FRESHWORKS Earningcall Transcript Of Q2 of 2024

Tyler Sloat, Freshworks' chief financial officer. The primary purpose of today's call is to provide you

with  information  regarding  our  second-quarter  2024  performance  and  our  financial  outlook  for  our

third quarter and full year 2024.

Some  of  our  discussion  and  responses  to  your  questions  may  contain  forward-looking  statements

within  the  meaning  of  the  Private  Securities  Litigation  Reform  Act  of  1995.  These  forward-looking

statements  are  based  on  Freshworks  current  expectations  and  estimates  about  its  business  and

industry,  including  our  financial  outlook,  macroeconomic  uncertainties,  management's  beliefs,  and

certain  other  assumptions  made  by  the  company,  all  of  which  are  subject  to  change.  These

statements  are  subject  to  risks,  uncertainties  and  assumptions  that  could  cause  actual  results  to

differ materially from those projected in the forward-looking statements. Such risks include, but are

not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to

meet customer demand and to control costs and improve operating efficiency.

During  the  course  of  today's  call,  we  will  refer  to  certain  non-GAAP  financial  measures.

Reconciliations between GAAP and non-GAAP financial measures for historical periods are included

in our earnings release, which is available on our Investor Relations website at ir. freshworks. com.

I  encourage  you  to  visit  our  Investor  Relations  site  to  access  our  earnings  release,  supplemental

earnings  slides,  periodic  SEC  reports,  a  replay  of  today's  call  or  to  learn  more  about  Freshworks.

And with that, let me turn it over to Dennis. 

Dennis Woodside -- President and Chief Executive Officer

Thanks, Joon, and thank you, everyone, for joining us on the call today. I'm pleased with our results

this quarter, which demonstrated continued growth, financial discipline and innovation. We are well

positioned for the expansive opportunities that are in front of us. In Q2, we delivered results that met

or exceeded each of our previously provided financial estimates.

We grew revenue to $174. 1 million and delivered another quarter of strong free cash flow of $32. 8

million, resulting in a free cash flow margin of 19%. This represents more than 600 basis points of

year-over-year  margin  improvement  and  is  reflective  of  our  increasing  operating  leverage  and

discipline.

We  also  welcomed  notable  customers  into  the  Freshworks  community,  including  Kayak,  Davidson

Kempner Capital Management, Paul Smith UK, and many others. Lastly, we completed the strategic

acquisition of Device42, which adds advanced ITAM capabilities to our Freshservice solution in early

June.  During  my  first  quarter  as  our  CEO,  I  spent  extensive  time  in  India  with  our  product  and

engineering teams, digging into our product road map and upcoming anticipated innovations. I also

met  with  customers,  partners  and  other  key  stakeholders  in  New  York,  Boston,  Chennai,  and

Bangalore,  gathering  feedback  and  better  understanding  what  we  do  well  and  what  we  can  do

better.

From those conversations, it's clear that customers are making buying decisions based on 4 criteria.

First,  they  want  to  automate  workflows  with  AI  to  increase  efficiency  across  IT,  customer  support,

sales,  marketing  and  beyond.  Second,  they  want  uncomplicated  solutions  that  are  simple  to

implement and to own. Third, they want to see rapid impact of their investments.

And fourth, they want the flexibility of a platform they can modify and scale over time. Freshworks

meets  those  needs.  In  addition  to  these  external  meetings,  we've  conducted  our  annual  strategic

review of the business with our leadership team. This review has confirmed our belief that we have a

significant opportunity right in front of us across multiple markets.

And  by  focusing  on  3  strategic  imperatives,  we  will  continue  to  drive  durable,  profitable  growth  for

years to come. The first imperative is that we play to one of our biggest trends, IT, and employee

experience  solutions,  which  includes  ITSM,  ITAM,  IT  operations  and  ESM.  Even  without  taking

Device42 into account, this is our largest business group with over $340 million of ARR and over a

30% growth rate year-over-year. Including Device42, we have over 17,000 IT customers, with 670

customers spending more than $100,000 with us.

