Q2 2023 Freshworks Inc Earnings Call
Okay.
Hello, and thank you for standing by welcome to the fresh work second 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.
Participating in the queue simply press star one one on your telephone.
To withdraw.
Press Star one again I would now like to hand, the call over to Joon huh.
Thank you good afternoon, and welcome to the fresh work second quarter 2023 earnings Conference call. Joining me today are girish, Martha with them freshwater Chief Executive Officer, Dennis Woodside, freshwater precedent and Tyler Sloat Crush works Chief Financial Officer.
<unk> purpose of today's call is to provide you with information regarding our second quarter 2023 performance.
The outlook for our third 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 B.
These forward looking statements are based on <unk> current expectations and estimates about his business and industry, including our financial outlook macroeconomic uncertainties managements 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.
<unk> from those projected in the forward looking statements.
Such risks include but are not limited to our ability to sustain our growth to innovate to meet customer demand and to control costs and improve operating efficiencies for a discussion of additional 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 and Form 10-Q.
And our other periodic filings with 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 for historical periods 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 pressures 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 second quarter of 2023.
We delivered a strong Q2 and outperformed our estimates across all our key financial metrics.
Revenue exceeded the high end of our financial outlook range coming in at $145 1 million for the quarter.
We continued to improve our business efficiency, leading to free cash flow of $18 1 million.
Significantly surpassing our expectations.
I am really proud of our team effort this quarter.
We made a number of operational changes at the beginning of the year to go after larger customers and target a more profitable segment of the market and we are starting to see the benefits in our results.
As a reminder, we have included these financial highlights in the supplemental earnings slides on our Investor Relations website.
We'll also hold our first Investor day on September seven in San Francisco.
I look forward to seeing you there.
Now I'll get into our business drivers beginning with product innovation.
In June we showcased our <unk> AI strategy.
Introducing new generative AI capabilities that can be used across product lines.
First is pretty self service, which helps businesses offer personalized customer and employee service with conversational box.
Next is really co pilot, which is a personal assistant that works like an always on EA collaborator offering contextual information and insight and offloading that particularly tuck.
And finally with pretty insight yes.
Leveraging <unk> to.
To provide even more proactive insights and recommendations through a conversational interface.
All three <unk> AI capabilities can help professionals.
<unk> people marketers and support agents work more efficiently.
Powered by <unk>, our self service experience, including fresh box for CX and virtual agents in our.
Assisted customers in more than 220 million interactions in Q2.
Later this week, we will be introducing new pricing for our AI powered box, which enables us to monetize our enhanced capabilities as we create value for our customers.
In addition, we plan to introduce at a later date or pretty copilot add ons that provides access to our AI capabilities, starting at a price of $29 per agent per month.
Our goal is to put the power of AI in the hands of as many customer and employee facing teams as possible.
With respect to our customer service business.
We'll be launching our <unk> customer service suite also later this week.
This is our first solution built from the ground up with pretty AI. The modern multichannel customer service suite brings to give them the power of AI advancements to condensation with support and ticketing.
All in one offering and we believe it is the future of customer service.
This will provide customers with automated self service across channels and is expected to supercharge agent productivity and deliver proactive insights for leaders.
We are proud to be opening this up to our customers in the next few days.
Turning to our <unk> business with first service.
<unk> continued to deliver capabilities that make employee experience is better and empower organizations to provide them efficiently and reliably.
We are also extending the capabilities of <unk> to preserve it.
Now provides conversational self service and employees language of choice include.
Including German French and Spanish.
After launching for service for business teams in December of 2022, we continue to see validation of our initial thesis of a large market demand.
Nearly one out of every five new accounts are adopting for service for business teams for non <unk> function on their initial purchase.
One of our customers pitch book offers financial research and insight to capital market professionals.
They were trying to make another well known provider solution work, but it was cumbersome and not so good for the it infrastructure and objectives.
Since going live with for service for that.
And robots Department pitch book has decreased agent response and of course, the wait times by over 20% and automated processes for employee Onboarding and off boarding.
In our CRM business, we remain focused on delivering our sales and marketing solution powered by AI that helps teams message sharper engage better sales smarter and closed deals faster.
We then for sale.
Have improved wholesalers operate and engage with customers by integrating generated across key modules pretty.
Co pilot provide support throughout the sales process. This.
This frees them to focus on building relationships and closing deals.
Within fresh market as we are leveraging <unk> AI to help marketers gain insights into customer behavior.
Frances and purchase patterns and launch highly personalized campaigns.
In Q2.
We released our integration with <unk> Commerce, which allows millions of store owners to get access to a fresh market solution.
In Q2, we also announced <unk> co pilot for developers.
Applying AI to the neo platform and enabling a faster app development experience.
In some instances critical pilot has cut Delaware time from nine to 10 weeks to less than a week we are.
Also launched the global apps framework to enable developers to publish a single marketplace app that can work across multiple <unk> products.
