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    Freshworks Inc (FRSH)

    Q1 2024 Earnings Summary

    Reported on Mar 11, 2025 (After Market Close)
    Pre-Earnings Price$18.25Last close (May 1, 2024)
    Post-Earnings Price$13.40Open (May 2, 2024)
    Price Change
    $-4.85(-26.58%)

    What went well

    • Strong Adoption of AI Solutions Leading to Increased Revenue: Freshworks has observed strong interest and adoption of their AI products like Freddy Copilot and Freddy Self Service across all customer segments, including SMBs and larger enterprises. Customers are seeing productivity improvements of over 30%, and are willing to increase contract sizes to gain efficiencies and cost savings. This adoption is leading to potential revenue growth for Freshworks through increased software sales, even as customers reduce their agent count.
    • Growth in Larger Customers and Upmarket Momentum: Despite macroeconomic headwinds affecting SMBs, Freshworks continues to see strong momentum and interest in the larger account space, with continued growth in customers contributing over $50,000 in ARR. This shift towards larger customers is leading to higher Average Revenue Per Account (ARPA), particularly in IT and customer support deals with enterprises.
    • Strategic Acquisition of Device42 Enhancing Competitiveness: The acquisition of Device42 is expected to enhance Freshservice's capabilities, making Freshworks more competitive in the enterprise segment. This fills a gap where Freshworks previously lost deals due to lacking advanced ITAM capabilities, and is expected to be revenue accretive for the year and cash flow neutral, leading to potential revenue growth through cross-selling opportunities to both Device42's 800 customers and Freshworks' existing customer base.

    What went wrong

    • Freshworks is experiencing continued weakness in the SMB segment, particularly in Customer Support (CS), due to macroeconomic pressures, leading to a decrease in net customer additions over the last year.
    • Prolonged decision-making and, in some cases, no decisions among SMB customers are impacting Freshworks' growth, especially within the CS business.
    • Calculated billings growth is expected to slow down to 12% in Q2, down from 14% as reported in Q1, indicating potential slowing growth momentum.

    Q&A Summary

    1. SMB Market Softness
      Q: Is SMB softness due to AI or other factors?
      A: Dennis explained that the softness in the SMB market is primarily due to macroeconomic factors like rising interest rates affecting SMB investment in customer support, not AI. Despite this, they saw good adoption of their AI solutions like Freddy Copilot among SMBs and larger customers. , , ,

    2. CEO Transition
      Q: Why is now the right time for CEO transition?
      A: Girish stated that the succession plan was in place when Dennis was hired 18 months ago. The timing is right for Girish to focus on product strategy and AI, while Dennis brings operational rigor to scale the company. Internally, this is not a sudden change. , , ,

    3. Device42 Acquisition
      Q: How will Device42 acquisition help move upmarket?
      A: Dennis said the Device42 acquisition adds advanced IT asset management capabilities demanded by larger customers, making Freshworks more competitive against ServiceNow and Atlassian. They plan to cross-sell into each other's customer bases and expect it to be revenue accretive and cash flow neutral for the year. , , , , ,

    4. AI Monetization
      Q: Can AI replace agents and increase contract value?
      A: Dennis and Girish confirmed that customers are replacing human costs with software costs, leading to potential increases in contract sizes upon renewal. AI products like Freddy Self Service and Copilot are generating tremendous interest and are central to sales and renewals. , , , , , , ,

    5. SMB Execution Improvement
      Q: What are the plans to improve SMB execution?
      A: Dennis aims to modernize the inbound and digital-led motion in SMB by applying AI and making it easier for customers to see value in their products. This is a 2024 initiative, with expected impact later in the year. , ,

    6. Billings Guidance
      Q: What are the billings expectations for the year?
      A: Tyler stated that normalized billings grew 17% in Q1, expect 12% as reported in Q2 due to prior year pull-ins, and 16% growth for the year. They see acceleration in billing schedules and expect improvements later in the year. ,

    7. Net Retention Rate
      Q: How is net retention trending and impact of upsells?
      A: Tyler mentioned net retention remains at 106%, with churn ticking up slightly but not materially. Expansion is driven by newer products like Freddy Copilot, but net retention is expected to remain around 106% in Q2 and for the year. ,

    8. Macro Impact on Deals
      Q: How is macro affecting customer deal cycles?
      A: Dennis observed prolonged decisions and headwinds in SMB due to macro factors. In larger accounts (500+ employees), they see good momentum and interest, especially with AI investments. ,

    9. ITSM Business Performance
      Q: How is the ITSM business performing?
      A: Dennis reported that the ITSM business continues to perform well, especially among larger customers. They are winning as a credible alternative to ServiceNow, and the Device42 acquisition strengthens their position. , ,

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