Full Year 2022 Freshworks Inc Earnings Call

February 7, 2023

Speaker 3: You.

Speaker 4: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.

Speaker 5: to earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. If you wish to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded.

Speaker 6: And now I'd like to introduce your host with today's program, Mr. Jun He, Vice President of investor relations. Please go ahead, sir.

Speaker 7: Thank you. Good afternoon and welcome to Freshworks' fourth quarter and full year 2022 earnings conference call. Joining me today are Gérish Mazerbutham, Freshworks' chief executive officer, Dennis Woodside, Freshworks president and other slope, Freshworks' chief financial officer.

Speaker 8: The primary purpose of today's call is to provide you with the information regarding our fourth quarter and full year 2022 performance and our financial outlook for our first quarter and full year of 2023. 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.

Speaker 9: 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 change.

Speaker 10: to differ materially from those projected in the forward-looking statements. For discussion of the material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed form 10Q and our other periodic filings with SEC. FreshWorks assumes no obligation to update any forward-looking statements in order to refer.

Speaker 11: 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 periodic SEC reports, a replay of today's call, or to learn more about fresh works. And with that, let me turn it over to Birish.

Speaker 12: Thank you, June , and welcome everyone. Thank you for joining us today on Freshworks Learning Call, covering our fourth quarter and full year 2022.

Speaker 13: Overall, we executed well in the quarter.

Speaker 14: We exceeded expectations across our operating results for total revenue, non-GAAP operating income and free cash flow.

Speaker 15: We capped off a strong finish to the year with $133.2 million in quarterly revenue as we surpassed $500 million in annual recurring revenue.

Speaker 16: In this environment, as companies are seeking greater value for their IT spend,

Speaker 17: We are seeing the fresh work value proposition resonate more than ever.

Speaker 18: In Q4, we added approximately 1800 new customers to our growing base and ended up with more than 63,400 total customers, including the San Francisco 49ers, Finn Choice, Mahindra, Supara, San Marci and Ulu Bikes.

Speaker 19: I'm incredibly proud of how we do the business.

Speaker 20: We also improved our non-GAAP operating margin by 8 percentage points in Q4 on a year-over-year basis and we generated positive free cash flow of $4 million in the quarter.

Speaker 21: Our approach during this recent period of macroeconomic uncertainty.

Speaker 22: was to focus on driving our growth through four key strategies.

Speaker 23: We believe these four business drivers will continue to move us forward in 2023.

Speaker 24: First is our continued focus on product innovation.

Speaker 25: In 2022, we expanded our unified CRM platform to include Fresh Chat.

Speaker 26: We launched fresh service for business teams to extend fresh service beyond IT.

Speaker 27: And we made our boss smarter across our CX, IT, and broader CRM products to help businesses engage their customers faster.

Speaker 28: Second, we saw results from our focus on larger customers.

Speaker 29: which is driving most of our growth.

Speaker 30: Today, nearly 60% of our business comes from mid-market and larger companies, with many of our Q4 deals starting with fresh service.

Speaker 31: The third business driver is Extension.

Speaker 32: Despite the challenging macroeconomy, customers expanded through agent additions, cross-sells, and upgrades into larger deployment.

In Q4, our net dollar retention was 110% on a constant currency basis.

And finally, our focus on operating efficiency.

We generated positive cash flow in Q4 and improved our non-GAAP operating margin.

We plan to build on this momentum and improve our efficiency in the year's second.

During today's call, Dennis, Tyler and I will go deeper on these four business drivers and how they played a role in our Q4 results and how we see them contributing going forward.

Starting with our product innovation.

We continue to make improvements last year across our IT, CX and broader CRM solutions.

New business increased as companies chose Freshworks products as credible alternatives to expensive and bloated software.

This is really important in the current environment that businesses want to control IT spend without sacrificing powerful functionality in mission critical applications.

In fact positive reviews from our customers this quarter earn those trust-readiest awards for best value for the price and best feature set.

It is those two reasons why we believe press service continues to grow and gain traction in the mid market.

Take swire Coca-Cola for example.

Swire is one of the world's largest Coca-Cola bottling partners in the US and Asia, and it shows fresh works for the breadth of our features, fast deployment, and lower cost of ownership.

Swire brought on Freshworks because they were looking for a platform that was comprehensive enough to support their complex needs while reducing their ITSM spend.

Additionally, last quarter we launched a service for business teams and in the past three months we have seen strong early success.

As businesses eliminate siloed support and service management platforms, other departments like HR and Finance are able to use Fresh Service to build a more modern and consolidated employee experience.

New customers like Coherent Corporation, a semiconductor company with over 23,000 employees, chose FreshService over a large incumbent thanks to our integrations and the ability to scale across IT and HR teams.

In our CX business, we continued enhanced fresh chat and freshness products with a focus on customer self service and agent experience.

In PressDesk, we added new integration with multiple telephonic partners.

Enterprises can now bring their own telephony solution into Fresnes to create a comprehensive omnichannel customer service solution.

In Fresh Chat, we introduce simpler ways to build self-service bots.

In Q4, we added more bot languages and industry specific bot templates, extending the reach of our product to global markets.

In Q4 alone, FreshChat powered hundreds of millions of bot conversations.

with the rise of modern messaging apps.

companies have rapidly shifted to engaging with customers over conversational messaging channels.

By automating responses across email, chat, and calls, Zia reduced resolution time by several hours.

Turning to our broader CRM solutions in sales and marketing, we improved analytics and reporting. We launched a new revenue attribution capability to help marketers better understand the sales impact of their cross-channel marketing campaign.

We also added integration to analyze sales calls to scale the effectiveness of their customer's contribution

I am super proud of our product innovation in 2022 and our dedication to building new capabilities that can deliver value to our customers through a challenging macro environment.

As we look ahead at our product priorities for this year, we will continue to differentiate this service as a comprehensive IT service, IT operations and enterprise service management district.

In CX, we will continue to deliver on the promise of an omnichannel customer support experience with self-service automation, conversational experience and ticketing.

And finally, we will continue to build a unified CRM with an out of the box Customer Data Platform and AIML.

I'll now turn it over to Dennis to talk about what we are seeing in the market, how larger customers are driving our business growth, and how customers are expanding on our products.

Thank you, G, and hello everyone. Thanks for joining us today.

I'm 5 months in at Freshworks and I'm excited by the progress we're making in the business.

We close the year on a high note, feeding our financial estimates and improving our operating efficiency.

In its upper market environment, we improved our execution to drive the highest new business quarter ever.

We saw increased competition for many of our deals and yet we still improved our win rates for our CX and ITSN products.

This was especially true for our larger deals in the field with Fresh Service leading the way as a scalable and cost-effective solution that is delivering incredible value to our customers.

Key talked about our first of four business drivers, product innovation. I'll cover the next two, our success with mid-market enterprise customers and our expansion motion.

I'll start with our enhanced focus on mid-market and enterprise customers.

Over the last 18 months, we've made substantial investments in people and tools to expand our go to market motions.

We believe those investments, which are now reflected in our cost base, are paying off in higher win rates, participation in more deals, and the expansion of our mid-market and enterprise business.

In 2022, our new business wins increased with companies spending more than $50,000 in ARR. And in Q4, this customer cohort grew 35% year over year and now represents 44% of our business.

While our business was historically more in SMB, our revenue base has shifted over the years towards more mid-market and enterprise customers.

Today, nearly 60% of our business is coming from mid-market companies, those with 251 to 5,000 employees.

and enterprise customers with more than 5,000 employees.

That's because our cost effective yet powerful products are delivering real value fast.

They can scale to serve thousands of agents, and millions of customer and employee interactions.

These benefits resonate with companies of all sizes, especially in the current economy.

The days of selecting a vendor only based on market share or brand name where it is are over.

Customers want rapid impact and lasting value at a reasonable cost and Freshworks delivers.

That's why Fresh Service was chosen by Kaurfor Belgium, a subsidiary of the eighth largest retailer in the world.

Their team of 300 IT professionals now have a more simplified and nimble approach to IT service management to support more than 11,000 employees.

While legacy and comments are focused on the 2000 largest companies in the world. Freshworks has the opportunity to serve hundreds of thousands of others. Who are dissatisfied or underserved by bloated and expensive software.

We provide mid-sized organizations like Databricks, TaylorMade and Georgetown University with a better choice.

powerful yet cost effective solutions.

Turning to expansion, I'm pleased to say that despite the macro conditions, our customers are still expanding through seat additions, cross-sells, and upgrades.

In Q4, net dollar retention was 110% in constant currency, as the overall term rate for our business remained in the high teens.

We see better retention rates in our mid-market and enterprise customers, which helps our overall net dollar retention.

While seed additions continue to drive the vast majority of our expansion's day, we expect cross-cell to be a bigger contributor to our growth over time.

The percent of customers using more than one product remain relatively the same as the prior quarter at 24%, with just a slight increase in Q4.

We are implementing specific initiatives to create more bundling and cross-cell opportunities for our go-to-market team this year.

Take Addison Leap for example.

The British private hire cab and courier company started as a fresh service customer in 2015 and in 2022 added on fresh sales and fresh desk.

They believe their previous CRM system from a large incumbent caused low agent productivity and did not deliver sufficient value.

Our fresh sales suite was selected to replace the older CRM for our modern intuitive UI built for the end user.

Looking at our customer cohort of over $50,000 in ARR, we added a net 191 customers in Q4.

While this customer number benefited from FX movements and new deals in the quarter, the biggest driver continued to be expansion as customers increased their spend on our products, and especially for the ITSM market.

An example is I-Corps, a managed services provider with more than 35,000 employees in 10 countries.

As part of I-Core's digital transformation strategy, the company expanded the use of fresh service and fresh test bots to its IT, HR, and finance teams to immediately answer questions before transferring to a technology team member.

The platform enables I-Corps team members to focus on more complex tasks and create a better experience for both employees and customers.

To me, it's customers like the ones you heard about today that validate my decision to join Freshworks.