That is expected to provide developers faster time to market less overhead of managing and building apps and better integrations across specialty product.
The last few months, we've made significant advancements in generator for our.
Tumors.
And we plan to continue to leverage our efficiency and scale to bring these accessible solutions to companies of all types.
Before I hand, it over to Dennis I.
I am pleased to announce the recent appointment of Frank Pelzer to our board of directors.
Frank is currently the executive Vice President and Chief Financial Officer of FY, Inc, and the former President and Chief operating officer of the cloud business group at S&P.
Im excited to add his tremendous experience building and scaling global cloud software companies to the fresh looks book.
Now over to Dennis who will detail how our changes in GBM have positively impacted our business.
Thanks, Jay and thank you everyone. We appreciate you joining us for today's call.
As you can see in our Q2 results, we're starting to realize some of the benefits of the strategic go to market decisions. We made earlier this year.
We are seeing that our actions that set us on a path to win bigger deals expand within existing accounts and improve our operating efficiency are working to drive profitable growth for fresh works.
In January we shifted our field teams to focus on landing bigger customers and this quarter, we began to see the results.
In Q2 fresh works customers paying us over $50000 and <unk> grew 33% year over year up from the 30% growth we saw in Q1.
This customer cohort now represents 46% of our IRR as larger customers are fueling the growth of our business.
Recent examples include a large American consumer product company, a famous British car company, a well known Japanese tech conglomerate and co pay Corporation.
<unk> is north America's leading garage door manufacturer and came to fresh works to improve customer engagement.
The increasing multichannel interactions with garage door dealers through calls mobile chats website forms and physical walk ins no.
<unk> stated a unified platform for a better agent and customer experience.
<unk> chose fresh desk fresh chat and fresh color to achieve this and continues to see significant customer service benefits.
Also in January we solidified teams dedicated to ensuring our customers succeed and grow with us.
We are seeing results from that change in Q2.
Of our net customer adds over $50000 and the majority is coming from expansion.
Our net expansion for our mid market enterprise accounts, with 12%, which is well above the average rate for the company.
Our average realized price per seat for <unk> for which we issued price changes in January increased by 4%.
And our multi product adoption rate increased in Q2 rounding up to 25%.
A great example is trainline and international digital rail and coach technology platform, serving trained riders in 45 countries.
Demand from U S travelers doubled the downloads of the trainline App in just one year and they relied on fresh desk and fresh chat for their customer service needs.
In Q2 train lines partner solutions team expanded their usage and adopted fresh service to manage their partner's experience, citing improved time to value as the main deciding factor.
An example of seat expansion as a leading American scale company.
After acquiring 12 companies in five years. This manufacturer selected fresh service for one business unit and has consistently replaced legacy vendors one after the next with another fresh service instance year after year.
We've grown from $250 to 600 agents, providing them excellent time to value as they centralize it workflows and govern multiple business units more efficiently.
In the first half of 2023, we made several tactical changes to how we go to market to acquire higher performing customers efficiently. These.
These changes have had a positive impact on our business.
First we adjusted our marketing budget to overweight the acquisition of larger higher potential customers.
This contributed to an overall improvement in efficiency demonstrated by non-GAAP sales and marketing as a percentage of revenue going from 51% in Q1 to 48% in Q2.
Second we expanded our free offering for fresh sales products for a number of Mount to test and attract a larger pool of future paying customers at a lower marketing costs.
We recently discontinued this expanded free test as we continue to optimize our offerings.
But as it related consequence of both of those tactical changes, we added fewer customers spending less than $5000 in <unk> in Q2.
Third we purposely moved more new customers from monthly and quarterly contracts to annual and multiyear agreements.
This trend towards annual contracts contributed to our Q2 calculated billings growth increasing quarter over quarter.
We ended the quarter with more than 65600 total customers, including Claremont Mckenna College, the state of Hawaii, Johns Hopkins and Dave and Busters.
While we added a lower number of customers compared to prior quarters, we increased ARPA and kept dollar based churn relatively stable.
We're confident that intentionally going after larger deals is creating a stronger and healthier base of customers to grow from in future quarters.
All of these changes are helping drive further efficiencies in the business and improve profitability.
Now over to Tyler to go through the financial details.
Thanks, Dennis and thanks, again to everyone for joining us.
Once again, we had a strong quarter in Q2.
Our revenue growth estimates and create significant leverage in the business to expand both non-GAAP operating and free cash flow margin by five percentage points quarter over quarter.
We are starting to realize the financial benefits, resulting from the operational changes made earlier in the year and we're creating a healthier foundation to position the business for profitable long term growth.
For our call today I will cover the Q2 financial results provide background on the key metrics and close with our forward looking commentary on expectations for Q3, and the full year 2023.
I'll 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 and other adjustments.
Starting with the income statement revenue grew 20% year over year adjusting for constant currency.
On an as reported basis revenue grew 19%.
$245 $1 million as we saw negative impacts on currency rates for the dollar against the euro and pound over the past year.
New business strength and <unk> continued to drive much of the growth in Q2.
While expansion rates overall ticked down slightly in the quarter.
In Q2, our non-GAAP gross margins increased one percentage point quarter over quarter to 84% as a result of efficiency improvements on our infrastructure spend.
<unk> costs and other onetime items.
Our non-GAAP operating expenses were relatively flat quarter over quarter and down more than $5 million year over year.
The majority of the decrease year over year was driven by lower sales and marketing expenses of $4 million as we improve spend in our go to market efforts.
This includes shifting focus towards a more durable higher yielding customer base.
All of this led to a significant outperformance for non-GAAP operating profit of $11 7 million and non-GAAP operating margin of 8% in Q2.
Given the many changes we've made over the past year I am pleased with the tangible improvements, we're making in our efficiency.
Turning to our operating metrics net dollar retention was 108% in the quarter, which includes a one percentage point benefit from FX.
In Q2 expansion growth was roughly in line with our expectations.
Dollar based churn performed better than our estimates, but slightly increased quarter over quarter.
We are planning for the lower net expansion trends to largely continue and expect the net dollar retention rate to be in the 105% to 1% to 6% range on a constant currency in the second half of the year.
Moving to our other key operating metrics of number of customers contributing more than $5000 in IRR.
This metric grew 18% year over year to 19105 customers in the quarter and maintained a similar growth rate compared to the prior quarter.
On a constant currency basis. This customer metric grew 17% year over year and now represents 88% of our era.
For larger customers contributing more than $50000 in IRR this customer count growth improved to 33% year over year with 2186 customers and now represents 46% of our air.
Adjusting for constant currency this cohort grew at 32%.
We added approximately 700 net customers in the quarter, which was lower than our historical quarterly figures.
Nearly all of the difference was from the smaller customer cohort of less than $5000 in the area.
Net adds for this cohort was impacted by the tactical changes that Dennis mentioned earlier as well as higher logo churn from smaller CX customers.
We ended the quarter with a customer count of more than 65600 <unk>.
As we continued our focus on attracting larger customers building, a healthier base and driving a higher ARPA.
Moving on to calculated billings balance sheet and cash items.
Calculated billings grew 22% year over year, both on a constant currency and as reported basis to $158 $9 million.
Factors, including timing duration of contracts and revenue reserves in the quarter accretive slight benefit resulting in a normalized calculated billings growth of approximately 21%.
Looking ahead to Q3 2023, our preliminary estimate for calculated billings growth is 18% as reported and 17% on a constant currency basis.
For the full year 2023, we expect calculated billings growth to be similar to our expected annual growth rate of approximately 19% as reported and 19% on a constant currency basis.
During the quarter, we generated over $18 million in free cash flow significantly ahead of our estimates and reflective of the efficiency improvements, we're making in the business.
As a result, we added $10 million in cash cash equivalence and marketable securities to end the quarter with a balance of $1 6 billion.
We continue to net settle vested equity amounts using more than $15 million during the quarter, which is reflected in financing activities. As this activity is excluded from free cash flow.
We plan to continue net settling the invested equity amounts, resulting in Q3 cash usage of approximately $23 million using current stock price levels.
Given the meaningful operational efficiencies, we realized in the first half of the year.
We are raising our free cash flow estimates for the full year, 2023% to $60 million with approximately $18 million and $15 million expected for Q3 and Q4, respectively.
Turning to our share count for Q2.
We had approximately 329 million shares outstanding on a fully diluted basis as of June 32023.
The fully diluted calculation consists of approximately 293 million shares outstanding.
34 million shares related to Unvested, Rcs, Mpr's use and 3 million shares related to outstanding options.
Let me now provide our forward looking estimates.
For the third quarter of 2023, we expect.
Revenue to be in the range of $149 million to a $151 5 million growing 16% to 18% year over year adjusting.
Adjusting for constant currency this reflects growth of 15% to 16% year over year.
non-GAAP income from operations to be in the range of 6 million to $9 million.
non-GAAP net income per share to be in the range of four to six.
Weighted average shares outstanding of approximately 302 million shares.
For the full year 2023, we expect revenue to be in the range of 587 million to $595 million.
Growing 18% to 19% year over year.
Adjusting for constant currency this reflects growth of 18% to 20% year over year.
non-GAAP income from operations to be in the range of 24 million to $32 million and non-GAAP net income per share to be in the range of 18 to 22, seven assuming weighted average shares outstanding of approximately $299 8 million.
Given the U S dollar trends over the past year, we saw a slight negative impact to our growth rates in Q2.
Our forward looking estimates are based on FX rates as of July 28, 2023, so any future currency moves are not factored in.
Let me close by saying I'm pleased with our business performance in the first half of the year.
Even though we made a number of changes to our go to market approach and business operations. The team continued to execute and manage through the changes to deliver on our growth targets for the business.
We're starting to see some of the benefits from the changes as we improve our operating leverage and drive profitable growth.
