Q3 2023 Freshworks Inc Earnings Call
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Hello, and welcome to the fresh works third 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 the session you will need to press star one one on your telephone.
We'll then hear an automated message advising that Youre Hain has been raised towards draw. Your question. Please press star one again please.
Please be advised that today's conference is being recorded.
It is now my pleasure to introduce Vice President Investor Relations Joon Huh.
Thank you good afternoon, and welcome to fresh works third quarter 2023 earnings Conference call. Joining me today are rich Martha with them Fresh works Chief Executive Officer, Dennis Woodside Fresh works, President and Tyler Sloat Fresh works Chief Financial Officer. The primary purpose of todays call is to provide you with information regarding our.
Third quarter, 2023 performance and our financial outlook for our fourth 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 expectations and estimates about its 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 from those projected in the forward looking statements.
Risks include but are not limited to our ability to sustain our growth to innovate.
To reach our long term revenue goals to meet customer demand and to control costs and improve operating efficiency 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, our form 10.
Q for the quarters ended March 31, 2023 at June 32000.
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And our other periodic filings with the SEC fresh works 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 at <unk> Dot com.
I encourage you to visit our Investor Relations site to access our earnings release supplemental earnings slide 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 third quarter of 2023.
We delivered another solid quarter of execution as we outperformed our previously disclosed estimate across our key financial metrics.
Our revenue exceeded the high end of our financial outlook range.
Coming in at $153 6 million for the quarter.
We surpassed our estimate for free cash flow with $22 1 million in Q3, and we improved our free cash flow margin to 14%.
We also held our foot.
In September that we showcased our product and outlined a path that we believe.
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Coming a $1 billion company and beyond.
Let's continue to reap the benefits of the industry.
Businesses of all sizes are having to comp to come to compete with <unk>.
Expectations for customer and employee experience are evolving to center around modern message.
AI is breaking down silos offerings, we kept in place.
To help businesses understand much more about their customers and employees.
This quarter in particular, we added new <unk> capability across products and opened up our credit and retail program.
Owing predict tell summit and pretty co pilot in Q2.
Intended to unlock more value out of our existing product suite.
You will hear me talk about AI quite a bit today, starting with customer support.
I'm really excited by the traction we have been seen since launching our customer service and other.
These are all in one solution to combine bought modern messaging and ticket.
In the first two months our sales team signed on more than 200 customer service suite customers from new and existing customers.
And we are seeing high levels of engagement with the product bandwidth Chris chat alone.
The suite not only saw great traction with new customers.
But also with long standing one, including large USD network and the highest fashion jewelry company, who decided to migrate them scale service features with our basket.
Unknown Executive: Hello, and welcome to the Freshworks third quarter 2023 Ernest Conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.
An early adopter of the customer service suite last week careers in South Africa.
Delaware over 16 million passengers annually to an area nearly twice the height of.
The company is growing but found its previous provider offering a disjointed customer service experience across different channels.
Now with the customer service suite, we think are able to better address this issue and handled live chats with automation and gain deep insights into ticket.
Joon Huh: It is now my pleasure to introduce Vice President Investor Relations, Joon Huh.
We continue to invest in cutting edge AI capability for our customer support users.
Joon Huh: Thank you. Good afternoon and welcome to Freshworks third quarter 2023 Ernest Conference call. Joining me today are Garrish Mathrubootham, Freshworks Chief Executive Officer, Dennis Woodside, Freshworks President, and Tyler Sloat, Freshworks Chief Financial Officer.
In our initial beta for critical climate we've.
We are predominantly focused on driving agent productivity.
<unk> heard great feedback from our customers, including bonus and luxury luggage brand.
Joon Huh: The primary purpose of today's call to provide you with information regarding our third quarter 2023 performance. And our financial outlook for our fourth quarter and four year 2023.
We featured during our Investor day.
Thomas Cook, a popular global travel company in the UK using fresh debt in 2021, and <unk>, our business process outsourcing company with 40000 employees.
Joon Huh: Some of our discussion and responses to your questions may contain forward looking statements within the meeting of the private securities litigation reform act of 1995. These forward looking statements are based on Freshworks current expectations and estimates about its business and industry, including our financial outlook, macro economic uncertainties, management beliefs, and certain other assumptions made by the company. All of which are subject to today's change. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward looking statements.
Our beta testing copilot features to further enhance agent productivity.
Any copilot adoption and usage among customers customers increased meaningfully from Q2.
Joon Huh: Such risks include but are not limited to our ability to sustain our growth to innovate to reach our long term revenue goals to meet customer demand and to control costs and improve operating efficiency for discussion of additional material risk and other important factors that could affect our results.
In Q3.
We continued to see growing demand for our IC product with mid market and enterprise customers.
We win with a unified service operations platform that enables customers to improve service reliability.
Our customers, including Telco group.
Children's health care and travel opioid see great value in our unified product.
Tom in particular is gaining traction.
Mentum Fokker services major incident management feature.
We added new capabilities to the feature and the customer base is growing.
Almost 200 customers now take advantage of both incident reports automated major incident accretion.
Joon Huh: Please refer to today's earnings release. Our most recently filed form 10K and form 10Q are formed 10Q for the quarters ended March 31st, 2023, and June 30th, 2023, and our other periodic filings with the SEC.
An organizational update through our branded goods.
We continue to harness the power of generated AI enabled and other business users to focus on high value work.
By using auto generated ticket and ticket responsibly.
Joon Huh: Freshworks assumes no obligation to update any forward looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law.
Our newest Retardedly includes Gen AI powered virtual agent that eliminate forms to create a more conversational experience for employees.
Joon Huh: During the course of today's call, we will refer to certain non-gap financial measures. Reconciliation between gap and non-gap financial measures for historical periods are included in our earnings release, which is available on our investor relations website at ir.freshworks.com.
Early adopters of new AIP discover service include existing customers restaurant.
And confluence.
Customer adoption of these features has more than doubled since Q2.
Through our continued innovation to meet the needs of large enterprises on the mid market. We believe we are increasing mindshare.
Joon Huh: 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 freshworks.
And anticipate that this will enable us to execute on the product opportunities.
On the sales and marketing we continue to execute on our vision of delivering an easy to use quickbooks smart CRM.
Garrish Mathrubootham: And with that, let me turn it over to Girish. Thank you, June, and welcome everyone.
At this point.
Garrish Mathrubootham: Thank you for joining us today on Freshworks earnings call covering our third quarter of 2023. We delivered another solid quarter of execution as we outperformed our previously disclosed estimates across our key financial metrics. Our revenue exceeded the high end of our financial outlook range, coming in at 153.6 million dollars for the quarter. We surpassed our estimates for free cash flow with $22.1 million in Q3, and we improved our free cash flow margin to 14%.
Second week, increasing conversion and accelerating revenue.
In Q3, we made improvements to the inbound experience and our sales and marketing products.
We revamped the UI are pristine to improve user I appreciate productivity and better visibility.
The upgraded integrated for sellers.
Boost context.
AI powered action and team collaboration cost of vehicles.
For example, local cabinetmaker in Georgia.
Julio users, both Christine and pushed it helps support and guarantee to collaborate better with that.
Garrish Mathrubootham: We also held our first invested day in September, where we showcase our products and outline the path that we believe will drive us towards becoming a billion-dollar company and beyond. Freshworks continues to reap the benefits of free industry standards. Businesses of all sizes are having to transform, to compete physically. Expectations for customer and employee experience are evolving to center around modern messaging, and AI is breaking down silos offering richer insight to help businesses understand much more about their customers and employees.
Click studios include thin plate by up to 35%.
We also continued to strengthen our AI capabilities for marketers to improve campaign creation.
While boosting efficiency conversion rate and customer satisfaction.
Can somebody.
Innovation was centered around unlocking more productivity for our customers to AI powered customer service.
And marketing products, and we will continue building and operating independently to help businesses understand their customers and employees.
Now over to David.
Garrish Mathrubootham: This quarter, in particular, we added new generative AI capabilities across products and opened up our Ferry Insights Beta program following Ferry Self Service and Ferry Co-Pilot in Q2, which is intended to unlock more value out of our existing products. You hear me talk about AI quite a bit today, starting with customer support. I'm really excited by the traction that we've been seeing since launching our customer service suite in orbit. It's our only one solution to combine both modern messaging and security.
Who will give more detail on the opportunities we are realizing the customers and the ongoing impact of changes, we are making to our duty modulation.
Thanks, Jay and thank you everyone. We appreciate you joining us for today's call.
As we talked about at our Investor day on top of product innovation, a few key growth drivers are helping us deliver on our targets for revenue operating profit and free cash flow.
Garrish Mathrubootham: In the first two months, our sales team signed on more than 200 customer service suite customers from new and existing customers. And we are seeing higher levels of engagement with the product than with fresh air alone. The suite not only saw great traction with new customers, but also with long-standing ones, including a large US TV network and a high-fascension-joulder company who decided to migrate to help them scale sales service features with our boss capability.
Let me provide some highlights from Q3.
Firstly, our unique go to market approach efficiently serve to the fortune 5 million, combining an efficient inbound sales motion growing field sales presence and a partner ecosystem that's built to scale.
Large customers like Tri Pointe homes, and qualifying turned to fresh works along with mid market customers like Salvation Army, Australia, Aspca and Jackson family winery.
We added nearly 1000 net customers in the quarter, resulting in a total of over 66600.
While we are addressing companies of all sizes were also targeting larger higher yielding customers.
Garrish Mathrubootham: An early adopter of the customer service suite passed away careers in South Africa. Delivered over 16 million parcels annually to an area nearly twice the size of Mexico. The company is growing, but found its previous provider offering a disjointed customer service experience across different channels. Now with the customer service suite, agents are able to better address this issue, can handle live chats with automation and gain deep insights into ticket trends. We continue to invest in cutting-edge AI capabilities for our customers' support users.
In Q3 fresh works customers paying us over $50000 in IRR grew 32% year over year or 30% on a constant currency basis.
This cohort continues to represent 46% of our IRR as larger customers fueled the growth of our business.
One example, a national Homebuilder has $4 billion in annual sales and 6000 employees.
They needed a consolidated platform that manages ticketing TSM and asset management to improve their efficiency given each of those was previously managed in disparate systems.
Garrish Mathrubootham: In our initial bid-off of ready co-pilot, we were predominantly focused on driving agent practices. We have heard great feedback from our customers, including Monos, a luxury luggage brand. We featured during our investment. Thomas Cook, a popular global travel company in the UK, using fresh debt since 2021. And I call a business process outsourcing company with 40,000 employees. Our beta testing co-pilot features to further enhance agent practices. Pretty co-pilot adoption and usage among customer service customers increased meaningfully from Q2.
They chose fresh service and added marketplace integrations to help them scale their global service management needs.
Another large company using fresh service is qualifying a leading business processing outsourcer with with 15000 employees.
I used the legacy providers TSM tool for years, but it never delivered on automation.
Qualcomm chose fresh service because it is easy to use and supports employee needs right out of the gate.
They can now automate over 2000 requests per month and saw an average resolution time improvement of 70%.
Garrish Mathrubootham: In Q3, we continue to see growing demands for our IT projects with bid markets and enterprise customers. We have been to the unified service operation platform that enables customers to improve service reliability. Our customers including Chalhoop Group, Valley Children's Healthcare, and Chavalopia, see great value in our unified product. ITAM in particular is gaining traction with momentum-properate services major incident management features. We added new capabilities to the feature and the customer base is growing.
Looking at our opportunity for expansion higher rates of multi product adoption with larger customers are contributing to this growth driver.
In Q3, 25% of our total customers use more than one product.
And our larger customers, we're finding more than half of our $50000 plus <unk> customers are using multiple products.
One example is giant eagle a retailer with more than 470 stores and approximately 36000 team members.
Garrish Mathrubootham: Almost 1500 customers now take advantage of post incident reports, automated major incident creation by others, and organizational updates to a branded stage of speech. We continued to harness the power of generative AI to enable IT and other business users to focus on high value work by using auto-generated ticket summary and ticket response positions. Our newest beta relief includes gen AI power virtual agent that eliminate forms to create a more conversational experience for employees.
Giant Eagle chose fresh service for its user friendly results driven platform and this summer introduced press chat to better measure employee engagement.
Building off an encouraging increase in self service among team members giant Eagle is now eager to integrate other communication platforms like text.
Western Financial group is another Great example of service to fresh expansion.
The Canadian insurer needed an enterprise tool to allow support teams to collaborate and respond effectively to frontline teams keeping data and reporting separate.
Garrish Mathrubootham: Early adopters of these new AI features for fish service include existing customers restaurant 365 and Confluent Health. The service customer adoption of these features has more than doubled in Q2. Two are continued innovation to meet the IT needs of large enterprises on the mid-market. We believe we are increasing mindset with CIO and anticipate that this will enable us to execute on the broader ITAM opportunity.
Moreover, they wanted to unlock tools for change problem and asset management and <unk>.
They chose <unk> service because of its vast automation opportunities ease of use and clean interface.
Most recently, they have expanded and begun using fresh chat.
Turning to our SMB opportunity. This remains large as Jim mentioned earlier, we're taking advantage of that by enhancing our inbound motion with a view to driving higher conversions and attracting stickier customers.
Garrish Mathrubootham: On to sales and marketing, we continue to execute on our vision of delivering an easy-to-use quick-to-setter smart CRM that access sales teams in generating weeks, increasing conversion and accelerating revenue. In Q3, we made improvements to the inbound experience in our sales and marketing products. We revamped the UI of press sales to improve user efficiency, productivity, and data accessibility. The upgraded interface for sellers helps boost context, AI-powered action, and team collaboration for faster deal quotients.
We saw encouraging signs in the SMB segment in Q3, as the churn rate improved year over year and also quarter over quarter.
Millions of Smbs need to adopt AI and automation now to stay competitive and we believe AI can greatly simplify customer and employee experiences.
Underscoring this many of our AI beta customers today, our SMB and mid market companies, including ultra fabrics and early pioneer of socially conscious fabric manufacturing Jacobs stern and sons of distributor, especially agricultural products since $18 50, and virtual identity or digital creative agency.
Garrish Mathrubootham: For example, a local cabinet maker in Georgia named Clix Studio uses both face sales and face sales to help support and feel the collaborate better because helps Clix Studio improve sales by up to 35%. We also continue to strengthen our AI capabilities for marketers to improve campaign creation while boosting efficiency, conversion rates, and customer satisfaction.
Each of these customers uses Freddie self service to automate level zero in level, one support with moderate virtual agent conversations.
We're embedding AI capabilities across our products as this is a critical growth driver for us.
Garrish Mathrubootham: In summary, Q3 innovation was centered around unlocking more productivity for our customers through AI-powered customer service, IT, and sales and marketing products, and we will continue building and offering richer insights to help businesses understand their customers and employees.
New features include context scenario for Freddie insights, which analyzes top contact scenarios in tickets and conversations and helps deploy box for them.
This is just one of many enhancements, we released with Freddie AI to deliver more value to our customers in Q3.
Dennis Woodside: Now, over to Dennis, who will give more detail on the opportunities we are realizing with customers and the ongoing impact of changes we are making to our GTM operations. Thanks, G, and thank you, everyone. We appreciate you joining us for today's call.
Our plan is to monetize the increased automation through bought sessions in a consumption or usage based model as.
As automation frees up agents to focus on higher value work. We can also assist with our copilot add on that helps them be more productive.
Dennis Woodside: As we talked about at our investor day, on top of product innovation, a few key growth drivers are helping us deliver on our targets for revenue, operating profit, and free cash flow. Let me provide some highlights from Q3. Firstly, our unique go-to-market approach efficiently serves the Fortune 5 million, combining an efficient inbound sales motion, growing field sales presence, and a partner ecosystem that's built the scale. Well, large customers like Tripoint Homes and Qualfon turn to Freshworks along with midmarket customers, like Salvation Army Australia, ASPCA, and Jackson Family Wines.
Our continued traction with larger customers over $50000 in IRR combined with our expansion motion and large SMB opportunity create a go to market motion unique to fresh works.
We believe it is this combination of growth levers that gives us confidence in our ability to reach our goal of $1 billion in revenue in the next three years.
I'm also excited to announce the upcoming appointment of a new management team member who will be crucial in helping us reach that big goal.
Mika Yamamoto will join us as chief customer and marketing officer on November 20th.
Dennis Woodside: We added nearly 1000 net customers in the quarter, resulting in a total of over 66,600. While we're addressing companies of all sizes, we're also targeting larger, higher yielding customers. In Q3, Freshworks customers paying us over $50,000 in ARR, through 32% year-over-year or 30% on a constant currency basis. This cohort continues to represent 46% of our ARR as larger customers fuel the growth of our business. One example, a national home builder has $4 billion in annual sales and 6000 employees.
Mika has proven executive leadership experience at large public tech companies with deep technology sales and marketing experience serving multiple buyers that are relevant to fresh works.
She was most recently the chief customer experience and marketing officer of <unk> five and was previously the president of Marquette out Chief digital and marketing officer at SAP.
And held senior roles, Amazon Gartner and Microsoft.
Now over to Tyler to go through the Q3 financials and talk about how we're driving efficiency.
Thanks, Dennis and thanks, again to everyone for joining us.
Before I get started I want to thank you once again to everyone who attended our first Investor day.
