 2 weeks ago. We felt they were really, really strong. In fact, last year was just a really good year of performance for us. We talked about it kinda every single quarter. We ended the year, you know, kinda 13% constant currency growth. We actually raised our revenue, you know, kinda forecast from what we had previously said at our investor day to 14% for this year. Really strong margin profile. We actually did a lot better than we said we're gonna do in Q4 on operating profit. You know, said we're gonna produce $250 million this year. We feel like we're doing really, really well. It's on the back of the strength of our EX products-
Yep
... which are, continues to be an over 20% grower, now over $500 million in ARR. Recently announced an acquisition of a company, FireHydrant, which is gonna fill out a 4-pillar strategy for us, which I can talk about in a minute.
Oh, yeah. We.
Yeah.
Let's do that. What's FireHydrant about?
FireHydrant is really gonna be kinda the core of our, an ITOM capability.
Yeah.
We had light operations management. It really fills out. You've seen, it's gonna be very similar to what we did with Device42, where we had kinda light ITAM asset management, bought Device42 to kinda get enterprise-grade asset management. Now, if you look across our entire portfolio, we have ITSM at the core, which is Freshservice, which has been, you know, our products, you know, now for, you know, 15 years or roughly. We have ESM, so employee service management, really focused on HR and legal and procurement and functions like that, with HR kinda being the core. We added ITAM, and now we have ITOM.
Between the four of them, they're actually somewhat different buyers, but all on the same platform, which we view is gonna be a huge growth opportunity for us.
Okay. Business feels like it's great.
Mm-hmm.
You like where you're positioned. Stock is at $8, right? We're gonna talk about, you know, You get to a point where the terminal value doesn't matter that much anymore. You can just discount the cash flows without it, right?
Yeah.
I think we're kinda getting there with you. Then we should also just talk about AI in your business. Let's do the math for us first. You're at, like, 7 times free cash flow, right?
Yeah, roughly.
Share the math with us on that.
Well, first of all, we announced a buyback last week on Thursday morning, $400 million buyback. This will be our second buyback. We finished our first $400 million buyback in August of last year. I think the average price was just over $14 that we did that at. This one, you know, as you said, we're trading around $8 right now. We have roughly $300 million, 300 million shares fully diluted. We have, you know, before the buyback, you know, a little over $800 million in cash. We have no debt. We said we're gonna produce $250 million in free cash flow this year. If you look at that, we have, you know, an enterprise value of like $1.6 billion.
Um-
Yeah, 300 million shares, $8, $2.4 million. Take out $800 million in cash.
Mm-hmm.
Right?
Little over, yeah.
$1.6 million, and you'll generate $250 in free cash flow this year.
Yeah. We feel like we're in pretty good shape from a balance sheet perspective, very much in control of our own destiny. Clearly working on growth. You know, our core product, EX, is already a 20% grower. Our CX product, we're really refocusing that product. it kinda.
We'll get to that in a second.
Yeah.
Let's do part 2 of why the stock's at $8.
Part two, yes.
Right. Part 2 is AI killing your business? You know, why is the stock at $8?
I think I don't know why the stock is at $8, but probably-
People think AI is killing your business.
That is why. Yeah.
Let's just hit it. Let's just hit it up front.
I-
Yeah.
No, absolutely not. We have really strong AI capabilities across all of our products.
Yeah.
That's been a strategy that we've had well before, you know, any ChatGPT or LLM model stuff. Obviously, we've been innovating very, very fast on that. We have three core AI products. We have AI Agent, which is kinda frontline deflection, both across CX and EX. The usage on that is increasing dramatically quarter-over-quarter. We have our Copilot products, which are an add-on to agents across our CX and EX products. We have an Insights product, which is really for kinda the managers and corporate to think about how they run their business. AI is obviously very, very important, it's gonna be core to success for any software company going forward. We've seen that for a while.
You can see it kind of in what's happening when customers are buying.
Hmm
... our deals over 30K have over a 50% attach rate on AI, Copilot specifically. Our AI products, at our investor day, we said we think, you know, specifically AI Agent and Copilot could each be $100 million products. We said, you know, the goal is to get them both to $100 million by 2028. We have over 8,000 customers using our AI products today. That's even across the SMB, which is that long tail where we have a high double-digit attach or sorry, high-teens attach rate on Copilot in those products. Clearly, it's really important. The second question is it destroying our business?