I believe we have the opportunity to build a large, impactful company that can serve hundreds of thousands of businesses over time.

By focusing on the four business drivers of product innovation, mid-market and enterprise customers, expansion and efficiency, we believe we can grow well beyond our current levels.

I'm excited about the progress we've made to better align our go-to-market teams and the many opportunities ahead of us.

Now over to Tyler to talk about how we are improving efficiency as Freshworks continues to grow.

Thanks Dennis. Looking back on our Q4 and full year 2022 performance, I'm pleased with our ability to drive operational efficiencies in the business.

Starting last year.

Starting last year, we knew that 2022 would be a big investment year.

building out our go-to-market teams, investing in product development, and taking on a full year of G&A public company costs.

What we didn't know was how the macroeconomy would play out and how that would impact the overall market for our products.

During a year of a slowing demand environment, negative FX movements, and pressure on small businesses, we still beat the high end of our 2022 estimates for revenue that we laid out 1 year ago by 3 million.

More significantly, we effectively managed our costs throughout the year to beat the high end of our 2022 estimates for non-GAP operating income by over $26 million.

We believe we have a durable business model and we're improving our operational efficiency as we drive business growth.

In Q4, we had another quarter of increased efficiency.

With revenue being expectations,

non-GAAP operating loss outperformed expectations by $6.5 million in the quarter.

We improved our non-GAAP operating margin year over year, and our business inflected to generate positive free cash flow of 4M dollars and non-GAAP EPS of 1 cents in the quarter.

As I normally do, I'll review our Q4 financial results, provide background on key metrics, and meet the potential status goals of most fund.'

and close with our expectations for the first quarter and full year of 2023. I will also include Concent Currency comparisons to provide a better view of our business fundamentals. Most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, payroll taxes on employees stock transactions.

Amherstation of Aquart and Tanduels and other adjustments.

Starting with the income statement, revenue grew 30% adjusting for constant currency, or 26% as reported, to $133.2 million.

Although the FX trend for the dollar against the euro and pound reversed in Q4, we continued to see the trailing negative impact to revenue resulting from FX movements earlier in the year.

As Dennis mentioned, we had a strong quarter of new business driven by fresh service while expansion continues to see pressure from the effects of the broader economic slowdown.

Smaller customers continue to feel the pressure as turn rates increase slightly for the SMB segment, leading to slower growth.

Overall, churn for the company remained relatively stable, ticking up less than 100 basis points in the quarter.

As a whole, we have made good improvements to our gross turn rates over the past several years.

In Q3 and Q4, we were able to keep growth turn relatively stable, but do see potential risk of turn increase in slightly going into 2023.

Moving to margins, our non-GAAP gross margins were roughly similar to Q3, rounding up to 83% for the quarter.

We continue to achieve strong non-GAPGOS margins with over 82% for the four years as we scale the business.

In Q4, non-gap operating margins improved 8% of points you over year to negative 2%.

driven mostly by lower R&D and G&A costs as a percentage of revenue.

Specifically for gene A, expenses in the prior year included non-recurring litigation settlement costs that were not included in the most recent quarter.

On a quarter over quarter basis, we had a very small improvement to non-GAAP operating margins as we largely maintained our run rate cost base in matching the business growth.

Demeter Q3, we had a one-time type benefit of approximately $4 million related to the reversal of the crude expenses from earlier in the year.

Our revenue outperformance combined with an improving cost base led to a non-GAAP operating loss of $2.8 million in Q4.

I'm pleased with our ability to control costs in the current market environment can expect to drive more operating leverages we go forward.

Turning to our operating metrics.

Net dollar retention was 110% on a constant currency basis, 408% as reported, and is largely in line with our commentary from the prior quarter.

As expected, we saw expansion slow down in the quarter reflective of the overall economic trend.

Looking ahead, as we expect the broader trend to continue, we estimate Q123 constant currency net value retention to be 107 percent and holding FX rates constant reported net value retention to be 105 percent.

In terms of our customer metrics, customers contributing more than $5,000 an error through 20% to 17,722 customers in the quarter and now represents 87% of our error.

our customer metrics, customers contributing more than $5,000 in ARR grew 20% to 17,722 customers in the quarter and now represents 87% of our ARR. On a constant currency basis, ARR is a

This customer cohort grew 21% year over year.

For larger customers contributing more than $50,000 in ARR, this customer count grew 35% to 1,908 and ticked up to represent 44% of our ARR.

Adjusting for cosmic currency, this customer cohort grew at 38%.

Lastly, we ended the quarter with a total customer count of more than $63,400 and our average revenue per account continued to increase.

Movie tour of buildings, balance sheet and cash items.

In Q4, calculated buildings grew 21% to $147.8 million dollars. In holding constant currency over the past year, calculated buildings grew 25%.

The other factor impacting the growth rate was billing's duration mix of negative 4%.

Adjusting for this, the normalized calculated billing's growth was approximately 29% in Q4.

Looking ahead to Q1 of 2023, our preliminary estimate for calculated building's growth is 20% on a constant currency basis or 17% as reported basis on current FX rates.

For the full year 2023, we expect calculated buildings to be similar to our expected revenue growth for the year of approximately 17%.

Turning to our balance sheet in Cashland.

We maintain a steady cash balance as we ended the quarter with cash and marketable securities of approximately $1.1 billion.

In Q4, we generated $4 million of free cash flow.

coming in ahead of our estimates.

Looking back on the full year, we outperformed our initial free cash flow estimate of negative $25 million by more than $10 million in 2022, despite a tougher economic environment.

further demonstrate our ability to drive efficiencies in the business.

We continued to net-settle vested equity amounts and used nearly $16 million under financing activities for Q4.

For the full year, we used approximately $167 million for the net settlement of nearly 9.8 million shares.

As a reminder, this financing activity is excluded from pre-cash flow.

We plan to continue net settling vested equity amounts, resulting in quarterly cash uses of approximately 17Million dollars at current price levels.

As we look forward to 2023, we expect to generate approximately $10 million of free cash flow for the year, with approximately $3 million in Q1.

We have some seasonality in spend throughout the year, so we anticipate Q2 and Q3 will be near breakeven and the remainder of the free cash flow expected in Q4.

With positive free cash flow now coming from the business, no debt, and a strong balance sheet, we believe we are well positioned to drive sustained growth into the future.

Turning to our share count for Q4, we had approximately 324 million shares outstanding on a fully diluted basis as of December 31st, 2022.

The fully diluted calculation consists of 289 million shares outstanding.

Approximately 32 million related to unvested RRCs and PRRCs.

and 3 million shares related to outstanding options.

Let me now talk about our forward looking estimates.

I'll go through the numbers first and then provide background commentary afterwards.

For the first quarter of 2023, we expect Revenue to be in the range of 133 million to 135 million dollars, growing 16 to 18% year over year.

Adjusting for cost and currency, this reflects growth of 19 to 21 percent year over year.

Non-gap loss from operations to be in the range of negative 9 million to negative 7 million dollars.

And non-GAAP net loss per share to be in the range of negative 3 cents to negative 1 cents, assuming weighted average shares outstanding of approximately 290.2 million shares.

For the full year 2023, we expect revenue to be in the range of $575 million to $590 million, growing 15% to 18% year over year. Adjusting for cost at currency, this reflects growth of 16% to 19% year over year.

Non-gap loss from operations to the median range of negative 14 million to negative 6 million dollars.

A non-gap net income or loss per share can be in the range of negative 1 cent to positive 3 cents, assuming weighted average shares outstanding of approximately $293.8 million.

We want to provide our best views of the business as we see it today and in a changing market environment it can be tough.

So a couple areas of substance to call out.

the call out. First on FX.

The weaker dollar trend in Q4 created a slight benefit to revenue and billings metrics compared to the prior quarter.

But on a year over your comparison, we still saw a negative impact.

These estimates are based on FX rates as of February 3rd, 2023. So in any future, FX moves are not factored in.

We started to hedge a small portion of our INR-based expenses in January 2023.

and expect the impact of the hedging program to increase throughout the year, which will improve the predictability for operating expenses moving forward.

the impact of the hedging program to increase throughout the year, which will improve the predictability for operating expenses moving forward. Second, on profitability.

I'm pleased that we delivered on our commitment to reach positive free cash flow by Q4 last year.

Now, as we head into 2023, we're driving additional efficiencies to show quarter-over-quarter improvement throughout the year.

As such, we expect non-gap operating loss to improve to negative 6 million in Q2, near brick even in Q3 and then turn positive by Q4.

We plan to maintain the stains profitability in the years ahead.

Let me close by saying.

And please, with our execution in the quarter, our ability to operate efficiently over the past you're highlighted the durability and resiliency of our business model.

Our view is that we're well positioned to execute through a changing market environment in the near term, and we remain bullish on our long term opportunities.

With that, let us take your questions. Operator? Certainly. If you have a question at this time, please press star 11 on your telephone. If your question has been answered, and you'd like to remove yourself from the queue, simply press star 11 again. One moment for our first question.

And our first question comes from the line of Pat Walravens from JMP Securities. Your question please.

Oh, great. Thank you very much and congratulations.

I have two if that's okay. The first one's on the macro, which is just, you know, last quarter you guys were talking a lot about companies reducing their growth forecast and headcount needs.

Your tone seems so much better now. Did the macro, I hate to even say this, but did the selling environment for you guys improve in some way in Q4?

I'll start the answer. Is this the first party you want to ask the second question as well? Yeah, and the second part is just, I think it'd be great to have Dennis. I mean, obviously he's on the board of the service now and he's the Dropbox and Google, why do you take this job? Let's throw that out there. Got it.

Well, let me let me start on the macro yet. We look, we had a really good quarter, especially on new business. Right? And we called that out and that felt strong, which I just think is a testament to. Our products and the value that they can bring to customers, even in in tough markets, the place that we continue to see pressure was on expansion. And that macro is still playing there. Right? And that the.

So I think over the last 18 months, we've made substantial investment in the products themselves. So if you think about our ITSM product, we announced enhancements that allow us to fulfill ITOM requirements in the second half of last year. We rolled out an ESM product.

