Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Freshworks Inc (FRSH, Financial) delivered Q2 revenue of $174.1 million, growing 20% year-over-year.
- Strong free cash flow of $32.8 million, resulting in a free cash flow margin of 19%.
- Successful strategic acquisition of Device42, enhancing ITAM capabilities.
- Significant customer wins including Kayak, Davidson Kempner Capital Management, and Paul Smith UK.
- Freddy AI products, particularly Freddy Copilot, showing strong adoption with over 1,200 customers and a 40% attach rate for new deals over $30,000.
Negative Points
- Net dollar retention rate slightly decreased to 106%, with expectations of further decline to 105% in Q3.
- Continued macroeconomic pressures affecting SMB segment, leading to slower expansion.
- Device42 integration may cause quarterly fluctuations in revenue due to its term-licensed business model.
- Challenges in the customer experience (CX) segment, primarily due to macroeconomic pressures on SMBs.
- Potential disruption in Device42's partner business involving competitors, which could impact revenue.
Q & A Highlights
Q: Dennis, can you elaborate on the strong adoption of Freddy AI and what is driving this momentum?
A: We are seeing tremendous interest among our customers, particularly with our Copilot product. Customers are comfortable with AI making their agents more productive. They typically start with a small deployment, measure productivity impact, and then decide to pay for the Copilot add-on. We are seeing attach rates around 40% for large deals, and every meaningful deal involves Copilot.
Q: Tyler, what drove the improvement in net new customer additions this quarter?
A: We saw a turnaround in customer additions due to a combination of top-of-funnel improvements on the SMB side, stabilization in churn, and better execution. While the pressures on SMB macro and expansion persist, we were pleased with the uptick in customer numbers.
Q: Dennis, can you discuss the trade-off between seat-based pricing and consumption-based pricing as AI increases agent productivity?
A: We have not seen meaningful changes in seat dynamics due to AI. Customers are adopting AI for its productivity benefits, and many are redeploying agents to handle more complex tasks. We are seeing strong attach rates for AI products without a reduction in seat counts.
Q: Based on the adoption trends and ROI efficiency with AI capabilities, do you feel like you've set Copilot and self-service pricing correctly?
A: Yes, we are pleasantly surprised with how the pricing for Copilot has held up. Customers see measurable productivity improvements, which drives the positive reception and pricing. We are leaning into this opportunity, and it is a core part of every sales conversation.
Q: Can you provide more color on the go-to-market strategy for Device42 and the timeline for its cloud-native solution?
A: We are integrating Device42 with Freshservice to create a seamless product experience by early next year. The cloud-native version of Device42 is planned for the latter part of next year. We are actively introducing Device42 into our pipeline and leveraging its partner network to drive new opportunities.
Q: What are the key priorities for Freshworks after your first quarter as CEO?
A: Our key priorities are to win in the IT and employee experience business, where we see strong product-market fit and momentum, and to accelerate the monetization of our AI capabilities. We are also focusing on making our customer experience products work together better to drive greater conversion of leads into customers.
Q: How are you addressing the challenges in the SMB segment, and when can we expect to see the benefits of your investments?
A: We saw some improvement in customer growth this quarter, but we continue to make incremental changes to our process to drive greater conversion of leads into customers. We are also working on making it more seamless for customers to buy into multiple products.
Q: Can you provide more details on the impact of AI on seat degradation and the macro pressures on the customer experience business?
A: We have not seen seat degradation due to AI. The rate of seat addition has come down due to macro pressures on SMBs. We do not see material differences in expansion or churn rates between customers who have and have not adopted AI.
Q: How do you plan to integrate Device42 into Freshworks' sales force, and what is the timeline for the cloud-native solution?
A: We are actively integrating Device42 into our sales pipeline and leveraging its partner network. The first product milestone is a seamless integration with Freshservice by early next year, and the cloud-native version is planned for the latter part of next year.
Q: Are there any segments or verticals where you are seeing increased or slower adoption of Freddy Copilot and Self Service?
A: We are seeing traction across various segments and verticals, including small and large businesses. Both customer service and IT agents are finding value in Copilot, and it is becoming a core part of our sales strategy.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