More than 2/3 of our IT ARR is from the mid-market and enterprise segment. Our net dollar retention

rates for this business exceed 110%, and we are seeing growth across the board for both small and

large businesses. To capture the expansive IT and employee experience opportunity, we intend to

prioritize investments of product and engineering resources to these solutions. This will allow us to

create richer ITSM capabilities for the enterprise, capture the ITAM opportunity with Device42 and

expand our business with a focus on ESM and automated workflows as we build for business teams

beyond IT.

For our IT and employee experience solutions, we continue to deepen our GTM capabilities to serve

the mid-market and enterprise. We are now replacing incumbents, whose companies were founded

with a primary focus on the IT function for Enterprise customers. In Q2 alone, we won 19 new and

expansion  deals  of  over  $100,000,  and  we  also  saw  a  6-quarter  high  win  rate  in  IT  against  our

largest competitor. Against our 2 largest competitors, we won deals with a major software player, a

large California state agency, a major real estate company and many more.

We  have  momentum  in  the  marketplace  for  customers  wanting  an  enterprise-grade  workflow

solution for IT without the high cost and hassle they're seeing with our competitors. In Q2, we saw

continued momentum across all segments, including enterprise, mid-market, commercial and SMB,

as  companies  achieve  high-value  benefits  without  implementation  and  ownership  complexities,

while delivering rapid impact at a competitive price. Large industry-leading organizations like Nucor

Steel,  Carrefour,  Bridgestone  Tires,  Wiseman,  Qualfon  and  Riverbed  technology  are  using  our

employee experience software to digitize their work and enable productivity gains, leading to more

efficient  processes  and  happier  employees.  For  example,  America's  largest  omnichannel  specialty

mattress retailer replaced their existing ITSM solution because the legacy software could not scale

to meet their needs as they grew head count across several functions.

We won this deal over one of our top competitors. Since going live with Freshservice, the company

has  seamlessly  onboarded  staff  across  departments  and  reduced  workflow  changes  from  months

with  the  incumber  to  a  single  day  with  Freshworks.  As  another  example,  an  iconic  fashion  retailer

chose our unified platform to manage all internal requests, approvals, and ticketing throughout the

inventory  planning,  buying  and  merchandising  processes.  Freshservice  helped  unify  multiple

inventory  management  and  merchandising  teams  on  a  single  centralized  service  management

platform,  reducing  operational  costs  by  10%,  improving  gross  margins  and  yielding  a  20%

improvement in ticket resolution time.

Our third customer example is Credit Safe, the most-used provider of business credit reports serving

430  million  businesses  worldwide.  A  longtime  Freshdesk  customer,  Credit  Safe  was  seeking  a

modern  ITSM  solution  that  could  easily  integrate  with  their  existing  tools.  They  evaluated

Freshservice against one of our top two competitors. Freshservice proved to be easier to use and

more cost-effective than the competition.

The  native  integration  with  Freshdesk  and  our  historically  strong  partnership  made  selecting

Freshservice  a  natural  choice  for  Credit  Safe,  as  they  more  than  doubled  their  account  value  with

us. These successes demonstrate that we have the opportunity to become the digital platform that

enables  mid-market  and  enterprise  customers  to  compete  at  global  scale.  On  capturing  the  ITAM

opportunity,  Device42  provides  a  more  comprehensive,  up-to-date  view  of  assets  across  an

organization's entire IT infrastructure. We're excited about going to market with our joint solution as

we see a lot of upside and strategic value from the acquisition.

We  now  have  both  the  opportunity  to  upsell  advanced  ITAM  capabilities  into  our  existing  fresh

service  customers  and  the  opportunity  to  cross-sell  Freshworks  products  into  the  Device42

customer  base.  With  deeper  enterprise  capabilities,  this  also  expands  our  addressable  market  as

we're now able to win deals in a broader group of large, mature companies. Device42 is primarily an

on-premise business today. So our first goal is to deliver an improved seamless integration between

fresh service and Device42 by Q1 of next year.