So we're able to address broader and broader needs of larger customers. And really this is just a continuation of a trend and a set of investments that have taken place over the last 12 months or so that really are starting to pay off in terms of those new business wins. We are seeing.

competitive win rates in Q4 than we did in Q3, both for fresh desk and for fresh service.

And we're getting involved in more deals. So we're companies are looking to us when they're evaluating better solutions, solutions with lower total cost of ownership. Everybody's looking for value. So we're getting more swings and we're hitting the ball more often. And I think that really started this show in Q4.

In terms of why I joined, I see an opportunity to build a company that does serve every business in the world. Every business in the world has a need for the products that we currently build. We can serve companies, employees, and customers equally well. I think the vision that the G is laid out and the products that...

built around creating a seamless, easy to use, easy to implement set of business software is super compelling. So that's why I joined.

Awesome. All right. Thank you.

Thank you. One moment for our next question.

Okay, and our next question.

comes from the line of Ryan McWilliams from Barclays. Your question, please.

Thanks for taking the question. Todd, we'll have to hear about maybe how we should think about net retention as we move through this year. And, just on your full year guide, how does this contemplate the macro? And have you guys thought about a scenario where should things get worse from the economics perspective, plan to get the break even faster from here? Thanks.

Yeah, you bet, Ryan. So, Net Dollar Attention, to start off, we did say something on the call there that we do expect that to decrease a little bit. And Net Dollar Attention churn, you know, there's two sides of that coin. We've been pretty open that we've made really good progress on gross churn.

Over the last couple of years in Q3 and Q4 of this past year, you know, that turn kind of remained stable and, you know, just essentially stay flat, which turn includes down. So for us, so that that it was a good thing. Our goal right now is to try to keep it there because I do think that's going to see some additional pressure.

The expansion motion, you guys know our biggest form of upsell is aging addition. And we started to see that kind of after Q1 we talked about it last year and we saw it throughout the year and we expect to continue to be pressure on that and that is what's driving and that dollar retention down.

And, you know, we said it could come down in Q2 in Q1. It could come down a little bit after that in Q2. But obviously we want to work as hard as we can to normalize that in terms of. Our guidance, we've built in everything that we see, and we were trying to call it as we see it. And we have, you know, we do expect that expansion motion to see some pressure.

We are looking at other ways that we can expand with our customers, specifically like Fresh Service for Teams, our new ESM application. We're really excited about that.

And obviously we're going to continue to lean in on new business, which was a really good and cute one.

Great, and just a follow-up on Patrick's question. The customer adds above 5K error or peer-strung in the quarter. Just given what you mentioned on headwinds, the seed expansion, will strengthen these ads primarily from net new customers, or perhaps maybe customers are knowing larger or upsells or operating the plans just.

a little bit of FX on both sides, but yes, also driven by new customer lands, which we had a, you know, we really had a really strong new business quarter in Q4. And, you know, obviously we're going to continue leaning on that. But customers are still expanding. Net dollar attention, you know, it was still, it came down slightly, but it was still good.

And our next question comes from the line of Pindjalambora from JP Morgan. Your question, please. Why did you have to use manufacturer cards?

Hey, thank you for taking the questions and congrats on quarter. I was, I wanted to take it on the guidance a bit.

Basically trying to understand if you added buildings growth of about 29% if I heard that correctly adjusted.

And the guidance is I think about 17 and a half revenue growth next year. I'm trying to think.

Would you go, you know, are you expecting kind of a

step down in macro from here. When I look at the additions to revenue, I think

in 2023 versus what you added in 2022, it's something like a 33% decline. It seems pretty conservative. I mean, would you go as far to say it is de-risked at this point? Like, how should we think about the guidance?

Yeah, again, a big detail, just Tyler, again on guidance in general, we are trying to call it as we see it. And that, you know, what we've done is we've taken into account that we expect to see continue pressure on the expansion motion. And that, you know, as our biggest forum of upsell is aging addition. that.

And when we look at that, you know, the Q1, the Calcutta Billings, it says 17%, and you know, 20% on a content currency. And then obviously, if we see any adjustments, like the 4% you mentioned that we talked about in Q4, I will add that at the end of the quarter to provide more color. But in general, I...

We're calling as we see it, I can't say it's complete de-risk because I don't know how long the macro conditions are going to hold. I think there's upside it. If companies go back to growing, we would clearly expect to take advantage of that growth with them. But if things get worse, we could actually see pressure there as well.

Understood. Thank you for that. And once the greece.

We recently hosted one of your partners and he seemed pretty bolded up on ITSM and you were seeing good traction on the ITSM side. Seems like you're taking share. How do you see that the position of fresh service at this point in the market? Maybe talk about it with respect to Atlassian seems like entering the market as well.

And how should it kind of invest in the thing called that business sustainable growth of that business?

should investors think of that business, sustainable growth of that business, minus any macro.

Sure. So, hey, Pangelem. So, from a first service business standpoint, let me talk to you about the competitive landscape and our positioning and strengths. So, clearly we know that ITSM is a huge market and from a tam standpoint.

Now we expanded into ITSM, ITAM as well as Enterprise Service Management. So there's no doubt on how big the market is. Now, Fresh Service is today the most credible alternative to ServiceNow in the industry and we are seeing that come into play, especially in mid-market and enterprise companies.

Specifically in this environment where businesses are scrutinizing their spend very clearly like every dollar of ID spend. So we are actually competing against and winning against ServiceNow and we have also replaced ServiceNow and again, even in the last quarter, multiple times.

So that is on the enterprise side where there is service now. Now before I comment on a class theme, you should also understand that there is a ton of legacy out there, like BMC, Ramadhi and Ivantee Sherwell. So we actually, Mahindra, one of the largest congram list in India, moved off of...

large legacy incumbent in 2022. Specifically with Atlassian, we are seeing them in some of the lower end of the mid-market deals, but Fresh Service wins purely based on the fact that we are built from the ground up as a full-blown ITSM and ITOM solution.

Whereas Atlassian I think has made around four acquisitions and they're trying to switch together a unified product experience. I think our customers choose us because of the unified product experience.

Thank you. Thank you. One moment for our next question.

And our next question comes from the line of Rich Hillcourt from Credit Suisse. Your question, please.

Hi everyone, thanks for taking my question.

So you mentioned it was the highest new business ever in this quarter. I think you talked about for some customers they were expanding. I think you called out the ITSM side. Tyler, I think you mentioned some stable retention. The question is I'm wondering what portion of overall bookings would you say came from newer expansion versus...

renewal in this quarter and maybe for the new business, can you give us a sense of the duration of those deals? Yeah, Rich, I'll take that. We don't break out the the new versus expansion in terms of quarter, but we did have one of our best new business quarters ever.

We did say that where it's coming from fresh service. It's still smaller than fresh desk from an ARR perspective, but it continued its trend of being the biggest ARR contributor. In a quarter, which it has been for the last couple of quarters, and it's growing faster than fresh desk on a duration perspective. We've got about.

Let's call it 60% of our business roughly. Those aren't exact that are on annual contracts and

There was no big change on that. Now, what does happen is that the bookings mix can change based on the expansion motion, right, because it depends on where you are within the contract on expansion and how much that billings would look like. But in terms of the new business, there wasn't any significant change. There has been this steady change of moving more to annual over the last couple of years.

Okay, great. Yep, that makes sense. And then maybe one last one here for you, Dennis. I was wondering if you can talk a little bit about your vision for unlocking multi-line of business selling. I know you guys disclose multi-product, but multi-line of business is kind of where I'm kind of zeroing in here. Maybe what do you still need to stand up or mobilize to ignite this even further?

Thanks. Yeah, yeah, thanks for the question. Well, I, you know, 1st of all, I would just say that it's happening right? 1 of the examples that we talked about was Addison Lee. Addison Lee originally was a fresh service customer for a couple of years. Satisfied with the product, you know, we're serving their IT department and they decide they're not satisfied with their existing CRM large incumbent.

So it's happening right now. I think the focus has been very much on new business. But as we kind of continue to scale up and we continue to have success with these larger accounts, you know, I-cores, a company with 35,000 employees. There's lots of opportunities for ESM and for other product expansion there. We're going to be leaning into that mode.

Thank you all so much.

Thank you one moment for our next question.

And our next question comes from the line of Brian Peterson from Raymond James. Your question, please. Hi, gentlemen. Thanks for taking the question and congrats on the stock order. So I just wanted to hit on the net ads. Obviously, I think it was better than what we were expecting. Is there any commonality in terms of the geo where you guys are having more success or ya know maybe even less successful.

I actually was under sent to maybe what you guys are displacing in terms of what you're picking up from that new I know it's different by product segment but any color there would be helpful.

Thanks Brian , this is Dennis. So on net ads overall by geo, you know for Q4 we saw a pretty good performance across the board. Our North America business was actually a little bit stronger than the rest of the world in Europe and Asia pack. But our European business performed well, we were pretty satisfied with kind of each.

I'm sorry, sweeteray here.

Very much kind of old on prem systems think of. B and C, that where the product, this is not scaling to what the customer needs and they are looking to make a change in other cases. We are displacing the likes of his end desk or service now. Or service cloud where.

The customer is no longer satisfied with the overall value proposition, especially in the current economy and they're looking for much better value. They're looking for a simpler product that they can deploy quickly and get fast time to value. And they're looking for a product that doesn't require them to have. You know, a number of consultants or specialists on staff just to maintain the product and make sure it does what it's supposed to be doing.

So, there's not, I wouldn't say there's one competitor, I wouldn't say there's one situation. It's really a fairly wide range of situations that's driving our growth.

Right, thanks, Dennis. And maybe a follow-up. I'm curious if you've seen any changes in the pricing environment over the last 90 days, and maybe anything that you guys have seen so far in 2023. Thanks, guys.