Dennis Woodside: They needed a consolidated platform that manages ticketing, ITSM, and asset management to improve their efficiency given each of those was previously managed in disparate systems. They chose fresh service and added marketplace integrations to help them scale their global service management needs. Another large company using Freshworks is Qualfon, a leading business processing outsourcer with 15,000 employees. They used the legacy provider's ITSM tool for years, but it never delivered on automation. Qualfon chose fresh service because it is easy to use and supports employee needs right out of the gate.
It was great to spend time with many of you in person and to provide an update on the <unk> story.
Once again, we had another quarter of good execution in Q3.
We beat our revenue growth estimates and continued driving additional leverage in the business to expand both non-GAAP operating and free cash flow margins quarter over quarter.
We continue to realize the financial benefits, resulting from the operational changes made earlier in the year and we're creating a healthier position to drive profitable long term growth for the business.
Our call today.
Cover the Q3 financial results provide background on the key metrics and close with our forward looking commentary and expectations for Q4 and the full year 2023.
Dennis Woodside: They can now automate over 2,000 requests per month and saw an average resolution time improvement of 70%. Looking at our opportunity for expansion, higher rates of multi-product adoption with larger customers are contributing to this growth driver. In Q3, 25% of our total customers use more than one product. In our larger customers, we're finding more than half of our $50,000 plus ARR customers are using multiple products. One example is GiantEagle, a retailer with more than 470 stores and approximately 36,000 team members.
We'll also 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 19% year over year to $153 6 million on a reported basis and 18% adjusted for constant currency.
As we are beginning to see the positive impacts on currency rates for the euro and pound against the dollar over the past year.
I TSM deal activity continues to drive much of the growth in Q3.
Dennis Woodside: GiantEagle chose fresh service for its user-friendly results driven platform and this summer introduced fresh chat to better measure employee engagement. Building off an encouraging increase in self-service among team members, GiantEagle is now eager to integrate other communication platforms like text. Western Financial Group is another great example of fresh service to fresh chat expansion. The Canadian insurer needed an enterprise tool to allow support teams to collaborate and respond effectively to frontline teams, keeping data and reporting separate.
While expansion rates ticked down slightly in the quarter.
Turning to margins, we had another strong quarter of non-GAAP gross margin of 84% as we efficiently scale the business in.
In Q3, we achieved a non-GAAP operating margin of 11%, which represents a three percentage point improvement quarter over quarter.
This was driven by lower than expected head count related costs, some delays in spend and ongoing improvements on operating expenses.
Turning to our operating metrics, we have two key business metrics net dollar retention and customers contributing more than $5000 in IRR.
Dennis Woodside: Moreover, they wanted to unlock tools for change, problem and asset management and CMDB. They chose fresh service because of its vast automation opportunities, ease of use and clean interface. Most recently, they have expanded and begun using fresh chat.
Net dollar retention was 108% in the quarter, which includes a two percentage point benefit from FX.
In Q3, our overall churn came in better than our initial estimates slightly improving from the prior quarter.
Looking ahead, we are planning for the lower net expansion trends to persist for the remainder of the year as we expect net dollar retention to be approximately 105% for both constant currency and as reported in Q4.
Dennis Woodside: Turning to our SMB opportunity, this remains large. As G mentioned earlier, we're taking advantage of that by enhancing our inbound motion with a view to drive entire conversions and attracting stickier customers. We saw encouraging signs in the SMB segment in Q3 as the term rate improved year over year, and also quarter over quarter. Millions of SMBs need to adopt AI and automation now to stay competitive, and we believe AI can greatly simplify customer and employee experiences.
Moving to our other key business metric of number of customers contributing more than $5000 in IRR.
This metric grew 17% year over year to 19551 customers in the quarter and continues to represent 88% of our IRR.
On a constant currency basis, this customer metric grew 16% year over year.
Dennis Woodside: Underscoring this, many of our AI beta customers today are SMB and mid-market companies, including ultra-fabrics and early pioneer of socially conscious fabric manufacturing, Jacob Stern in Suns, a distributor of specially agricultural products since 1850, and virtual identity, a digital creative agency. Each of these customers uses Freddie Self Service to automate level zero and level one support with modern virtual agent conversations. We're embedding AI capabilities across our products as this is a critical growth driver for us.
For our larger customer cohort contributing more than $50000 in IRR. This cohort grew 32% year over year to 2268 customers and represents 46% of our <unk>.
Adjusting for constant currency. This core grew at 30%.
We added nearly 1000 net customers in the quarter, which was an increase from Q2.
We ended the quarter with a customer count of approximately 66600, as we continued our focus on attracting higher yielding customers and building a healthier base and driving a higher ARPA.
Moving to calculated billings balance sheet and cash items.
Dennis Woodside: New features include context scenario for Freddie Insights, which analyzes top context scenarios in tickets and conversations, and helps deploy bots for them. This is just one of many enhancements we released with Freddie AI to deliver more value to our customers in Q3. Our plan is to monetize increased automation through bot sessions in a consumption or usage-based model. As automation frees up agents to focus on higher value work, we can also assist with our co-pilot add-on to help them be more productive. Our continued traction with larger customers over $50,000 in ARR, combined with our expansion motion and large SMB opportunity, create a go-to-market motion unique to fresh works.
Calculated billings grew 21% year over year to $165 3 million and 19% on a constant currency basis.
Factors, including timing duration of contracts and revenue reserves in the quarter create a slight benefit of 1% to these growth numbers.
Looking ahead to Q4 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 revenue growth of approximately 20% for both as reported and constant currency.
During the quarter, we generated $22 1 million in free cash flow ahead of our estimates and reflective of the efficiency improvements, we're making in the business.
Dennis Woodside: We believe it is this combination of growth levers that gives us confidence in our ability to reach our goal of one billion in revenue in the next three years. I'm also excited to announce the upcoming appointment of a new management team member who will be crucial in helping us reach that big goal. Nika Yamamoto will join us as Chief Customer and Marketing Officer on November 20th. Nika has proven executive leadership experience at large public tech companies, with deep technology, sales, and marketing experience serving multiple buyers that are relevant to fresh works. She was most recently the Chief Customer Experience and Marketing Officer of F5, and was previously the President of Marquetto, Chief Digital and Marketing Officer at SAP, and held senior roles at Amazon, Gardner, and Microsoft.
We ended the quarter with a similar balance for cash cash equivalents and marketable securities of $1 6 billion.
We continue to net settle vested equity amounts using $24 million during the quarter, which is reflected in financing activities and this activity is excluded from free cash flow.
As we look forward to Q4, we plan to continue net settling invested equity amounts, resulting in Q4 cash cash usage of approximately $18 million using current stock price levels.
For the year, we expect to use approximately $70 million to net settle vested equity amounts.
Given the meaningful operational efficiencies, we've realized so far this year, we are raising our free cash flow estimates for the full year 2023 by $15 million to $75 million.
Tyler Sloat: Now, over to Tyler to go through the Q3 financials and talk about how we're driving efficiency. Thanks, Dennis, and thanks again to everyone for joining us.
Turning to our share count for Q3, we.
Tyler Sloat: Before I get started, I want to thank you once again to everyone who attended our first investor day. It was great to spend time with many of you in person and to provide an update on the fresh work story. Once again, we had another quarter of good execution in Q3. We beat our revenue growth estimates and continued driving additional leverage in the business to expand both non-GAP operating and free cash flow margins quarter over quarter.
We had approximately 327 million shares outstanding on a fully diluted basis as of September 32023.
The fully diluted calculation consists of approximately 295 million shares outstanding $29 million related to Unvested ours to use mpr's use and 3 million shares related to outstanding options.
Let me now provide our forward looking estimates.
For the fourth quarter of 2023, we expect.
Tyler Sloat: We continue to realize the financial benefits resulting from the operational changes made earlier in the year, and we're creating a healthier position to drive profitable long-term growth for the business. Far call today. I'll cover the Q3 financial results, provide background on the key metrics, and close with our forward looking commentary and expectations for Q4 in the full year 2023. I'll also include constant currency comparisons for certain metrics to provide a better view of our business trends.
Revenue to be in the range of $156 7 million to $159 3 million growing 18% to 20% 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 $5 5 million to $8 5 million.
And non-GAAP net income per share to be in the range of <unk> <unk> to <unk> <unk>, assuming weighted average shares outstanding of approximately $303 3 million shares.
Tyler Sloat: As a reminder, most of our discussion will be focused on non-gap financial results, which exclude the impact of stock-based compensation expenses and other adjustments. Starting with the income statement, revenue grew 19% year-over-year to $153.6 million on a reported basis, and 18% adjusted for constant currency. As we're beginning to see the positive impacts on currency rates for the euro and poundings of dollar over the past year. ITSM deal activity continue to drive much of the growth in Q3 while expansion rates tick down slightly in the quarter.
For the full year 2023, we expect.
Revenue to be in the range of 593 million to $595 5 million growing 19% to 20% year over year.
Adjusting for constant currency this reflects growth of 19% to 20% year over year.
non-GAAP income from operations to Marines of $38 5 million to $41 5 million.
non-GAAP net income per share to be in the range of 23 to 25, assuming weighted average shares outstanding of approximately $301 million.
Tyler Sloat: Turning to margins, we had another strong quarter of non-gap gross margin of 84% as we efficiently scale the business. In Q3, we achieved a non-gap operating margin of 11%, which represents a 3% point improvement quarter of a quarter. This is driven by lower than expected headcount-related costs, some delays in spend, and ongoing improvements on operating expenses. Turning to our operating metrics, we have two key business metrics, net dollar retention and customers contributing more than $5,000 in ARR.
Given the U S dollar trends over the past year, we saw a slight positive impact to our growth rates in Q3.
Our forward looking estimates are based on FX rates as of October 27th 2023, So any future currency moves are not factored in.
Let me close by saying, we continue to execute on our goals in Q3, we maintained our rapid pace of product innovation realize the benefits of operational changes made earlier this year and remain focused on the growth initiatives to help drive momentum into 2024.
Tyler Sloat: Net dollar retention was 108% in the quarter, which includes a 2% point benefit from FX. In Q3, our overall turn came better than our initial estimates, slightly improving from the prior quarter. Looking ahead, we are planning for the lower net expansion trends to persist for the remainder of the year as we expect net dollar retention to be approximately 105% for both constant currency and as reported in Q4. Moving to our other key business metric of, number of customers contributing more than $5,000 in ARR.
We're excited and look forward to our many opportunities ahead.
And with that most of your questions operator.
Thank you.
As a reminder to ask a question. Please press star one one on your telephone.
To withdraw your question Press Star one again.
And our first question comes from the line of Scott Berg with Needham <unk> Company.
Okay.
Tyler Sloat: This metric grew 17% year-over-year to 19,551 customers in the quarter and continues to represent 88% of our ARR. On a constant currency basis, this customer metric grew 16% year-over-year. For our larger customer cohort contributing more than $50,000 in ARR, this cohort grew 32% year-over-year to 2,268 customers and represents 46% of our ARR. Adjusting for constant currency, this cohort grew at 30%. We added nearly 1,000 net customers in the quarter, which was an increase from Q2.
Pardon me Scott Please check your mute button.
Okay. One moment please for our next question.
Okay.
And our next question comes from the line of Ryan Mcmil Mcwilliams with Barclays.
Hey, guys. Thanks for taking the question and pleased to see the continued work to improve profitability here.
Asking about kind of how things move through third quarter like how would you say your new business did.
Tyler Sloat: We ended the quarter with a customer count of approximately 66,600 as we continued our focus on attracting higher yielding customers in building healthier base and driving a higher ARPA. Moving to calculated buildings, balance sheet and cash items. Calculated buildings grew 21% year-over-year to 165.3 million and 19% on a constant currency basis. Factors including timing duration of contracts and revenue reserves in the quarter create a slight benefit of 1% to these growth numbers.
In the month of September and how is October been so far thanks.
Hey, sorry about that thanks.
Ed.
I think the question is around linearity and so as we went through September.
It kind of played out as we expected, meaning that we've been dealing with larger companies and larger deals and had over the last let's call. It year become a little bit more backend loaded. So that was expected October the guidance that we just gave out.
Tyler Sloat: Looking ahead to Q4 2023, our preliminary estimate for calculated buildings growth is 18% as reported and 17% on a constant currency basis. Frances, for the full year 2023, we expect calculated values growth to be similar to our expected annual revenue growth of approximately 20 percent for both as reported and constant currency. During the quarter, we generated 22.1 million in free cash flow ahead of our estimates and reflective of the efficiency improvements we're making in the business.
Taking into account everything you can see we're trying to call. It as we see it. So October is going as we expected as well.
I appreciate that and I know, it's early but.
A lot of.
Customer interest around for the AI, so any more detail on the timing of the rollout there.
Expectations or just any more additional commentary around how that can be initially adopted within your customer base like <unk> penetration rate or what kind of customer you can see that first okay. Thank you.
Sure Ryan I'll take that this is <unk>.
Tyler Sloat: We ended the quarter with a similar balance for cash, cash equivalents and marketable securities of $1.16 billion. We continued to net settle vested equity amounts using $24 million during the quarter, which is reflected in financial activities. And this activity is excluded from free cash flow. As we look forward to Q4, we plan to continue net selling vested equity amounts, resulting in Q4 cash usage of approximately $18 million using current stock price levels.
We have.
If you remember last quarter during Investor day, we actually said that.
Several of our customers will be done testing.
Specifically.
<unk> self service, because the service automation capabilities for our customers and employees.
That is.
And being used by our customers we are monetizing it through our box and the customer service platform.
And.
Copilot and pretty insights this quarter, we have actually put it in.
Tyler Sloat: For the year, we expect to use approximately $70 million to net settle vested equity amounts. Given the meaningful operational efficiencies we've realized so far this year, we are raising our free cash flow estimates for the full year 2023 by $15 million to $75 million. Turning to our share count for Q3, we had approximately 327 million shares outstanding on a fully diluted basis as of September 30th, 2023. The fully diluted calculation consists of approximately 295 million shares outstanding 29 million related to unvested RSU's and PR's use. And three million shares related to outstanding options.
And when I say this quarter, I mean, Q3, and we have actually put it into EBITDA.
Our customers thousands of customers that are using it are clients for monetizing.
Pretty copilot would be thinking of Q1 2024 is when we would start charging for copilot and that's an add on to agency licenses. We are still working with customers on insights we are not unless the pricing put in sites.
Perfect color okay.
Thank you one moment please for our next question.
Our next question comes from the line of Scott Berg with Needham <unk> Company.
Tyler Sloat: Let me now provide our forward looking estimates. For the fourth quarter of 2023, we expect revenue to be in the range of 156.7 million to $159.3 million, growing 18% to 20% year over year. Adjusting for constant currency, this reflux growth of 17% to 19% year over year. Non-gap income from operations to be in the range of $5.5 million to $8.5 million and non-gap net income per share to be in the range of 4 cents to 6 cents, assuming weighted average shares outstanding of approximately 303.3 million shares.
Yeah.
Hopefully everyone can you hear me this time congrats on the strong quarter and thanks for taking my questions.
I guess a couple Denis wanted to start with you sales in the quarter you seem quite quite pleased with them one of the trends have noticed over the last couple of years as your third quarter kind of customer adds or.
Have a seasonal dip versus the second quarter results. This year. It looks like it's very much. The same can you help remind us what you see internationally that might be causing a little bit of that changed from Q2 Q2 to Q3, My guesses that had something to do with just the European sales cycles, but didn't know if there's anything more nuanced to call out there in particular.
Tyler Sloat: For the full year 2023, we expect revenue to be in the range of 593 million to 595 million dollars, growing 19% to 20% year over year. Adjusting for constant currency, this reflux growth of 19% to 20% year over year. Non-gap income from operations to range of 38.5 million to 41.5 million dollars. And non-gap net income per share to be in the range of 23 cents to 25 cents, assuming weighted average shares outstanding of approximately 300.1 million.
Yeah. Thanks, Scott Yeah, nothing really nuanced there I don't think we had anything this quarter.
Related to European sales cycles, we continue to see strength in the larger accounts continue to see strength in it.
And we did see an uptick in net adds to around 1000 net adds for the quarter from last quarter.
So we didn't see the kind of dip that perhaps we've seen in the past.
Tyler Sloat: Given the US dollar trends over the past year, we saw a slight positive impact to our growth rates in Q3. Our forward looking estimates are based on FX rates as of October 27, 2023. So any future currency moves are not factored in. Let me close by saying, we continue to execute on our goals in Q3. We maintain our rapid pace of product innovation, realize the benefits of operational changes made earlier this year, and remain focused on the growth initiatives to help drag momentum into 2024.
Last quarter, we had in Q2, we had a free offering for our.
Fresh sales product that we then pulled back and that has resulted in the.
The increase in the overall net ads for Q3.
Got it helpful. And then I wanted to follow up on the question on improving win rates or excuse me improving churn down market I think thats always super interesting because of points improvement there makes a big difference both on the topline and Bottomline profitability, how should we think about your opportunity to improve that.
Unknown Executive: We're excited and look forward to our many opportunities ahead and with that let's dig your questions.
Churn in that segment SMB churn across software is always the tourists who low I know you all have had some some success improving that number but how do we think about what that kind of runway for improvement looks like maybe over the next several quarters.
Unknown Executive: Operator? Thank you. As a reminder, let's ask a question.
Unknown Executive: Please press star 11 on your telephone. To withdraw your question, press star 11 again.
Yeah, Hey, Scott this is Tyler.
You're right, we've actually done a really good job on churn just as a company over the last I'll call. It year, plus what we've had quarters, where it's kind of remained stable and then other quarters, where we actually make some some good improvement on it this past quarter was a company best for us in terms of churn in general.