Second, we're working on turning Device42 into a cloud-native solution, which we anticipate could

be  ready  by  the  end  of  next  year,  but  we  already  see  the  great  product  market  fit  with  larger

customers  that  use  both  Device42  and  Freshworks,  like  Kaiser  Permanente,  the  State  of  Indiana,

the University of Alberta, Hewlett-Packard Enterprise and HD Supply. Let me share an example of

how Freshservice plus Device42 is delivering value for our customers. A regional bank in the U. S.

operating  230  branches  was  looking  for  a  long-term  partner  to  support  their  IT  needs  cost

effectively.  We  beat  a  large  competitor  and  replace  the  legacy  incumbent  based  on  or  to  provide

visibility into assets and apps, which was a key priority in the highly regulated risk-averse industry.

This bank chose a multiproduct solution consisting of Freshservice, Freshchat and Device42 based

on the scalability and sophistication of the solution and time to value. The final component of playing

to  our  IT  business  strength  is  expanding  the  business  by  focusing  on  ESM  and  automated

workflows.

We are seeing strong demand for our Enterprise Service Management offering of Freshservice for

Business Teams, which allows teams like HR, finance, and facilities to automate employee service

delivery and benefit from the same uncomplicated solutions and rapid time to value as ITSM. We're

seeing great traction in this category and expect that with continued focus on this area, it can be a

meaningful contributor to ARR in the coming years. Texas A&M, a top-ranked public university with

world-class business agriculture and engineering programs, initially implemented Freshservice for IT

service management. After seeing improvements in productivity and ticket resolution, they expanded

Freshservice to include ESM, supporting both internal IT needs and external transit-related inquiries,

which was particularly important during the football season when they needed to scale operations.

Freshservice enabled Texas A&M to manage complex game day logistics supporting up to 150,000

visitors and handling over 600 tickets daily with a 30% faster resolution time. Our second imperative

is to build out our AI capabilities and bring them to market to thousands of customers. Customers

are already seeing the value in the 2 Freddy AI products that are in the market today, with Freddy

Self  Serve  bots  and  Freddy  Copilot.  We  are  encouraged  by  the  results  we've  seen  since  Freddy

Copilot became generally available in mid-February.

In  Q2,  we  saw  significant  momentum  in  adoption  with  now  over  1,200  customers  as  Copilot

numbers for both customers and ARR nearly doubled from the prior quarter. We're seeing over 40%

attach  rates  for  new  deals  of  $30,000  or  more.  Customers  are  seeing,  on  average,  a  30%

productivity  lift  with  the  help  of  Freddy  Copilot.  We  have  thousands  of  licenses  from  Freshservice

customers  with  power  users  of  Freddy  Copilot  seeing  more  than  40%  improvement  in  average

resolution time for IT incidents.

I'm pleased to say that we are monetizing ahead of our internal targets for Freddy Copilot, as this

thing is now a core part of every sales conversation. We are seeing customers like European travel

company,  Digitrips,  choose  Freshworks  as  a  scalable  foundation  for  end-to-end  cloud  operations.

Using  Freddy  Copilot,  they  improved  their  response  times  to  customer  inquiries  by  nearly  300%

even  as  ticket  volume  doubled  during  the  same  period.  GenAI  is  rapidly  transforming  how  agents

and  customers  are  leveraging  technology  and  customer  service,  the  world's  largest  operator  of

open-top  sightseeing  tours  in  26  cities  globally,  serving  6  million  tourists  each  year,  recently

transitioned  to  Customer  Service  Suite  powered  by  Freddy  Copilot,  which  has  resulted  in  an

improved  agent  satisfaction  score  by  12  points,  with  a  nearly  20%  reduction  in  resolution  time  for

their customers.

Freddy  Self  Service  for  customer  support  continues  to  be  another  strong  area  of  value  for  our

customers.  We're  starting  to  see  traction  on  customer  adoption,  with  over  900  customers  for  bot

sessions  doubling  from  a  year  ago,  and  realizing  an  average  deflection  rate  of  around  40%.  One

example  is  Hinge  Health,  a  virtual  clinic  that  serves  more  than  200,000  patients.  They  chose

Freshdesk with Freddy Copilot, Self Service, and Insights for its all-in-one customer service solution.