Yeah, so this is Dennis. We haven't seen any major change in pricing. I would say the second half of last year on the fresh desk side, you know, the service of this cloud of the world and, um,

And then desk have been very aggressive on pricing, but that's that was true in Q3 and really continued into Q4. I wouldn't say there's any discernible trends on the side. To note.

Thank you one moment for our next question.

And our next question comes in line of Elizabeth Porter from Morgan Stanley . Your question, please.

In your conversations, is there any bit more of a lean towards just the product functionality versus price being the incremental driver that tilts the deals your way? Thanks.

So in your conversation, is there any bit more of a lean towards just the product functionality versus price being the incremental driver that tilts your deals, the deals your way? Thanks. Great, Dennis, I'll take that one. Thank you, Peter.

The trends that we're seeing on WIM rates are broad-based, so it's not confined to any one segment or any one product. Both our fresh desk and fresh service product in Q4 saw higher WIM rates in Q3. That said, for mid-market and enterprise, the mid-market and enterprise segment, our WIM rates are not confined to any one segment or any one product.

Improved at a higher rate, so we saw meaningful improvement. There now, in terms of why are why is that happening? Well. Most of the customers that we're talking to now, the 1 of the number 1 things on their mind is value. Either either total cost of ownership they're looking at, you know.

They need a business case, an ROI. And part of that equation is what is the cost to implement the products? What is the timeline for implementation? How fast can we get the value? And what's the ongoing maintenance cost to get the functionality out of the products that they need?

And in many cases, we are superior on all 3 dimensions now, from a product functionality standpoint, if you were to wind back the clock, 12 or 18 months. We've done a lot in the last 12. 12 months 18 months to.

be able to compete on a feature by feature basis with the likes of a Zendesk or service cloud or Service now and you know the the product functionality has gotten better the robustness has gotten better product is scaling incredibly well We support thousands of agents

Millions of customer interactions across our customer base. All of those investments that we've made over the last 12 or 18 months are paying off. And and that really is helping drive those when rates up. So we think it's quite promising. For, you know, for the future and for where. Uh, our buyers are going, we think the product we have is the right.

product the right strategy for where the market is today and that's a big opportunity for us.

I'm sorry, Elizabeth, I just wanted to add on just this garage. So on the product functionality itself, so it's important to note that if you take CX for example, a fresh desk and fresh chat together offers the most comprehensive Omni-Cable customer service solution today covering the whole spectrum.

of automation service automation with bots, as well as conversation agent experience on modern messaging channels combined with ticketing, right? To take a fresh service, like we have a unified single product across ITSM and ITOM and ESM, which is fresh service of business team. So I think

That is the value that we are talking about. Really, customers not having to buy four or five different tools and struggle with integrating all of that. So that is the superior product value where everything is built organically in one platform.

Great, thank you so much. And then just following up, you mentioned just now the conversation all kind of thoughts and the seamless kind of one platform.

Earlier this week there was the announcement just around the meta messenger integrations and bots. And there was a good amount of buzz in that in the market post that announcement. So just wanted to get a little bit more color from you on the opportunities around that function and feature set.

to just either add new customers or accelerate revenue per customer. Kind of how are we thinking about those capabilities more specifically, is that what we can lean out?

Sure, I think that. So first of all, let me clarify by saying that our partnership with Facebook and Meta goes a long way since 2011, where we were the first Freshdesk for the first helpdesk to integrate Facebook Messenger when they introduced that.

So the recent announcement that we did was more calling out some of the customers usage of this. We know that Conversational has really been picking up in the last few years. The messenger apps under the meta portfolio like WhatsApp, Instagram, Facebook messenger.

So there are more than a billion messages every month that businesses are sending over these channels. And so this announcement was specifically to call out some of the customer wins that we have with our conversational product and showcasing how

we are powering those conversational customer support experiences specifically for B2C companies. So I just wanted to call out that it is our partnership with Meta is like it's not a new one and it's been ongoing and so this is more to showcase some of our customer work.

Great, thank you so much.

Thank you one moment for our next question.

And our next question comes from the line of Scott Berg from Needham. Your question, please.

outside of maybe just leaning into something like ITSM that's selling a little bit better. Is there anything that you're changing in those processes that would be noteworthy? You know try to you know effectively maybe get some of these new customers over the line faster. Hey Scott, Dennis here. So yeah there are a number of things that we're doing. I think

Before I get to the sales specific ones, I would just go back to the product side. You know, a number of the features and big enhancements that we launched in the second half of last year, we're really getting traction with now and into Q4. Things like ITOM, things like ESM.

And the enhancements on the conversational side to fresh desk that that G referred to. So, you know, a lot of it is, hey, we've got, we've got products that really are well suited to the market in terms of the field side. You know, 1 of the a couple of the adjustments that we've made has been have been to focus on bigger deals and focus.

from 250 to 500. We can serve those 250 to 500 employee companies very well and more efficiently through our India operations through inbound. Many of them, most of them are coming to us anyway through a response to a marketing message or coming to our website and signing up for a trial. So that was one pretty meaningful change. Another change, we've created a set of product specialists to focus on fresh chat and fresh sales in particular. Both of those products are fairly complex. The competitive set is complex. So we feel the specialization on the sales side is really important. And we think that that will result in...

continued improvement in wind rate for those products. And in general, the field team is pretty jazzed up about what the product set looks like, the competitive positioning, and where we are in the market. So we're excited about this year, and I think we're gonna see quite a few opportunities. Got it, very helpful there. And then from a follow-up perspective...

No change in philosophy's got me like trying to take everything into account that we know. A year ago we did not know the impact of the kind of macro right we did not expect the expansion motion to just slow down the way it did throughout the year. And so you know.

Now it's kind of the opposite. We actually expect it to continue to be tough for a while and we've built that in. And, you know, we'll see how it goes throughout the year and obviously we're going to do our best to find other ways to grow with customers. But in terms of the philosophy itself, there's no big change.

Excellent, thanks for taking my questions.

Thank you. One moment for our next question.

And our next question comes from the line of Brent Thill.

from Jeffries your question please.

Hi, this is Love Sota on for Brent Hill. Thank you for taking my question. Just wanted to ask one for Girish. On ESM, could you maybe, you know, to categorize that opportunity, could you maybe give us an attach rate to, you know, call for fresh service? How should we think about the opportunity?

we knew that

almost 4,000 plus customers of Frisk Service were actually using it outside of IT, like in departments like HR facilities legal and finance. So I think that gave us the real product validation that we needed to create.

the new module to kind of price it separately, give the workspaces that are required. So we actually think there is tremendous opportunity to go into all of the existing customer base and actually encourage them to use fresh service inside those other teams. And also the fresh service of business teams actually priced

lower than an IT agent, so we think it would be attractive for that. So there is an expansion motion play, which we will be taking on to take this to existing customers. Having said that, we also have multiple new lands where we are landing in multiple departments, not just IT. So I think both of these will allow us to extend pre-service for business teams.

into multiple departments within the company. Got it. And then one quick follow up for Dennis. In terms of the go-to-market organization is.

I know last quarter of the seat Patty was appointed as the interim CRO. Any other changes, I guess, in terms of the organization itself? Do you feel like you have all the resources you need to execute this here? Thank you.

Yeah, thanks. Yeah, so first of all, Patty's done an amazing job taking on the CRO role. And a number of the changes that I described earlier around the focus on 500 to 5,000 employee companies, crispening the team's focus on larger deals, winning larger deals.

our product market fit is becoming much more apparent to the market, that's creating a lot of opportunity for us to move up. So we're very pleased with where things are in the go-to-market side right now.

Thank you.

Thank you. One moment for our next question.

And our next question comes in line of DJ Heinz from Kennecord. Your question, please.

Hey guys, thanks for taking the question. Maybe I could just follow up on the loves question there around the broader ESM strategy. I mean, how much attention do you think investors should be putting on that today? Like if we fast forward, could ESM be ultimately a bigger opportunity than Core IT? Like how are you thinking about sizing?

the two relative opportunities within the fresh service portfolio? So I think right now it is still early days for us. And also we are landing ESM through IT departments. We are not actually starting a go-to-market motion where they're trying to sell this to HR teams or finance teams. So I think in that sense.

We are, our go-to-market is go to IT and then focus on organizations where IT is helping HR legal and finance teams to do that. So I don't expect ESM to be much bigger than IT in the short or in the coming, say, short term. So I would still.

say that we will land with IT and then expand into others or maybe co-land.

into multiple departments. Yeah, yeah, okay, okay, that makes sense. And then, Tyler, on the sales and marketing side, how much of your spend is variable versus fixed? And I'm really getting at kind of that inbound side, which I think is largely driven by digital marketing spend, like how much flexing up and down.

can you do there to control margins and where are you on that spectrum today? Yeah, we don't think of it as flexing up and down. We do look at the digital marketing spend. We plan it out and then we do kind of change it if we're seeing big changes in auction rates or conversions.

But it's not one that we're using as a margin lever necessarily because it does feed one whole side of the business, which is that kind of that SMB that lower than 250, a lot of that is fed by digital marketing spend. And outside of that, that's a variable component. And for the SMB, it's the biggest kind of cost.

on the flip side for the field and where most of our businesses coming from now, which is that field business, which is kind of the greater than 500, the variable component there is commissions, but it's all headcount. That's mainly headcount through it. It is important to note that we spent a lot of...

end of 21 and in a lot of last year building out that field presence. And we think we have a lot of those peace parts in place right now. We still are hiding higher and quarter bearing reps where we think we need them. But we have built out a lot of that already.

21 in a lot of last year building out that field presence. And you know we have we think we have a lot of those piece parts in place right now. We still you know are hiring quarter bearing reps where we think we need them. But you know we have built out a lot of that already. Yep perfect okay thank you for the call guys.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Junha for any further remarks.

Great, thanks everybody for joining us today. If you have any other questions, please feel free to call our email. We look forward to catching up with you throughout the quarter. Thank you.

The U-Ladies and Gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.

conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1 1 on your telephone. If you wish to remove yourself from the queue simply press star 1 1 again. As a reminder today's program is being recorded.