We plan to carry this business momentum into the second half of the year and we remain excited as ever and look forward to our many opportunities ahead.
With that let's take your questions operator.
Thank you I will start the Q&A now and I will ask our participants to please keep your questions to one as a reminder to ask a question press. The star one one on your telephone and wait for your name to be announced and to withdraw your question simply press Star one again.
One moment, while we compile our Q&A roster.
Alright, and our first question comes from Brian <unk> with Piper Sandler. Please proceed.
Thank you for taking the question good afternoon.
Obviously, it looks like fundamentals here are stabilizing Dennis maybe for you could you double click into the acceleration you saw in the 50000 K cohort I think it looked like the acceleration there improved from a 30% growth to 33 is that tied to some of the changes you've made an internal.
Execution or do you think there's something else that's resonating with those larger customers about the product.
Thanks for the question Brent So absolutely we are starting to realize the benefits of a lot of the changes that we made back in January .
And that has enabled us to create an even stronger and healthier base of these larger customers to grow from.
We our product has.
Has advanced at a very high rate over the last couple of years, if you look at it.
<unk> product specifically, we have some we have item we have ASM now all of those are resonating in the market and our.
Our sellers are doing quite well, so we're getting more at bats, and we've just put more wood behind the not huge deals, but slightly larger deals when youre seeing that in the numbers for sure.
Helpful Helpful and great to see thanks.
Thank you one moment for our next question. Please.
Alright. It comes from the line of Ryan Macwilliams with Barclays. Please proceed.
Hey, guys. Thanks for taking my question and really excited to see the AI product announcements coming.
Just on the contribution from the AI products and the new pricing.
As contemplated in the forward guidance I guess, how do you envision this learning into your model on the company.
Quarters or years.
Hey, Ryan Thanks for the question. So no we actually haven't built in any upside.
From the products and the pricing changes that are coming forward because I think it is so early that we'll have to we'll have to learn.
But our guidance is essentially reflective of what we see today based on what we have and what we expect to sell about without any upside from that.
Great and also pleased to see the strong profitability improvement in the quarter.
Some of the drivers there and are there any changes in the head count.
Clearly contribute to this improvement.
Yes.
Yes, Youre right. We are really excited about the kind of efficiency initiatives that we put in place at the beginning of the year.
How those have played out and we've always felt we would have leverage in the model and feel that we continue to have leverage in the model, which we obviously built that into a lot of our guidance going forward.
Headcount wise, we haven't had to do anything dramatic.
Actually just then moving to kind of a cultural performance.
Formats, and everything else is as we move forward and making sure we have the right people in the right places.
Maybe some color.
Thank you one moment, while we get our next caller.
Alright. It comes from the line of pendulum named Bora with Jpmorgan. Please proceed.
Great Hey, guys. Congrats on the quarter. One question on just maybe talk about your conversations with your customers about kind of appetite for AI co pilot trying to understand how should we think of kind of the ramp or uptake of Freddie copilot within the <unk> business and how are you thinking of price.
<unk> kind of the other co pilots in self serve and insight tools.
Thanks for the question this is Denise.
So are.
We are working first of all critical pilot is.
Think of it as an AI assistant for all of our users customers those people are.
Sales folks et cetera. So.
We have several early adopter customers, who we're working with in terms of seeing it. One example, I can give you as a customer of shipping and postal company in New York is actually using this customer service people are using the early features launched in terms of.
Creating a place where customers summarizing it and things like that so we also are looking at.
Making sure that.
The copilot can help automate routine manual tasks.
We are excited we are like more than 2000 customers and we are working with early adopters.
Lynn.
We are trying to monetize the copilot.
Soon.
Okay.
Interesting got it thanks and on free cash flow seems like if I remember that correctly I think when you entered the year. It was about $10 million for the year and then you enter 2000 and now you are talking about 60, how much of that ramp is because of this change in duration.
Towards the annual.
Yes, I would say not that not that impacted pingo, but it does have a little bit of impact to our billings numbers.
But the actual.
Change in annual collections.
That's not really driving our operational kind of performance a lot of it is Rob just.
Prudence that we've had on the cost side.
And.
Prudent throughout on hiring.
The duration billing is.
Pretty nominal.
Got it thank you.
Thank you.
As a reminder, ladies and gentlemen.
As a courtesy to other analysts please keep your questions to one more moment for our next question.
And it comes from the line of Brian Peterson with Raymond James. Please proceed.
Hi, gentlemen, and congrats on the quarter just one for me.
On AI and all the product announcements you have I know, there's a lot of important approach that you are already selling today, but I'd love to understand on the sales and marketing front as AI becomes more commonplace do you see that changing as kind of a medium term land to those products as they build from where they are today able to give some perspective on that thanks guys.
Sure, Brian I'll take that.
So.
This is a quick brief we announced pretty self service for our customer and employee self service critical pilot, which is.