Hinge Health started with 8 seats and has since expanded to hundreds of seats on Freshdesk. With

Freddy Self Service, they've increased their ticket handling capacity by more than 30-fold, achieving

an impressive 85% CSAT score and lowering their first response time from hours to minutes. Today,

we're focused on driving broad customer adoption and usage so they can realize value from our AI

products,  and  we  believe  meaningful  monetization  will  follow  over  time.  Our  third  imperative  is  to

accelerate growth for our Customer Experience Solutions, which includes our customer service and

sales and marketing products.

SMB and commercial companies continue to be the most significant consumers of these offerings,

which  make  up  approximately  $350  million  in  ARR,  with  a  combined  year-over-year  ARR  growth

rate in the mid- to high single digits as of the end of last quarter. To accelerate this growth, we are

further simplifying the product experience to increase the ease of implementation and maintenance

and  improve  time  to  value.  We  are  also  streamlining  our  go-to-market  processes  to  be  more

customer  segment-focused,  including  recruiting  more  partners  that  focus  on  the  SMB  and

commercial space. Partners are driving meaningful growth for SMB and commercial new business

today, and we are optimistic about the added growth our new partners will deliver.

As mentioned previously, we are seeing increasing momentum for Freddy Copilot with our Customer

Experience  Solutions.  Among  our  SMB  and  commercial  customers,  we're  achieving  double-digit

attach  rates  on  new  deals  for  Freddy  Copilot.  Leveraging  the  benefits  of  AI,  our  customers  in  all

segments  are  able  to  deliver  higher  levels  of  customer  satisfaction  while  enjoying  improved

efficiencies.  Customers  like  Total  Experts  and  Ashley  Furniture  have  invested  and  are  realizing

immediate value.

Another  example  is  Canada's  British  Columbia  lottery,  which  selected  Freshchat  over  our  largest

competitor  to  improve  its  customer  experience.  They  chose  Freshchat  with  Freddy  Copilot  for  its

easy-to-use interface that provides the team with analytics to help identify and solve challenges in

the customer journey. Since implementing Freshchat with Freddy Copilot, British Columbia Lottery

has seen an uptick to their customer experience scoring and an agent productivity increase of 20%.

In Q2, customers continued to expand usage across our Customer Experience Solutions portfolio,

with multiproduct adoption ticking up to 27%.

One  example  is  a  global  leader  in  the  logistics  and  transportation  industry,  who  has  been  a

Freshchat customer for 8 years. Recognizing the value that Freddy AI delivers, they expanded their

usage  to  include  Freddy  Copilot  and  Freshchat  to  maximize  their  service  delivery  at  an  affordable

cost while simplifying their processes. Overall, it's been a tremendous first quarter as CEO. And with

our strategic priorities in place, we believe we are well positioned to seize this massive opportunity

in front of us and accelerate growth.

I'm  excited  to  lead  our  company  of  5,000  talented  employees  into  the  next  phase  of  Freshworks

Growth Journey as we work toward delivering innovative solutions that customers want and scaling

the  business  to  $1  billion  in  revenue  and  beyond.  Now  I'll  hand  it  over  to  Tyler  to  discuss  the

financial details. 

Tyler Sloat -- Chief Financial Officer

Thanks, Dennis, and thanks to all of you joining on the call and via webcast. As Dennis mentioned

earlier,  we  met  or  exceeded  our  key  financial  estimates  in  Q2,  even  without  the  Device42  results.

Now  with  the  addition  of  Device42  as  part  of  the  Freshworks  family,  we're  excited  to  go  after  a

broader set of customers in the mid-market and enterprise. We are sharpening our strategic focus to

lead  with  the  IT  employee  experience  business  as  we  see  strong  customer  demand  and  more

attractive opportunities for this part of the business.