For EX specifically, if you look at the cohort of customers who had Copilot 1 year ago, their agent counts grew, meaning like not only are they buying Copilot, but they're also continuing to buy agents as they've gone along. For two quarters now we've said. Well, the other thing is about net dollar retention, and, you know, we're about 105 at a corporate level on net dollar retention.
Okay. You say their agent count grew.
Yeah, their EX agents.
Right.
They're buying more agents and they're buying Copilots on, attached on top of it.
Yeah. We say agents, we're talking about humans?
Humans.
See that, yeah, that's.
Humans
... important point to make.
Humans. Yes.
Yeah. Humans.
Humans.
That's kind of interesting.
Yes.
Right? What's going on there?
Well, what we're seeing is that, okay, companies are continuing to grow, but as we've, you know, continued to innovate but also, you know, a four-pillar strategy across those pillars, like our customers are adding humans.
Yeah.
As they're doing that, they're also adding our Copilot capabilities. The other stat we gave out over the last 2 quarters, 2 quarters ago, we said, "Hey, for the customers who had purchased AI, Copilot a year before, where our corporate NDR rate is 105, the NDR, net dollar retention for that cohort is 112.
Yeah.
That actually increased this past quarter, meaning that clearly the expansion, both adding human agents, but also adding Copilot capabilities is outweighing any churn for that entire cohort. Now, it's two quarters of data, right?
Yeah.
Clearly, we would expect all of our AI capabilities to allow our customers be much more efficient. That's gonna continue to happen specifically on the frontline deflection. That for us is a usage-based model. We today it's sessions, and a session is an interaction between our customer and their employee or our customer and their customer within a 24-hour period, and customers have to buy session packs. We're looking at this as like it has to be core to your capabilities today. It's almost something that is gonna be kind of commoditized. If you wanna compete, you have to have great AI capabilities. We're proving that we do. We're also proving that we can provide our customers a lot of efficiencies as they go out and do their jobs.
At the same time, they're buying more, so it's demonstrating that it's working.
Part of my takeaway from that is that it's not like you have already penetrated all the possible customers, and that in each of those possible customers, you've penetrated the entire firm, right? Like you guys are growing.
Sure.
You're There's tons of new potential customers, right? When you land, there's a whole bunch of new things you can sell, which is part of the reason that just as everyone adopts more AI and even lowers their headcount, that doesn't necessarily mean that your business-
No
We've proven that.
slows. Yeah
... pricing and packaging is gonna be.
Yeah
the key going forward, and everybody's changing their pricing and packaging so much. We've been kind of taking a slower approach. We wanna see what happens. We wanna see usage. We've come out with our pricing and packaging. We've changed the prices, but we haven't changed our structures yet.
Yeah.
What I think you're also getting at, Pat, is like I talked about the attach rates on new business. I said, "Okay, for the deals that are over $30,000, it's over 50% attach on Copilot." I also said we have 8,000 customers using our AI today, but we have 75,000 customers. Clearly our opportunity set, which we've been very open about, is our existing install base, which we are, you know, going back and engaging with all of our existing customers. It is really interesting because the counterpoint to is AI destroying your business is like, well, why wouldn't every single customer be buying it then, right, and adding it? The reality is a lot of customers, especially in our customer base, you know, they're saying, "That's great. We'll watch it.
We'll come test it, but it's not top on our priority list right now.
Yeah. A lot of these CX customers are really small-
Yes
right?
Mm-hmm.
Like.
Yeah.
I don't-
We, you know, have always been kind of on the CX side, kinda long tail of SMB. We have some very large CX customers, but the majority of our customer base is in that long tail of SMB on the CX side, which we also have been really open that we're starting to focus away from that long tail, and that's one of the reasons that our actual customer count went down this past quarter.
Yeah
... because we've been purposely not trying to go after that customer base anymore.
We have a panel later this afternoon on how AI impacts SaaS businesses, we have Anu, the former president of Atlassian, and Dan Springer, the former president of DocuSign.
Yep.
Both former, right?
Mm-hmm.
It should be really interesting.
Yeah. That should be interesting.
Yeah, it should be really interesting.
Uh-huh.
You know, one of the questions sort of focuses on when you look at the impact of AI on SaaS businesses, there's sort of an offensive
Mm-hmm
... perspective to it, which you just talked about it, right? There's also the defensive perspective, which is sort of what are your moats, right, that prevent, you know, an Anthropic from coming in.
Destroying the business.
... retraining your
Yeah
... or that prevent your own customers from just vibe coding a solution. What would you say are the defensive moats that Freshworks has?
I think there's a couple things. One, if you look at the software that we build and sell, it is must-have software. Every, you know, company of some scale in the world needs an IT kind of a software behind the scenes to be able to engage with their employee base and not just help them be productive, but also keep the firm safe. If you look at what's required for that's not something that you could just put a thin layer on top of.
Secondary, we've been doing this for a long time, so we have, you know, 16+ years of data, of tickets, of resolutions, of customer interactions, that, you know, not only help us train our own models, but also, you know, provides the capability for our customers as they continue to use to get better and better and better. These things are all what I would consider, you know, moats or, you know, just proofs of system of record that you have to have. Clearly, there's gonna be application layers on top that are doing, you know, agentic activities to help solve some things. We're also building these things. We have yet to see any customers actually just build their own or completely rely on an LLM model to go replicate.
Mm.
The second thing is that we're serving, you know, mainly the mid-market, low enterprise. Specifically for our Freshservice product, our ICP tends to be kinda lower tech organizations, that this is not their skill set either. What we've seen from them is that they have 0 interest or capability to go do that. We're just plugging away with what we know we can provide.
Yeah, if you break out your customer base by sort of industry, what's it just super roughly-
It's.
Like how much is tech and how much is, you know?
I would say we absolutely have tech customers in there, but as... We are not like a SaaS company that's grown up by selling to other SaaS.
Yeah.
If you look at who we talk about on the EX side, it's pretty heavy manufacturing...
Mm-hmm
... there. We have. We're one of the largest, I think, we might have the most, like, law firms in the world. We have a ton of sports teams. McLaren, who we are a sponsor of-
Yeah. It's cool
us, they are a customer of ours, and that's why we actually went to go sponsor them. You could consider them a tech team 'cause they're very tech forward Or a tech company. They are not, you know, internally developing software that they are going out and selling.
For manufacturing companies, law firms, sports teams, there's not a lot of vibe coding of SaaS applications.
Correct.
That's an important thing to keep in mind, right?
Absolutely.
That's not how they're gonna win.
Yeah.
Right? You are a software company, so are you looking internally at, you know, the systems that you use? Are you thinking, "Gosh, maybe there's some of this stuff we could recreate"? To provide a little context for that question.
Mm
I asked Global-e this question, after their earnings call, and they said, "You know, we have a internal SEAL team of AI experts, and they're going around and they're looking for places. It's not that we are looking to replace SaaS companies and save however many $ thousand a year. It's where can we build something that we think will suit our needs better than what we're currently using?
Yeah.
They found 3 examples.
In their business, they have a BI solution, where they're building their own internal-.
Mm-hmm
... solution that they think will do a better job for them than whatever they're using now. I don't know what they're using now. There was a knowledge management solution they think they can build a better one. The last one was they have a solution where they transcribe all the salespeople's phone calls.
Mm-hmm.
Right? Then.
Yeah
That they're building their own too.
Yeah.
just as an example.
Well-
Are you guys doing that internally?
Well, first of all, we use our own products.
Yeah.
both on Freshservice and Freshdesk.
Yeah
We're absolutely using our capabilities there and trying to optimize our own work product internally and efficiencies the same way we're trying to provide to our customers.
Yeah.
You know, we'd consider ourselves customer zero. Ashwin, our CIO, who sits on my team, like we redeployed, you know, even Freshservice over the last year and made sure that we are, you know, forefront of using our own technologies. Second is we obviously buy a lot of software too. You know.
Like rough ballpark, how many SaaS solutions do you think you guys use?
Oh, hundreds.
Hundreds?
Yeah, hundreds.
Wow. Okay.
Like our customers do to us, right, you need to hold companies accountable or vendors accountable to provide the capabilities that they say they're going to. We have initiatives internally to drive automation and AI, literally to drive efficiencies within the organization across every single team. Internally, we also have, like you described, little SWAT team or Tiger teams.