And now I'd like to introduce your host with today's program, Mr. Jun He, Vice President of Investor Relations. Please go ahead, sir. Thank you. Good afternoon and welcome to Freshworks' fourth quarter and full year 2022 earnings conference call.

Joining me today are Girish Matrabutam, Freshworks Chief Executive Officer, Dennis Woodside, Freshworks President, and Tyler Sloat, Freshworks Chief Financial Officer. The primary purpose of today's call is to provide you with the information regarding our fourth quarter and full year 2022 performance and our financial outlook for our first quarter and full year of 2023.

Some of our discussion and responses, your questions may contain forward-looking statements within the meaning of the Private Security's Litigation Reform Act of 1995. These forward-looking statements are based on fresh works, 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. For discussion of the material risks and other important factors that could affect our results, please refer to today's webinar.

Earnings release are most recently filed form 10Q in our other periodic filings with SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this presentation except as required by law.

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

SEC reports a replay of today's call or to learn more about Freshworks. And with that, let me turn it over to Girish.

Thank you, June , and welcome everyone. Thank you for joining us today on Freshworks Learning Call, covering our fourth quarter and full year 2022. Overall, we executed well in the quarter.

We exceeded expectations across our operating results for total revenue, non-GAAP operating income and free cash flow. We capped off a strong finish to the year with $133.2 million in quarterly revenue as we surpassed $500 million in annual recurring revenue.

In this environment, as companies are seeking greater value for their IT spread, we are seeing the fresh works value proposition resonate more than ever. In Q4, we added approximately 1800 new customers to a growing base and ended up with more than 63,400 total customers, including the San Francisco 49ers.

Tint Choice, Mahindra, Supara, Sanmarshi and Ulu Bikes.

choice Mahindra, Supara, Sanmarshi and Uno bikes. I'm incredibly proud of how we grew the business.

We also improved our non-GAAP operating margin by 8% in Q4 on a year-over-year basis and we generated positive free cash flow of $4 million in Q4.

Our approach during this recent period of macroeconomic uncertainty was to focus on driving our growth to 4 key strategies. We believe these four business drivers will continue to move us forward in 2023. First is our continued focus on product innovation.

In 2022, we expanded our unified CRM platform to include Fresh Chat.

We launched Fresh Service for Business Teams to extend Fresh Service beyond IT.

And we made our boss smarter across our CX, IT, and broader CRM products to help businesses engage their customers faster.

Second, we saw results from our focus on larger customers, which is driving most of our growth.

Today, nearly 60% of our business comes from mid-market and larger companies with many of our Q4 deals starting with fresh service. The third business driver is expansion.

Despite the challenging macroeconomy, customers expanded through agent additions, cross-sells, and upgrades into larger deployment.

In Q4, our net dollar retention was 110% on a constant currency basis.

And finally, our focus on operating efficiency.

We generated positive cash flow in Q4 and improved our non-GAAP operating margin.

We plan to build on this momentum and improve our efficiency in the years ahead.

During today's call, Dennis, Tyler and I will go deeper on these four business drivers and how they played a role in our Q4 results and how we see them contributing going forward.

Starting with our product innovation, we continued to make improvements last year across our CX and broader CRM solutions.

New business increased as companies chose threshold products as credible alternatives to expensive and bloated software.

This is really important in the current environment that businesses want to control IT spend without sacrificing powerful functionality in mission critical applications.

In fact, positive reviews from our customers this quarter earned us Trust Radius awards for Best Value for the Price and Best Feature Set.

It is those two reasons why we believe press service continues to grow and gain traction in the mid market.

It is those two reasons why we believe press service continues to grow and gain traction in the mid-market. Take Swayal Coca Cola for example.

Swire is one of the world's largest Coca-Cola bottling partners in the US and Asia, and it shows fresh works for the breadth of our features, fast deployment, and lower cost of ownership.

Swayat brought on fresh works because they were looking for a platform that was comprehensive enough to support their complex needs while reducing their IT SM spend. Additionally, last quarter we launched fresh service for business teams and in the past three months we have seen strong early success.

New customers like coherent cooperation, a semiconductor company with over 23,000 employees closed wish service over a large incumbent, thanks to our integrations and the ability to scale across IT and HRT.

In our CX business, we continue to enhance FrishChat and FrishDesk products with a focus on customer self-service and agent experience.

In PressDesk, we added new integrations with multiple telephonic partners.

Enterprises can now bring their own telephone solution into freshness to create a comprehensive Omni Channel customer service solution.

In Fresh Chat, we introduced simpler ways to build self-service bots. In Q4, we added more bot languages and industry-specific bot templates, extending the reach of our products to global markets. In Q4 alone, Fresh Chat powered hundreds of millions of bot conversations.

with the rise of modern messaging apps.

companies have rapidly shifted to engaging with customers over conversational messaging channels.

Zia Active, an active lifestyle brand in the US, Canada and Australia, started with Freshdesk and later bought FreshChat to handle repetitive support requests like returns and auto status more efficiently. By automating responses across email, chat and calls, Zia reduced resolution time by several lovers.

Turning to our broader CRM solutions in sales and marketing, we include analytics and reporting. We launched a new revenue attribution capability to help marketers better understand the sales impact of their cross-channel marketing campaigns.

We also added integration to analyze sales calls to scale the effectiveness of their customer conversation.

I am super proud of our product innovation in 2022 and our dedication to building new capabilities that can deliver value to our customers through a challenging macro environment. As we look ahead at our product priorities for this year, we will continue to differentiate our service as a comprehensive IT service, IT operations and enterprise service management solution.

In CX, we will continue to deliver on the promise of an Omnichannel customer support experience with self-service automation, conversation experience and ticketing. And finally, we will continue to build a unified CRM with an out-of-the-box customer data platform and AIML Insight.

I'll now turn it over to Dennis to talk about what we are seeing in the market, how larger customers are driving our business growth, and how customers are expanding on our products.

Thank you, Gee, and hello everyone. Thanks for joining us today. I'm 5 months in at Freshworks and I'm excited by the progress we're making in the business. We close the year on a high note, beating our financial estimates and improving our operating efficiency.

In a tougher market environment, we improved our execution to drive the highest new business quarter ever. We saw increased competition for many of our deals, and yet we still improved our win rates for our CX and ITSN products.

This was especially true for our larger deals in the field with fresh service leading the way as a scalable and cost effective solution that is delivering incredible value to our customers.

He talked about our first of four business drivers, product innovation. I'll cover the next two, our success with mid-market and enterprise customers, and our expansion motion.

I'll start with our enhanced focus on mid-market and enterprise customers. Over the last 18 months, we've made substantial investments in people and tools to expand our go-to-market motions.

We believe those investments, which are now reflected in our cost space, are paying off in higher wind rates, participation in more deals, and the expansion of our mid-market and enterprise business.

In 2022, our new business wins increased with companies spending more than $50,000 in ARR. And in Q4, this customer cohort grew 35% year over year and now represents 44% of our business.

While our business was historically more in SMB, our revenue base has shifted over the years towards more mid-market and enterprise customers.

Today, nearly 60% of our business is coming from mid-market companies, those with 251 to 5,000 employees.

and enterprise customers with more than 5,000 employees. That's because our cost-effective yet powerful products are delivering real value fast.

They can scale to serve thousands of agents and millions of customer and employee interactions. These benefits resonate with companies of all sizes, especially in the current economy. The days of selecting a vendor only based on market share or brand name awareness are over. Customers want rapid impact and lasting value at a reasonable cost.

and FreshWorks delivers. That's why Fresh Service was chosen by Kaurfor Belgium, a subsidiary of the eighth largest retailer in the world. Their team of 300 IT professionals now have a more simplified and nimble approach to IT service management to support more than 11,000 employees.

While legacy incumbents are focused on the 2000 largest companies in the world, Freshworks has the opportunity to serve hundreds of thousands of others who are dissatisfied or underserved by bloated and expensive software.

We provide mid-sized organizations like Databricks, TaylorMade, and Georgetown University with a better choice.

We provide mid-sized organizations like Databricks, TaylorMade, and Georgetown University with a better choice. Powerful yet cost effective solutions.

Turning to expansion, I'm pleased to say that despite the macro conditions, our customers are still expanding through seat additions, cross sells and upgrades. In Q4, net dollar retention was 110% in constant currency. As the overall term rate for our business remained in the high teens. We see better retention rates in our event market and enterprise customers.

which helps our overall net dollar retention. While seed additions continue to drive the vast majority of our expansion today, we expect cross-dell to be a bigger contributor to our growth over time. The percent of customers using more than one product remain relatively the same as the prior quarter at 24%, with just a slight increase in Q4.

We are implementing specific initiatives to create more bundling and cross-cell opportunities for our go-to-market team this year. Take Addison Lee for example.

The British private hire cab and courier company started as a fresh service customer in 2015 and in 2022 added on fresh sales and fresh desk. They believe their previous CRM system from a large incumbent caused low agent productivity and did not deliver sufficient value.

Our fresh sale suite was selected to replace the older CRM for our modern intuitive UI built for the end user.

Looking at our customer cohort of over $50,000 in ARR, we added a net 191 customers in Q4. While this customer number benefited from FX movements and new deals in the quarter, the biggest driver continued to be expansion as customers increased their spend on our products.

and especially for the ITSM market. An example is iCore, a managed services provider with more than 35,000 employees in 10 countries.

As part of iCore's digital transformation strategy, the company expanded the use of FreshService and FreshDesk bots to its IT, HR, and finance teams to immediately answer questions before transferring to a technology team member.

The platform enables 514 members to focus on more complex tasks and creates a better experience for both employees and customers.

To me, it's customers like the ones you heard about today that validate my decision to join Freshworks.

I believe we have the opportunity to build a large, impactful company that can serve hundreds of thousands of businesses over time. By focusing on the four business drivers of product innovation, mid-market and enterprise customers, expansion and efficiency, we believe we can grow well beyond our current levels.

On the site is about the progress we've made to better align our go-to-market teams and the many opportunities ahead of us.

Now over to Tyler to talk about how we are improving efficiency as Freshworks continues to grow.

Thanks Dennis. Looking back on our Q4 and full year 2022 performance, I'm pleased with our ability to drive operational efficiencies in the business. Starting last year.

We knew that 2022 would be a big investment year. Building out our go to market teams, investing in product development and taking on a full year of G&A public company costs. What we didn't know was how the macro economy would play out and how that would impact the overall market for our products.

to beat the high end of our 2022 estimates for non-GAAP operating income by over $26 million. We believe we have a durable business model, and we're improving our operational efficiency as we drive business growth. In Q4, we had another quarter of increased efficiency.

With revenue being expectations, non-GAP operating loss outperformed expectations by $6.5 million in the court. We improved our non-GAP operating margin year over year and our business inflicted to generate positive free cash flow of $4 million and non-GAP EPS of 1 cents in the court.

As I normally do, I'll review our Q4 financial results, provide background on key metrics, and close with our expectations for the first quarter and full year of 2023. I will also include constant currency comparisons to provide a better view of our business fundamentals. The rest of our discussion will be focused on non-GAAP financial results.

which exclude the impact of stock-based compensation expenses, payroll taxes on employees stock transactions.

the impact of stock-based compensation expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles, and other adjustments.

Starting with the income statement, revenue grew 30% adjusting for constant currency, or 26%, as reported, to $133.2 million. Although the FX trend for the dollar against the euro and pound reversed in Q4, we continued to see the trailing negative impact to revenue resulting from FX movements earlier in the year.

As Dennis mentioned, we have a strong quarter of new business driven by fresh service lock expansion continue to see pressure from the effects of the broader economic slowdown. Smaller customers continue to feel the pressure as turn rates increase slightly for the SMB segment leading to slower growth.

Overall, churn for the company remained relatively stable, ticking up less than 100 basis points in the quarter. As a whole, we have made good improvements to our gross churn rates over the past several years. In Q3 and Q4, we were able to keep gross churn relatively stable, but do see potential risk of churn increasing slightly going into 2023.

Moving to margins, our non-GAAP gross margins were roughly similar to Q3, rounding up to 83% for the quarter. We continued to achieve strong non-GAAP gross margins with over 82% for the full year as we scale the business. In Q4, non-GAAP operating margins improved 8 percentage points year over year to negative 2%.

driven mostly by lower R&D and G&A costs as a percentage of revenue. Specifically for G&A, expenses in the prior year included non-recurring litigation settlement costs that were not included in the most recent quarter. On a quarter over quarter basis, we had a very small improvement to non-GAAP operating margins as we largely maintained our run rate cost base in matching the business growth.

Demeter Q3, we had a one-time type benefit of approximately $4 million related to the reversal of the crude expenses from earlier in the year.

Our revenue outperformance combined with an improving cost base led to a non-GAAP operating loss of $2.8 million in Q4.

I'm pleased with our ability to control costs in the current market environment and expect to drive more operating leverage as we go forward.

Turning to our operating metrics, net dollar retention was 110% on a constant currency basis or 108% as reported and was largely in line with our commentary from the prior quarter. As expected, we saw expansion slow down in the quarter reflective of the overall economic trend.

Looking ahead, as we expect the broader trend to continue, we estimate Q1 2023 constant currency net dollar retention to be 107% and holding FX rates constant reported net dollar retention to be 105%.

In terms of our customer metrics, customers contributing more than $5,000 in ARR grew 20% to 17,722 customers in the quarter. And now represents 87% of our ARR. On a constant currency basis,

this customer cohort grew 21% year over year. For larger customers contributing more than $50,000 in ARR, this customer count grew 35% to 1,908 and ticked up to represent 44% of our ARR.

Adjusting for cosmic currency, this customer cohort grew at 38%. Lastly, we ended the quarter with a total customer count of more than $63,400 and our average revenue per account continued to increase.

Moving to our billing, balance sheet and cash items. In Q4, calculated billing is good 21% to $147.8 million, and holding constant currency over the past year calculated billing is good 25%. The other factor impacting the growth rate.

was Billings duration mix of negative 4%. Adjusting for this, the normalized calculated Billings growth was approximately 29% in Q4.

Looking ahead to Q1 of 2023, a preliminary estimate for calculated buildings growth is 20% on a constant currency basis or 17% as reported basis on current FX rates. For the full year 2023, we expect calculated buildings to be similar to our expected revenue growth for the year of approximately 17%.

Turning to our balance sheet and cash items, we maintain the steady cash balance as we ended the quarter with cash and marketable securities of approximately $1.1 billion.

In Q4, we generated $4 million of free cash flow, coming in ahead of our estimates.

Looking back on the full year, we outperformed our initial free cash flow estimate of negative $25 million by more than $10 million in 2022, despite a tougher economic environment.

further demonstrate our ability to drive efficiencies in the business. We continue to net-subtle vested equity amounts and use it nearly $16 million under financing activities for Q4.

For the full year, we used approximately $167 million for the net settlement of nearly 9.8 million shares.

As a reminder, this financing activity is excluded from free cash flow. We plan to continue net suddenly invested equity amounts, resulting in quarterly cash uses of approximately 17M dollars at current price levels. As we look forward to 2023, we expect to generate approximately 10M dollars of free cash flow for the year with approximately 3M dollars in Q1.

We have some seasonality in spend throughout the year, so we anticipate Q2 and Q3 will be near break even and the remainder of the free cash flow expected in Q4. With positive free cash flow now coming from the business, no debt and a strong balance sheet, we believe we are well positioned to drive sustained growth into the future.

Turning to our share count for Q4, we had approximately 324 million shares outstanding on a fully diluted basis as of December 31, 2022. The fully diluted calculation consists of 289 million shares outstanding, approximately 32 million related to unvested RSCUs and PRRCUs.

and 3 million shares related to outstanding options. Let me now talk about our forward-looking estimates.

I'll go through the numbers first and then provide background commentary afterwards. For the first quarter of 2023, we expect revenue to be in the range of $133 million to $135 million, growing 16 to 18% year-over-year. Adjusting for constant currency, this reflects growth of 19 to 21% year-over-year.

to you in a million shares.

For the full year 2023, we expect revenue to be in the range of $575 million to $590 million, growing 15% to 18% year over year, adjusting for contact currency. This reflects growth of 16% to 19% year over year. Not got lost from operations to the range of negative 14 million.

business as we see it today. And in a changing market environment, it can be tough. So a couple areas and assumptions to call out. voters have also acet [* Animation

And in a changing market environment, it can be tough. So a couple areas and assumptions to call out. First on FX.

The weaker dollar trending Q4 create a slight benefit to revenue and billing metrics compared to the prior quarter

But on a year-over-year comparison, we still saw a negative impact. These estimates are based on FX rates as of February 3rd, 2023. So, any future FX moves are not factored in. We started to hedge a small portion of our INR-based expenses in January 2023. Expect the impact of the hedging program to increase throughout the year.

which will improve the predictability for operating expenses moving forward. Second on profitability.

And please that we delivered on our commitment to reach positive free cash flow by Q4 last year. Now as we head into 2023, we're driving additional efficiency to show quarter-over-quarter improvement throughout the year. As such, we expect non-GAAP operating loss to improve to negative 6 million in Q2, yearbreak even in Q3 and then turn positive by Q4.

We plan to maintain sustained profitability in the years ahead. Let me close by saying I'm pleased with our execution in the quarter. Our ability to operate efficiently over the past year highlighted the durability and resiliency of our business model. Our view is that we're well positioned to execute through a changing market environment in the near term. We remain bullish on our long term opportunities.

With that, let us take your questions. Operator? Certainly. Maybe you can gentlemen. If you have a question at this time, please press star 1-1 on your telephone. If your question has been answered, and you'd like to remove yourself from the queue, simply press star 1-1 again. One moment for our first question.

And our first question comes from the line of Pat Walravens from JMP Securities. Your question, please. Oh, great. Thank you very much and congratulations. I have two if that's OK. The first one's on the macro.

which is just last quarter, you guys were talking a lot about companies reducing their growth forecast and head count heat. For your tone seems so much better now. Did the macro, I mean, I hate to say this, but did the selling environment for you guys improve in some way and do you for?

If at this pattern, I'll start the answer because this is the 1st party when asked the 2nd question as well. Yeah, and the 2nd part is just, I think it'd be great to have Dennis. I mean, obviously he's on the board of service now and he has the Dropbox and Google. Why you take this job? Throw that out there. That let me let me start on the macro yet. We look, we had a really good quarter, especially on your business.

Right. And we called that out and that felt strong, which I just think is a testament to. Our products and the value that they can bring to customers, even in in tough markets, the place that we continue to see pressure was on expansion. And that macro is still playing there right? And that the expansion motion did slow down throughout the year. But we talked about that throughout the year.

We expect to continue to see that for a while. But on the new business side, yes, we are upbeat because we're optimistic because we had a good quarter on the business. But I'll hand over to Dennis. Yeah, just some commentary on the new business front. So I think over the last 18 months, we've made substantial investment in the products themselves. So if you think about our ITSM product, we announced.

enhancements that allow us to fulfill ITOM requirements in the second half of last year. We rolled out an ESM product, so we're able to address broader and broader needs of larger customers. And really, this is just a continuation of a trend and a set of investments that have

taken place over the last 12 months or so that really are starting to pay off in terms of those new business wins. We are seeing better win rates, competitive win rates in Q4 than we did in Q3 both for fresh desk and for fresh service.

And we're getting involved in more deals. So we're companies are looking to us when they're evaluating. Better solutions solutions with with lower total cost of ownership. Everybody's looking for value. So, we're getting more swings and we're hitting the ball more often. And I think that really started this show in Q4. In terms of why why I joined.

I see an opportunity to build a company that does serve every business in the world. Every business in the world has a need for the products that we currently build. We can serve companies, employees, and customers equally well. And I think the vision that Gee has laid out and the products that he's built.

around creating a seamless, easy to use, easy to implement, set of business software is super compelling. So that's why I joined.

Awesome. All right. Thank you. Thank you one moment for our next question.

All right, thank you. Thank you. One moment for our next question. And our next question.

Come through the line of Ryan McWilliams from Mark Lays. Your question, please.

Thanks for taking the question. Tyler, we'll have to hear about maybe how we should think about net retention as we move through this year. And just on your full year guide, how does this contemplate the macro? And have you guys thought about a scenario where should things get worse from the economics perspective? Plan to get the break even faster from here. Thanks.

Yeah, you bet, Ryan. So, Net Dollar Attention, to start off, we did say something on the call there that we do expect that to decrease a little bit. And Net Dollar Attention churn, there's two sides of that coin. We've been pretty open that we had made really good progress on gross churn over the last couple years in Q3 and Q4 of this past year.

You know, that turn kind of remained stable and, you know, just essentially stay flat, which, you know, turn includes down. So for us, so that that it was a good thing. Our goal right now is to try to keep it there. Because I do think that's going to see some additional pressure. The expansion motion, you guys know, our, our biggest form of upsell is agent addition and in, you know, we started to see that kind of after Q1 we talked about it last year and.

We saw it throughout the year, and we expect to continue to see pressure on that and that is what's driving and that dollar retention down. And we said it could come down in Q2 in Q1. It could come down a little bit after that in Q2. But obviously we want to work as hard as we can to normalize that in terms of. Our guidance.

We built in everything that we see and we were trying to call it as we see it And we have you know, we do expect that expansion motion to see some pressure we are looking at other ways that we can expand with our customers specifically like a fresh service for teams our new ESM application. We're really excited about that.

And obviously we're going to continue to lean in on new business, which was really good And just a follow up on Patrick's question. The customer adds above 5K error, peer to strong in the quarter. Just given what you mentioned on headwinds, the seed expansion, will strengthen these ads from the new customers or perhaps.

maybe customers renewing larger with upsells or upgrading the plans just like the piece of part that's right there. Thanks. Yeah, we talked about the 50K that actually the biggest add to the 50K were in expansion. And that actually helps the 5K as well, but the 50K, I think, was helped a little bit more.

We also, there's a little bit of FX on both sides, but yes, also driven by new customer lands, which we had a, you know, we really had a really strong new business quarter in Q4, and you know, obviously we're going to continue leaning on that. But customers are still expanding, net dollar retention.

It was still, it came down slightly, but it was still good. And even though there's pressure there, we do have customers who are growing on us. And that was the number 1 reason for the greater than 50 and also helped the greater than 5. Thank you 1 moment for our next question.

And our next question comes from the line of Pinjall and Bora from J.P. Morgan. Your question, please.

Hey, thank you for taking the questions and congrats on quarter. I was I wanted to get on the on the guidance a bit. Basically trying to understand if you if you added buildings growth of about 29% if I heard that correctly adjusted.

And the guidance is I think about 17 and a half revenue growth next year. I'm trying to think.

Would you go, you know, are you expecting kind of a step down in macro from here? When I look at the additions to revenue, I think, in 2023 versus what you added in 2023, it's something like a 33% decline. It seems pretty conservative. I mean, would you go?

As far as I say, it is de-risk at this point. How should we think about the guidance?

Yeah, again, the opinion on this, Tyler, again, on guidance in general, we are trying to call it as we see it and that what we've done is we've taken into account that we expect to see continued pressure on the expansion motion. And that, you know, as our biggest form of upsell is agent addition.

And when we look at that, the Q1 calculated billing just says 17% and 20% on a content currency. And then obviously, if we see any adjustments, like the 4% you mentioned that we talked about in Q4, I will add that at the end of the quarter to provide more color. But in general, we're calling as we see it. I can't say it's completely de-risked because I don't know how long.

The macro conditions are going to hold. I think there's upside if companies go back to growing. We would clearly expect to to take advantage of that growth with them. But if things get worse, we could actually see pressure there as well.

Understood. Thank you for that. And what for grace?

We recently hosted one of your partners and he seemed pretty bold up on ITSM and you were seeing good traction on the ITSM side Seems like you're you're taking share How do you see that the position of fresh service at this point in the market? Maybe talk about it with respect to Atlassian seems like entering the market as well

And how should investors think of that business, sustainable growth of that business, minus any macro? Sure. So, hey, Benjalim. So,

From a first service business standpoint, let me talk to you about the competitive landscape and our positioning and strengths. So clearly we know that ITSM is a huge market and from a time standpoint now we expanded into ITSM and my Tom as well as enterprise service management.

So there is no doubt on how big the market is. Now, fresh service is today the most credible alternative to ServiceNow in the industry. And we are seeing that come into play, especially in mid-market and enterprise companies. Specifically in this environment where businesses are scrutinizing their spend very clearly, like every dollar of IT spend.

So we are actually competing against and winning against ServiceNow, and we have also replaced ServiceNow anecdotally even in the last quarter multiple times. So that is on the enterprise side where there is ServiceNow. Now, before I comment on a class theme, if you also understand that there is a ton of legacy out there, like BMC remedy and Ivantee Sherwell.

So, we actually – Mahindra, one of the largest congruentists in India, moved off of a large legacy incumbent in 2022. So, specifically with Atlassian, we are seeing them in some of the lower end of the mid-market deals, but we win. Fresh service wins purely based on the fact that we are built from the ground up as a –

full-blown ITSM and ITOM solution. Whereas Atlassian I think has made around four acquisitions and they're trying to switch together a unified product experience, I think our customers choose us because of the unified product experience.

Thank you very much. Thank you. Thank you one moment for our next question.

And our next question comes from the line of Rich Hilker from Credit Suisse. Your question, please.

Hi everyone, thanks for taking my question. So you mentioned it was the highest new business ever in this quarter. I think you talked about for some customers they were expanding. I think you called out the ITSM side. Tyler, I think you mentioned some stable retention. The question is, I'm wondering what portion of overall bookings would you say came from newer expansion?

versus renewal in this quarter. And maybe for the new business, can you give us a sense of the duration of those deals? Yeah, Richard, I'll take that. We don't break out the new versus expansion in terms of the court, but we did have, you know,

in this quarter and maybe for the new business, can you give us a sense of the duration of those deals? Yeah, Rich, I'll take that. We don't break out the new versus expansion in terms of the quarter, but we did have one of our best new business quarters.

Ever and we did say that, you know, where it's coming from fresh service. It's still smaller than fresh desk from an ARR perspective, but it continued its trend of being the biggest error contributor. In the quarter, which it has been for the last couple of quarters, and it's growing faster than fresh desk.

on a duration perspective, you know, we've got about, let's call it 60% of our business roughly. Those aren't exact that are on annual contracts. And,

That there was no big change on that. Now what does happen is that the. The bookings mix can change based on the expansion motion, right? Because it depends on where you are within the contract. Uh, on expansion and how much that Billings would look like, but in terms of the new business, there wasn't any significant change.

there has been this steady change of moving more to annual over the last couple years. Okay, great. Yep, that makes sense. And then maybe one last one here for you, Dennis. I was wondering if you can talk a little bit about your vision for unlocking multi-line of business selling. I know you guys disclose multi-product, but multi-line of business is kind of where I'm kind of zeroing in here.

Maybe what do you still need to stand up or mobilize to ignite this even further? Thanks. Yeah, thanks for the question. Well, first of all, I would just say that it's happening, right? One of the examples that we talked about was Addison Lee. Addison Lee originally was a fresh service customer for a couple of years.

Satisfied with the product, you know, we're serving their IT department and they decide they're not satisfied with their existing CRM, you know, large incumbent. They're not getting value out of it. Very expensive to continue to maintain. And so they looked us and so that kind of.

That kind of situation we're seeing across the pitch. I court it was another account that was was was a an expansion from fresh service and the fresh desk. So it's happening right now. I think the focus has been very much on on new business, but as we

Kind of continue to scale up and we continue to have success with these larger accounts. You know, I core is a company with 35,000 employees. There's lots of opportunities for and for. For other product expansion there, we're going to be leaning into that motion much more. But, like I said, so far, you know, a lot of the emphasis has been on new business and.

We're getting natural kind of product cross sell. We call it persona cross sell. That's going to become an increasingly important part of our business going forward and a big opportunity for us.

natural product cross cell, we call it persona cross cell, that's going to become an increasingly important part of our business going forward and a big opportunity for us. Understood, thank you all so much.

Thank you one moment for our next question. And our next question comes from the line of Brian Peterson from Raymond James. Your question, please. Hi, gentlemen. Thanks for taking the question and congrats on this talk order. So I just wanted to hit on the net ads. Obviously, I think it was better than what we were expecting.

Thanks, Brian . This is Dennis. So on net ads overall by geo, you know, for Q4, we saw a pretty good performance across the board. Our North American business was actually a little bit stronger than the rest of the world than Europe and Asia pack, but our European business performed well. We were pretty satisfied with.

IT footprints and situations. In some cases, we're displacing very much kind of old on-prem systems, think of BMC, where the product is not scaling to what the customer needs and they are looking to make a change. In some cases, we are displacing the likes of a Zendesk or ServiceNow.

or service cloud where the customer is no longer satisfied with the overall value proposition, especially in the current economy. They're looking for much better value. They're looking for a simpler product that they can deploy quickly and get fast time to value. And they're looking for a product that doesn't require them to have.

You know, a number of consultants or specialists on staff just to maintain the product and make sure it does what it's supposed to be doing. So, so it's, it's, there's not, I wouldn't say there's 1 competitor. I wouldn't say there's 1 situation. It's really a fairly, a fairly wide range of situations that's driving driving our growth.

Right thanks, and maybe a follow up. I'm curious if you've seen any changes in the pricing environment over the last 90 days and it may be anything that you guys have seen so far in 2023. Thanks. Yeah, so this is Dennis. We haven't seen any major change in pricing. I would say the 2nd, half of last year. On

The fresh desk side, you know, the service clouds of the world and and Zendesk have been very aggressive on pricing, but that's that was true in Q3 and really continued into Q4. I wouldn't say there's any discernible trends on the ITSM side. To note.

Thank you one moment for our next question.

And our next question comes in line of Elizabeth Porter from Morgan Stanley . Your question, please.

Great, thanks so much. You mentioned earlier the better win rates, and I wanted to get a little bit more color if you're seeing any particular improvement at the low end versus the high end or if it's broad-based. I know you guys have been doubling down on functionality. And then second, just kind of within those competitive conversations, in your conversations, is there any bit more of a lean towards just the product functionality versus the product functionality? So, I'm going to go ahead and take a little bit more of a look at the product functionality.

product in Q4 saw higher wind rates in Q3. That said, for mid-market and enterprise segment, our wind rates improved at a higher rate. So we saw meaningful improvement there. Now, in terms of why is that happening? Well,

Most of the customers that we're talking to now, the 1 of the number 1 things on their mind is value. Either either total cost of ownership they're looking at, you know.

They need a business case and ROI and part of that equation is what is the cost to implement the products? What is the timeline for implementation? How fast can we get the value? And what's the ongoing maintenance cost to. Get the functionality out of the products that they need and in many cases, we are superior on all 3 dimensions now from a product. Functionality standpoint, if you were to wind back the clock, you know, 12 or 18 months.

We've done a lot in the last 12 months, 18 months, to be able to compete by feature basis with the likes of a Zendesk or Service Cloud or ServiceNow. And the product functionality has gotten better. The robustness has gotten better. Product is scaling incredibly well. We support thousands of agents.

millions of customer interactions across our customer base. All of those investments that we've made over the last 12 or 18 months are paying off. And that really is helping drive those win rates up. So we think it's quite promising for the future and for where our buyers are going. We think the product we have is the right product, the right strategy for where the market is today.

And that's a big opportunity for us. Great. Dennis? Sorry, Elizabeth, I just wanted to add on. Just this is Girish. So on the product functionality itself, so it's important to note that if you take CX, for example, Freshdesk and FreshChat together offers the most comprehensive omni-channel customer service solution today covering the whole spectrum.

of automation service automation with bots, as well as a connoisational agent experience on modern messaging channels combined with ticketing. Right? If you take a fresh service, like we have a unified single product across ITSM and ITOM and ESM, which is for service of business teams. So I think...

Great, thank you so much. And then just following up, you mentioned just now the conversational kind of bots and the seamless kind of one platform. Earlier this week there was the announcement just around the meta messenger integrations and bots. And there was a good amount of buzz in that.

in the market post that announcement. So just wanted to get a little bit more color from you on, you know, the opportunities around that function and featured set to just either add new customers or accelerate revenue per customer. Kind of how are we thinking about those capabilities more specifically, is that what we can lean out?

Sure, I'll take that. So, first of all, let me clarify by saying that our partnership with Facebook and Meta goes a long way since 2011, where we were the first Freshdesk for the first Help Desk to integrate Facebook Messenger when they introduced that. So, the recent announcement that we did was more...

calling out some of the customers usage of this. We know that Conversational has really been picking up in the last few years. The messenger apps under the meta portfolio, which is WhatsApp, Instagram, or Facebook Messenger. There are more than a billion messages every month that businesses are

sending over these channels. And so this announcement was specifically to call out some of the customer wins that we have with our conversational product and showcasing how we are powering those conversational customer support experiences specifically for B2C companies. So about what we would like more to do, we wanted our customers all the way out to make sure that we made the right adjustments to all facing customer, and the online activity

I just wanted to call out that it is our partnership with METAS, like it's not a new one and it's been ongoing. And so this is more to showcase some of our customer work. Great. Thank you so much.

Thank you one moment for our next question. And our next question comes from the line of Scott Berg from Needham. Can you repeat your question please?

Hi everyone, thanks for taking my questions. I have a couple. First is on sales process as you look at calendar 23 here. We all know what's happening with the macro last year and into this year. But as you look at your sales processes and overall go to market strategies, I've thought of maybe just leaning into something like ITF and that's selling a little bit better. BR driver ?? loslenus fr jobzilla.com is my second think, with potentially frustrated

Is there anything that you're changing in those processes that would be noteworthy to try to effectively maybe get some of these new customers over the line faster?

Hey, Scott Dennis here so yeah, there's a number of things that we're doing, I think.

Before I get to the sales specific ones, I would just go back to the product side. You know, a number of the features that and big enhancements that we launched in the second half last year were really getting traction with now and in the Q4, things like I-TOM, things like ESM, and the enhancements on the conversational side to fresh death that that G referred to.

You know, a lot of it is, hey, we've got products that really are well suited to the market. In terms of the field side, you know, a couple of the adjustments that we've made have been to focus on bigger deals and focus more squarely in the mid-market. So I would say this is just an enhancement to the strategy that we've been pursuing for the last year or so. One of the things we did was we shifted our field team to focus on a...

Most of them are coming to us anyway through a response to a marketing message or coming to our website and signing up for a trial. So that was one pretty meaningful change. Another change we've created a set of product specialists to focus on.

fresh chat and fresh sales in particular. Both of those products are fairly complex. The competitive set is complex, so we feel the specialization on the sale side is really important. And we think that that will result in continued improvement in win rate for those products.

And in general, the field team is pretty jazzed up about kind of what the products that looks like the competitive positioning and kind of where we are in the market. So, we're excited about this year and I think I think we're going to, we're going to see quite a few opportunities. Got it very helpful there and then from a follow up perspective, Tyler.

There's no change in philosophy, Scott. I mean, like, trying to take everything into account that we know. A year ago, we did not know the impact of kind of macro, right? We did not expect the expansion motion to slow down the way it did throughout the year. And so, you know, now it's kind of the opposite. We actually expect it to continue to be tough for a while and we built that in.

And, you know, we'll see how it goes throughout the year. And obviously we're going to do our best to find other ways to grow with customers. But in terms of the philosophy itself, there is no big change.

Excellent. Thanks for taking my questions. Thank you. One moment for our next question.

And our next question comes from the line of Brent Thill.

from Jeffries, your question please. Hi, this is Love Soda on for Brent Thil. Thank you for taking my question. I just wanted to ask one for Bereesh on ESM. Could you maybe, you know,

to categorize that opportunity, could you maybe give us an attach rate to core fresh service? How should we think about the opportunity within the install base that you already have?

Sure, love. So, if you really.

think about Fresh Service or Business teams. One of the things I would like to tell you is even before the launch we knew that

almost 4,000 plus customers of Frisk Service were actually using it outside of IT, like in departments like HR facilities, legal and finance. So I think that gave us the real product validation that we needed to create.

The first steps of business teams actually priced lower than an IT agent, so we think it'd be attractive for that. So there is a expansion motion play which we will be taking on to take this to existing customers. Having said that, we also have multiple new lands where we are landing in multiple departments, not just IT.

I think both of these will allow us to extend pre-service of business teams into multiple departments within the company. One quick follow-up for Dennis. In terms of the go-to-market organization,

I know last quarter obviously Patty was appointed as the interim CRO. Any other changes, I guess, in terms of the organization itself? And do you feel like you have all the resources you need to execute this year? Thank you.

Yeah, thanks. Yeah. So, 1st of all, Patty's done. Patty's done an amazing job taking on the, the, the role and. A number of the changes that I described earlier around the. Focus on 500 to 5000 employee. Companies, crispening the teams focus on larger deals, winning larger deals, some upskilling that's going on across the organization that all is being driven by.

Thank you. Thank you. One moment for our next question.

And our next question comes in line of DJ Hines from Kent Accord. Your question, please.

Hey guys, thanks for taking the question. Do you maybe I could just follow up on the loves question there around the broader ESM strategy? I mean, how much attention do you think investors should be putting on that today? Like, if we fast forward, could ESM be ultimately a bigger opportunity than Core IT? Like, how are you thinking about...

sizing the two relative opportunities within the fresh service portfolio. So I think right now it is still early days for us. And also we are landing ESM through IT departments. We are not actually starting a go-to-market motion where we're trying to sell this to HR teams or finance teams. Okay, so I think in that sense.

We are, our go-to market is go to IT and then focus on organizations where IT is helping HR legal and finance teams to do that. So I don't expect ESM to be much bigger than IT in the short or in the coming, say, short term. So I would feel.

say that we will land with IT and then expand into others or maybe co-land into multiple departments. Yeah, yeah. Okay, okay. That makes sense. And then, Tyler, on the sales and marketing side, how much of your spend is variable versus fixed? And I'm really getting at kind of that inbound side, which I think is largely driven by digital marketing spend. How much flow?

rates or conversions. But it's not one that we're using as a margin lever necessarily, because it does feed one whole side of the business, which is that SMB that lower than 250, a lot of that is fed by digital marketing spend.

And outside of that, you know, that that's a variable component and for the S and B, it's the biggest kind of. Cost on on the flip side for the field and, you know, where most of our business is coming from now, which is that, you know, that field business, which is kind of the greater than 500. You know, the variable component there is commissions, but it's all headcount. Right? And that's mainly headcount through of it.

but we have built out a lot of that already.

Okay, thank you for the call, guys. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to June Hafer any further remarks. Great. Thanks, everybody, for joining us today. If you have any other questions, please feel free to call our email. We look forward to catching up with you throughout the quarter. Thank you. Thank you. The U-Ladies and Gentlemen for your participation at today's conference. This does conclude the program.

It is important to note that we spent a lot of, you know, kind of end of 21 and a lot of last year building out that field presence. And, you know, we have, we think we have a lot of those peace parts in place right now. We still, you know, are hiding, hiring, quarter bearing reps where we think we need them. But, you know, we have built out a lot of that already. Yeah, perfect. Okay. Thank you for the call, guys. Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to June , huh, for any further remarks. Great. Thanks everybody for joining us today. If you have any other questions, please feel free to call our email. We look forward to catching up with you throughout the quarter. Thank you. The U. Ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. You have a great time. Thank you.

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