We plan to fuel additional growth and better capitalize on the huge IT opportunity and other adjacent

markets. At the same time, we're maintaining our focus to drive rational efficiencies that we expect

will lead to durable and profitable growth in the business over time. For our call today, I'll cover the

Q2 2024 financial results, provide background on the key metrics and close with our forward-looking

commentary  and  expectations  for  Q3  and  the  full  year  2024.  I'll  include  constant  currency

comparisons for certain metrics to provide a better view of our business trends.

As  a  reminder,  we  closed  the  Device42  acquisition  on  June  6,  so  our  Q2  numbers  include  partial

Device42 results for the quarter. Where there is meaningful contribution from the acquisition, I will

break  out  specific  metrics  on  a  onetime  basis  to  help  provide  a  better  understanding  into  our

business performance. Most of our discussion will be focused on non-GAAP financial results, which

exclude the impact of stock-based compensation expenses and other adjustments. Starting with the

income statement.

Total  revenue  in  Q2  increased  to  $174.  1  million,  growing  20%  for  both  as  reported  and  on  a

constant  currency  basis.  Professional  services  revenue  contributed  $2.  5  million  for  the  quarter,

which was similar to Q1 as continue to shift services revenue to our partner network.

Device42  revenue  contribution  was  approximately  $3  million  as  we  recognized  revenue  for  the

partial quarter. We closed large IT opportunities with the upmarket customers, and this once again

drove the majority of our ARR growth. We saw meaningful strength for our new business in the U. S.

and  won  a  number  of  competitive  6-figure  deals  in  the  field.  Moving  to  margins.  We  maintained  a

strong non-GAAP gross margin of 85%, similar to Q1, as we remain diligent in efficiently scaling the

business. This represents an improvement of nearly 100 basis points compared to the prior year.

Our  non-GAAP  operating  income  came  in  at  $13.  1  million,  representing  a  non-GAAP  operating

margin of approximately 8% and ahead of prior expectations. Most of the outperformance was the

result  of  certain  expenses  pushing  out  to  the  second  half  of  the  year  and  lower  personnel-related

costs. As a reminder, the Device42 results and associated transaction costs are included in these

numbers, but these were not meaningful to the total operating results.

Moving to the operating metrics. Our 2 key business metrics are net dollar retention and customers

contributing  more  than  $5,000  in  ARR.  From  a  macro  and  demand  environment  perspective,  Q2

trends were generally similar to what we saw in Q1, as gross expansion continued to see pressure,

while  overall  churn  remained  steady  quarter-over-quarter.  Net  dollar  retention  was  106%  in  the

group, both as reported and on a constant currency basis and in line with our expectations.

Looking  forward,  we  estimated  net  dollar  retention  of  approximately  105%  for  Q3  as  we  expect  to

see ongoing pressure on the expansion part of the business. For our second key business metric of

number of customers contributing more than $5,000 in ARR, this metric grew 14% year-over-year to

21,744  customers,  representing  quarterly  net  adds  of  nearly  1,200  customers,  with  631  of  these

customers coming from Device42. This customer cohort now represents 90% of our ARR. For our

larger  customer  cohort,  contributing  more  than  $50,000  in  ARR,  this  cohort  grew  30%

year-over-year  to  2,839  customers,  representing  quarterly  net  adds  of  246,  with  145  of  these

customers coming from Device42.

This  cohort  now  represents  50%  of  our  ARR.  For  total  customers,  we  added  approximately  1,300

net customers in the quarter and ended with over 68,800 customers, with just over half of the new

customers  coming 

from  Device42.  Excluding  customers 

from 

the  acquisition,  we  added

approximately 600 net customers in the quarter, pointing to signs of improvement for customer adds

compared to 400 in Q1. Now let's turn to calculated billings, balance sheet and cash items.

Our  calculated  billings  grew  17%  on  an  as-reported  basis  and,  on  a  constant  currency  basis,  to

$185. 9 million in Q2. Device42 billings contribution was $7. 7 million for the quarter.