Yeah, we do. Yeah
a set of, you know, a small set of engineers who are working with teams on how we can actually build our own little apps to kinda automate things. These are typically areas that have, you know, manual processes around them that you can just automate. Yes, we're constantly doing that. We made a lot of progress last year, and I think we're gonna continue to make this year. I think it shows in kind of how we're operating, right? We, we've done really well on, both, free cash flow generation, but on operating profit as well.
Awesome. Have you replaced anything internally?
Systems?
Of the hundreds, of the, you know.
Well, yeah, I mean, the rule is, like, if you wanna buy one, you gotta get ready to, right? What I think you're gonna see, especially when it's, When you're doing really well, you don't necessarily have to have the discipline to just go in and cut everything.
Yeah.
Then sometimes you wake up and you're just like, "Well, guys, if we're trying to drive automation, we're trying to drive efficiencies, and we're looking across all our teams, and we're thinking about what does, you know, work look like internally a year from now, two years from now, you're gonna go evaluate every single system that we have." A lot of the systems, you know, they are changing as well. As you go through that, you can add, say, a solution to go look at all of your cloud spend and see what the utilization of it are, and I think there's a lot of opportunities for us to even get, you know, better at what we're doing.
Yeah
... in terms of how it's done.
Have you tried Claude Cowork?
No.
No. I tried it this weekend.
Oh, no. I personally have not tried it, but we have a lot of people on the teams-
Yeah
who have tried it. Yeah.
It is mind-boggling.
Yeah.
It really is. your comment about how work is gonna change in a year-
Yeah
it's mind-boggling.
We're a Google shop, so, Workplace Studio, you know, there's a lot of stuff you can do there just for efficiencies of your own day-to-day.
Yeah.
I've done some of that. Yeah.
Will it go through your calendar and find all the things like that?
Exactly.
Yeah.
Yeah.
That alone is a huge time saver.
Yeah. It's great.
Right? It's huge.
It's great.
Two current events I wanna talk to you about, and if you don't wanna... If you're like, "I really don't wanna touch on that," that's fine, right? Number one is, you know, the layoffs at Block, right? Where you have a company that, you know, 10,000 employees and they let 4,000 of them go and they say it's because, you know, we're embedding intelligence in our business. What did you make of that?
I don't know. I mean, like, the stories this morning was all about AI washing, right? Isn't that? I think that's the phrase. I don't know. With that Block, if you look at their head count, I think they went up dramatically.
They sure did. Yeah.
Whether this is them coming down, but I have no idea. If you look at us, our head count was relatively flat over the last year, it was actually down from the year before that. I think, you know, you have to constantly be looking at technologies internally, on how to drive efficiency. You gotta constantly looking at making sure you have the right people in the right roles.
Yeah.
We're doing that internally, for sure.
Yeah. You're growing. What are you gonna grow this year? What is it, 14%?
Revenue
Yeah, yeah.
Yeah.
You did that, the growth you had last year was on flat head count. That tells you a lot.
Correct.
Right. It tells you a lot. second question. Well, anyway, the whole Anthropic department of war.
I don't-
standoff. No?
I don't... Well, I know a little bit about it, right?
Yeah.
We haven't had the government come to us to ask us to share anything, like, we'll just stay out of that one.
Yeah, I think that's... I think a lot of people are gonna say that today. Okay. Do we have any questions from our audience? We are kind of blinded up here.
It is.
Yeah, it's.
It is very bright.
Yeah, please.
You, is your Copilot the same thing as Microsoft's Copilot, or?
Meaning in terms of how it works?
We have to repeat the question.
The question was, is our Copilot the same thing as Microsoft's Copilot? Our Copilot, across our EX and CX portfolios, if a customer purchases an agent, specifically in the higher tiers, they can add a Copilot add-on to that agent. What that does is that allows that agent to have access to a whole lot of capabilities. It automates a lot of what those tasks would be within the system itself. For example, a summarizer capability. You have a whole bunch of tickets coming in and you oftentimes tickets will go from, you know, kinda one agent to the next as it flows over shifts, for example. That next agent needs to know what's the history of what happened. Summarizer is one of it. First best response is another great example.
I don't know if some of the capabilities are the same, but I think the structure is similar. It's really all about making the agent much more efficient at their job.
Where you're adding the AI LLM capabilities, is that driving your costs up 'cause you're kinda reselling those tokens at some different margin, so your margin structure will change over time as your clients use those?
Yeah. We've been doing this for a while.
You have to repeat the question.
The question was, in general, I think your question is, are we being impacted by LLM costs, right? If you look at our gross margin structure, we're at 85% roughly on gross margin, and those costs would be incorporated there. Clearly we look at it all the time. What we've done is we're clearly paying an LLM and have token costs, you know, for all of the activities on AI agent, but also on Copilot. We're also looking at there are certain things that can happen without having to go ping the external, or you can ping a lower cost model, which what we've designed for as well.
Clearly we are monitoring it all the time because as the activities increase, which is what we want, there will be costs associated with it.
I was talking to a young AI engineer at one of the San Francisco startups, and he goes, "Oh, I saved my company $250,000 today.
Mm-hmm.
I go, "How'd you do that?" You wanna guess how he did it?
Didn't come to work.
Was it?
Someone said didn't come to work. No, he said, "You know, I was looking at it. We send all this stuff to OpenAI. We don't need to be sending it to OpenAI.
Yeah, yeah.
Right? The, the sort of the mass optimization period that we went through, you know, a year ago, We're not there yet, right? There.
Well-
I heard that and I was like, "Oh, there might be an opportunity for a similar sort of optimization around tokens at some point here.
Yeah. I think there, I think that's what you're gonna see is that. You know, the latest and greatest models are the most expensive. One thing you're saying is that, okay, maybe you don't actually need access to the latest models.
Mm
... to actually get the, you know, great responses. That's one. The latest costs more. Also you're seeing a whole bunch of activities that are being, you know, brought in and, you know, you're running smaller models internally, so you don't actually have to ping the external. When you have a combination of those two things, especially with certain types of activities, and they could be high velocity activities, you can actually get a weighted average cost that's a lot lower.
Yeah. Awesome. Okay. We have time for one more. maybe in the back. Oh, you pick. You picked, so-
You mentioned.
Oh.
You mentioned about 10% or so, 8,000 customers out of 75,000 have adopted AI. How do you see the trend? Are they picking up faster or slowing down and evaluating?
No. It's increasing. The growth rate on our AI growth is much higher than, say, our revenue growth rate. If you think about it, the attach rate, even on Copilot, it's 50% on larger deals, which is $30,000. That is where our business is now, led by EX. Each quarter is gonna increase as we close more deals. Now, again, our opportunity set is our existing install base, we have, you know, multiple campaigns to go in and engage with our existing customers, whether it's through PLG motions or actual, you know, contact through sales and CSMs and things like that, to go show them the value, which we'll be, you know, continuing to work on every single day and month this year.
The growth rate for AI, both adoption as well as purchase is quite strong.
Someone was standing up in the back.
Yeah. Who? Yeah.
Whoever stood up gets a question.
Oh, hold on.
All right.
I'll give you a pass. Tyler, where are customers most seeing value from the Freshworks product today? How is that translating into the pricing model that you see going forward into the future?
The question I think was, where are customers seeing the most value from our products today, and how does that translate to the pricing model?
Correct.
Yeah. Today, EX is our driver for growth. It's clear. It's an over 20% grower. We feel that we have the number one solution for that mid-market, low enterprise, customer there, and mainly landing with IT. The value is, you know, our motto is uncomplicated. A software that just works, that has enterprise-grade feature functionality that we can get you live really, really quick and get you everything that you need to be able to get, you know, run your business from an IT perspective. That's where customers are seeing the most value and ROI. You can see even on our income statement, our professional services are very, very low. It's a testament to the capabilities that we have on getting customers live and going really quickly.
That being said, it doesn't mean that they're sacrificing feature functionality, and that's where the value is that we're providing. As we, you know, can land in IT and do everything you need there. That's demonstrated by the fact that customers are staying with us as they grow. We have some very, very large organizations now that we're running their entire, kinda back-end IT stack. Now expanding into ESM capabilities, so we're landing with other functions and our attach rates on ESM on new business is really high and growing. Then moving on to asset management and ITOM. ITOM's actually gonna be a different buyer. It's the people who run your services internally.
when you see the value we're providing specific to EX, it's really everything you need at a great value and a great time to value, and then maybe be able to run and grow your business on us and no need to change.
Awesome.
We're out of time, Tyler.
Awesome. Thanks, guys.
Good to see you.
Good to see you, buddy.
Thank you so much for coming down.
Yeah.
We really appreciate it.