Scott Berg: And our first question comes from the line of Scott Berg with Needham and Company.
Unknown Executive: Pardon me, Scott, please check your mute button.
That's across the board across the products on the SMB side.
More characteristic that the products are getting better and we're getting also better at kind of.
Ryan Macwilliams: Okay, one moment please for our next question. Our next question comes from the line of Ryan MacWilliams with Barclays. Hey guys, thanks for taking the question.
Focusing on the right icp's for ideal customer profiles for our customers even non SMB.
Which has led to maybe slightly lower total number of customers, which you've seen in Alaska.
Our quarters, but better customers in some cases, so I do think that going forward.
Ryan Macwilliams: Please see the continued work to improve profitability here. Just asking about, you know, kind of how things moved through the third quarter. Like, how did you say your new business did, you know, in the month of September? And, you know, how has October been so far? Thanks.
The improvements are going to be more subtle, but I do think that we do have a little bit of room to go in terms of improving churn over the next year year and a half.
Excellent very helpful. Thanks for taking my questions and congrats on the strong quarter again.
Thanks Scott.
Unknown Executive: Hey, hey, sorry about that. Right. Thanks, Ben.
Thank you one moment please for our next question.
Tyler Sloat: I think the question's around linearity. And so as we went through September, kind of played out as we expected, meaning that, you know, we've been dealing with larger companies and larger deals and have over the last, you know, let's call it year, become a little bit more back and noted, so that was expected. Good October, you know, the guidance that we just gave out is, you know, it takes into account everything we see, we're trying to call it as we see it. So October's going as we expected as well. Appreciate that.
And our next question comes from the line of pendulum Bora with J P. Morgan.
Hey, guys. Thanks for taking the questions and congrats on the quarter.
I wanted to ask you on the box side can you help us maybe understand what portion of the overall IRR today is driven by broad based pricing and how should we think about kind of the changes in the pricing and packaging that went into effect.
August how is that going to be layered into the model.
Garrish Mathrubootham: I know it's early, but, you know, we've heard a lot of customer interest around for the AI. So any more detail on the timing of the rollout there, any early expectations or any, just any more additional commentary around how that can be initially adopted within your customer base. So it may be a penetration rate or what kind of customer you can see that first. And thank you. Sure.
Yeah, I'll start with that talk about the financial parts syndrome. This is Tyler.
Garrish Mathrubootham: I'll take that.
We changed the pricing at the end of Q2.
In terms of.
Our chat pricing, which then.
Bots are.
Kind of embedded in that which would also embedded the.
Friday self service capabilities.
It's really really new and so we don't have that much embedded in terms of new feature functionality, we do have.
Garrish Mathrubootham: This is garage. So we have actually, if you remember last quarter during investor day, we actually said that several of our customers will be testing our very AI, specifically, pretty self service, which is the self service automation capability for customer service and employee service. That is in being used by our customers, we are monetizing it through our bots and the customer service platform and pretty co pilot and pretty insights this quarter.
I think a decent amount of revenue and we would expect that to continue to kind of increase as we progressed here.
Other AI capabilities right. We haven't started charging for it there is still in beta and they will be coming out kind of.
Q1, and that's that's really co pilot will be the next one that's coming out and so.
Every quarter, we expect to have a little bit more increase on.
On self service again, thats going to be reflected more in chat usage.
Garrish Mathrubootham: We have actually put it in when I say this quarter, I mean, three, and we have actually put it in beta into our customer thousands of customers are using it our plans for monetizing. Pretty co pilot would be we're thinking of Q1 2024 is when we would start charging for co pilot and that's an add on to agency licenses. We are still working with customers on insights. We are not unless surprising for insight.
Yes, understood and Tyler on that topic, then it seems like you have a few tailwind going into next year. The blood based pricing Skus that I think you said, we'll be monetizing in Q1.
Unknown Executive: Thank you. Appreciate it.
Maybe potential stabilization on the MTR metric.
Obviously macro and geopolitical climate is a wildcard, but help us understand how are you thinking about 2024, what are the puts and takes.
Unknown Executive: Thank you.
We look forward.
Yeah. So.
So we haven't guided to anything for 2020 for you in our Investor Day, we kind of talked about 2025 in terms of gain to rule of 40, and then we talked about some revenue numbers for 2026, we will give out the <unk> numbers at the end of this quarter I do think youre right in terms of <unk>.
Scott Berg: One moment, please. For our next question. Our next question comes from the line of Scott Berg with Needhaman Company. Hi, I hope everyone can hear me this time. You can grab some of the strong coordinates. Thanks for taking the questions. I guess a couple of minutes wanted to start with you. Sales and quarter, you seem quite pleased with them. One of the trends I've noticed over the last couple of years is your third quarter kind of customer ads.
I just said I think we can make some.
Slight improvements there, but it's definitely heading in the right direction.
In terms of the AI skus.
So new.
Have to wait and see.
On those things.
The one other comment you made on macro we don't expect macro to immediately return on turnaround and for us.
Scott Berg: You always have a seasonal dip versus the second quarter kind of results in this year looks like it's very much the same. Can you help remind us what you see internationally that might be causing a little bit of that change from Q2 to Q3. My guess is that that's something to do with just European sales cycles, but didn't know if there's anything more nuance to call out there. Yeah, thanks. Yeah, nothing really nuance there.
That would be reflected in our expansion motion increasing with agent addition, being companies are going back to hiring and we expect that to see continued pressure for a while so we've kind of built that into our expectations.
Got it thank you.
Thank you one moment please for our next question.
Scott Berg: I don't think we had anything this quarter related to European sales cycles. We continue to see strength in the larger accounts, continue to see strength and it and, you know, we did see an uptick in net ads to around a thousand net ads for the quarter from last quarter. So we didn't see the kind of dip that perhaps we've seen in the past. Remember last quarter. We had in Q2, we had a free offering for our fresh sales product that we then pull back and that has resulted in the increase in the overall net ads for Q3.
Yes.
And our next question comes from the line of Rob Oliver with Baird.
Great Hi, good afternoon, Thanks for taking my questions Dennis one for you just on.
The comment around more than half of the 50000 plus customers now using two products.
Clearly great great product.
Progress on that front for you guys. I think you said overall, it's 25%, which is kind of what you had said at the analyst day, which is great.
Just curious.
As you make that move sort of off market are you seeing more multi product lands or are these still largely expands and then can you talk a little bit about what you see in the pipe and if theres. Some mix of those and then I had a quick follow up yes.
Scott Berg: Got it helpful. And then I wanted to follow up on the question on improving win rates or excuse me, improving churn down market. I think that's always super interesting because a point improvement there makes a big difference both on the top line and bottom line profitability. How should we think about your opportunity to improve that churn in that segment? S&B churn across offer is always notoriously low. I know you all have had some success improving that number.
Sure, Yes, so thanks, Rob we do see multi product lines they tend to be.
Multi products within the same family. So an example would be a customer taking plus CSM.
Or fresh chat and fresh desk.
Now most of our expansion in those larger accounts tends to go cross true persona. So for me to see us in fact, if we look at our largest expansions.
Scott Berg: But how do we think about what that kind of runway for improvement looks like maybe over the next several quarters?
Tyler Sloat: Yeah, hey, Scott. This is Tyler. You're right.
Those are true cross product expansion some of them I think we talked about in the.
Tyler Sloat: We've actually done a really good job on churn just as a company over the last call, you know, year plus. What we've had quarters was kind of remain stable and then you know, other quarters where we actually make some good improvement on it. This past quarter was a company best for us in terms of churn in general. And that's across the board across the products on the S&B side. I think it's, you know, more characteristic that the products are getting better and we're getting also better at kind of focusing on the right ICPs for ideal customer profiles for our customers, even on SMB. Which is led to, you know, maybe slightly lower total number of customers, which you know, last couple of quarters, but better customers in some cases.
In the prepared remarks, like giant Eagle and Western financial.
So as we as we continue to move up market that expansion motion is becoming more and more important for us and thats going to be a big emphasis for us going into next year.
Great. That's really helpful. Thanks for the color there.
And then just on the macro Tyler.
Your comments in response to the last question just about how youre thinking about macro around agent count.
You kind of reiterated what you said at the analyst day, which is hey, we're not really counting on those agent additions.
Yes.
Does that sounds like Thats pressure thats likely going to remain here, but on the other hand, it does seem like you guys.
Tyler Sloat: So I do think that going forward, you know, the improvements are going to be more subtle, but I do think that we do have a little bit of room to go in terms of improving churn over the next year, year and a half.
Tremendous value for the price. So I'm, just just be curious to get a sense.
The execution has been strong here.
Unknown Executive: Thanks for the very helpful piece of taking my questions and congrats on the start quarter again. Thanks Scott. Thank you.
Is there is there a flip side to the sort of macro headwinds where some of those mid market customers feeling like maybe upper end can get a lot more value with you guys or are you seeing some of that as well. Thanks.
Ben Gillin Bora: One moment, please for our next question. And our next question comes from the line of Ben Gillin Bora with JP Morton. Hey guys, thanks for taking the questions and congrats on the quarter.
I think that is a good issue.
First of all I would like to say that.
On a macro standpoint, we're not seeing any significant change.
Tyler Sloat: I want to ask you on the box side. Can you help us maybe understand what portion of the overall ARR today is driven by box based pricing? And how should we think about kind of the changes in the pricing and packaging that went into effect in August? How is that going to be layered into the model? Yeah, I'll start with that.
In Q3 compared to Q2 and one of this.
Clearly.
When companies are still carefully considering the expense we are a vendor of choice because of our affordable pricing and lower total cost of ownership. So that maybe labor not just one specific efficacy.
Tyler Sloat: Talk about the financial parts from John Mrs. Tyler. You know, we changed the pricing at the end of Q2 in terms of our chat pricing, which then the bots are kind of embedded in that, which would also embed the Freddie self service capabilities. It's really, really new.
Pretty much a promise to our customers.
As we see continued demand for AI and even to offset.
Moving forward, we hope that.
AI strategy will help us.
Make money when they visit or not heading agents.
<unk> businesses are hiring agents by making them more productive and also out in place got it helping open up a new SKU for our leaders.
Tyler Sloat: And so we don't have that much embedded in terms of the new feature functionality. We do have a decent amount of chat revenue. And we would expect that to continue to increase as we progress here. The other AI capabilities, right, we haven't started charging for it. They're still in beta. And they will be coming out kind of, you know, Q1 and that that's really co pilot will be the next one that's coming out. And so, you know, every quarter we expect to have a little bit more increase on on Freddie self service. Again, that's going to be reflected more in chat usage. Yeah, understood.
Great. Thanks, Steve Thanks, everyone.
Thanks, Rob.
Thank you.
Please for our next question.
And our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.
Hi, guys. Thanks for taking my question congrats on the quarter.
The first for me you guys talked about your AI products.
And it seemed like that maybe <unk> might be the biggest early adopters of this is that how youre thinking about it and you think that can help maybe drive a step function improvement in churn at the lower end of the market.
Tyler Sloat: And Tyler on that topic, then seems like you have a few tailwinds like going to to next year, the bot based pricing, the AI skews that I think Greece said will be monetizing in Q1, maybe potential stabilization on the NDR metric, obviously macro and geopolitical climate is a wild card, but help us understand how are you thinking about 2024, what are the pretend takes as we look forward. Yeah, so we haven't got it to anything for 2024 yet.
Okay.
Yes, I'll take that.
No.
First of all if you look at the people or somebody I strategy pretty self service.
I think will be really really useful and adopted by larger customers. Because they are the ones who have a large volume of support millions of customers coming in first of all and so that's where the scope for automation.
Tyler Sloat: And on best of day, you know, we can't talk about 2025 in terms of getting to a 40 and then we talked about some revenue numbers for 2026. We'll give out the 2024 numbers at the end of this quarter. I do think you're right, you know, in terms of turn, I just said, I think we can make some, you know, slight improvements there, but it's definitely heading the right direction. And in terms of the AI skews that it's so new, we'll have to wait and see on those things.
Much higher on the other hand pretty copilot.
Probably be.
More universally applicable to SMB and mid market customers because.
The user can now become more productive and smbs really want to do more with less so and for any insights. This four leaders again.
Larger companies may benefit more because that needs for data from different teams could be larger so spin.
Tyler Sloat: And the one other comment you made on macro, we don't expect, you know, macro to immediately return around turn around and for us, that would be reflected in, you know, our expansion motion, increasing with agent addition means companies are going back to hiring. And, you know, we expect that to see continued pressure for a while, so we've kind of built that into to our expectations. Got it. Thank you.
Specifically on AI, helping us deal with the macro I think.
We said this.
The last earnings call. So we are focused we are not waiting for the macro to improve we are focused on controlling the variables that we can focus on growth pillars, and how can we use product innovation and AI, how can we cross sell more into our existing base. How can we focus on larger deals and drive more operational efficiencies. So that is our plan to keep X.
<unk> is while we wait for the metrics.
Rob Oliver: One moment, please for our next question. Our next question comes from the line of Rob Oliver with Bayard. Great. Hi. Good afternoon. Thanks for taking my questions. Dennis, one for you just on the comment around more than half of the 50,000 plus customers now using two products. Clearly, great, great progress on that front for you guys. I think you said overall it's at 25%, which is kind of what you had said at the end of the day, which is great.
Hey, Dennis just to add some color there today.
We're seeing even though our products are still in beta we're seeing pretty broad adoption across all customer sizes for our AI products. So we have over 2500 customers and data using Freddie co pilots and provision productivity, we have over 4000 customers using some aspect of Freddie insights and those range the gamut from our <unk>.
Largest to smallest customers. So I think I think AI is it's on the agenda for every every CEO theyre all looking for improved outcomes. They are looking for improved efficiency in their operations and all of our customers. Whether you are a customer support leader on it later you have to have an AI strategy. So thats provoking a lot of discussions and we are.
Dennis Woodside: Just curious, you know, as you make that move for a rough market, are you seeing more multi-product lands or are these still largely expands? And then can you talk a little bit about what you see in the pipe and if there's some mix of those? And then I had a quick follow-up. Sure. Yeah, so thanks Rob. We do see multi-product lands. They tend to be multi-products within the same family. So an example would be a customer taking IT plus ESM or fresh chat and fresh desk.
And we're very optimistic about how this is going to play out over the next year.
Perfect I appreciate it thanks guys.
Thank you one moment please for our next question.
Our next question comes from the line of Nick Altmann with Scotiabank.
Dennis Woodside: Now most of our expansion in those larger accounts tend to go cross true persona. So from IT to CS. In fact, if we look at our largest expansions, those are true cross product expansions. Some of them, I think we talked about in the in the prepared remarks like Giant Eagle and Western Financial. So as we as we continue to move up market, that expansion motion is becoming more and more important for us. And that's going to be a big emphasis for us going into next year. Great. That's really helpful. Thanks for the color there. Yeah.
Awesome. Thanks, guys.
Earlier, you had noted that churn has improved in SMB, both year over year and quarter over quarter.
I was wondering if you could maybe talk about the expansion side and how Thats trended and then just as a follow up.
Were any of the changes that you've made to pricing earlier. This year has that been sort of a tailwind to NR and if you could quantify that if.
<unk> disclosed that that'd be helpful. Thanks.
Hey, Nick this is Todd I'll take that one so yeah and churn, we're just doing better.
Tyler Sloat: And then just on the macro, Tyler, I appreciate your comment in response to the last question just about how you're thinking about macro and around each encounter. You know, we're kind of reiterated what you said at the analyst day, which is, you know, hey, we're not really counting on those agent additions. And that sounds like that's the pressure that's likely going to remain here. But on the other hand, you know, it does seem like you guys.
Got it and have been for a while just because these are subtle improvements in and as mentioned we made kind of a.
A company best ever and turn this past quarter.
And it goes from SMB, all the way up I think part of that is because we have been moving to larger customers. They are signed annual deals.
Tyler Sloat: I mean, deliver tremendous value for the price. So I'm just just curious, you know, to get a sense, you know, as the execution has been strong here, what, what, you know, is there, is there a flip side to the sort of macro padwins where some of those mid market customers are feeling like it may be upper end can get a lot more value with you guys. Are you seeing some of that as well.
So the mix shift of our customer base is changing part of it fresh service in general which plays in the larger markets that is growing faster and that has great characteristics.
Then on the flip side of the question you asked about expansion expansion is.
It really hasnt changed.
Change is still a pretty tough environment for expansion and specifically around agent addition.
Tyler Sloat: Thanks. Hey Rob, I think that is a great. So, first of all, I would like to say that from a macro standpoint, we're not seeing any significant change in Q3 compared to Q2. And one of this clearly, when companies are still carefully considering their spends, we are a vendor of choice because of our affordable pricing and lower total cost of ownership. So that may be in play, but not that's not specifically that's pretty much our promise to our customers.
And so what we have been doing is looking at other ways to expand with our customer base, one of those which you've alluded to that we did.
Do some some price changes on our service product and we did get some.
Some benefit from that so far this year and so that has helped our net dollar retention slightly.
So even though on one side the expansion motion overall is coming down we did we did get some expansion benefit from price a little bit.
Tyler Sloat: And as we see continued demand for AI and even to offset the moving forward, we hope that our AI strategy will help us make money when businesses are not hiring agents that will make money when businesses are hiring agents by making them more productive and also our insights product helping open up a new skew for leaders. Great. Thanks, Chief. Thank you everyone.
But also benefit from churn so hopefully that breaks it down for you.
Awesome. Thanks, guys.
Okay.
Thank you one moment please for our next question.