So excluding the impact of Device42, calculated billings grew $0. 12. Looking forward to Q3 2024,

our  initial  estimate  for  calculated  billings  growth  is  16%,  which  includes  Device42  results.  For  the

full-year 2024, we expect calculated billings growth to be approximately 16%, with approximately 1

to 2 percentage points coming from Device42.

Moving  to  our  cash  items.  Our  largest  use  of  cash  during  the  quarter  was  $214  million  for  the

acquisition. We generated $32. 8 million in free cash flow for Q2, outperforming our estimates as we

continue to drive our operational efficiencies in the business.

Given our strong cash flow performance again in the quarter, we are increasing our full-year 2024

estimates  to  $132.  5  million,  with  approximately  $32.  5  million  expected  in  Q3.  We  continue  to

manage  and  offset  share  count  dilution  by  net  settling  invested  equity  amounts  by  using

approximately $15 million during the quarter.

This activity is reflected in our financing activities and is excluded from free cash flow. As a result of

these activities, we ended the quarter with cash, cash equivalents and marketable securities of $1

billion. We plan to continue net settling invested equity amounts going forward, resulting in expected

Q3 cash usage of approximately $13 million at current stock price levels. For the year, we expect to

use approximately $63 million to net settle vested equity amounts.

With our ongoing focus on operational efficiency and financial discipline, we expect to end the year

with cash of well over $1 billion, maintaining a strong balance sheet and financial flexibility for the

business. Turning to our share count for Q2. We have approximately 328 million shares outstanding

on a fully diluted basis as of June 30, 2024, representing a share reduction compared to the prior

year.  The  fully  diluted  calculation  consists  of  approximately  301  million  shares  outstanding,  24

million  related  to  unvested  RSUs  and  PRSUs  and  nearly  3  million  shares  related  to  outstanding

options.

Before  providing  our  financial  estimates  for  Q3  and  full-year  2024,  let  me  provide  background  on

how we're planning for Device42 results in our consolidated financials going forward. First, Device42

is primarily a term license business today, which creates less predictability for our reported revenue

quarter-to-quarter. Second, we expect specific partner business involving competitors to decline and

ultimately go away. These factors may cause quarterly fluctuations to our total revenue so we want

to be prudent in our forecast models.

As  we  go  forward,  we  will  provide  breakouts  for  metrics  as  required  for  disclosure  or,  if  they're

meaningful,  to  understand  the  underlying  business  fundamentals.  Now  on  to  the  specific  numbers

for our forward-looking estimates. For the third quarter 2024, we expect revenue to be in the range

of  $180  million  to  $183  million,  growing  17%  to  19%  year-over-year;  non-GAAP  income  from

operations to be in the range of $13 million to $15 million; and non-GAAP net income per share to

be in the range of $0. 07 to $0.

08, assuming weighted average shares outstanding of approximately 304. 2 million shares. For the

full-year 2024, we expect revenue to be in the range of $707 million to $713 million, growing 18. 5%

to 19.

5% year-over-year. This includes estimates of approximately $11 million for Device42 for the year.

Non-GAAP income from operations to be in the range of $60 million to $66 million and non-GAAP

net income per share to be in the range of $0. 32 to $0.

34,  assuming  weighted  average  shares  outstanding  of  approximately  306.  4  million.  Our

forward-looking estimates are based on FX rates as of July 26, 2024, so any future currency moves

are  not  factored  in.  Let  me  close  by  saying  that  we  believe  we  have  the  right  strategy  in  place  to

capture the market opportunity in front of us and drive durable long-term growth at Freshworks.

We are prioritizing investments to our business that we believe will position us for better execution in

IT  and  employees'  experience.  We  remain  focused  on  product  innovation,  delivering  on  our  AI

initiatives and improving the growth of our customer-facing solutions to deliver scalable solutions for

our  customers.  We  look  forward  to  updating  you  on  our  progress,  and  we're  excited  for  what's

ahead. And with that, let us take your questions.

Operator? 

Operator

Questions & Answers: