Q1 2023 Freshworks Inc Earnings Call

May 2, 2023

These forward looking statements are based on fresh works current expectations and estimates about business and industry, including our financial outlook.

Pro economic uncertainties managements beliefs, and certain other assumption made by the company all of which are subject to change.

Such risks include but are not limited to our ability to sustain our growth.

To innovate to meet.

Meet customer demand and to control costs and improve operating efficiencies.

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 a discussion of material risks and other important factors that could affect our results. Please refer to today's earnings release, our most recently filed Form 10-K.

Other periodic filings with the SEC.

<unk> assumes no obligation to update any forward looking statements in order to reflect events or circumstances that may arise. After the date of this call 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 Dot <unk> Dot com.

I encourage you to visit our Investor Relations site to access our earnings release supplemental earnings slides periodic SEC reports, a replay of today's call or to learn more about pressure and with that let me turn it over to Girish.

Thank you Joan and welcome everyone.

Thank you for joining us today on Facebook earnings call covering our first quarter of 2023.

We started the year off strong achieving our first quarter of non-GAAP operating profit as a public company.

We exceeded our expectations for Q1 with revenue coming in above the high end of our financial outlook range at $137 7 million.

We outperformed our estimates for free cash flow.

$9 1 million in Q1, as we drove meaningful efficiencies in our business.

In today's environment as businesses are seeking efficiencies in their software spend and seeking faster time to value I am excited to see the pressure value proposition resonate even better with larger companies.

Before diving into our business drivers.

Note that starting this quarter.

Providing supplemental flight of some of our financial results.

These slides can be found on our Investor Relations website, and we hope you find them to be useful.

Yes.

During these uncertain economic times.

Fitted to sustaining growth through four key strategies that I outlined last quarter.

Third.

Our focus on product innovation continues to allow us to meet customer demand for efficiency.

By streamlining processes, enhancing omnichannel customer experiences and launching an AI powered fresh market beta program.

Second we are experiencing strong growth for Midmarket and enterprise customers, which Dennis will discuss further after this.

Third our focus on expansion and helping our customers adopt more of our solutions continues and Dennis will elaborate on this.

Finally, we are dedicated to improving our operating efficiency as I mentioned, we delivered our first quarter of operating profit on a non-GAAP basis since becoming a public company.

Tyler will cover this in more detail later.

Beginning with our latest product innovation this quarter, our teams launched enhancements in our CX Ics and CRM products that give our customers even faster time to value freeing up agents to do their most rewarding work.

Starting with idea Tim the first service team has been working hard to expand its operations management capabilities.

Last year, we added support for Microsoft teams, and Whatsapp, allowing customers to repeat on call notifications on those channels.

To date.

There have been over 1 million alerts per month, highlighting the success of our service health monitoring and management capabilities.

Notable customer pillar, a global sportswear manufacturer.

Service partners ease of use and consideration.

In Q1.

Also added new capabilities workflow automation and workload management and facilities.

Flow automated feature helps businesses digitize their workflow and automate their particular path.

The workload management feature provides supervisors with full visibility of assigned work assisting workload monitoring and helps prevent implied burnout.

This service has also expanded its services beyond ADT with the launch of <unk> services businesses, notably.

Customers using <unk> services a business team include.

And diversity in the U K and the commercial bank of Dubai.

Services commitment to providing cost effective solutions with enterprise great capabilities makes it a strong contenders in this market.

In our fixed business.

Digital turned to fresh desk.

Cost effective solution for their Super App.

Turning to scale support for <unk>.

1 billion potential users in India.

In just six months total digital achieved a 50% it can reflection and a 50% increase in customer satisfaction.

The address desk, another customer Riverside insight was able to improve agent productivity by tracking real time ticket trend.

Adding to an 80% reduction in logging to look at ticket and improved customer satisfaction.

Additionally, our Q1 release of the unified agent work. This <unk> enables agents to work efficiently across talent.

And our self service bought experiences.

Intelligent and quite a deflection.

Turning to our enhanced conversation widget.

1500 early adopters are already using this with more than half deploying box.

Our leading beauty business in India.

Patricia for a unified customer support solutions by leveraging our GPT features.

Purple achieved an impressive 95% first call resolution rate.

As we continue to innovate we are dedicated to empowering businesses like these.

To provide exceptional customer experiences.

Now turning to our CRM business, our focus in Q1 was on enhancing sales sequences.

Enabling cross channel personalized marketing campaigns to help marketers boost customer engagement.

We have updated our Crystal park with an <unk>.

Embedded E signature feature expediting the deed to court process, our sales team.

In response to marketers demands for better email performance.

We have integrated GPT powered pretty AI.

Into a fresh market or marketing automation platform.

This powerful first sale first marketer combination is driving significant results for clients like event manufacturing a plastics manufacturer.

After implementing both to loosen the weakness the TX increasingly email open rates over 200% surge in activity.

And a substantial raising revenue.

The fresh look new platform is the driving force behind our innovative products.

I'm learning App development, and unifying customer data and analytics across specialty products.

Summer in our product launch, we will have more to share about our platform with new AI capabilities.

<unk> products are proving to be a powerful alternative to legacy software providers.

Our products are offering more flexibility and helping customers avoid the pitfalls of cumbersome implementation.

Hello, Peter.

Whether it's a super App, our passion for growth. We believe our solutions are the future of App development and business growth.

Lastly, before turning it over to Dennis.

Can also take the opportunity to announce that we will be holding our first investor day on September seven in San Francisco.

Please save the date that we will send out more details later.

Look forward to seeing you there.

Now over to Dennis to talk about what we're seeing in the market our larger customers that are driving our business growth and how customers are expanding.

Got it.

Thank you Jay and thanks to all of you for joining us.

Really pleased with our first quarter performance as we once again beat our financial estimates for revenue and improved our operating efficiency.

To achieve our first quarter of non-GAAP operating profit as a public company.

We surpassed our targets by focusing on new business growth, especially with larger customers expanding with our existing customers and making strategic investments and enhancements in our field and go to market teams.

This focus drove continued multi product adoption higher participation in competitive deals and more new business opportunities for both CX.

Our ability to build software at a lower cost allows us to deliver a low total cost of ownership and thus offer a higher return on investment to the customer.

In Q1, our products continue to show they can scale to support thousands of mid market and enterprise customers. These.

These customers need a sophisticated level of support but are hungry for simpler implementation than some of our biggest competitors provide.

Looking at our large customer cohort, which we define as customers spending more than $50000 in IRR.

Grew 30% year over year to 2013 customers in Q1 or 33% in constant currency.

These customers, which represent 45% of our business are choosing fresh works over larger established players and legacy on Prem solutions.

It's incredible to see how very different companies are finding rapid impact and lasting value with fresh works.

A large company like S&P global needed a support team to respond to customer queries as quickly as the market changes.

S&P mines billions of data points to offer independent ratings benchmarks and analytics.

Hey, Dan offers critical information to companies governments and individuals to make investment decisions.

S&P uses fresh test to automate route and assign tickets to agents, who can resolve issues fast for its 13000 customers.

S&P's ticket resolution is now four times faster than the industry benchmark and took us assignments happened twice as fast as the industry average.

Turning to our expansion motion I am encouraged to see that our customers are realizing value and one fresh works product and growing their appetite for more through seat increases additional products and upgrades.

In Q1, our net dollar retention rate was 108% on a constant currency basis coming in slightly better than we expected.

Travel counselors as a multi award winning travel agency with over 2000 individual travel companies known as Tcs Tcs bring their own book of business and contracts and collaborate dynamically with each other this required a faster more efficient system to provide dependable service experience for Tcs.

Since 2017 process has helped streamline automate and prioritize support requests to provide timely help enabling tcs to provide a great service experience average first contact resolution is now over 75% and average <unk> is now more than 90% more recently they added fresh sales for their tcs.

To manage new leads recruit new counselors and convert corporate travel opportunities.

The publishing industry is always facing pressure to be more efficient with fewer resources.

Global online and print publisher Forbes was held back by a homegrown employee support tool, making their service less efficient.

While looking for alternative solutions, they discovered fresh service to streamline all employee service request, which has helped the team save costs and cut their average resolution time in half in two years.

Since then forms Forbes added fresh desks omni channel customer support software.

In Q1 customers using more than one product remained steady at 24%.

Customers come back for more than one product because of the consistency of our core attributes across the entire suite.

Great design experience and performance with minimal upfront investment allows us to deliver great value to our customers.

What is significant for us is that even in this uncertain macro environment, our new business momentum has been able to offset some of the expected slowdown in expansion.

This means we don't have to focus just on maximizing value from existing customers like some of our competitors.

While legacy SaaS companies may be facing challenges for new deal activity. We are encouraged by the traction our products are gaining in the market as we land new customers like Johnson Bill.

La Dodgers and expand with others like travel counselors and Forbes.

Lastly, because of the investments we've already made in our go to market operations were not expecting to see meaningful cost increases in order to continue this momentum.

As we evolve and target larger customers, we're getting more leverage from our go to market operations.

We're also finding more areas across the board to scrutinize and reduce spend.

We expect to continue creating this operating leverage going forward and as a result, our plan is to deliver positive non-GAAP operating profit for the year.

We're starting to see the promise of building a durable India based software company that utilizes our strategic asset of lower cost operations.

Before turning it over to Tyler to talk through the financial details and how we are driving these efficiencies I want to highlight the appointment of Patty <unk> as our chief revenue officer that we announced earlier today.

Patti has held the internal interim title for the past several months and has done a fantastic job.

And is that a meaningful impact on our business over the years.

In addition to Patti I'm also pleased to welcome a number of other talented leaders and team members to fresh works now over to you Tyler.

Thanks, Dennis and thanks, again to everyone for joining us.

As you've heard from our earlier commentary Q1 was a great quarter of execution.

Beat our estimates for revenue and more significantly we improved our operating margins to position the business for sustainable and profitable growth in the years ahead.

With our ability to adjust our operating model to meet the realities of the current market environment and generate a meaningful level of outperformance in the quarter.

For our call today I will cover the Q1 financial results provide background on the key metrics and close with our forward looking commentary and expectations for Q2 and the full year 2023.

Similar to prior quarters include constant currency comparisons for certain metrics to provide a better view of our business trends.

As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude 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 23% year over year on a constant currency basis, or 20% as reported to $137 7 million.

Currency rates for the dollar against the Euro and pound relatively stable in Q1, so the different growth rates represent the trailing negative impact to revenue from FX movements, mainly from prior quarters.

Despite a tighter spending environment from companies, we continue to see momentum in new deal activity for our CSM product press service in the field.

Our larger deals over $50000 and there are once again, the fastest growing segment for new business in the quarter.

Expansion activity for the quarter performed roughly in line with our expectations as agent additions continue to be affected by a slower growth environment.

In terms of churn, we achieved a slightly better churn rates in Q1 with improvements coming from both smaller and larger customers in the quarter.

Turning to margins we.

We had another strong quarter of non-GAAP gross margins of 83% as we efficiently scale. The business in Q1, we achieved a positive 3% non-GAAP operating margin.

It represents a 5% improvement quarter over quarter.

This was driven by a number of ongoing changes, we're making to improve our cost structure and better align our operating model to support the business.

Specifically we are.

<unk>, the new hire process, coupled with enhancing our performance management culture, which resulted in fewer new employees and some employee exits.

We're also consolidating our or reducing certain go to market and G&A functions to match our changing needs.

And reevaluating all our sources of external spend for software contractors and other areas.

All of these resulted in an decrease of total non-GAAP operating expenses by $2 $3 million compared to Q4.

Our revenue outperformance combined with a lower cost base led to non-GAAP operating profit of $3 9 million in Q1.

This is a meaningful beat on our non-GAAP profitability for the quarter and positions us for margin improvement for the full year.

Let me now turn to our operating metrics.

Our net dollar retention was 108% on a constant currency basis or 107% as reported.

This metric came in slightly better than our commentary from the prior quarter and was driven primarily by the churn improvement I just mentioned.

The biggest driver of our expansion revenue continues to be agent additions.

Therefore as companies continue to reduce their hiring needs. We expect this to impact our expansion bookings.

We had previously called out that we expect to see a slight uptick in churn coming into 2023.

Although we saw churn improved in the first quarter, we are seeing some risk going forward.

Given both factors, we estimate Q2 constant currency and reported net dollar retention to be approximately 105% with.

With net retention rates stabilizing in the second half of the year.

Moving to our customer metrics.

Customers contributing more than $5000 in the IRR grew 18% to 18441 customers in the quarter.

And represent 87% of our era.

On a constant currency basis. This cohort grew 19% year over year.

For larger customers contributing more than $50000 in IRR.

Customer count grew 30% year over year to 2013 customers and now represents 45% of our IRR.

Adjusting for constant currency this cohort grew at 33%.

Lastly, we ended the quarter with a total customer count of more than 64900.

And a higher average revenue per account compared to the prior quarter.

Now turning to calculated billings balance sheet and cash items.

In Q1 calculated billings grew 21% year over year on a constant currency basis, or 18% as reported to $152 6 million.

Other factors that impacted billings growth for the quarter were.

The timing duration and revenue reserves, each having approximately negative 1% impact.

Adjusting for these factors normalized calculated billings growth was approximately 23% in Q1.

Looking ahead to Q2 2023.

Our preliminary estimate for calculated billings growth of 17% on a constant currency basis and as reported using current FX rates for.

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

Moving to our balance sheet and cash items, we maintained a similar cash balance compared to Q4 as we ended the quarter with cash cash equivalents in marketable securities of approximately 115 billion.

In Q1, we generated $9 $1 million of free cash flow.

Coming in well ahead of our estimates and reflective of the efficiency improvements we've made in the business.

We continue to net settle vested equity amounts and use a little more than $12 million and financing activities. As this activity is excluded from free cash flow.

We plan to continue net settling invested equity amounts, resulting in Q2 cash usage of approximately $17 million at current stock price levels.

Given the operating leverage we are creating in the business. We are increasing our free cash flow estimates for the full year 2023 to approximately $20 million.

We do have some seasonality in spend throughout the year. So we expect free cash flow of approximately $3 million in Q2, and Q3 with the remainder in Q4.

Turning to our share count for Q1, we had approximately 324 million shares outstanding on a fully diluted basis as of March 31 2023.

The fully diluted calculation consists of approximately 291 million shares outstanding $31 million related to Unvested, <unk> and Prs use and 3 million shares related to outstanding options.

Let me now talk about our forward looking estimates as usual I'll go through the numbers first and then provide background commentary afterwards.

In the second quarter of 2023, we expect revenue.

Revenue to medium range of 140 million to $142 5 million growing 15% to 17% year over year.

Adjusting for constant currency this reflects growth of 16% to 18% year over year.

non-GAAP loss from operations to be in the range of negative $2 million to breakeven.

And non-GAAP net income per share to be in the range of zero to positive <unk> <unk>, assuming weighted average shares outstanding of approximately 291 9 million shares.

For the full year 2023, we expect.

Revenue to be in the range of $580 million to $592 5 million growing 16% to 19% year over year.

Adjusting for constant currency this reflects growth of 17% to 19% year over year.

non-GAAP income from operations to be in the range of positive 2 million to $8 million and.

non-GAAP net income per share to be in the range of positive <unk> <unk> to positive 12.

Assuming weight weighted average shares outstanding of approximately $298 2 million.

A couple of items to call out in terms of how we're thinking about the year.

First on FX rates.

<unk> trends largely stabilized in Q1, so there was little impact to the results compared to the prior quarter.

However, on a year over year basis, we still saw a negative impact.

These estimates are based on FX rates as of April 28, 2023, so any future FX moves are not factored in.

At the beginning of the year, we started our hedging program for our R&R based expenses the impact to our operating expenses was minimal in Q1, and our objective is to improve predictability for operating expenses as we go forward.

Second on operating profit.

I am pleased with our ability to deliver non-GAAP operating profit just one quarter after delivering sustainable free cash flow and two quarters ahead of our prior schedule.

Allowing us to meaningfully raise full year estimates for profitability on a non-GAAP basis.

We have our annual merit cycle that impacts Q2 expenses, but after that we expect to generate non-GAAP operating profit in the second half of the year with Q3 at roughly breakeven in Q4 at approximately $2 million.

Let me close by saying, we had a really good quarter of execution to start the year. We continued our rapid pace of product innovation, we won meaningful deals around the world and we made a number of changes to the business that we believe will drive durable and profitable growth.

We're excited and look forward to our many opportunities ahead.

With that let's take your questions operator.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question Press Star One line again.

Please standby, while we compile the Q&A roster.

Perfect.

Our first question comes from the line of Elizabeth quarter from Morgan Stanley . Your line is open.

Hi, Thanks for taking my question.

Ryan restaurant for Elizabeth.

Thinking about the results for the quarter Theyre fairly strong even despite the difficult macro I'm just kind of curious what youre seeing around the consolidation theme in the market are you seeing more customers consolidate their platforms onto your systems or what's driving some of the factors senior.

Hey, Brian this is girish.

Take back.

Overall I would say.

There is no significant change compared to the previous quarters.

Clearly we are seeing.

Customers scrutinizing their spend.

Mike.

If I can speak from experience we looked at all the software that we bought and used and I think every company is going through that and seeing if they could get stuff done with fewer vendors.

So that would be something of that and we have.

70 anecdotal customer examples.

Kind of replace two or three tooth, but that has been.

Play engender, so I wouldn't call out anything specific to this quarter, but overall.

Businesses looking to seek more value and we are benefiting from that.

Thanks helpful. Maybe.

Maybe with the recent banking crisis in mind I was curious if you've seen any difference in customer performance by vertical or maybe even region with the U S underperforming or outperforming Europe and APAC.

Hey, thanks.

We have not.

Yes.

Sorry. This is Dennis just wanted to answer that one.

We didn't see any appreciable difference in performance by region.

We continue to see that.

Similar trends to what we saw last quarter.

In with SMB being a little bit weaker in our mid market business being quite good.

And you see that in our numbers in terms of the number of customers that are over 50000 continues to grow at strong rates.

Very helpful. Thanks for the question.

Okay.

Yes.

Thank you.

One moment for our next question.

Our next question comes from the line of Brent Thill of Jefferies. Your line is now open.

Thanks.

Tyler just in terms of what you're embedding in the guide can you just give us a sense of worsening environment stable better how are you.

And that in for the year in terms of guide what are the underlying assumptions here.

Yeah, Hey, Brian so.

Theres a couple of things one we do expect to see some continued pressure on the expansion motion.

In Q1 churn actually came in better.

Then than we expected we had talked at the end of Q4 that we expected to see a little bit of pressure on term, we do think thats going to have a little bit in Q2, we talked about net dollar retention going down to 105.

From where it was in Q1, which is a little bit better than what we thought and went away.

But we think it is kind of we expect it to kind of plateau at that point in terms of the.

The guide for Q2 on revenue and then on billings, which we expect to kind of match revenue at around 17%. We're really just trying to call as we see it.

We don't have as much visibility.

<unk> Enterprise software company of our sales cycles and so we are just trying to be as transparent as possible from that perspective, I do think there's some really good things going on in new business growth.

We are still expanding with our customers, but as agent addition is our biggest form of expansion still that has slowed down and we've been talking about that for almost a year now on the efficiency side, we're going to continue to drive efficiencies, we were able to raise.

Suitably on the operating profit and our cash.

And we're going to plan to execute against that for the rest of the year.

And to Dennis comments about SMB.

Weaker was that weaker than last quarter or is that just kind of the same weakness you haven't seen a drop anymore.

Thank you.

No change no change from last quarter.

Okay, and then just one quick follow up for Jewish on.

AI when you think about embedding chat GBT, how long does this take to actually get embedded when customers start to appreciate the differences in the products is this a couple of quarters out is this going to take a year, how long does it take to hit production.

Four point, where you'd like to see it have full scale adoption.

So Brent we've had AI before Tad GTD also in terms of.

Freddie offerings.

In terms of what we already have live.

Some of the stuff.

That we all saw in terms of.

Helping our users get better content summarizing content in all of desktop open AI based <unk> a lot of it is already out.

But we are excited and actually investing right now which is a priority for us.

Like in this quarter in the coming quarters is how do we actually used <unk> to think about improving.

Our ability to help businesses deliver better customer experiences and better employee experiences. So we are thinking along the lines of hey, how can <unk>.

Help customers self serve them selves.

Customer service agents.

Solve customer problems our leaders.

Actually get better insight and we're doing this across not just our CX products, but also across.

Our IP in our sales and marketing products.

We have.

It's tough announcements coming up in June .

Product launch event being shed more than that.

I hope you can join us.

Thank you.

Thank you one moment for our next question.

Our next question comes from the line of pendulum Bora of Jpmorgan. Your line is now open.

Oh, great Hey.

Guys congrats on the quarter.

Great to see the operating leverage maybe.

Maybe help us understand where are we in terms of just completing some of these efficiency levers that youre pulling and how much of the low hanging fruit still remains and I heard there were some <unk>.

I think you said on the sales side, how are you thinking about kind of sales capacity going forward.

Hey, Tien Tsin this is Tyler.

Yes.

We made some changes coming into the year, but a lot of it.

A lot of the go to market changes, we started doing at the end of Q4 and it kind of went into effect at the beginning of January .

And then the other changes that I alluded to we're really kind of threefold one.

Really focusing on a performance based culture, which did result in some exits.

Really looking at hiring and being very focused on making sure. We have the right people in the right places and then three theyre still employee attrition, although employee attrition has gone down as a result, we did end the quarter with with <unk>.

Slightly lower head count than we had entering the quarter.

But the efficiency exercises are going to continue right I think that we.

Have the advantage that number one we've been hiring really rapidly up through kind of the.

At the beginning of second quarter last year, and we really started to slow that down.

Two it's kind of just one of the competitive advantages that we have with a lot of our functions really being run out of India and the DNA of the company has always been kind of about being efficient.

And we're just getting back to that and making sure. We're trying to drive that efficiency in terms of the sales side. We feel that we are structured now we have this one quarter, where some of the changes and the capacity is there we are still hiring reps, where we feel that we need to build capacity out and we're still going to continue to tweak things to make sure we can get as much return as possible.

For those dollars that we're throwing into the go to market motion.

Yeah understood. Okay. Thank you for that and one for.

Ganesh.

Obviously, you're starting to add a lot of the.

AI capabilities.

That we have with open AI in jeopardy, and all that stuff I wanted to ask more of a high level question of.

Introduction of AI and driving efficiency.

Or potentially could have pressure on seats. So I'm thinking how are you kind of balancing the potential to capture incremental value from these efficiencies versus any potential pressure on seats that you might see in the future.

Yes Benjamin.

This.

It's a journey that is not new but definitely the question is being asked louder.

But in 2016, we embarked on the journey, where we foresaw a future where the industry is moving.

More towards bots and automation and.

I think the reality of.

Let's take the biggest market, which is customer service and support the reality is level one support.

This will have a lot of reflection and automation.

The higher order support will actually always acquire.

Some amount of.

Human touch personalization and.

Subject matter expertise so.

I think we are just seeing more and more automation, if and when that is.

Possible so we already have.

As part of our <unk> offering where we charge for that not like based on the number of sessions views are based on the number of.

Interactions.

And we also have a primary agent based model. So I think both will exist the moat.

Automation will drive so we will add more value to customers and be able to charge more for them.

Broad based automation.

Understood. Thank you very much.

Thank you.

A reminder, given the number of analysts that we have on the call could you limit to one question and then get back in the queue. If you have additional questions. Thank you.

So one moment our next question.

Our question comes from the line of Adam <unk> of Bank of America. Your line is now open.

Hey, Thanks for taking my question. So it sounded like the solid traction as you move up market and you've cut it cited some pretty big customers such as the S&P or Forbes.

So I guess my signal might actually consider just so on enterprises.

I wanted to know where do you draw the line in terms of large customers you're actively target in and outbound manner versus some correlation you kind of get pulled into those deals. Thank you.

Yes. Thanks, Adam this is Dennis so.

Our our ideal customer profile today is up about up to 5000 employee company, although we do stretch up into 10000 in some cases bigger than that we handle all companies coming in and this is this is new this year of up to 500 employees.

Through through our inbound motion and that's primarily served out of India. So it's a rather low cost.

Motion more product led growth and then companies that are over 500 employees are handled by our field teams and you're correct. We have had some good progress in moving up market one of the big changes. We made this year is focusing our field sales teams on winning bigger deals and splitting our.

Hunting motion from our farming or account management motion. So we have sellers, whose job is 100% focused on acquiring new business and sellers, whose job is 100% on upsell.

We see early signs that that's working and I think again you see it in some of the numbers and some of the some of the bigger logos and all of these deals are competitive we're going up against.

The big cloud players as well as legacy incumbents in and we're winning based on a combination of having a feature complete product and having really strong value. So.

It's still early but good progress.

Okay. Thank you.

Our next question.

Comes from the line of Brent <unk> of.

Excuse me.

Of Piper Sandler Your line is now open Brent.

Good afternoon, great to see balancing profitable growth positive free cash flow here.

Obviously part of the path to profitable growth has been.

Your own internal look at vendor consolidation and Dennis for you as you just think about this vendor consolidation theme, we entered the year with our.

Our CIO survey, saying that that there was definitely an appetite.

Sure.

For companies to reduce the number of vendors.

How is that progressing we're four months in is there a narrative out there is it is really resonating with the customers you are talking to them at a lower cost.

Consumer friendly platform is helping or is that something maybe that could show up in the second half of the year any color on vendor consolidation on the tail end of the business definitely so we do see in particular in our fresh des business, we see consolidation as playing in our favor. So if you look at that.

If you look at a typical service operation today, there are multiple different functions that software plays that could be provided by different players in some cases have been in the past you can buy your bots from one provider you can buy your second tier ticketing system from a different one and you can buy a conversational layer from a whole bunch.

The smaller players we've built a best in class solution that encompasses all of those things in in an integrated way without acquiring any of them. So the code base is cleaned the user experience is really slick and we're winning quite a bit of business in rip out of.

<unk>.

Companies that have chosen a more fragmented approach in the past. So we think consolidation in value is is a theme that we're pursuing it's also much easier for the customer on an ongoing basis to manage us.

Rather than having to manage three or four different solutions all of the integration that goes with that.

So thats the winning motion for us and we think that will play out positively.

Clearly seeing it in fresh to ask have you seen as a cross platform consolidation you are starting to ask yes, yes, we are starting to so if you one of the examples was travel counselors today.

Counselors.

Was there.

There is a fresh desk customer they added fresh sales.

And thats more and more common for us where we're seeing customers that have been with us for a couple of years they've had success with the product and then they are adding a second product the third product.

Again, it's still relatively early for US most of our expansion has historically come from seed edition of the same product, but we're leaning more and more into the true cross sell motion like the travel counselors example.

Okay. Thank you.

One moment for our next question, which comes from the line of Alex Zukin.

Research Your line is now open.

Hey, guys. This is ethan on for <unk>. Thanks for taking my question.

One thing.

The revenue for like the new customers, who saw it seem like a continued step down and I guess, it's understandable considering I would've been environment is but can you just help us think around how we think that you guys were 105 and stabilize them to each how does he think that linearity.

See that in the environment going forward kind of course that with your commentary around the bottom for <unk>. Thank you.

Okay.

You broke up a little bit, but I think youre asking about the number of customers.

And then net dollar retention we are.

We're typically closing.

<unk> hundred 2000.

Customers per quarter, and we came in at 500.

There is some noise on the SMB on the small side, but the new logos were actually SMB on the small side in terms of churn, but the new logos are actually pretty healthy and the offset from a continued increase in our ARPA alright. So there's nothing there that we were concerned about really in terms of net dollar retention.

We came a little bit higher than what we thought and we thought we had a really good quarter of execution. There are still expanding with customers, but we are continuing to see the pressure on the upsell motion or the expansion motion on agent addition, our we're finding other ways to start expanding with with our customers.

<unk> talked about fresh service for teams as an example.

Which is the first real add on for fresh service. This is the first quarter was available.

But.

One of the reasons, we did better as churn actually came in better.

For the quarter from a dollar perspective, which is a little bit different than what I said from a customer number perspective, we do expect to see a little bit of pressure on churn going forward, but also continued to express pressure on the expansion motion. That's why we're talking about a 105 endear, but we do think it's going to kind of.

Kind of get settled at that as we look at the back half of the year and obviously, we'll update that as we get more information in the coming quarter.

Okay.

Thank you.

One moment for our next question.

Which comes from the line of Brian Peterson of Raymond James Your line is now open.

Hey, Tyler Thanks for taking my question sort of follow up on the last one just on the <unk> is there anything that you guys have seen in April that's changed I. Appreciate all the perspective that you gave but in terms of that expansion motion has that changed I guess, so far in April versus what you saw in March and is there any element too that you guys are just landing bigger so big.

There is kind of less of an initial MLR push and that's a factor as well just want to unpack that a bit. Thank you.

Yes, I mean, no real change in April I mean, we're obviously guided today for the quarter and we've taken everything into account that we know and so everything is kind of as expected.

And so there is no real change there in terms of expansion or.

<unk>.

Thats different than what we were expecting coming into the month.

In terms of are we landing more I would say the sales pattern, we are landing with larger customers right and we've been talking about how we've.

Then moving up and we're not we're not talking about huge companies right.

Dennis just went through the size of companies that we're talking about but the landing.

We look at the deals it doesn't feel like we're having any difference in land in terms of I think you are alluding to haze or possible like shelfware in that people are growing into what they are buying.

<unk> isn't really the sales motion most of the customers still kind of buy what they need.

It's just that I think that the companies are not hiring as fast as they have been in the past.

And then on the on the flip side on the churn side, we have seen down sells which is included in churn as companies come up for renewal if they've laid off people and so that's just really a macro thing something we didn't expect kind of coming into last year, and we've been able to adjust our business model accordingly, but I do think that will change.

And people companies will go back to growing and then we will both be able to participate in that.

Thank you.

Our next question.

Question comes from the line of Erin Timson of JMP Securities.

Your line is now open.

Okay.

Oh, great. Thank you, it's actually Pat for Erin.

I was going to ask Dennis.

And in terms of the opportunity that you saw here when you took this job.

What levers have you pulled so far I mean the.

Hunter farmer or it seems to be one.

And what do you still have that you can do in the future.

Okay.

Hey, Pat Thanks for the question. So I think we started we've really just gotten started on a number of things I think one of the themes that I've talked about pretty consistently is the opportunity we have to serve serve true mid market customers and thats really still quite untapped. So.

<unk> has done an amazing job of.

Laying the groundwork, making sure we've got the right people focused on the right kinds of deals making sure. Our field team is winning big deals and anything Thats thats not over a certain threshold is going to.

Our low cost inbound motion.

And that's just that's still early days I think some of the hiring that we've done.

Going to pay off over the course of the year, we brought in a new head of channel. We brought in a new head of strategy and ops, who was previously at AWS for eight years. So those hires are going to start having impact I think an area thats really untapped for US is channel the more I talk to partners.

Here, what they're hearing in terms of our competitor set and some of the pricing practices that some of our competitors are pulling they're looking for alternatives in both.

<unk> and <unk> space and in the sales and marker space I think thats, a big lever for us I think.

Youre going to see I think the effect of the changes that Patti has made in the back half of this year.

In terms of getting the right kinds of reps doing the right kinds of things and then we haven't pulled the lever really on true cross sell right. We have an expansion motion. That's heavily seat addition, driven.

But we have the opportunity to do a much better job in selling.

Selling our it products into our large installed base and vice versa, and then bringing in sales and marketing at the right time. So all those things I think are still ahead of us.

And then you layer on top of that the some of the advancements that we're making in AI and.

The productivity improvements that they will drive for our customers and their agents and managers all of those things are pretty exciting.

Thank you.

One moment our next question.

The question comes from the line of DJ Hynes of Canaccord. Your line is now open.

Hey, this is Luke on for DJ Thanks for taking the question.

Taking a bit of a longer term view here, but I'm curious if you think we could gradually be a significant structural improvement and net dollar retention over time as you continue to really push up market.

And push that cross sell motion or in your view is perhaps a more subtle shift than that.

Hey, Luke.

So I think that I think a couple of things will happen.

Net dollar retention.

Coming into last year.

We were kind of mid teens and a lot of that was not a lot of it.

A big portion of that was driving driven by that agent edition, which is has really decreased at the same time, though we had brought when we went public we are low twenties churn and we've talked about hey, we've moved that to kind of high high teens, and we're going to continue to make progress on that in fact, now we're kind of like mid to high teens on churn rates.

Over time.

We're going to do I think three things one continuing to work on churn and get that to kind of as long as we can thats kind of a slow moving thing, but as we move to servicing larger companies as press service continues to grow.

Our fastest growing product, which has great churn characteristics.

And as we continue to provide value through our products, we expect the churn to come down secondarily. We're.

We are working on.

Other ways to grow with our customers outside of agent addition, in first servicer teams is a great example of that and the cross sell motion across products, which Dennis just talked about is another great example of that that's going to essentially help with expansion outside of that and then third as we come out of macro we would expect.

Companies to start hiring again and then the agent. In addition, we will kick back in if you look at all of that there is no. We don't think there's any reason we can't get back to that kind of 110 to 115 rate on net dollar retention as those things happen.

As an extra 10 points of growth for us just just from expansion with our own customers. So we're optimistic about that we just kind of need to weather. This macro storm through the rest of this year.

Thank you one moment please.

Our next question comes from the line of Ryan Macwilliams of Barclays. Your line is now open.

Thanks, two questions color another non-GAAP hospital and given your net debt position any changes that youre thinking about the potential for share repurchases here and then for Dennis you may have alluded to this in your prepared remarks, but some of your competitors have raised prices in recent quarters I know <unk> offers the cost about the sale force customers.

But do you have any new thoughts on potentially raising prices across different products tiers of geography. Thanks guys.

I'll take the first piece first right so.

We're about year, and a half and to being public here, we kind of say, it's got a three step process get to sustainable free cash flow positive first thing gets a sustainable non-GAAP operating profit and then third GAAP operating profit.

I think we've done the first the second one just on the first step of doing.

And then one.

Once we are really confident there then.

We would look at our cash obviously were very healthy and we still have $1 $1 billion in the bank and we have no debt.

We're going to start producing cash we are using that cash right now parts part of it to do net settles of ours use.

While over $100 million last year to do that I think we used about $17 million last quarter and that is kind of a form of buyback.

You look at it that way because those shares will never hit the market and then the broader point of what we do with our cash of it does not use for operations is clearly a board discussion that we would have with them at some point in time.

John pricing I think we do have leverage we have.

We took prices up for ITM in January for new customers and renewals by about 4% and we didn't really see much in the way of pushback are first of all the price umbrella between us and either like a BMC product or.

Now, it's quite big and.

And secondly, our customers are getting a lot of value out of out of the solution.

So there potentially is more more there are the other area that we're looking at is at renewal, we when we're coming up to renewal historically, we've had a number of customers that are on fairly discounted deals. We're revisiting those discounts as part of the renewable discussion and we're able to effectively raise price at renewal as well.

So I think there are more and more levers we are getting more sophisticated about how we're thinking about pricing and thats another area that I'm certainly digging into.

Thank you.

One moment.

Our next question comes from the line of Nick Hoffman of Scotiabank. Your line is now open.

Awesome. Thanks, guys.

You guys over the past couple of quarters have talked about how some fresh service has been a strong area and an area that you guys are leaning into.

When you look at sort of the bookings this quarter can you just maybe talk about the bookings strength between fresh service fresh desk fresh sales et cetera, and then just as a follow up do you think <unk> is maybe holding up a bit stronger.

Budgets are a little bit more insulated there and it's a bit more upmarket.

Or do you think it's sort of a front office versus Middle office back office dynamic and maybe buying propensity is a little bit better in <unk> versus other areas.

Any commentary around around those aspects would be very helpful. Thanks.

Hey, Nick this Tyler so in terms of the the bookings byproduct, we haven't really broken that out.

We do plan on our Investor day to give more kind of.

Product.

Information.

Asian, but what we have said is that <unk> has been the fastest growing is the biggest contributor to <unk> growth and that continued in Q1 that the product is doing great and we also called out that it was actually a really good kind of new business quarter. There. Now you asked is there is there more budget I think it is interesting that I don't necessarily think that <unk> has more budget in fact on the <unk>.

Smaller companies, what we would see is that those those customers would wait in times like this and they kind of stay with.

Just E mail and whatnot for their <unk> and so I think that's a future opportunity for us is as companies get a little bit more budget that they would look to us to buy actually look at it more as this the opportunity in a market of our product and the value that that product can provide and then also be in a great value for sake.

Existing service now customers, who are tired of that product that we can provide an incredible alternative and that's what we've been leaning into in that we're going to continue to do that and also specifically with the legacy vendors there and so it is a great space and we're going to continue to go capture as much as possible, yes. Nick one other thing. This is Dennis I would call out is the investment that we've made over the last.

Several years.

The product and the product in particular is absolutely critical in winning deals. So think about hi, Tom capability that we didn't have a year ago or.

<unk> solution that works for teams outside of it that we didn't have a year ago. These are really important development for us that allow us to address a broader range of customers and thats showing up in the.

In the numbers.

Yeah.

Okay.

Thank you.

Our next question.

It comes from the line of Brett Knoblauch from.

Cantor Fitzgerald your line is now open Brett.

Hi, guys congrats on the quarter and thanks for taking my question.

You talked about being more involved.

And more deal opportunities I guess is this is <unk>.

But you have seen accelerate given the budgetary pressures youre seeing with some larger and.

Prizes.

Hey, Brian It's Dennis So yes. We are we are one of the things. We look at is how many swings of the bat do we get per quarter and once again Q1 was greater than Q4 in Q4 and year historically, a pretty good time, a year or two.

To get that kind of volume so we're in the mix more were in la.

Larger.

Situations. So we're swinging at fatter pitches, so to speak so the deals that we are.

Getting involved in on average are bigger than they have been in the past and I think that's.

Back to the product innovation, both for <unk> and for <unk>.

That goes to all of the investments that we've made in conversational and automation on the <unk> side and <unk> and DSM. Another other features on the on the <unk> side. So.

It's a really important metric for us.

It demonstrates the network that we're building in terms of referrals and customers that are happy and talking to other customers all of that stuff comes together and looking at how.

How much are we participating in new opportunities of course, how many of those are winning.

So we think it's we think it's an important trend and I do think.

In talking to customers. They are looking for value and in many cases, they are not satisfied with whatever solution. They have whether that's an old on premise solution or newer cloud solutions.

Okay.

Perfect. Thanks, guys I appreciate it.

Okay. Thank you at this time I would like to turn the call back to the company for closing remarks.

Great Hey, thanks for everybody joining us we look forward to meeting with you and speaking with you throughout the quarter and will catch up with you next quarter. Thank you.

Thank you all for your participation in today's conference. This does conclude the program and you may now disconnect.

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Good day and thank you for standing by welcome to the <unk> first quarter 2023 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 this session you will need you.

Press Star one line on your telephone you will then hear an automated message advising your hand is raised.

Withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.

Joon Huh, Vice President of Investor Relations. Please go ahead.

Thank you good afternoon, and welcome to <unk> first quarter 2023 earnings Conference call. Joining me today are Girish method with the press release, Chief Executive Officer, Dennis Woodside Fresh works, President and Tyler Sloat freshwater Chief Financial Officer, the primary purpose.

Today's call is to provide you with information regarding our first quarter 2023 performance and our financial outlook for our second quarter and full year 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 1095.

These forward looking statements are based on fresh works current expectation estimates about business and industry, including our financial outlook macroeconomic uncertainties managements beliefs and certain other assumption made by the company all of which are subject to change.

Such risks include but are not limited to our ability to sustain our growth to.

To innovate.

Meet customer demand and to control costs and improve operating efficiency.

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 a discussion of material risks and other important factors that could affect our results. Please refer to today's earnings release, our most recently filed Form 10-K.

Other periodic filings with the SEC.

<unk> assumes no obligation to update any forward looking statements in order to reflect events or circumstances that may arise. After the date of this call except as required by law.

Heard you to visit our Investor Relations site to access our earnings release supplemental slides periodic SEC reports a replay of today's call.

To learn more about pressure and with that let me turn it over to Girish.

Thank you Joon and welcome everyone.

You for joining us today on Facebook earnings call covering our first quarter of 2023.

We started the year off strong.

Our first quarter of non-GAAP operating profit as a public company.

We exceeded our expectations for Q1 with revenue coming in above the high end of our financial outlook range.

$37 7 million and we outperformed our estimates for free cash flow with $9 1 million in Q1, as we drove meaningful efficiencies in our business.

In today's environment as businesses are seeking efficiencies in their software spend and seeking faster time to value.

Excited to see the pressure look value proposition resonate even better with larger companies.

Before diving into our business driver.

I should note that starting this quarter.

We are providing supplemental flight of some of our financial results.

These slides can be found on our Investor Relations website, and we hope you find them to be useful.

During these uncertain economic time.

Committed to sustaining growth in our four key strategies that I outlined last quarter.

Foot.

Our focus on product innovation continues to allow us to meet customer demand for efficiency.

By streamlining processes, and hunting omnichannel customer experiences and launching an AI powered fresh market beta program.

Second we are experiencing strong growth for Midmarket and enterprise customers, which Dennis will discuss further after this.

Good.

Focus on expansion and helping our customers adopt more of our solutions continues and Dennis will elaborate on this.

Finally, we are dedicated to improving our operating efficiency.

As I mentioned, we delivered our first quarter of operating profit on a non-GAAP basis since becoming a public company.

Taylor will cover this in more detail later.

Starting with idea Tim.

First service team has been working hard.

Expanded operations management capabilities.

Last year, we added support for Microsoft teams and Whatsapp.

Moving customers to repeat on call notifications on those tenants.

To date.

That have been over 1 million per month, highlighting the effectiveness of our service health monitoring and management capabilities.

Notable customer pillar, a global sportswear manufacturer.

Fixed service partners.

Ease of use and configuration.

In Q1.

Also added new capabilities workflow automation and workload management and visibility.

The workflow automated feature helps businesses digitize their workflow and automate the particularly the.

The workload management feature provides cooper leases with full visibility of assigned work assist in workload monitoring and helps prevent employee Bullock.

This service has also expanded its services beyond ADT.

The launch of Chris service hub business.

Notable customers using <unk> services business team include goodwill University in the UK and the commercial bank will provide <unk>.

Chris Services' commitment to providing cost effective solutions with enterprise grade capability makes it a strong contenders in this market.

In our business.

Talking about digital turned to fix that as a cost effective solution for their super apps aiming to scale support put over 1 billion potential users in India.

In just six months total digital achieved a 50% it could deflection and a 50% increase in customer satisfaction.

The address that.

Another customer Riverside insight was able to improve agent productivity by cracking realtime ticket plan leading.

Leading to an 80% reduction in logging to look at ticket and improve customer satisfaction.

Additionally, our Q1 release of the unified agent and dress shirt enables agents to work efficiently across tenant.

And our system has bought experiences.

<unk> intelligent and quite a deflection.

Turning to our enhanced condensation widget.

1500 early adopters are already using this with more than half deploying box.

Our leading beauty business in India.

<unk> for the unified customer support solution by.

By leveraging our GPT features.

<unk> achieved an impressive 95% first call resolution rate.

We continue to innovate we are.

Dedicated to empowering businesses like these to.

To provide exceptional customer experiences.

Now turning to our CRM business, our focus in Q1 was on enhancing sales sequences and enabling cross channel personalized marketing campaigns to help marketers boost customer engagement.

We have updated our Crystal park with an embedded E signature features but I think the deep court process for our sales team.

In response to market demand or better email performance.

We have integrated GPT powered pretty AI.

Into a fish market marketing automation platform.

This powerful fish stale fish marketed combination is driving significant results.

Clients like event manufacturing.

Six benefits.

After implementing both pollution David Tx.

<unk> increasingly email open rates over 200% surge is activity and.

And a substantial raising revenue.

The fresh look new platform is the driving force behind our innovative products.

I'm learning <unk>, and unifying customer data and analytics across Facebook products.

This summer in our product launch.

Have multiple ship about our platform with new AI capabilities.

This first product are proving to be a powerful alternative to legacy software providers.

Our products are offering more flexibility and helping customers avoid the pitfalls of cumbersome implementation and unnecessary visits.

It's hard to put up our passion for growth, we believe our solutions of the future of App development and growth.

Lastly, before turning it over to Dennis.

Let me also take the opportunity to announce that we will be holding our first investor day on September seven and 10 Francisco. Please.

Please save the date.

We will send out more details later.

We look forward to seeing that now.

Now over to Dennis to talk about what we're seeing in the market our larger customers are driving our business growth and how customers are expanding.

Product.

Thank you Jay and thanks to all of you for joining us.

We're really pleased with our first quarter performance as we once again beat our financial estimates for revenue and improved our operating efficiency to achieve our first quarter of non-GAAP operating profit as a public company.

This focus drove continued multi product adoption higher participation in competitive deals and more new business opportunities for both CX.

Yes.

Our ability to build software at a lower cost allows us to deliver a low total cost of ownership and thus offer a higher return on investment to the customer.

In Q1, our products continue to show they can scale to support thousands of mid market and enterprise customers.

These customers need a sophisticated level of support but are hungry for simpler implementation than some of our biggest competitors provide.

Looking at our large customer cohort, which we define as customers spending more than $50000 in IRR.

<unk> grew 30% year over year to 2013 customers in Q1 or 33% in constant currency.

These customers, which represent 45% of our business are choosing fresh works over larger established players and legacy on Prem solutions.

It's incredible to see how very different companies are finding rapid impact and lasting value with fresh works.

A large company like S&P global needed to support <unk> to respond to customer queries as quickly as the market changes.

S&P mines billions of data points to offer independent ratings benchmarks and analytics.

Hey, Dan offers critical information to companies governments and individuals to make investment decisions.

S&P uses fresh desk to automate route and assign tickets to agents, who can resolve issues fast for its 13000 customers.

S&P's ticket resolution is now four times faster than the industry benchmark and tick us assignments happened twice as fast as the industry average.

Turning to our expansion motion I am encouraged to see that our customers are realizing value in one <unk> product and growing their appetite for more through seat increases additional products and upgrades.

In Q1, our net dollar retention rate was 108% on a constant currency basis coming in slightly better than we expected.

To manage new leads recruit new counselors and convert corporate travel opportunities.

The publishing industry is always facing pressure to be more efficient with fewer resources.

Global online and print publisher Forbes was held back by a homegrown employee support tool, making their service less efficient.

While looking for alternative solutions. They discovered press service to streamline all employee service requests, which has helped the team save costs and cut their average resolution time in half in two years.