Q2 2024 Earnings Summary
- Freshworks is gaining significant momentum in the IT and employee experience business, achieving a record number of wins against its largest competitor in Q2, indicating strong product-market fit and opportunities for growth.
- Strong adoption and monetization of AI-powered Freddy Copilot, with attach rates around 40% for large deals over $30,000, and customers seeing significant productivity improvements, suggesting AI products are driving growth.
- An uptick in net customer additions, excluding Device42, from under 400 in the prior quarter to approximately 600 net adds in Q2, showing early signs of improvement in customer acquisition, particularly in the SMB segment.
- The company continues to experience pressure in the SMB segment and expansion, particularly in agent additions, affecting its Customer Experience (CX) business. This ongoing challenge may hinder growth prospects in these areas.
- Gross churn remains in the mid-teens, which, although stable, indicates a significant level of customer turnover, especially within the SMB segment. This high churn rate could impact net customer growth and overall revenue.
- The company's guidance suggests a softer growth outlook for the core business in the second half of the year, excluding the benefit from the Device42 acquisition. This includes a reduction in billings growth guidance, reflecting potential slowing momentum and unpredictability in certain business segments.
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AI Adoption and Monetization
Q: What is driving strong AI adoption, and how is Copilot performing?
A: Dennis Woodside explained they're seeing tremendous interest in AI, especially their Copilot product. Customers value AI's ability to suggest answers, leading to attach rates around 40% for large deals over $30,000 per year. Copilot is priced at $29 per seat per month, and this pricing has held firm due to the clear productivity benefits observed by customers. -
Impact on Seat Dynamics and Pricing
Q: How is AI affecting seat-based pricing and overall seat counts?
A: Despite increased agent efficiency from AI, Dennis noted they are not seeing meaningful changes in seat dynamics. Customers are actually adopting AI without reducing seat counts, and some are repurposing agents for higher-order tasks. This reinforces confidence in their seat-based pricing model amid the rise of AI. -
Device42 Acquisition and Integration
Q: How does the Device42 acquisition impact guidance and go-to-market strategy?
A: Tyler Sloat stated they've built in $11 million from Device42 for the full year, accounting for potential disruptions due to its term license model. Dennis mentioned plans for a more seamless integration with Device42, aiming for a cloud-native offering by the end of next year. The acquisition is expected to unlock new partner opportunities and enable earlier entry into customer deals. -
Guidance and Outlook
Q: Are there changes influencing the revenue guidance and net retention expectations?
A: Tyler indicated there's no significant change in business dynamics affecting the Q3 guidance. The field business remains back-end loaded, and pressures on SMB and expansion persist. Net dollar retention is expected to be around 105%, with continued expansion pressures due to macroeconomic factors ,. -
Customer Growth and Churn
Q: How is customer growth trending, and are there changes in churn rates?
A: The company added approximately 600 net new customers excluding Device42, up from under 400 in the prior quarter, driven by improvements in the SMB segment and stabilized churn. Gross churn remains relatively stable with no material changes in Q2. -
Streamlining Go-to-Market Strategy
Q: How is the go-to-market strategy being adjusted for customer experience and sales products?
A: Dennis outlined that they've reoriented their inbound sales team to be product-centric rather than geographically focused, enhancing expertise and improving conversion rates. These changes are completed and being implemented this quarter.