And our next question comes from the line of Brent Thill with Jefferies.
Tyler on MRI you mentioned.
Unknown Executive: Next up.
He is going to moderate more in Q4 is Q4 going to be a bottom for for that moderation and NR in may.
Brett Noblick: Thank you. One moment please for our next question. Our next question comes from the line of Brett Noblick with Cantor Fitzgerald. Hi guys, thanks for taking my question and grab from the quarter. I guess the first for me, I talked about your AI product and it seemed like that maybe SMEs might be the biggest early adopters of this. Is that how you're thinking about it and you think that could help maybe try to step function improvement in turn at the lower end of the market.
Maybe for Dennis U S and EMEA held up really well in APAC I showed a pretty big slowdown anything going on in APAC that.
That would describe what happened there. Thanks.
Hey, Brian I'll take the first part of it. So we have been calling kind of coming out of Q1, even that we thought Q2 was going to go to $105 six range and we've been doing a little bit better and part of the reasons because churn has been doing better because of kind of the.
The expansion kind of come through as we expect.
We're calling the kind of 105 for Q4 and based on what we see right now we do hope that thats kind of be.
Garrish Mathrubootham: So yeah, I'll take that. So first of all, if you look at the three pillars of our AI strategy, pretty self service. I think will be really, really useful and adopted by larger customers because they are the ones who have a large volume of support like millions of customers coming in for support. So that's where the scope for automation is much higher. On the other hand, pretty co-pilot would probably be like more universally applicable to SMEs and with market customers because every user can now become more productive and SMEs really want to do more with less. And pretty insight is for leaders again, larger companies may benefit more because their needs for data from different teams could be larger. So, and specifically on AI, helping us deal with the macro.
The floor.
And we'll obviously update that going into next year, if anything changes.
That kind of assumes that we will be able to maintain the levels of churn and expansion is not going to get dramatically worse and so thats obviously the.
The assumptions going into that number yes, just on the.
Thiago for your question, we really didn't see a slowdown in Asia Pac we had pretty consistent performance across our three big Geos.
So no I would say no appreciable trends to call out there.
Great. Thanks.
Thanks, Brian.
Thank you one moment please for our next question.
And our next question comes from the line of Alex Zukin with Wolfe Research.
Garrish Mathrubootham: I think we said this in the last earnings call. So we are focused. We're not waiting for the macro to improve.
Hey, guys. This is Ethan broke on for Alex.
Garrish Mathrubootham: We are focused on controlling the variables that we can like our focus on fourth growth pillars. How can we use product innovation in AI? How can we cross sell more into an existing base? How can we focus on larger deals and drive more operational efficiency? So that is our plan to keep executing as while we wait for the money. Just to add some color there, today we're seeing even though our products are still in beta, we're seeing pretty broad adoption across all customer sizes for our AI products.
<unk> results I have two quick questions. The first one of your peers earlier in the month noted that there is some growth slowdown since September so I'm, just curious like what youre seeing in the demand environment, just given the solid results.
Based on early customer conversations and budgets like what are the discussion been like for 2024, we've heard a lot around a two consolidations. So just curious how you guys saw them across the front office staff, helping driving some larger strategic deals.
Hi, Haytham I'll take that so in terms of the first part of the question is around September.
Garrish Mathrubootham: So we have we have over 2500 customers in beta using Freddie Copilot and Proveagen productivity. We have over 4,000 customers using some aspect of Freddie insights and and those range the gamut from our largest to our smallest customers. So I think I think AI is it's on the agenda for every every CEO. They're all looking for improved outcomes. They're looking for improved efficiency in their operations and all of our customers, whether you're a customer, a sport leader, an IT leader, you have to have an AI strategy. So that's provoking a lot of discussions and we're and I we're very optimistic about how this is going to play out over the next year. I appreciate it. Thanks, guys. Thank you. One moment, please.
I already mentioned, hey, we become a little bit more backend loaded as we have been dealing with larger customers.
But it kind of came through as we expected and.
It wasn't there was no real surprise there.
And we expect that kind of that backend loaded nature of the quarters two to continue as we are.
Kind of doing that more of that field motion.
As we look into next year and you asked about hey in terms of budgets or we've seen.
Anything different there, we're not seeing anything different in part of our players do you just mentioned is to be a great.
Kind of a great cost alternative and we're going to continue to try to flex that muscle as we go engage with customers, especially if they are seeing budget pressures, we feel that we can be a great alternatives some of their big heavy software that they might have.
Nick Altman: For our next question, our next question comes from the line of Nick Altman with Scotia Bain. Awesome. Thanks, guys. I think earlier you had noted that churn has improved an SMB both year over year and quarter over quarter. I was wondering if you can maybe talk about the expansion side and how that's trended and then just as a follow up. Were any of the changes that you made to pricing earlier this year has that been sort of a tailwind to NRR and if you could quantify that if you're willing to disclose that that'd be helpful. Thanks.
Yeah, and then just a quick follow up around that.
Hi, Smedes so.
Copilot coming in <unk>.
The constructive I'm just curious based on the early traction you're seeing in beta and just how would you stack rank. What you guys would expect to be the most impactful for 'twenty four numbers. If we think about impact from new spend are interested in getting our skus.
With improving gross retention just curious like Directionally. How you guys are thinking about this and thanks again.
So it's a question on monetization.
Nick Altman: Hey, Nick, this time I'll take that one. So yeah, you know, in turn, we're just doing better kind of having for a while and just because these are subtle improvements and I just mentioned we made, you know, kind of a, you know, a company best ever in turn this past quarter. And, you know, it goes from SMB all the way up. I mean, part of that is because we have been moving to larger customers, they're signing annual deals.
It's so early even right we have our.
The amortization that is just starting essentially in fairly self service, which is again reflected in chat we.
We've talked about Q1 being kind of rolling out <unk>.
Co pilot.
Which would start selling it I think Dennis just mentioned, we've got a lot of customers across the three differ.
Different AI play that we have that are in beta right now and we're planning to learn as we go and then start to roll. This stuff out. So I think the first time, we're really going to have anything that we would talk about as part of the first half of next year.
Nick Altman: So the mixture of our customer base is changing part of it, fresh service in general, which plays in the larger markets that is growing faster and as great characteristics. When on the flip side of the question, you asked about expansion expansion is, you know, it really hasn't changed and it's still a pretty tough environment for expansion is specifically around Asian addition. And so what we have been doing is looking at other ways to expand with our customer base.
Okay got.
Got it thank you guys and congrats again on the results.
Excellent.
Thank you one moment please for our next question.
And our next question comes from the line of Brent <unk> with Piper Sandler.
Nick Altman: One of those which you alluded to is that, you know, we did do some some price changes on our fresh service product. We did get some, you know, some benefit from that so far this year. And so that that helped our net dollar retention slightly. And so even though, you know, on one side, the expansion motion overall is coming down. We did, we did get some expansion benefit from price a little bit, but also benefit from turn. So hopefully that breaks it down for you. Awesome. Thanks, guys. Thank you. One moment, please for our next question.
Thank you good afternoon.
I'll start with you here it sounds like you're excited by the SCS suite product a couple of hundred customers deploying that this quarter. What is the HCV uplift as you think about a customer that moves to <unk> suite.
Is there an ASP uplift.
When customers move or should we think about this more of a modernized stack and with no uplift.
Okay. Thanks Brent.
So.
First of all yes, there is an uplift.
Probably have to get back to you with the exact numbers, but because of the pricing.
Brent Bill: Our next question comes from the line of Brent Bill with Jeffries. Tyler on NRR, you mentioned it is going to moderate more in Q4. It is Q4 going to be a bottom for that moderation and NRR. And maybe for Dennis, US and Mia held up really well. That the APAC showed a pretty big slowdown. Anything going on in the APAC that would describe what happened there. Thanks.
Slightly higher for the CSS suite than standard Flash desk.
<unk> alone I would think it's probably.
I would say, 10% to 20% higher but actual realizations could be different so, but yes in principle debt as an ASP because the customer is getting.
Box and conversational agent experience as well as ticketing all in one package. So it's higher than <unk>, Standalone and <unk> Standalone and box will add on usage based pricing as well.
Tyler Sloat: Hey, Brent, I'll take the first part of it. So, you know, we had been calling kind of coming out of Q1 even that without Q2, it's going to go to 105106 range and, you know, we've been doing a little bit better and part of the reasons because turn has been doing better because we've kind of, you know, the expansions kind of come through as we expect. You know, we're calling the kind of 105 for Q4 and based on what we see right now, we do hope that that's kind of kind of be kind of the floor.
Got it helpful color there and then Dennis just as you think about the business here or there is some moving parts you guys are doing a good job of navigating a challenging environment.
One of the things that stood out to me is clearly a talking about strength on the enterprise strength in <unk>.
Tyler Sloat: You know, going and we'll obviously update that, you know, going into next year if anything changes. That kind of assumes that, you know, we'll be able to maintain the levels of turn and the expansion is not going to get dramatically worse. And so that's, you know, obviously the assumptions going into that number.
We're looking across the industry is seeing some some weakness on the SMB side.
But if I look at net logo adds it did look like enterprise was down slightly in <unk>.
SMB space was up maybe if you could just give us an update on what you saw overall in the quarter relative to larger customer demand SMB and update that plc to another initiative is that starting to have a little bit of an impact here on net net adds thanks.
Dennis Woodside: Yeah, just on the geography question, we really didn't see a slowdown in Asia back. We had pretty consistent performance across our three big Geos. So, you know, no, I would say no appreciable trend to call out there. Great. Thanks. Thank you.
Yes so.
Just to back up a bit remember the markets that we're competing in are massive between sales marketing customer support.
And.
Ethan Brock: What moment please for our next question. Our next question comes from the line of Alex Zookin with Wolf Research. Hey guys, this is Ethan Brock on trial to you can bring back on the solve results. I have two quick questions. They're dispersed. So one of your peers early in the month noted that there's some growth slowdown to September. So I'm just curious like what you're seeing in an environment, just given the solve results.
Any business of any size needs, what we provide needs an it solution needs of customers sports solution needs to sales and marketing solutions. So the market is massive.
Still when you get into SMB still relatively underpenetrated about 40% of our revenue is from S&P today.
We.
In any given quarter, we're going to see fluctuations across SMB versus our large account acquisition also if you think about like in enterprise. In particular, you tend to have a lot of buying cycles that take place at the end of the year as opposed to in the third quarter, so that potentially play into it for Q3.
Ethan Brock: And like based on early customer conversation on budgets like work at the discussion than like the 2024. We've heard a lot around a two consolidation. So curious how you guys saw them across the front off the stack helping driving some larger strategic fields.
In SMB, but in SMB in particular.
We've started to do some of the things that I talked about at the analyst day to improve.
Tyler Sloat: Hey, you know, I'll take that. So in terms of the first part of the questions around September. You know, I already mentioned he would become a little bit more back and loaded, you know, as we've been dealing with larger customers. But it kind of came through as we expected and, you know, it. It wasn't, you know, there was no real surprise there. And we expect that kind of, you know, that back and loaded nature of the quarters to continue as we are, you know, kind of doing that more of that field motion.
The efficiency of our.
And the scale of our SMB business.
I spent this past quarter Q3, diversifying some of the <unk>.
<unk> a leader in the <unk>.
For the funnel so early.
Think about like going into affiliate marketing and investing more in Seo to drive organic leads into our into our trial funnel.
What we're doing this quarter is focusing on improving the efficiency of that funnel itself and that's through things like creating more personalized journeys for a prospect thats in the trial itself.
Tyler Sloat: As we look into next year and you asked about, hey, in terms of budgets, are we seeing, you know, anything different, they're not seeing anything different. And you know, part of our play is to you just mentioned is to be a great, you know, kind of a great cost alternative. And we're going to continue to try to flex that muscle as we go engage with customers, especially if they're seeing budget pressures. We feel that we can be a great alternative to some of their big heavy software that they might have.
<unk> chat and other means to communicate to that trial is to help them get educated on the product and get to value faster and we know if you get to value faster ideally in the first day or two of trying the product you're much higher much more likely to convert so we think theres a lot of levers that we havent really pulled there and optimizing that funnel.
Unknown Executive: Yeah, and then just a quick follow up around the AIC. So in a copilot coming in one few, the constructors, I'm just curious. Based on the early traction, you're seeing data and just how would you stack rank what you guys would expect the most impact of the 24 numbers. If you think about impact from you spend on the DNA, I use all to uplift, including those connections. Here's like directly how you guys are thinking about this. Thank you.
Which will play out over the course of the next year. So I think we got it.
Very broadly speaking continued to be pushing into mid market customers lower end of enterprise in particular with our it products.
More and more emphasis on cross sell and expansion of our existing base and then getting that SMB funnel hunting through what we're calling <unk> two point out those are the three big levers, we're really going be playing with over the course of the next year that will that will be talking about on their calls.
Unknown Executive: There's a question on monetization. So yeah, I mean, we, the, it's so early, even right, we have our. The monetization that is just starting essentially in a free self service, which is again, good reflected in chat. We talked about Q one to being kind of rolling out GA of copilot, which we'd start selling it. I think you know, Dennis just mentioned we've got a lot of customers across the three different AI plates that we have that are in beta right now.
Super helpful color. Thank you.
Yeah.
Thank you one moment please for our next question.
And our next question comes from the line of Brian Schwartz with Oppenheimer <unk> company.
Thank you for taking my question, Tyler just about but not the IRR.
Guidance and the compression I think you called out.
Unknown Executive: And you know, we're planning to learn as we go and then start to roll the stuff out. So I think the first time we're really going to have anything that we will talk about as part of the first half of next year. Thank you. Thank you guys. Thank you. One moment, please.
Kind of being.
The expansion is weaker than expected in your introductory commentary.
But that in the Q&A it sounds like maybe it was a low bar broad based so just wanted to get maybe some clarity on that if it is constrained to the Ics.
Brent Bracelin: For our next question, and our next question comes from the line of Brent Bracelin with Biber Sandler. Thank you, good afternoon.
Isn't that or Youre seeing across the product set and then Dennis one question for you just on the on the cost of the new customer adds can you shed any light on what you are seeing across industries.
Garrish Mathrubootham: G, I'll start with you here. Sounds like you're excited by the CS suite product. A couple hundred customers deploying that this quarter. What is the ACV uplift? Did you think about a customer that moves to CS suite? Is there an SP uplift when customers move, or should we think about this more of a modernized stack and with no uplift? Thanks.
We heard about some weakness in auto mode oven suppliers.
And just wondering if youre seeing any strength or weaknesses across industries, just given how horizontal the solution. Thank you.
Yeah, Hey, Brian I'll take the first part I don't think we need to call on <unk> expansion in particular seem.
<unk> pressure, mainly just saying.
Garrish Mathrubootham: Hey, thanks, Brent. And so, first of all, yes, there is an uplift. I probably have to get back to the exact numbers. But because of the price. The pricing is slightly higher for the CS suite than standard fresh desk or fresh chat alone. I would think it's probably, I would say 10 to 20% higher, but actual realizations could be different. So, but yes, in principle, there is an SP uplift because the customer is getting bought and connozational agent experience as well as ticketing all in one package. So, it's higher than fresh lift standalone and fresh chat standalone and bought the lad on usage based pricing as well.
The expansion motion in general continues to see pressure, which it has for over a year now really be the agent addition, part of that I think what we called out is that.
Unknown Executive: Got a helpful color there.
On <unk>, we actually had a little bit of price leverage this year, and so that kind of offset a little bit of the agent.
<unk> that might have slowed and so that was kind of more of a positive TSM in general.
<unk> also has better churn characteristics.
It's dealing with larger customers so.
Hopefully that clarifies, we weren't trying to call out expansion our pressure on <unk> specifically.
So just on the industry question.
For the reasons that I was just talking about the fact that we address such a broad market. The fact that the market is very horizontal if you have an it department of our customer support department you need to automate it.
Dennis Woodside: And then Dennis, just as you think about the business here, or there's some moving parts, you guys are doing a good job of navigating a challenging environment. One of the things that stood out to me is clearly talking about strength on the enterprise, strength and ITSM. We are looking across the industry seeing some weakness on the SMB side. But if I look at NetLogo ads, it would look like enterprise was down slightly and the SMB space was up.
We don't have any single industry that really drives a lot of concentration for us today, we tend to get.
I'd say on the larger accounts, we tend to get a nice reference cycle, where we get two or three travel companies next thing you know we've got 10 travel companies, we've seen that with industrial recently, where we had a handful of industrial companies. Some of the scale from a manufacturing all of a sudden we've got a lot going on there.
And then the other area that we have seen I would say fairly continued strength over the course of the last several quarters is in higher Ed and education, where lots of universities are trying to automate all aspects of their business. They are trying to become more efficient as well typically have very fragmented it stacks across separate departments University.
Dennis Woodside: Maybe if you could just give us an update on what you saw overall in the quarter relative to larger customer demand SMB and update that PLG to that initiative, is that starting to have a little bit of an impact here on NetAd. Thanks. Yeah, so just to back up a bit, remember the markets that we're competing in are massive between sales marketing, customer support, and IT and any business of any size needs what we provide needs an IT solution needs a customer support solution need to sell the market solution.
<unk> is an example of one that we referred to where that was an expansion of an existing account where they are trying to.
Everybody and.
On the school and the same platform. So those are the kinds of things that that we're seeing in.
Across the board, but I wouldn't say that there's any specific industry that showed particular strength or weakness given the broad base of customers that we have.