As its been for our users and then pretty insights for data driven insights to leaders. So what we're trying to do is like on August when we are launching our new customer. So this week, we will be monetizing all pretty self service product.
Through our fish box and then.
Our copilot, which wheat.
Im thinking of it can be priced at $29 per agent.
But it will be monetized.
Later, we are still working with early adopter customers as he mentioned and pretty insightful followed that.
So.
Thank you.
One moment for our next question please.
And it comes from the line of Patrick well Ravens with citizens JMP Securities. Please go ahead.
Oh, great. Thank you and congratulations on the second really good quarter in a row.
So Jim one one area that I've been wondering a lot about is sort of the resources that you need to deliver generative AI solutions.
So in particular do you have enough sort of ph D level AI talent to design. These and then you have access to the Gpus for the training and the interests.
Okay.
So but.
Making those investments so we have.
I don't know the exact count how many ph lease we have but we have.
AI leaders from Microsoft will have much some experience working in our team. So we are also working with some of the technology providers, whether it's in Europe on the I R.
So with other leading providers of debt.
We are also in the process of it.
Investing.
In AI.
To kind of build domain specific and customer specific large language models.
As part of that we are.
Sitting up some.
And in India.
So that is independent.
Great and then what about it.
All of a sudden video stuff how hard is it to actually get access to the GPU power that you need to train these models.
Yes, I think we have heard.
If that becomes a scan to be great.
So that is one of the reasons why we wanted to set up investment so that we have access to that and some of our.
Blake.
We've seen with tourism also outflow.
<unk> to connect so I think for now we don't pay shortage, but.
We are all waiting to see how things play out in the future.
Okay, great. Thank you.
Okay.
Thank you.
A moment for our next question please.
When he comes from the line of DJ Hynes with Canaccord Genuity. Please proceed.
Hey, guys congrats on the quarter Tyler I want to ask on the Billings guide. So look if my numbers are right I think in Q1, it was 20% constant currency growth.
This quarter improved to 21% normalized I think you said youre guiding to 17 in Q3, I mean from all the qualitative.
Wanted his commentary it sounds like you guys feel pretty good about business momentum.
I'm just wondering if thats like typical prudence or are you seeing something in the business that would suggest things might slow again in Q3, just any any kind of high level thoughts there would be helpful.
Yeah. Thanks P J.
No we really are trying to call it as we see it we don't see.
Slowdown per se, we do we did say that we expect net dollar retention too.
Kind of come down to 105 106.
We had actually expected a little bit higher train coming into the year, we didn't see it in Q2 and Q1.
Q2 churn.
Ticked up slightly but actually was better than our expectations.
We still think there's going to be some continued pressure there and thats why were saying its going to come down and then the expansion motion, which we started talking about at the end of last year, it's still seeing pressure and so what we're trying to do is just to call. It as we see it and then obviously we will update it as we go along.
Okay. Thank you guys.
Thank you one moment please for our next question.
Yeah.
Alright any comes from the line of Alicia the border with Morgan Stanley . Please proceed.
Great. Thank you so much.
Ask about the move up market and pricing you guys have expanded the portfolio, which along with the go to market motion has allowed you to be more successful up market pricing still largely balances being able to address both the low end of customer than the high end of customers I know you called out price increases in PSM, but just more broadly how.
Do you think about pricing as a lever as you focus more on up market customers. Thank you.
Hey, Elizabeth it's Dennis Thanks for the question, we see pricing as a lever that we absolutely are going to be focused on.
We made our one of our first pricing moves this year in our it suite, where we took prices up and as I said in the remarks, we saw about a 4% price increase realized there.
And that and the way we roll prices out it's for net new customers and then renewing customers, we're seeing an opportunity with renewing customers across all products to realize more price as we we have deals that are coming up for renewal that may have been on.
Higher levels of discount then we need to make today given the.
Our rapid advance of the product and the value that we're delivering to those customers and that also is a lever for us to bring our.
ARPA up and Youre seeing it in the ARPA numbers. So I think I think as the company gets better at thinking about price and pricing to value price will become a bigger lever for us going forward. It's absolutely one of those things I'm focused on.
And we want to preserve our position in the marketplace, we still have a meaningful tcl advantage against all of our competitors both in terms of.
Our net are sicker prices as well as the actual cost of implementing our software.
So we have room for sure we want to be thoughtful about any kind of price changes, but there is absolutely room for us to be more sophisticated about pricing you are seeing it with the AI pricing as well, where we're going to be pricing, our AI add on at about $29 a seat youre seeing it with our BOP pricing, which we're going to announce later this week.
A a revised bought pricing scheme, which will allow us to monetize thoughts at a higher rate.
Great. Thank you very much.
Thank you for a moment for our next question. Please.
And it comes from the line of parallel or Mcguinness with UBS. Please proceed.
Yes, hi, thanks for taking my question.
<unk> performance relative to the guide was really solid and if I adjust for days in the quarter. It looks like the sequential growth in the <unk> guide is roughly a point stronger than what you guided to in Q I know that you said churn picked up a little but I guess, how would you characterize the demand environment in June and July versus what we'd seen previously are we starting to lap.
Some of the right sizing or slower expansion activity that could be helping are you seeing signs of improvement or is it largely just driven by some of the sales changes you've made.
Yes, I think largely it's going along as we expected.
Clearly our guidance has taken into all of it.
In fact, all the information we know right now.
So in terms of how the quarter's going as expected.
The guide like I said earlier, we are really trying to call it as we see it.
I think if you look at billings it was impacted slightly by kind of a move to larger customers tend to pay annually in advance and specifically our new business. In Q2 was there was really strong specifically with Ikea.
<unk> motion.
We would expect that to continue but we built all that kind of into our guidance.
Great. Thank you so much.
Thank you.
Okay.
Thank you one moment for our next question. Please.
Comes from the line of Adam <unk> with Bank of America. Please proceed.
Hey, Thanks for taking my question.
Can you expand on any differences you may be seeing in demand expansion in.
And front office versus back office solutions for example, just comparing maybe.
Yes.
Yes.
And then also just thinking about front office back office, what do you think will have.
I have a greater value proposition for <unk>.
Well why don't I start and then.
How do you talk about some of the AI stuff I think.
Generally speaking.
Just start kind of a little bit higher level in terms of new business, we're seeing.
In particular, do very well and I think that's partly because the product has come a long way.
We've introduced I, Tom ASM capabilities at a number of other.
Other aspects of functionality that makes the product really suitable for that solid mid market business, which for US is about a 5000 employee company.
Hi, all.
But our largest customers tend to be more of the customer service.
And Thats because you tend to have a lot more agents in our customer support team than you do over on it.
So we see quite a bit of expansion there.
We are seeing as we move into larger accounts those larger accounts are expanding at higher rates than than our smaller accounts and that's also helping us drive that or more sustaining the net extension expansion rate that we that we've seen so.
I don't I think the demand is slightly different in that we are seeing.
Very strong demand on the it side, we're seeing more muted demand for new business on the <unk> side.
We're seeing.
Reasonable demand I would say on the expand motion.
For <unk> and it is a newer product or newer large installed base. There. The expansion most of it also is quite good with <unk>.
Products like <unk> and that gives us a whole new expansion motion for those customers. So.
That gives you a little bit of a flavor and Jim maybe you can talk about the asked US, yes, and quickly add Adam while we expect AI adoption and transformation across all products I think the biggest.
Change is going to come.
The demand is going to come from customer self service in the <unk>.
Tom.
Awesome, Thanks for the answers.
Thank you one moment for our next question. Please.
It comes from the line of Alex Zukin with Wolfe Research. Please proceed.
Hey, guys. Thanks for taking the question just two quick ones for me. So if we step back and think about just the arc of the demand trends.
And optimization trends in your end markets as we look kind of coming out of the quarter versus going in.
Are we through kind of peak pain.
In your in your market you had monthly contracts you were first and then arguably maybe even first out.
Some of these optimization trends, but can you maybe just comment im not asking for the all clear, but just conceptualize what kind of as you see the demand patterns evolving.
Coming out of this quarter, you mentioned it was a little bit better on the retention front than you were anticipating I understand the guidance, but just.
Help us understand that and I've got a quick follow up on that.
Yeah, Alex as Tyler I'll take that one I think just in terms of.
Demand trends I think they are kind of staying relatively constant meaning that we do expect there to be continued pressure on the expansion motion.
We do think theres going to be a little bit of increase pressure on churn, which is why we are saying hey, we think that dollar retention could $105 six we do think it will stabilize there.
And a lot of it is how just the number is calculated with a year over year.
Our annualized some of the stuff that happened last year.
So from that perspective, Okay, we think theres still going to be a little pressure there on the on the field Moshe we mentioned that we had some really good new business in the field and some really good execution and.
A lot of the recipe for our products, meaning that the markets are really receptive specifically for refresh service and we would expect that to continue just to add a little bit more color. There. So so remember the Tam and the markets that we're playing in are massive and relatively fragmented there are large competitors, but.
There's a lot of room, there is still a lot of legacy players that are not innovating as fast as we are and our product is improving.
Every month, so we have a lot of runway the changes that we made on go to market and just driving this more balanced focus on both inbound and outbound sales SMB mid market and enterprise, bringing in the leadership and the teams that can that can build a very large field business those those change.
It just happened in Q1.
So we're starting as we said in the kind of the opening we're starting to see the impact, but theres a long way to go and I think theres a lot of upside we're seeing more.
More at bats, and more big deals than we ever had we're closing more big deals ever.
Every quarter than we ever had in prior quarters, we have goals around number of as an example, 30 K deals that we need to close in the quarter last quarter, we handily beat that goal and those numbers go up every quarter. So I think that the long term market is still we're still pretty early in that and how the go to market changes.
Play out in the business and we're feeling really good about where that's going to how that's going to take us.
So that's super insightful im going to.
<unk>.
Hopefully I'm on a roll with the conceptual questions, but I wanted to ask one about AI because Dennis you mentioned pricing Angie you talked about pricing a few times on this call and look I think everyone's a little struck by some of the pricing.
<unk> four AI skus for the co pilots you talked about $30 I think thats.
The largest adoption is going to come from fresh sales and froze their most popular SKU.
That's a 60% uplift.
On customers that would be adopting pro that's obviously at list price, but just help us understand.
Like.
I guess the rationale for that pricing why that's going to drive success and ultimately I know youre not guiding to it but as we think about either how this layers into driving greater adoption of specific products or adoption of the co pilot SKU within your cohorts like what's the.
High level, the uplift or the growth tailwind over time, we should expect from AI layering into the model.
So.
I think it's still early days I can give you a brief on how we are thinking about the pricing we are still not decided on which plants exactly are going to have.
Turning to Angola add on are we going to make it available to everybody but.
The whole idea is to look at it from a productivity standpoint.
<unk> are going to be like say, 20% to 40% more productive because the copilot helps them get the job done faster than automate.
European Das Wyndham.
<unk>.
This is not going to save on agent costs and so.
Like if it's a 20% productivity like how can we actually get.
Some capture some of that value. So that's the thought.
Our process in terms of how we're thinking about this.
But I think it can win win for both customers and tissue.
It's still early days and maybe you'll have more color for you in our Investor day on September seven.
Perfect. Thank you guys.
Thank you.
Yes.
One moment for our next question please.
And it comes from the line of Rob Oliver with Baird. Please proceed.
Great. Good afternoon, guys I appreciate you taking the question Dennis I appreciate all the color you've given.
Paired remarks and in response to the questions on that over 50, K cohort, which sounds like it's going really well I just wanted to ask on that you did say at the outset that multi product is now up to 25% of customers. So since the IPO you guys have done a nice job sort of migrating that up when you look at the enterprise opportunity and.
Today, maybe the MLR extension.
Expansion Youre seeing there is that mostly just seat expansions within.
Core products already sold or are you already seeing.
Meaningful cross sell let's say fresh service into fresh desk, and maybe if you could just talk a little bit about that opportunity for you guys that would be helpful. Thank you.
Yes so.
I would say the strength is a combination of.
Net new business. So a number of the wins that I talked about like the large steel company well actually that was an extension with BP.
The net new still is a big part of our our growth story and really that's because you have a lot of vendors are a lot of customers who are coming up on a three year contract two year contract. We were not really in the mid market gained two or three years ago and they're looking for an alternative that provides higher.
Value of modern interface for their agents and fast time to value. We offer all of that so we're getting more and more of those at bats on the new side on the expansion side.
We are seeing the opportunity to cross sell true cross persona sales and an example.
Steel company that I mentioned in the remarks, that's an example of that kind of.
Cross sell the train line. Another example of the cross per cent a cell where we are.
I think we started out on the on the sports side and moved into the <unk> side. So one of the things that we did at beginning of year separate remember the kind of the hunting motion from the farming motion and we need to perfect. The art of going out and winning new business and we need to perfect. The art of seeing opportunities within existing accounts servicing new needs and then getting in front of the right decision.
Isn't makers.
Two to prove that what we have a solution that we have can add value to their business and thats where were starting to see that pay off.
And these true cross persona sales Thats, where you get the big expansions.
So that's a little bit of color of kind of how we're thinking about the opportunity there.
I appreciate that thank you.
Thank you.
One moment for next question please.
And it comes from the line of Brian Schwartz with Oppenheimer <unk> Company. Please proceed.
Yes, hi, Thanks for taking my question and congratulations on a real nice quarter.
Just one more on the AI capex.
G. Maybe just ask you a question I'm thinking about the right pace of adoption within the install base for the AI products is there any way of comparing that to any of your previous product launches or.
Any insights on how we should think about the uptake of those products as they continue to get rolled out. Thank you.
Yeah. So.
So thanks for the question Brian .
So I think putting we are excited about is the August 3rd launch of our modern customer service suite. So we think that.
Actually represents what could be the future of how customer service should look like starting from.
Jimmy I based natural language conversational self service pending off seamlessly to a human agent support and then enabling seamless collaboration with <unk>.
So we are bringing it altogether.
So.
Sure.
Customers, who.
Used standalone, a bite standalone versus today's conference Chad products will also have.
Access to this but it's not a one time event Bryan. So there is a lot of stuff that we are going to continuously keep the.
In terms of all of these three pillars of self service, so, let's Gulf Island as well as insights. So I think we will continue to see a rolling Thunder.
Kind of adoption as opposed to one big Bang.
Thank you.
Thanks.
One moment for our next question.
And he comes from the line of Brent Thill with Jefferies. Please proceed.
Dennis you mentioned that the go to market changes in Q1 I am curious how far are you into those changes do you have more of that you're you're making or do you feel that the go to market sales team is is in the right spot youre going to run this playbook.
The current form.
Any more color in terms of how youre thinking about that would be helpful.
I think yes, I think we're getting there, but there's still more work to do so remember think of our business as a an inbound business.
Which is very meaningful for us a lot of our larger accounts started out as an inbound lead.
And then you've got the outbound business and a lot of the commentary that I've had has been focused on the outbound business because thats.
To me coming in that was such the the kind of the near term.
Clear opportunity.
One of the areas that we've been focusing on more recently is that inbound business I'm really okay. Now that we've kind of got what we think is outbound on the right track, we're getting the right people and we're starting to see some traction what can we do on that inbound business to really fire that up.
I was talking about cross sell before getting better at cross sell servicing other products in.
If youre in fresh sales surfacing for a service those sorts of things are.
Our tactics that we can do much better than we've done in the past and we're starting to invest and so really getting back to that product led growth.
Thesis.
And bringing some some innovation to to how our products can grow themselves. That's another area of growth for us. So I think that I think that we're just finding more and more pockets of growth in the business.
On the field side the leaders that we brought in really have joined us in the last two quarters. So it takes time for them to get up to speed they need to get their teams kind of focused in a way that they want.
And we believe that that's going to continue to pay off throughout the rest of this year, but Q2 was a good indicator that that the changes are taking route and that we've got a lot of a lot of opportunity. If we can get this right.
Thank you.
Thank you one moment for our next question. Please.
And it comes from the line of Scott Berg with Needham and company. Please proceed.
Hi, everyone. Congrats on a really nice quarter and thanks for taking my questions. I guess I also have a question for Dennis on the upmarket traction that you're having there.
I think we'd probably all agree Dennis at least from the outside looking in that your success in a short timeframe of markets, probably a lot better than what we all expected, but how do you think about what that trajectory looks like can you move even further into the enterprise or do you think you have a targeted end market that.
I don't know reflects the high end of the mid market low end of the enterprise. However, you're structuring it and then within that do you think about the competitors any differently. If you try to target even further up market. Thank you.
Yeah, So we think of our <unk>.
ICP today really is that 5000 person solid mid market business right, where you have a you have a sophisticated <unk> you have.
At demanding internal audience, if it's on the it side or you have a demanding customer base, if you're talking on the customer support side.
You need to offer on the on this on the customer support side, the kind of conversational interfaces that you're.
That their end customers are demanding.
<unk> and Tech service all of that stuff.
And and you want something Thats fast time to value you don't you can't afford or you don't want to pay for a large group of consultants just to implement your product, that's where we really shine now that said more and more larger companies are demonstrating those characteristics. So.
The steel company that I mentioned actually there's a second steel company that that we won this quarter.
In both cases, they were looking for a solution that was easier to use to implement.
To modify workflows for it to solve for their in both cases it issues.
And so some of these larger companies that are well above that 5000 person ICT. They are demonstrating similar characteristics and that's where we have an opportunity at that lower end of the enterprise today now as our product matures and we Havent we have.
A very exciting roadmap.
For both the the CRM products and <unk> products as they mature that's going to open up more and more opportunity for us. So the art is to make sure that you are focused on the near term at the areas that have the highest opportunity and then pick off those larger accounts that happen to be demonstrating the characteristics that you know you can you can.
Satisfy and then gradually moving moving more and more upmarket. So I don't think that we think that there is a hard limit on where we can go just based on the customers. We have today, we just have to be thoughtful about how we get there.
Excellent. Thanks for taking my question.
Yeah.
Thank you one moment for our next question.
And it is coming from the line of Nick Altmann with Scotia Bank. Please proceed.
Awesome, Thanks, guys for taking the question.
The margins in the quarter and the free cash flow guide was very impressive. So I guess my question is really around the trade off of growth versus margin improvements.
I know, there's some one time items this year, but some of the underlying metrics suggest that there is some level of stabilization. So I guess with that in mind.
How are you guys sort of thinking about margin leverage over the coming years.
In a time, where things sort of seem to be stabilizing the go to market tweak seem to be working nicely and you have a handful of new exciting skus coming online.
Yeah, Hey, Dan This Tyler I'll answer that.
Youre right, we've actually had great performance on the bottom line and margin doing really well.
<unk> always said, we think we thought we had leverage in the model and we kind of just.
Really focused on that now we do want to be clear.
We are not producing cash and profits at the expense of growth and we're going to continue to invest in our go to market motions and then that machine we want to make sure. Those are efficient investments are that we get back the right returns, but we are.
We are really focused on continuing to invest there and continuing to grow and to fuel that growth and we're going to we're going to do the same next year.
And this is something we'll probably talk about a bit in our investor day on September seven.
Kind of break that down but.
Absolutely, we think theres, a huge opportunity across all our product lines that we're going to continue to fund capturing market for this update.
Thank you everybody for your time. This is the end of the Q&A. Thank you all for participating and you may now disconnect.
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