Release Date: November 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Freshworks Inc (FRSH, Financial) reported a strong third quarter with a 22% year-over-year revenue growth, reaching $186.6 million.
- The company generated free cash flow of $40.1 million, nearly doubling from the previous year, with a free cash flow margin of 21%.
- Freshworks Inc (FRSH) added over 800 net new customers, marking the highest organic net adds in the last four quarters.
- The company's Employee Experience (EX) business achieved over $390 million in ARR with a year-over-year growth rate of over 40%.
- Freshworks Inc (FRSH) announced a $400 million share repurchase program, reflecting confidence in its growth strategy and financial health.
Negative Points
- Freshworks Inc (FRSH) is undergoing a global workforce realignment, resulting in a 13% reduction in headcount.
- The company anticipates a charge of approximately $11 million to $13 million in Q4 due to the workforce reduction.
- Net dollar retention for Q3 was 107%, with expectations to decrease to approximately 106% in Q4, indicating pressure on expansion.
- Freshworks Inc (FRSH) faces challenges in maintaining growth momentum in its Customer Experience (CX) business, despite recent improvements.
- The company is cautious about its 2025 revenue growth, projecting low to mid-teens growth, partly due to tougher year-over-year comparisons post-Device42 acquisition.
Q & A Highlights
Q: Can you touch on the trends you saw in the SMB sector and how that business fared versus your initial expectations?
A: We saw positive signs in Q3 around SMB, continuing trends from prior quarters. Net customer adds have increased from 400 to 800 over the last three quarters. This is due to focused product investments and efforts to help customers see value in our products, which has improved churn. We've also seen positive momentum in converting free plan customers to paid plans, particularly with AI and conversational solutions.
Q: On the reduction in force, were any areas impacted more than others?
A: The reduction was broad-based, but we made some reductions in sales and marketing to focus on fewer markets and bigger opportunities. The goal was to focus our teams on key areas: EX, AI capabilities, and driving growth in the CX business.
Q: What is driving the improvement in the CX business, and has growth troughed at this point?
A: The CX business saw growth in Q3 due to a continuation of trends from previous quarters, with net adds picking up and churn at an all-time low. This is due to focused product investments and improvements in customer support. Seat growth continues, and we're optimistic about the business's direction, especially as SMBs recover.
Q: Can you discuss the assumptions around the 2025 numbers for ITSM and CX, and are you factoring in AI?
A: We're in the middle of planning for 2025 and have provided a preliminary revenue growth estimate in the low to mid-teens. We haven't broken down product specifics yet but are optimistic about achieving and exceeding our financial targets, including a greater than 25% free cash flow margin. AI investments will continue to play a role.
Q: How do you split the improvement between macro factors and internal execution?
A: On the EX side, success in moving upmarket is due to our solution's fast time to value and low TCO. AI adoption is widespread, with copilot being included in half of large deals. In CX, product experience improvements and better conversion of free users to paid plans have driven growth. The improvements are largely due to internal efforts rather than macro factors.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