Dennis Woodside: So the market is massive. And still when you get into SMB is still relatively under penetrated about 40% of our revenue is from SMB today. We, you know, in any given quarter, we're going to see fluctuations across SMB versus our large account acquisition. Also, if you think about like in enterprise in particular, you tend to have a lot of buying cycles that take place at the end of the year as opposed to in the third quarter, so that potentially played into it for Q3.
Thank you for taking my questions.
Thank you.
Please for our next question.
And our next question comes from the line of Pat Walraven ends with JMP Securities.
Oh, great. Thank you and congratulations on the results.
So billings growth was 19% constant currency in Q3 versus 21 in Q1 and Q2. So Dennis is it fair for us to assess that sales attainment was good in Q3, but maybe not quite as good as in the first half.
Dennis Woodside: But in SMB, but in SMB in particular, we've started to do some of the things that I talked about at the analyst stage to improve the efficiency of our and the scale of our SMB business, we've spent this past quarter Q3 diversifying some of the sources of leads in before the funnel. So early think about like going into affiliate marketing and investing more in SEO to drive organically into our into our trial funnel.
So overall look we are pleased with the quarter in terms of where we landed of course, we kind of we set high goals for ourselves and I think we said this at the.
At the.
At the Investor Day, we're not we're not satisfied with the growth rates that we're seeing now we think we can do much better we've got a lot going on.
Dennis Woodside: What we're doing this quarter is focusing on improving the efficiency of that funnel itself, and that's through things like creating more personalized journeys for a prospect that's in the trial itself, using chat and other means to communicate to that trial is to help them get educated on the product and get to value faster. And we know if you get to value faster, ideally in the first day or two of trying the product, you're much higher, much more likely to convert.
Get there I think the addition of <unk> Yamamoto as our new chief.
<unk> customer marketing officer, that's a big.
AD for us because a lot of what we need to do also is in that marketing space.
So, yes, I mean, our aspiration and our goals are to continue to grow the business at rates that are higher than what we're seeing now and that's what we're going to continue to do.
Alright, great that's helpful and then.
Dennis Woodside: So we think there's a lot of levers that we haven't really pulled there and optimizing that funnel, which will play out over the course of the next year. So I think we've got, you know, very broadly speaking, continued to be pushing into mid market customers lower end of enterprise, in particular with our IT products, more and more emphasis on cross cell and expansion of our existing base and then getting that SMB funnel humming through what we're calling PLG 2.0. Those are the three big levers.
At the Analyst day, you guys.
And I know youre, very specifically not breaking out by segment, but at the analyst day. It was growing in the low <unk> and <unk>.
Customer service and a low to mid teens in sales less than 10 is that still like a.
Overall, our roughly accurate assessment of the business or was there some change.
Yeah. So so we shared that data.
At the analyst day, specifically to give investors some sense as to the size and scale of the different parts of our business. We don't intend to update those numbers on a quarterly basis potentially at a future investor day, but broadly speaking.
Dennis Woodside: We're really going to be playing with over the course of the next year and that we'll be talking about on our calls.
Unknown Executive: Super helpful color. Thank you.
Ryan Schwartz: One moment, please for our next question. Our next question comes from the line of Ryan Schwartz with Oppenheimer and Company. Thank you for taking my question. Tyler, just to button up the NRR guidance and the compression, I think you called out ITSM kind of being the expansions weaker than expected in your introductory commentary. But then in the Q&A, it sounds like maybe it was a little more broad based. So I just wanted to get maybe some clarity on that if it's constrained to the ITSM business or you're seeing across the product set.
The trends that we and.
The data that we shared back in September the trends that we shared are consistent with what we've seen this quarter in Q3 as well.
Alright, great. Thank you very much.
Thank you.
Please for our next question.
And our next question comes from the line of Adam Burger with Bank of America.
Hey, Thanks for taking my question so with the focus on cross sell what are the some of the biggest initiatives and investments there.
Naturally.
What products have you found to be more common pairings that youre kind of pushing for thanks.
Ryan Schwartz: And then Dennis, one question for you just found the new customer ads. Can you shed any light on what you're seeing across industries? You know, we heard about some weakness in auto modem and suppliers. And just wondering if you're seeing, you know, any strength or weaknesses across industries given how horizontal the solution is. Thank you.
Yes, I'll take that so I think.
One of the motions that we highlighted last quarter that started to really happen is that it.
<unk> and <unk> so well.
We're finding more and more customers are looking to.
Provision a single workflow engine for all of their departments and often we can we can turn on it only discussion into an it plus finance finance plus.
Ryan Schwartz: Hey, Brian, I'll take the first part. No, I don't think we, we didn't need to call it ITSM expansion in particular. I've seen pressure mainly just saying, you know, the expansion motion in general continues to see pressure, which it has for over a year now, really be, you know, the agent addition part of that. I think what we called out is that, you know, on ITSM, we actually, you know, had a little bit of price leverage this year.
Our legal department discussion or we can go back to our customers that are just on TSN and broaden the discussion to include other departments because we've proven that we can serve their it department.
Ryan Schwartz: And so that kind of offset a little bit of the agent additions that might have slowed. And so that was, you know, come more of a positive to ITSM in general, ITSM also has better turn characteristics as it's dealing with, you know, larger customers. So hopefully that clarifies we're trying to call out expansion pressure on ITSM specifically. I think so just on the industry question, you know, for the reasons that I was just talking about the fact that we address such a broad market.
So that's that's a real clear.
And for US that we're just making part of how we how we go to market.
Youre seeing on the on the customer support side.
Moving customers into bought two previously may not have tried to automate their interactions with their customers. So we have a natural upsell for customers that or maybe they have fairly rudimentary bots that are just handling a small fraction of their inbound inquiry. There is an opportunity there to educate them on how to.
Automate more and more interactions with their customers how to apply AI to those interactions to build bots.
Ryan Schwartz: The fact that the market is very horizontal, if you have an IT department or a customer support department, you need to automate it. We don't have any single industry that really drives a lot of concentration for us today. We tend to get. I would say on the larger accounts, we tend to get a nice reference cycle where we get two or three travel companies. Next thing you know, we've got 10 travel companies.
And Thats actually an up sell opportunity for us because it creates this consumption a revenue stream, that's really where.
We're going to be spending a lot of time this quarter and then next year, because we have a lot of customers that have sizable consumer basis in particular and this is in particular be to say it does apply to <unk> as well, but particularly <unk>.
Ryan Schwartz: We've seen that with industrial recently where we had a handful of industrial company, some of the deals on the manufacturing, all of some we've got a lot going on there. And then the other area that we have seen, I would say fairly continued strength over the course of the last several quarters is in high red. And education where a lot of universities are trying to automate all aspects of their business. They're trying to become more efficient as well, typically have very fragmented IT stacks across different departments.
Who have not automated as many workflows as they can or they have automated only the rudimentary workflows AI allows you to automate a lot more and and that in turn creates a revenue stream for us.
So there's a little bit of a flavor of the big moat that we're focused on.
Ryan Schwartz: Universe Pennsylvania is an example of one that we referred to where that was an expansion of an existing account where they're trying to put everybody in on the school and the same platform. So those are the kinds of things that we're seeing across the board. But I wouldn't say that there's any specific industry that showed particular strength or weakness given the broad base of customers at least. We have.
Yes, that's awesome color. Thank you.
Thank you one moment please.
And our final question comes from the line of Taylor Mcginnis with UBS.
Yeah, Hi, Thank you so much for squeezing me in.
Question I think you've kept the medium.
The median of the constant currency revenue guide for <unk> unchanged, but you lowered the high end of the range. So is that a reflection at all of any area as being a tad softer than expected, perhaps maybe there was something at the end of the corridor and if you look at the upside the billings there was a bit lighter than what we saw last quarter. So maybe that Heather I'll I know earlier.
Unknown Executive: Thank you for taking my questions. Thank you.
Patrick Walravens: One moment, please. For our next question. Our next question comes from the line of Pat Walravens with JMP Securities. Oh, great. Thank you. And congratulations on the results. Billings Growth was 19% in Concentrating Q3 versus 21 and Q1 and Q2. So, Dennis, is it fair for us to assess the sales attainment was good in Q3, but maybe not quite as good as in the first half. So overall look, we are pleased with the quarter in terms of where we landed.
You mentioned being more backend loaded, but maybe you can help us bridge those two metrics.
Hey, Taylor.
I wouldn't read too much into it I think.
In general, Yes, I mean, there is still macro pressures on expansion right. So we are cautious still and we every quarter, we've kind of been like that as we go into as we want to see things play out.
The guidance, we are just trying to call it as we see it.
On the billing side, we have had this.
This shift too.
Patrick Walravens: Of course, we set high goals for ourselves. I think we said this at the investor day, you know, we're not we're not satisfied with the growth rates that we're seeing now. We think we can do much better. We've got a lot going on to get there. I think the addition of Nika Yamamoto as our new Chief customer marking officer. That's a big ad for us because a lot of what we need to do also is in that marketing space.
Are you kind of.
Slightly larger deals, but those tend to pay annual in advance, which does help your billing cycle, but then again we.
We still do have a really decent expansion motion in a lot of that is unpredictable as it come through based on the proration of those contracts.
Read in too much on the mid points and whatnot.
But going into Q4, I mean, we're still going to be cautious on the expansion side of it but new businesses.
Patrick Walravens: So, so yeah, I mean, our our aspiration, our goals are to continue to grow the business at rates that are higher than what we're seeing now. And that's what we're going to continue to do. All right. Great. That's helpful.
It came in.
In Q3 the numbers.
Net adds were good.
We just need to execute this quarter.
Okay.
Thank you.
Patrick Walravens: And then, you know, the analyst they you guys and I know you're you're very specifically not breaking out my segment, but at the analyst they IT was growing in the low 40s and customer service in the low to mid teens and sales less than 10. Is that still like a overall or roughly accurate assessment of the business or was there some change? Yeah, so, so, you know, we shared that data at the analyst day specifically to give investors some census to the size and scale the different parts of our business.
Ladies and gentlemen, thank you for participating. This concludes today's program you may now disconnect.
Okay.
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Patrick Walravens: We don't intend to update those numbers on a quarterly basis, potentially at a future investor day, but broadly speaking, the, you know, the trends that we and the data that we shared back in September, the trends that we shared are consistent with what we've seen this core in Q3 as well. All right. Great. Thank you very much. Thank you.
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Adam Berger: One moment, please for our next question. Our next question comes from the line of Adam Berger with Bank of America. Hey, thanks for taking my question. So, what the focus on cross sell? What are some of the biggest initiatives and lessons there and just, you know, naturally, you know, what products have you found to be more, you know, common pairings that you're kind of pushing for. Thanks.
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Dennis Woodside: Yeah, I'll take that. So, I think I, you know, one of the motions that we highlighted last quarter that started to really help is that IT and ESM. So, we're finding more and more customers are looking to provision a single workflow engine for all their department. And often we can, we can turn an IT only discussion into an IT plus finance, you know, finance plus legal department discussion. Or we can go back to our customers that are just on IT SM and broaden the discussion to include other departments because we've proven that we've conserved their IT department.
Yeah.
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Dennis Woodside: So, that's a real clear motion for us that we're just making part of how we, how we go to market. You're seeing on the customer support side, moving customers into bots who previously may not have tried to automate their interactions with their customers. So we have a natural upsell for customers or that maybe they have fairly rudimentary bots that are just handling a small fraction of their inbound inquiry. There's an opportunity there to educate them on how to automate more and more interactions with their customers, how to apply AI to those interactions to build bots.
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Dennis Woodside: And that's actually an upsell opportunity for us because it creates this consumption revenue stream. That's really where we're going to be spending a lot of time. This quarter and the next year because we have a lot of customers that have sizable consumer bases in particular, and this is in particular B2C, it does apply to be as well, but particularly B2C who have not automated as many workflows as they can or they've automated only the rudimentary workflows, AI allows you to automate a lot more and and that in turn creates a revenue stream for us. So those are a little bit of flavor of the big moments that we're focused on. Yeah, that's awesome color.
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Unknown Executive: Thank you.
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Unknown Executive: And our final question comes from the line of Taylor McGinnis with UBS. Yeah, hi, thank you so much for squeezing me in. Just question and see, you kept the medium, the medium of the constituency revenue guide for 4Q and change. But you lowered the high end of the range. So is that a reflection of at all of any areas being a tad softer than expected, you know, perhaps maybe there was something at the end of the quarter.
Unknown Executive: And if you look at the upside to buildings, it was a bit lighter than what we saw last quarter. So maybe that had a role. I know earlier, you mentioned, you know, things being more back and loaded, but maybe you can help us bridge those two metrics. Thanks.
Tyler Sloat: Hey Taylor, I wouldn't read too much into it. I think in general. Yeah, I mean, there are still macro pressures on expansion, right. So we are cautious, though. And, you know, we every quarter, we've kind of been like that as we go in as we want to see things play out in terms of the guidance, you know, we are just trying to call it as we see it. On the billing side, you know, we have had this, you know, this shift to kind of, you know, slightly larger deals, but those tend to play annual advance, which does help your billing cycle, but then again, you know, we still do have a really decent expansion motion and a lot of that's unpredictable as it comes through based on the probation of those contracts.
Tyler Sloat: So I wouldn't read into much on the midpoint, so whatnot. But going into Q4, I mean, we're still going to be cautious on the expansion side of it, but new businesses, you know, it came in in Q3, the numbers that, that adds were good. And we just need to execute this quarter.
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Unknown Executive: Thank you, ladies and gentlemen, thank you for participating this concludes today's program. You may now disconnect. Thank you. [inaudible] you, thank you, thank you, thank you,[inaudible] . . [inaudible] . .
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Hello, and welcome to the fresh works third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one.
On your telephone you will then hear an automated message advising that Youre Hain has been raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
It is now my pleasure to introduce Vice President Investor Relations Joon Huh.
Thank you good afternoon, and welcome to fresh <unk> third quarter 2023 earnings Conference call. Joining me today are Girish <unk> <unk>, Chief Executive Officer, Dennis Woodside, freshwater president and Tyler Sloat <unk> Chief Financial Officer. The primary purpose of todays call is to provide you with information regarding our <unk>.
Third quarter, 2023 performance and our financial outlook for our fourth 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 expectations and estimates about its business and industry, including our financial outlook macroeconomic uncertainties managements belief.
<unk> and certain other assumptions made by the company all of which are subject to change.
These statements are subject to risks uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward looking statements.
Such risks include but are not limited to our ability to sustain our growth to innovate to reach our long term revenue goals to meet customer demand and to control costs and improve operating efficiency for a discussion of additional material risks and other important factors that could affect our results. Please refer.
Today's earnings release, our most recently filed Form 10-K and Form 10-Q, our Form 10-Q for the quarters ended March 31, 2023 at June 30.
In Q3, and our other periodic filings with the SEC Fresh works 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 measure.
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 at <unk> Dot com.
Carriage you to visit our Investor Relations site to access our earnings release supplemental earnings slide 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 Fishbach earnings call covering our third quarter of 2023.
We delivered another solid quarter of execution as we outperformed our previously disclosed estimate across our key financial metrics.
Our revenue exceeded the high end of our financial outlook range.
Coming in at $153 6 million for the quarter.
We surpassed our estimate for free cash flow with $22 1 million in Q3, and we improved our free cash flow margin to 14%.
We also held our foot lifted date in September.
We showcased our product and outline the path that we believe.
Teva, becoming a $1 billion company and beyond.
Thanks, a lot.
To reap the benefits of the industry Campbell.
Businesses of all sizes are having to comp to come to compete digitally.
Expectations for customer and employee experience are evolving to center around modern messaging and AI is breaking down silos offerings, which have been quiet.
Okay businesses understand much more about their customers and employees.
This quarter in particular, we added new dividend capability across product and opened up our credit and retail program following pretty self evident and pretty co pilot in Q2, which is intended to unlock more value out of our existing product suite.
You will hear me talk about AI quite a bit today, starting with customer support.
I'm really excited by the traction we have been seeing since launching our customer service suite.
These are all in one solution to combine bought modern messaging and ticket.
In the first two months or since the signed on more than 200 customer service suite customers from new and existing customers.
And we are seeing high levels of engagement with the product bandwidth Chris chat alone.
The suite not only saw great traction with new customer.
Also with long standing one, including a large U S network and a high fashion jewelry company, who decided to migrate.
Gail.
Features with our basket.
An early adopter of the customers know the suite last week Korea, and South Africa.
Unknown Executive: Code. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 11 again.
Delaware over $16 million positive annually to an area nearly twice the height.
The company is growing but found its previous provider offering a disjointed customer service experience across different channels.
Now with the customer service suite.
Unknown Executive: Please be advised that today's conference is being recorded.
<unk> been able to better address this issue and handle live chats with automation and gain deep insights in particular.
Joon Huh: It is now my pleasure to introduce Vice President Investor Relations, Joon Huh. Thank you. Good afternoon and welcome to Freshworks 3rd quarter 2023 earnings conference call. Joining me today are Garrish Mathrubootham, Freshworks Chief Executive Officer, Dennis Woodside, Freshworks President, and Tyler Sloat, Freshworks Chief Financial Officer. The primary purpose of today's call to provide you with information regarding our 3rd quarter 2023 performance and our financial outlook for our 4th quarter and full year 2023.
We continue to invest in cutting edge AI capability for our customers to go through this.
In our initial beta for critical climate.
We're predominantly focused on driving agent productivity.
Great feedback from our customers including models.
Im getting luggage brand.
We featured during our Investor day.
Thomas Cook, a popular global travel company in the UK using fresh debt in 2021, an icon or a business process outsourcing company with 40000 employees.
Joon Huh: Some of our discussion in response is to you your questions may contain forward-looking statements within the meeting of the Private Security's litigation reform act of 1995. These forward-looking statements are based on Freshworks current expectations and estimates about its business and industry, including our financial outlook, macroeconomic uncertainties, management beliefs, and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements.
Our VITAS listing copilot features to further enhance agent productivity.
<unk> copilot adoption and usage among customers and new customers increased meaningfully from Q2.
In Q3.
We continued to see growing demand for our IC product.
Mid market and enterprise customers.
We've been with a unified service operations platform that enables customers to improve service reliability.
Our customers, including Telco group.
Children's health care, and so I would hope we see great value in our unified product.
Joon Huh: Such risks include but are not limited to our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand, and to control costs and improve operating efficiency. 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 10K and form 10Q. Our form 10Q for the quarters ended March 31, 2023, and June 30, 2023, and our other periodic filings with the SEC.
Tom in particular is gaining traction.
Mentum Fokker services major incident management and future.
We added new capabilities to the teacher and the customer base is growing.
Almost 500 customers now take advantage of both liquid into the core automated incident accretion.
An organizational update to a branded goods.
We continue to harness the power of generative AI enabled and other business users to focus on high value work.
By using auto generated ticket somebody and particular sponsor.
Joon Huh: Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law. During the course of today's call, we will refer to certain non-gap financial measures. Reconciliation between gap and non-gap financial measures for historical periods are included in our earnings release, which is available on our investor relations website at ir.freshworks.com.
Our newest we've got elite includes Gen AI powered virtual agent that eliminate form to create a more conversational experience for employees.
Early adopters of new AIP personal care service include existing customers respond.
And confluence.
Customer adoption of VIX futures has more than doubled since Q2.
Through our continued innovation to meet the needs of large enterprises on the mid market. We believe we are increasing mindshare.
Joon Huh: 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 freshworks.
I would anticipate that this will enable us to execute on the broader opportunity.
On the sales and marketing we continue to execute on our vision of delivering an easy to use quick smart.
Joon Huh: And with that, let me turn it over to Girish. Thank you, June, and welcome everyone.
Garrish Mathrubootham: Thank you for joining us today on Freshworks earnings call, covering our third quarter of 2023. We delivered another solid quarter of execution as we outperformed our previously disclosed estimates across our key financial metrics. Our revenue exceeded the high end of our financial outlook range, coming in at 153.6 million dollars for the quarter. We surpassed our estimates for free cash flow with $22.1 million in Q3, and we improved our free cash flow margin to 14%.
Ladies and.
And generating.
Increasing conversion and accelerating revenue.
In Q3, we made improvements to the inbound exclusion in our sales and marketing products.
We revamped the UI are pristine, we improve user depreciate productivity and data.
The upgraded into critical pillars.
Boost context.
AI powered axiom and team collaboration across the vehicles.
For example, our local covenant Macon, Georgia.
Video users, both Christine and Christa can help support them to collaborate better with that.
Garrish Mathrubootham: We also held our first investor day in September, where we showcase our products and outline the path that we believe will drive us towards becoming a billion dollar company and beyond. Freshworks continues to reap the benefits of three industry standards. Businesses of all sizes are having to transform, to compete physically. Expectations for customer and employee experience are evolving to center around modern messaging. AI is breaking down silos offering richer insight to help businesses understand much more about their customers and employees.
Click studio <unk> by up to 25%.
We also continued to simply not air capabilities for marketers to improve campaign creation.
While boosting efficiency conversion rate and customer satisfaction.
Can somebody.
Innovation was centered around unlocking more productivity for our customers. The AI powered customer service Eitan and monthly products and we will continue building and operating quite well.
Understand their customers and employees.
Now over to David.
Garrish Mathrubootham: This quarter, in particular, we added new generative AI capabilities across products and opened up our Ferry Insights beta program following Ferry sales service and Ferry co-pilot in Q2, which is intended to unlock more value out of our existing product suite. You will hear me talk about AI quite a bit today, starting with customer support. I'm really excited by the fact that we've been seeing since launching our customer service suite in knowledge.
Who will give more detail on the opportunities we are realizing the customers and the ongoing impact of changes, we are making to our deuterium operation.
Thanks, Jay and thank you everyone. We appreciate you joining us for today's call.
As we talked about at our Investor day on top of product innovation, a few key growth drivers are helping us deliver on our targets for revenue operating profit and free cash flow.
Let me provide some highlights from Q3.
Firstly, our unique go to market approach efficiently serve the fortune 5 million, combining an efficient inbound sales motion growing field sales presence and a partner ecosystem that's built to scale.
Garrish Mathrubootham: It's our all-in-one solution to combine both modern messaging and security. In the first two months, our sales team signed on more than 200 customer service suite customers from new and existing customers. And we are seeing higher levels of engagement with the product than with fresh chat alone. The suite, not only saw great traction with new customers, but also with long-standing ones, including a large USB network and a high-fascension-joulding company who decided to migrate well-than-scale sales service features with our board capability.
Large customers like Tri Pointe homes, and qualifying turning to fresh works along with mid market customers like Salvation Army, Australia, Aspca and Jackson family winery.
We added nearly 1000 net customers in the quarter, resulting in a total of over 66600.
While we are addressing companies of all sizes were also targeting larger higher yielding customers.
Garrish Mathrubootham: An early adopter of the customer service suite passed away careers in South Africa. Delivered over 16 million passes annually to an area nearly twice the size of Texas. The company is growing, but found its previous provider offering a disjointed customer service experience across different channels. Now, with the customer service suite, agents are able to better address this issue, can handle live chats with automation and gain deep insights into ticket trends. We continue to invest in cutting-edge AI capabilities for our customers, suppose users.
In Q3 fresh works customers paying us over $50000 in IRR grew 32% year over year or 30% on a constant currency basis.
This cohort continues to represent 46% of our IRR as larger customers fueled the growth of our business.
One example, a national Homebuilder has $4 billion in annual sales and 6000 employees.
They needed a consolidated platform that manages ticketing TSM and asset management to improve their efficiency given each of those was previously managed in disparate systems.
Garrish Mathrubootham: In our initial bid-off or credit co-pilot, we were predominantly focused on driving agent practice. We have heard great feedback from our customers, including Monos, a luxury luggage brand. We featured during our investment. Thomas Cook, a popular global travel company in the UK, used in fresh depth since 2021 and I call a business process outsourcing company with 40,000 employees. Our beta testing co-pilot features to further enhance agent practice. Ready co-pilot adoption and usage among customer service customers increased meaningfully from Q2.
They chose <unk> service and added marketplace integrations to help them scale their global service management needs.
Another large company using fresh service is qualifying a leading business processing outsourcer with with 15000 employees.
They use the legacy providers TSM tool for years, but it never delivered on automation.
Qualcomm chose fresh service because it is easy to use and supports employee needs right out of the gate.
They can now automate over 2000 requests per month and saw an average resolution time improvement of 70%.
Garrish Mathrubootham: In Q3, we continue to see growing demand for our IT projects with bid markets and enterprise customers. We've been to the unified service operations platform that enables customers to improve service reliability. Our customers, including Chalhoop Group, Valley Children's Healthcare and Travelovia, see great value in our unified projects. Act, ITAM, in particular, is gaining traction with momentum focus services, major incident management feature. We added new capabilities to the feature and the customer base is growing.
Looking at our opportunity for expansion higher rates of multi product adoption with larger customers are contributing to this growth driver.
In Q3, 25% of our total customers use more than one product.
In our larger customers, we're finding more than half of our $50 plus <unk> customers are using multiple products.
One example is giant eagle a retailer with more than 470 stores and approximately 36000 team members.
Garrish Mathrubootham: Almost 1,500 customers now take advantage of both incident reports, automated major incident creation by others, and organizational updates to a branded stage of speech. We continued to harness the power of generative AI to enable IT and other business users to focus on high value work by using auto-generated ticket summary and ticket response positions. Our newest beta release includes Gen AI power, virtual agent that eliminate forms to create a more conversation experience for employees.
Giant Eagle chose fresh service for its user friendly results driven platform and this summer introduced press chat to better measure employee engagement.
Building off an encouraging increase in self service among team members giant Eagle is now eager to integrate other communication platforms like text.
Western Financial group is another Great example of service to fresh expansion.
The Canadian insurer needed an enterprise tool to allow support teams to collaborate and respond effectively to frontline teams keeping data and reporting separate.
Garrish Mathrubootham: Early adopters of these new AI features for the service include existing customers, restaurant 365, and confluent health. This service customer adoption of these features has more than doubled in Q2. Two are continued innovation to meet the IT needs of large enterprises on the mid-market.
Moreover, they wanted to unlock tools for change problem and asset management and CMV.
They chose <unk> service because of its vast automation opportunities ease of use and clean interface.
Most recently, they have expanded and begun using fresh chat.
Garrish Mathrubootham: We believe we are increasing mindset with CIO and anticipate that this will enable us to execute on the broader ITAM opportunity.
Turning to our SMB opportunity. This remains large as Jim mentioned earlier, we're taking advantage of that by enhancing our inbound motion with a view to driving higher conversions and attracting stickier customers.
Garrish Mathrubootham: On to sales and marketing. We continue to execute on our vision of delivering an easy to use quick to set up smart CRM that assist sales teams in generating leads, increasing conversion, and accelerating the village. In Q3, we made improvements to the inbound experience in our sales and marketing products. We revamped the UI of fresh sales to improve user efficiency, productivity, and data accessibility. The upgraded interface for sellers has boost context, AI-powered action, and theme collaboration for faster deal corrosion.
We saw encouraging signs in the SMB segment in Q3, as the churn rate improved year over year and also quarter over quarter.
Millions of Smbs need to adopt AI and automation now to stay competitive and we believe AI can greatly simplify customer and employee experiences.
Underscoring this many of our AI beta customers today, our SMB and mid market companies, including ultra fabrics and early pioneer of socially conscious fabric manufacturing Jacobs stern and sons of distributor, especially agricultural products since $18 50, and virtual identity or digital creative agency.
Garrish Mathrubootham: For example, a local cabinet maker in Georgia named Clicks Studio uses both fresh sales and freshness to help support and feel to collaborate better, which has helped Clicks Studio improve its sales by 30 by up to 35%. We also continue to strengthen our AI capabilities for marketers to improve campaign creation while boosting efficiency, conversion rates, and customer satisfaction.
Each of these customers uses Freddie self service to automate level zero in level, one support with moderate virtual agent conversations.
We're embedding AI capabilities across our products as this is a critical growth driver for us.
Garrish Mathrubootham: In summary, Q3 innovation was centered around unlocking more productivity for our customers to AI-powered customer service, IT, and sales and marketing products. And we will continue building and offering richer insights to help businesses understand their customers and employees.
New features include context scenario for Freddie insights, which analyzes top contact scenarios in tickets and conversations and helps deploy box for them.
This is just one of many enhancements, we released with Freddie AI to deliver more value to our customers in Q3.
Dennis Woodside: Now, over to Dennis, who will give more detail on the opportunities we are realizing with customers and the ongoing impact of changes we are making to our GTM operation. Thanks, G, and thank you, everyone. We appreciate you joining us for today's call.
Our plan is to monetize the increased automation through bought sessions in a consumption or usage based model as.
As automation frees up agents to focus on higher value work. We can also assist with our copilot add on that helps them be more productive.
Dennis Woodside: As we talked about at our investor day, on top of product innovation, a few key growth drivers are helping us deliver on our targets for revenue, operating profit, and free cash flow. Let me provide some highlights from Q3. Firstly, our unique go-to-market approach efficiently serves the Fortune 5 million, combining an efficient inbound sales motion, growing field sales presence, and a partner ecosystem that's built to scale. Large customers, like Tripoint Homes and Qualfon, turn to fresh works along with mid-market customers like Salvation Army Australia, ASPCA, and Jackson's Family One.
Our continued traction with larger customers over $50000 in IRR combined with our expansion motion and large SMB opportunity create a go to market motion unique to fresh works.
We believe it is this combination of growth levers that gives us confidence in our ability to reach our goal of $1 billion in revenue in the next three years.
I'm also excited to announce the upcoming appointment of a new management team member who will be crucial in helping us reach that big goal.
Mika Yamamoto will join us as chief customer and marketing officer on November 20th.
Dennis Woodside: We added nearly 1,000 net customers in the quarter, resulting in a total of over 66,600. While we're addressing companies of all sizes, we're also targeting larger, higher yielding customers. In Q3, Freshworks customers paying us over $50,000 in ARR, through 32% year over year, or 30% on a constant currency basis. This cohort continues to represent 46% of our ARR as larger customers fuel the growth of our business. One example, a national home builder has $4 billion in annual sales and 6,000 employees.
Meager has proven executive leadership experience at large public tech companies with deep technology sales and marketing experience serving multiple buyers that are relevant to fresh works.
She was most recently the chief customer experience and marketing officer of <unk> and was previously the president of Marquette out Chief digital and marketing officer at SAP.
And held senior roles, Amazon Gartner and Microsoft.
Now over to Tyler to go through the Q3 financials and talk about how we're driving efficiency.
Thanks, Dennis and thanks, again to everyone for joining us.
Before I get started I want to thank you once again to everyone who attended our first Investor day.
Dennis Woodside: They needed a consolidated platform that manages ticketing, ITSM, and asset management to improve their efficiency given each of those was previously managed in disparate systems. They chose fresh service and added marketplace integrations to help them scale their global service management needs. Another large company using fresh service is Qualfon, a leading business processing outsourcer with 15,000 employees. They used a legacy provider's ITSM tool for years, but it never delivered on automation. Qualfon chose fresh service because it is easy to use and supports employee needs right out of the gate.
It was great to spend time with many of you in person and to provide an update on the <unk> story.
Once again, we had another quarter of good execution in Q3.
We beat our revenue growth estimates and continued driving additional leverage in the business to expand both non-GAAP operating and free cash flow margins quarter over quarter.
We continue to realize the financial benefits, resulting from the operational changes made earlier in the year and we're creating a healthier position to drive profitable long term growth for the business.
For our call today.
Cover the Q3 financial results provide background on the key metrics and close with our forward looking commentary and expectations for Q4 and the full year 2023.
Dennis Woodside: They can now automate over 2,000 requests per month and saw an average resolution time improvement of 70%. Looking at our opportunity for expansion, higher rates of multi-product adoption with larger customers are contributing to this growth driver. In Q3, 25% of our total customers use more than one product. In our larger customers, we're finding more than half of our $50,000 plus ARR customers are using multiple products. One example is Giant Eagle, a retailer with more than 470 stores and approximately 36,000 team members.
We'll also 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 19% year over year to $153 6 million on a reported basis and 18% adjusted for constant currency is.
Dennis Woodside: Giant Eagle chose fresh service for its user-friendly results driven platform, and this summer introduced fresh chat to better measure employee engagement. Building off an encouraging increase in self-service among team members, Giant Eagle is now eager to integrate other communication platforms like text. Western Financial Group is another great example of fresh service to fresh chat expansion. The Canadian insurer needed an enterprise tool to allow support teams to collaborate and respond effectively to frontline teams, keeping data and reporting separate.
As we are beginning to see the positive impacts on currency rates for the euro and pound against the dollar over the past year.
I TSM deal activity continues to drive much of the growth in Q3.
Dennis Woodside: Moreover, they wanted to unlock tools for change, problem, and asset management and CMDB. They chose fresh service because of its vast automation opportunities, ease of use, and clean interface. Most recently, they have expanded and begun using fresh chat.
While expansion rates ticked down slightly in the quarter.
Turning to margins, we had another strong quarter of non-GAAP gross margin of 84% as we efficiently scale the business in.
In Q3, we achieved a non-GAAP operating margin of 11%, which represents a three percentage point improvement quarter over quarter.
This was driven by lower than expected head count related costs, some delays in spend and ongoing improvements on operating expenses.
Turning to our operating metrics, we have two key business metrics net dollar retention and customers contributing more than $5000 in IRR.
Net dollar retention was 108% in the quarter, which includes a two percentage point benefit from FX.
In Q3, our overall churn came in better than our initial estimates slightly improving from the prior quarter.
Looking ahead, we are planning for the lower net expansion trends to persist for the remainder of the year as we expect net dollar retention to be approximately 105% for both constant currency and as reported in Q4.
Dennis Woodside: Turning to our SMB opportunity, this remains large. As G mentioned earlier, we're taking advantage of that by enhancing our inbound motion with a view to drive entire conversions and attracting stickier customers. We saw encouraging signs in the SMB segment in Q3 as the term rate improved year over year and also quarter over quarter. Millions of SMBs need to adopt AI and automation now to stay competitive, and we believe AI can greatly simplify customer and employee experience.
Moving to our other key business metric of number of customers contributing more than $5000 in IRR.
This metric grew 17% year over year to 19551 customers in the quarter and continues to represent 88% of our IRR.
On a constant currency basis, this customer metric grew 16% year over year.
Dennis Woodside: Sciences. Underscoring this, many of our AI beta customers today are FNB and mid market companies, including ultra fabrics and early pioneer of socially conscious fabric manufacturing, Jacob Stern and Suns, a distributor of specially agricultural products since 1850, and virtual identity, a digital creative agency. Each of these customers uses Freddie Self Service to automate level zero and level one support with modern virtual agent conversations. We're embedding AI capabilities across our products, as this is a critical growth driver for us.
For our larger customer cohort contributing more than $50000 in the IRR. This cohort grew 32% year over year to 2268 customers and represents 46% of our <unk>.
Adjusting for constant currency. This core grew at 30%.
We added nearly 1000 net customers in the quarter, which was an increase from Q2.
We ended the quarter with a customer count of approximately 66600, as we continued our focus on attracting higher yielding customers and building a healthier base and driving a higher ARPA.
Dennis Woodside: New features include context scenario for Freddie Insights, which analyzes top context scenarios in tickets and conversations and helps deploy bots for them. This is just one of many enhancements we released with Freddie AI to deliver more value to our customers in Q3. Our plan is to monetize increased automation through bot sessions in a consumption or usage-based model. As automation frees up agents to focus on higher value work, we can also assist with our co-pilot add-on to help them be more productive. Our continued traction with larger customers over $50,000 in ARR, combined with our expansion motion and large SMB opportunity, create a go-to-market motion unique to fresh works.
Moving to calculated billings balance sheet and cash items.
Calculated billings grew 21% year over year to $165 3 million and 19% on a constant currency basis fact.
Factors, including timing duration of contracts and revenue reserves in the quarter create a slight benefit of 1% to these growth numbers.
Looking ahead to Q4 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 revenue growth of approximately 20% for both as reported and constant currency.
During the quarter, we generated $22 1 million in free cash flow ahead of our estimates and reflective of the efficiency improvements, we're making in the business.
Dennis Woodside: We believe it is this combination of growth levers that gives us confidence in our ability to reach our goal of one billion in revenue in the next three years. I'm also excited to announce the upcoming appointment of a new management team member who will be crucial in helping us reach that big goal. Nika Yamamoto will join us as Chief Customer and Marketing Officer on November 20th. Nika has proven executive leadership experience at large public tech companies with deep technology, sales, and marketing experience serving multiple buyers that are relevant to fresh works. She was most recently the Chief Customer Experience and Marketing Officer of F5 and was previously the President of Marquetto, Chief Digital and Marketing Officer at SAP and held senior roles at Amazon, Gardner, and Microsoft.
We ended the quarter with a similar balance for cash cash equivalents and marketable securities of $1 $1 6 billion.
We continue to net settle vested equity amounts using $24 million during the quarter, which is reflected in financing activities and this activity is excluded from free cash flow.
As we look forward to Q4, we plan to continue net settling invested equity amounts, resulting in Q forecast cash usage of approximately $18 million using current stock price levels.
For the year, we expect to use approximately $70 million to net settle vested equity amounts.
Given the meaningful operational efficiencies, we've realized so far this year, we are raising our free cash flow estimates for the full year 2023 by $15 million.
Tyler Sloat: Now over to Tyler to go through the Q3 financials and talk about how we're driving efficiency. Thanks, Dennis, and thanks again to everyone for joining us.
To $75 million.
Turning to our share count for Q3.
Tyler Sloat: Before I get started, I want to thank you once again to everyone who attended our first investor day. It was great to spend time with many of you in person and to provide an update on the fresh work story. Once again, we had another quarter of good execution in Q3. We beat our revenue growth estimates and continued driving additional leverage in the business to expand both non-GAP operating and free cash flow margins quarter over quarter.
We had approximately 327 million shares outstanding on a fully diluted basis as of September 32023.
The fully diluted calculation consists of approximately 295 million shares outstanding $29 million related to Unvested ours to use mpr's use and 3 million shares related to outstanding options.
Let me now provide our forward looking estimates.
For the fourth quarter of 2023, we expect.
Tyler Sloat: We continue to realize the financial benefits resulting from the operational changes made earlier in the year and recreating a healthier position to drive profitable long-term growth for the business. For our call today, I'll cover the Q3 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q4 in the full year 2023. We'll also include constant currency comparisons for certain metrics to provide a better view of our business trends.
Revenue to be in the range of $156 7 million to $159 3 million.
Growing 18% to 20% 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 $5 5 million to $8 5 million.
And non-GAAP net income per share to be in the range of <unk> to <unk> <unk>, assuming weighted average shares outstanding of approximately $303 3 million shares.
Tyler Sloat: As a reminder, most of our discussion will be focused on non-gap financial results, which exclude the impact of stock-based compensation expenses and other adjustments. Starting with the income statement, revenue grew 19% Eurovere to $153.6 million on a reported basis, and 18% adjusted for constant currency, as we're beginning to see the positive impacts on currency rates for the Euro-and-pounding is the dollar over the past year. ITSM deal activity continued to drive much of the growth in Q3, while expansion rates ticked down slightly in the quarter.
For the full year 2023, we expect.
Revenue to be in the range of 593 million to $595 5 million growing 19% to 20% year over year.
Adjusting for constant currency this reflects growth of 19% to 20% year over year.
non-GAAP income from operations to Marines of $38 5 million to $41 5 million.
non-GAAP net income per share to be in the range of 23 to 25, assuming weighted average shares outstanding of approximately $301 million.
Tyler Sloat: Turning to margins, we had another strong quarter of non-gap gross margin of 84% as we efficiently scale the business. In Q3, we achieved a non-gap operating margin of 11%, which represents a 3% point improvement quarter of a quarter. This is driven by lower than expected headcount-related costs, some delays in spend, and ongoing improvements on operating expenses. Turning to our operating metrics, we have two key business metrics, net dollar retention and customers contributing more than $5,000 in ARR.
Given the U S dollar trends over the past year, we saw a slight positive impact to our growth rates in Q3.
Our forward looking estimates are based on FX rates as of October 27th 2023, So any future currency moves are not factored in.
Let me close by saying, we continue to execute on our goals in Q3, we maintained our rapid pace of product innovation realize the benefits of operational changes made earlier this year and remain focused on the growth initiatives to help drive momentum into 2024.
Tyler Sloat: Net dollar retention was 108% in the quarter, which includes a 2% point benefit from FX. In Q3, our overall turn came better than our initial estimates, slightly improving from the prior quarter. Looking ahead, we are planning for the lower net expansion trends to persist for the remainder of the year as we expect net dollar retention to be approximately 105% for both constant currency and as reported in Q4. Moving to our other key business metric of, number of customers contributing more than $5,000 in ARR.
We're excited and look forward to our many opportunities ahead.
And with that most of your questions.
Later.
Thank you and as a reminder to ask a question. Please press star one one on your telephone.
To withdraw your question Press Star one again.
And our first question comes from the line of Scott Berg with Needham <unk> Company.
Okay.
Tyler Sloat: This metric grew 17% year over year to 19,551 customers in the quarter, and continues to represent 88% of our ARR. On a constant currency basis, this customer metric grew 16% year over year. For our larger customer cohort contributing more than $50,000 in ARR, this cohort grew 32% year over year to 2,268 customers and represents 46% of our ARR. Adjusting for constant currency, this core grew at 30%. We added nearly 1,000 net customers in the quarter, which was an increase from Q2.
Pardon me Scott Please check your mute button.
Okay. One moment please for our next question.
Okay.
And our next question comes from the line of Ryan Mcmil Mcwilliams with Barclays.
Hey, guys. Thanks for taking the question and pleased to see the continued work to improve profitability here.
Asking about kind of how things move through third quarter like how would you say your new business did.
Tyler Sloat: We ended the quarter with a customer count of approximately 66,600 as we continued our focus on attracting higher yielding customers and building a healthier base and driving a higher ARPA. Moving to calculated buildings, balance sheet and cash items. Calculated buildings grew 21% year over year to 165.3 million and 19% on a constant currency basis. Factors including timing duration of contracts and revenue reserves in the quarter create a slight benefit of 1% to these growth numbers.
In the month of September and how is October been so far.
Hey, sorry about that Ryan Thanks, Pat.
I think the question is around linearity and so as we went through September.
Kind of played out as we expected.
Meaning that we've been dealing with larger companies and larger deals and over the last let's call it year become a little bit more backend loaded. So that was expected October the guidance that we just gave out.
Tyler Sloat: Looking ahead to Q4 2023, our preliminary estimate for calculated buildings growth is 18% as reported and 17% on a constant currency basis. For the full year 2023, we expect calculated buildings growth to be similar to our expected annual revenue growth of approximately 20% for both as reported and constant currency. During the quarter, we generated 22.1 million in free cash flow ahead of our estimates and reflective of the efficiency improvements we're making in the business.
Takes into account everything we see we are trying to call. It as we see it. So October is going as we expected as well.
I appreciate that and I know, it's early but.
A lot of.
Customer interest around for the AI, so any more detail on the timing of the rollout there.
Expectations or just any more additional commentary around how that can be initially adopted within your customer base like <unk> penetration rate or what kind of customer you can see that first okay. Thank you.
Sure I'll take that this is good.
Tyler Sloat: We ended the quarter with a similar balance for cash, cash equivalents and marketable securities of $1.16 billion. We continued to net settle vested equity amounts using $24 million during the quarter, which is reflected in financing activities. And this activity is excluded from free cash flow. As we look forward to Q4, we plan to continue net settle invested equity amounts, resulting in Q4 cash usage of approximately $18 million using current stock price levels.
So we.
We have.
If you remember last quarter during Investor day, we actually said that.
Several of our customers will be divesting, our phase II, specifically <unk> self service.
Self service automation capability for our customer service and employee service.
This.
And being used by our customers we are monetizing it through our box and the customer service platform.
Pretty copilot and pretty insights this quarter, we have actually put it in.
Tyler Sloat: For the year, we expect to use approximately $70 million to net settle vested equity amounts. Given the meaningful operational efficiencies we realized so far this year, we are raising our free cash for less than that's for the full year 2023 by $15 million to $75 million. Turning to our share count for Q3, we had approximately 327 million shares outstanding on a fully diluted basis as of September 30, 2023. The fully diluted calculation consists of approximately 295 million shares outstanding 29 million related to invested RSU's and PR's use and 3 million shares related to outstanding options.
When I say this quarter than in Q3, and we have actually put it into EBITDA and to our cost.
Thousands of customers that are using it are clients for monetizing.
Copilot would be thinking of Q1 2024 is when we would start.
<unk> four copilot and Thats, an add on to agency licenses, we are still working with customers on insights we have not unless the pricing put in it.
Perfect color okay.
Thank you one moment please for our next question.
Tyler Sloat: Let me now provide our forward looking estimates. For the fourth quarter of 2023, we expect revenue to be in the range of 156.7 million to $159.3 million growing 18% to 20% year over year. Adjusting for constant currency, this reflects growth of 17% to 19% year over year. Non-gap income from operations to be in the range of $5.5 million to $8.5 million and non-gap net income per share to be in the range of 4 cents to 6 cents, assuming weighted average shares outstanding of approximately 303.3 million shares.
Our next question comes from the line of Scott Berg with Needham <unk> Company.
Hopefully everyone can you hear me this time congrats on the strong quarter and thanks for taking my questions.
I guess a couple of Denis wanted to start with you sales in quarter, you seem quite quite pleased with them one of the trends I've noticed over the last couple of years as your third quarter kind of customer adds are.
We have a seasonal dip versus the second quarter results. This year. It looks like it's very much. The same can you help remind us what you see internationally that might be causing a little bit of that change from Q3 Q2 to Q3. My guess is it has something to do with just the European sales cycles, but didn't know if there's anything more nuanced to call out there in particular.
Tyler Sloat: For the full year 2023, we expect revenue to be in the range of 593 million to 595.5 million dollars growing 19% to 20% year over year. Adjusting for constant currency, this reflects growth of 19% to 20% year over year. Non-gap income from operations to be in the range of 38.5 million to 41.5 million dollars and non-gap net income per share to be in the range of 23 cents to 25 cents. Assuming weighted average shares outstanding of approximately 300.1 million.
Yeah. Thanks, Scott Yeah, nothing really nuanced there I don't think we had anything this quarter.
Related to European sales cycles, we continue to see strength in the larger accounts continue to see strength in it.
And we did see an uptick in net adds to around 1000 net adds for the quarter from last quarter.
So we didn't see the kind of depth that perhaps we've seen in the past.
Tyler Sloat: Given the US dollar trends over the past year, we saw a slight positive impact to our growth rates in Q3. Our forward-looking estimates are based on FX rates as of October 27, 2023. So any future currency moves are not factored in. Let me close by saying we continue to execute on our goals in Q3. We maintain our rapid pace of product innovation, realize the benefits of operational and changes made earlier this year, and remain focused on the growth initiatives to help drive momentum into 2024. We're excited and look forward to our many opportunities ahead.
Last quarter, we had in Q2, we had a free offering for our.
Truss sales product that we then pulled back and that has resulted in the.
The increase in the overall net ads for Q3.
Got it helpful. And then I wanted to follow up on the question on improving win rates or excuse me improving churn down market I think thats always super interesting because of points improvement there makes a big difference both on the topline and Bottomline profitability, how should we think about your opportunity to improve that.
Churn in that segment SMB churn across software is always the tourists. We low I know you all have had some some success improving that number but how do we think about what that kind of runway for improvement it looks like maybe over the next several quarters.
Unknown Executive: And with that, let's take your questions.
Unknown Executive: Operator? Thank you. As a reminder, let's ask a question.
Unknown Executive: Please press star 1-1 on your telephone. To withdraw your question, press star 1-1 again.
Yes, Hey, Scott this is Tyler.
You are right, we've actually done a really good job on churn just as a company over the last I'll call it year.
Scott Berg: Anderson, and our first question comes from the line of Scott Berg with Needham and Company.
Year, plus what we've had quarters, where it's kind of remained stable and then other quarters, where we actually make some some good improvement on it this past quarter was a company best for us in terms of churn in general.
Unknown Executive: Part of me, Scott, please check your mute button.
It's across the board across the products on the SMB side.
I think it's more characteristic that the products are getting better and we're getting also better at kind of.
Ryan Macwilliams: Okay, one moment please for our next question. And our next question comes from the line of Ryan MacWilliams with Barclays. Hey guys, thanks for taking the question. Please see the continued work to improve profitability here. Just asking about, you know, kind of how things moved through the third quarter. Like, how did you say your new business did, you know, in the month of September? And, you know, how has October been so far? Thanks.
Focusing on the right icp's for ideal customer profile for our customers, even though on SMB.
Which has led to maybe slightly lower total number of customers, which you've seen in Alaska.
Our quarters, but better customers in some cases, so I do think that going forward.
The improvements are going to be more subtle, but I do think that we do have a little bit of room to go in terms of improving churn over the next year year and a half.
Yeah.
Thanks, a lot very helpful. Thanks for taking my questions and congrats on the strong quarter again.
Thanks Scott.
Ryan Macwilliams: Hey, sorry about that. Right. Thank you, Ben.
Thank you one moment please for our next question.
Tyler Sloat: I think the question's around linearity. And so as we went through September, kind of played out as we expected, meaning that, you know, we've been dealing with larger companies and larger deals and have over the last, you know, let's call it year and become a little bit more back and noted. So that was expected. October, you know, the guidance that we just gave out is, you know, it takes into account everything. You were trying to call it as we see it. So October is going as we expected as well. Appreciate that.
And our next question comes from the line of pendulum Bora with J P. Morgan.
Hey, guys. Thanks for taking the questions and congrats on the quarter.
I wanted to ask you on the box side can you help us maybe understand what portion of the overall IRR today is driven by broad based pricing and how should we think about kind of the changes in the pricing and packaging that went into effect.
<unk>, how is that going to be layered into the model.
Garrish Mathrubootham: And I know it's early, but, you know, we've heard a lot of customer interest around pretty AI. So any more detail on the timing of the rollout there. Any early expectations or any just any more additional commentary around how that can be initially adopted within your customer base, like maybe a penetration rate or what kind of customer you can see that first. And thank you.
Yeah, I'll start with that and talk about the financial parts tender on this is Tyler.
Garrish Mathrubootham: Sure. I'll take that. This is good.
We changed our pricing at the end of Q2.
In terms of.
Our chat pricing, which then.
Bots are.
Kind of embedded in that which would also embedded the.
Friday self service capabilities.
It's really really new and so we don't have that much embedded in terms of the new feature functionality, we do have.
Garrish Mathrubootham: So we have. Actually, if you remember last quarter during investor day, we actually said that several of our customers will be testing our very AI, specifically, pretty self service, which is the self service automation capability for customer service and employee service. That is in being used by our customers. We are monetizing it through our boards and the customer service platform and pretty co pilot and pretty insights. This quarter, we have actually put it in.
I think a decent amount of revenue and we would expect that to continue to kind of increase as we progressed here.
Other AI capabilities right, we haven't started charging for it they're still in beta and they will be coming out kind of.
Q1, and that's that's really co pilot will be the next one that's coming out and so.
Every quarter, we expect to have a little bit more increase on.
Self service again, that's going to be reflected more in usage.
Yeah understood and Tyler on that topic, then it seems like you have a few tailwind like going into next year. The blood based pricing Skus that I think you said, we'll be monetizing in Q1.
Garrish Mathrubootham: We have actually put it in beta into our customers, thousands of customers are using it our plans for monetizing pretty co pilot would be we're thinking of Q1 2024 is when we would start charging for co pilot and that's an add on to agency licenses. We are still working with customers on insights. We are not unless surprising for insight.
Maybe potential stabilization on the MTR metric.
Obviously macro and geopolitical climate is a wildcard, but help us understand how are you thinking about 2024, what are the puts and takes.
Unknown Executive: Thank you.
We look forward.
Yeah. So.
So we haven't guided to anything for 2020 for you in our Investor day, we kind of talked about 'twenty 'twenty five in terms of gain to rule of 40, and then we talked about some revenue numbers for 2026, we will give out the 24 numbers at the end of this quarter I do think youre right in terms of <unk>.
Scott Berg: One moment please for our next question. Our next question comes from the line of Scott Berg with Needham and company. Hi, I hope everyone can hear me this time. You can grab some of the strong coordinates. Thanks for taking the question. I guess a couple of Dennis wanted to start with you. Sales and quarter, you seem quite pleased with them.
I just said I think we can make some.
Slight improvements there, but it's definitely heading in the right direction.
In terms of the AI skus.
So new.
Have to wait and see on those things.
Dennis Woodside: One of the trends I've noticed over the last couple of years is your third quarter kind of customer ads or you always have a seasonal dip versus the second quarter kind of results in this year looks like it's very much the same. Can you help remind us what you see internationally that might be causing a little bit of that change from Q2 to Q3. My guess is that that's something to do with just European sales cycles.
The one other comment you made on macro we don't expect macro to immediately return on turnaround and for us.
That would be reflected in our expansion motion increasing with agent addition, meaning companies youre going back to hiring and we expect that to see continued pressure for a while so we've kind of built that into our expectations.
Dennis Woodside: But didn't know if there's anything more nuanced to call out there. Yeah, thanks. Yeah, nothing really nuance there. I don't think we had anything. This quarter related to European sales cycles. We continue to see strength in the larger accounts, continue to see strength and IT. And, you know, we did see an uptick in net ads to around 1000 net ads for the quarter from last quarter. So we didn't see the kind of.
Got it thank you.
Thank you one moment please for our next question.
Okay.
And our next question comes from the line of Rob Oliver with Baird.
Great Hi, good afternoon, Thanks for taking my questions Dennis one for you just on.
The comment around more than half of the 50000 plus customers now using two products.
Dennis Woodside: Dip that perhaps we've seen in the past. Remember last quarter we had in Q2, we had a free offering for our fresh sales product that we then pull back and that has resulted in the increase in the overall net ads for Q3. Got it helpful.
Clearly great great product.
On that front for you guys. I think you said overall, it's at 25%, which is kind of what you had said at the analyst day, which is great.
Just curious.
As you make that move sort of off market are you seeing more multi product lands or are these still largely expands and then can you talk a little bit about what you see in the pipe and if there is a mix of those and then I had a quick follow up yes.
Tyler Sloat: And then I wanted to follow up on the question on improving win rates or excuse me, improving churn down market. I think that's always super interesting because a, you know, point improvement there makes a big difference both on the top line and bottom line profitability. How should we think about your opportunity to improve that, you know, churn in that segment. SMB churn across offer is always the tourist low. I know you all have had some some success improving that number, but how do we think about what that kind of runway for improvement looks like maybe over the next several quarters.
Sure, Yes, so thanks, Rob we do see multi product lines they tend to be.
Multi products within the same family. So an example would be a customer taking plus CSM.
Or fresh chat and fresh desk.
Now most of our expansion in those larger accounts tends to go cross true persona. So for me to see us in fact, if we look at our largest expansions.
Tyler Sloat: Hey, Scott, this is Tyler. You're right. We've actually done a really good job on churn just as a company over the last call, you know, year plus where we've had quarters was kind of remained stable and then, you know, other quarters where we actually make some good improvement on it. This past quarter was a company best for us. In terms of terms of turn in general. And that's across the board across the products on the SMB side.
Those are true cross product expansion some of them I think we talked about in the.
In the prepared remarks, like giant Eagle and Western financial.
So as we as we continue to move up market that expansion motion is becoming more and more important for us and thats going to be a big emphasis for us going into next year.
Great. That's really helpful. Thanks for the color there.
Tyler Sloat: I think it's, you know, more characteristic that the products are getting better and we're getting also better at kind of focusing on the right ICPs for ideal customer profiles for our customers, even on SMB, which is led to, you know, maybe slightly lower total number of customers, which is, you know, last couple of quarters, but, but better customers in some cases. So I do think that going forward, you know, the improvements are going to be more subtle, but I do think that we do have a little bit of room to go in terms of improving turn over the next year, year and a half. Thanks for the very helpful things taking my questions in regards to the start quarter again. Thanks, Scott. Thank you.
And then just on the macro Tyler.
Your comments in response to the last question just about how youre thinking about macro around agent count.
You kind of reiterated what you said at the analyst day, which is hey, we're not really counting on those agent additions.
Yes.
Does that sounds like Thats, the pressure thats likely going to remain here, but on the other hand, it does seem like you guys.
Deliver tremendous value for the price. So I'm, just just be curious to get a sense.
The execution has been strong here.
Is there is there a flip side to the sort of macro headwinds where some of those mid market customers are feeling like maybe upper end can get a lot more value with you guys or are you seeing some of that as well. Thanks.
Ben Gillin Bora: One moment, please. For our next question. And our next question comes from the line of Ben Gillin Bora with JP Morgan.
Hey, Rob I think that is good.
Tyler Sloat: Hey guys, thanks for taking the questions and congrats on the quarter. I want to ask you on the box side. Can you help us maybe understand what portion of the overall ARR today is driven by bought based pricing. And how should we think about kind of the changes in the pricing packaging that went into effect in August?
First of all I would like to say that.
On a macro standpoint, we are not seeing any significant change.
In Q3, compared to Q2 and one of those.
Clearly.
When companies are still carefully considering the expense we are the vendor of choice because of our affordable pricing and lower total cost of ownership. So that maybe labor not just one specific efficacy.
Tyler Sloat: How is that going to be layered into the Yeah, I'll start with that, talking about the financial parts from Joon, Mrs. Tyler. You know, we changed the pricing at the end of Q2, in terms of, you know, our chat price in which then, you know, the bots are kind of embedded in that, which would also embed the Freddie self service capabilities. It's really, really new. And so we don't have that much embedded in terms of the new feature functionality.
Pretty much a promise to our customers.
As we see continued demand for AI and even to offset.
Moving forward, we hope tech.
AI strategy will help us.
Make money when businesses are not heading agents.
Make money when businesses are cutting agents by making them more productive and also out in place got it helping open up a new SKU for our leaders.
Tyler Sloat: We do have, you know, a decent amount of chat revenue. And we would expect that to continue to, you know, kind of increase as we progress here. The other AI capabilities, right, we haven't started charging for it. They're still in beta, and they will be coming out kind of, you know, Q1 and that's, that's really co-pilot. We'll be the next one that's coming out. And so, you know, every quarter we expect to have a little bit more increase on, on Freddie self service.
Great. Thanks, Steve Thanks, everyone.
Thanks, Rob.
Thank you.
Please for our next question.
Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.
Hi, guys. Thanks for taking my question congrats on the quarter.
The first for me you guys talked about your AI products.
And made it seem like that maybe <unk> might be the biggest early adopters of this is that how youre thinking about it and you think that can help maybe drive a step function improvement in churn at the lower end of the market.
Tyler Sloat: Again, that's going to be reflected more in chat usage. Yeah, understood. And Tyler on that topic, then it seems like you have a few tailwinds, like going into, to next year, the bot-based pricing, the AI SKUs that I think Greece said will be monetizing in Q1. Maybe potential stabilization on the NDR metric. Obviously macro and geopolitical climate is a wild card, but help us understand how are you thinking about 2024? What are the potential takes as we look forward?
Okay.
Yes, I'll take that.
No.
First of all if you look at the three pillars of <unk> strategy pretty self service.
I think will be really really useful and adopted by larger customers. Because they are the ones who have a large volume of support like millions of customers coming in for <unk>, So that's where the scope for automation.
Tyler Sloat: Yeah, so, so we haven't guided anything for 2024 yet. And on best of day, you know, we can't talk about 2025 in terms of getting to a 40 and then we talked about some revenue numbers for 2026. We'll give out the 2024 numbers at the end of this quarter. I do think you're right, you know, in terms of turn, I just said, I think we can make some, you know, slight improvements there, but it's definitely heading the right direction.
Much higher on the other hand pretty copilot.
Probably be.
More universally applicable to SMB and mid market customers because.
The user can now become more productive and smbs really want to do more with less so and pretty insights. This four leaders again.
Tyler Sloat: And in terms of the AI SKUs, it's so new, we'll have to wait and see on those things. And the one other comment you made on macro, we don't expect, you know, macro to immediately return around and for us, that would be reflected in, you know, our expansion motion, increasing with agent addition means companies are going back to hiring. And, you know, we expect that to see continued pressure for a while, so we've kind of built that into to our expectations. Got it. Thank you.
Larger companies may benefit more because that needs for data from different teams could be larger so and specifically on AI, helping us deal with the macro I think.
He said this.
Last earnings call. So we are focused we are not waiting for the macro have improved we are focused on controlling the variables that weekend I'll focus on four growth pillars, and how can we use product innovation and AI, how can we cross sell more into our existing base. How can we focus on larger deals and drive more operational efficiencies. So that is our plan to keep exit.
Rob Oliver: One moment, please for our next question. Our next question comes from the line of Rob Oliver with Bayard. Great. Hi. Good afternoon. Thanks for taking my questions. Dennis, one for you just on the comment around more than half of the 50,000 plus customers now using two products. Clearly great, great progress on that front for you guys. I think you said overall it's at 25%, which is kind of what you had said at the end of the day, which is great.
<unk> is while we wait for the metrics.
Hey, Dennis just to add some color there today.
Dennis Woodside: Just curious, you know, as you make that move for a rough market, are you saying more multi-product lands or are these still largely expands? And then can you talk a little bit about what you see in the pipe and if there's some mix of those? And then I had a quick follow up. Yeah. Sure. Yeah. So thanks Rob. We do see multi-product lands. They tend to be multi-products within the same family.
We're seeing even though our products are still in beta we are seeing pretty broad adoption across all customer sizes for our AI products. So we have over 2500 customers and data using Freddie co pilots and provision productivity, we have over 4000 customers using some aspect of Freddie insights and those range the gamut from our <unk>.
Just to our smallest customers. So I think I think AI is it's on the agenda for every every CEO theyre all looking for improved outcomes. They are looking for improved efficiency in their operations.
And all of our customers whether you are a customer support later and later you have to have an AI strategy. So thats provoking a lot of discussions and we're very optimistic about how this is going to play out over the next year.
Perfect I appreciate it thanks guys.
Dennis Woodside: So an example would be a customer taking IT plus ESM or fresh chat and fresh desk. Now, most of our expansion in those larger accounts tend to go cross true persona. So from IT to CS. In fact, if we look at our largest expansions, those are true cross product expansions. Some of them, I think we talked about in the, in the prepared remarks like giant evil and Western financial. So as we continue to move up market, that expansion motion is becoming more and more important for us.
Thank you one moment please for our next question.
Our next question comes from the line of Nick Altmann with Scotiabank.
Awesome. Thanks.
Thanks, guys I think earlier you had noted that churn has improved in SMB, both year over year and quarter over quarter.
I was wondering if you could maybe talk about the expansion side and how that's trended and then just as a follow up.
Were any of that any of the changes that you've made to pricing earlier. This year has that been sort of a tailwind to NR and if you could quantify that if youre willing to disclose that that'd be helpful. Thanks.
Dennis Woodside: And that's going to be a big emphasis for us going into next year. Great, that's really helpful. Thanks for the color there. Yeah, and then just on the macro, Tyler, I appreciate your comment in response to the last question, just about how you're thinking about macro and around each encounter. You know, we're kind of reiterated what you said at the analyst day, which is, you know, hey, we're not really counting on those agent additions.
Hey, Nick this Tyler I'll take that one so yeah.
And churn, we're just doing better.
Kind of and have been for a while just because these are subtle improvements and.
And as mentioned, we made kind of a.
Accompany best ever and turn this past quarter.
Dennis Woodside: You know, and that sounds like that's the pressure that's likely going to remain here. But on the other hand, you know, it does seem like you guys, I mean, deliver tremendous value for the price. So I'm just just curious, you know, to get a sense, you know, as the execution's been strong here, what, what, you know, is there, is there a flip side to the sort of macro, pedwins where some of those mid market customers are feeling like it may be upper end can get a lot more value with you guys.
It goes from SMB, all the way up I think part of that is because we have been moving to larger customers, they're saying annual deals.
So the mix shift of our customer base is changing part of it fresh service in general which plays in the larger markets that is growing faster and that has great characteristics.
On the flip side of that question you asked about expansion expansion is it really hasnt changed.
Changed and it's still a pretty tough environment for expansion and specifically around agent addition.
Dennis Woodside: Are you seeing some of that as well? Thanks. Hey Rob, I think that is a great. So, first of all, I would like to say that from a macro standpoint, we're not seeing any significant change in Q3 compared to Q2 and one of this. Clearly, when companies are still carefully considering their spends, we are a vendor of choice because of our affordable pricing and lower total cost of ownership. So that may be in play, but not that's not specific.
Dennis Woodside: So that's pretty much our promise to our customers. And as we see continued demand for AI and even to offset the moving forward, we hope that our AI strategy will help us make money when businesses are not hiding agents that will make money when businesses are hiding agents by making them more productive and also our insights product helping open up a new skew for leaders.
And so what we have been doing is looking at other ways to expand with our customer base, one of those which you've alluded to that we did.
They do some some price changes on our service product.
Did get some.
Some benefit from that so far this year.
So that has helped our net dollar retention slightly and so even though on one side. The expansion motion overall is coming down we did we did get some expansion benefit from price a little bit.
But also benefit from churn so hopefully that breaks it down for you.
Awesome. Thanks, guys.
Okay.
Thank you.
Please for our next question.
And our next question comes from the line of Brent Thill with Jefferies.
Tyler on NRI, you mentioned it is going to moderate more in Q4 is Q4 going to be a bottom for for that moderation and NR in.
Tyler Sloat: Great. Thanks, Chief. Thank you, everyone. Thanks Rob. Thank you.
Brett Noblick: One moment please for our next question. Our next question comes from the line of Brett Noblic with Cantor Fitzgerald. Hi guys, thanks for taking my questions and grabs on the quarter. I guess the first for me, you guys talk about your AI product. And it seemed like that maybe SMEs might be the biggest early adopters of this. Is that how you're thinking about it and you think that could help maybe try to step function improvement in turn at the lower end of the market. So yeah, I think that so.
Maybe for Dennis.
In EMEA held up really well.
<unk> showed a pretty big slowdown anything going on in APAC.
Describe what happened there thanks.
Hey, Brian I'll take the first part of it. So we have been calling kind of coming out of Q1, even that we thought Q2 is going to go to $105 six range.
We've been doing a little bit better and part of the reason is because churn has been doing better because of kind of the.
The expansion has kind of come through as we expect.
We're calling the kind of 105 for Q4 and based on what we see right now we do hope that thats kind of kind of be.
Garrish Mathrubootham: First of all, if you look at the three pillars of our AI strategy, pretty self service. I think will be really, really useful and adopted by larger customers because they are the ones who have a large volume of support like millions of customers coming in for support. So that's where the scope for automation is much higher. On the other hand, pretty co-coil it would probably be like more universally applicable to SMEs and with market customers because every user can now become more productive and SMEs really want to do more with less.
The floor.
And we'll obviously update that going into next year, if anything changes.
That kind of assumes that we will be able to maintain the levels of churn and expansion is not going to get dramatically worse and so that's obviously the assumptions going into that number yes. Just on the geography question, we really didn't see a slowdown in Asia Pac we had pretty consistent performance across our three big Geos.
<unk>.
So no I would say no appreciable trends to call out there.
Garrish Mathrubootham: And pretty insight is for leaders again, larger companies may benefit more because their needs for data from different teams could be larger. So and specifically on AI helping us deal with the macro. I think we said this in the last earnings call. So we are focused. We're not waiting for the macro to improve. We are focused on controlling the variables that we can like our focus on fourth growth pillars. How can we use product innovation in AI? How can we cross sell more into an existing base? How can you focus on larger deals and drive more operational efficiency? So that is our plan to keep executing as well. We wait for them.
Great. Thanks.
Thanks, Brian.
Thank you one moment please for our next question.
And our next question comes from the line of Alex Zukin with Wolfe Research.
Hey, guys. This is Ethan broke on for Alex Congrats on the solid results I have two.
Quick questions are dispersed so one of your peers earlier in the month noted that there's some growth slowdown in September. So just curious like what youre seeing in the demand environment, just given the solid results.
An early customer conversations and budgets like what are the discussions like with 24, we've heard a lot around a two consolidations. So just curious how you guys saw going across the front office staff, helping driving some larger strategic deals.
Dennis Woodside: Yeah, and just pay, it's Dennis just to add some color there. Today we're seeing, even though our products are still in beta, we're seeing pretty broad adoption across all customer sizes for our AI products. So we have, we have over 2500 customers in beta using Freddie co-pilot and pervaging productivity. We have over 4,000 customers using some aspect of Freddie insights and and those range of gamut from our largest to our smallest customers.
Hi, Haytham I'll take that so in terms of the first part of the question is around September.
I already mentioned, hey, we become a little bit more backend loaded as we've been dealing with larger customers.
It kind of came through as we expected and.
<unk>.
Dennis Woodside: So I think, I think AI is, it's on the agenda for every, every CEO, they're all looking for improved outcomes, they're looking for improved efficiency in their operations. And all of our customers, whether you're a customer, sport leader, an IT leader, you have to have an AI strategy. So that's provoking a lot of discussions. And we're, and we're very optimistic about how this is going to play out over the next year. I appreciate it. Thanks, guys.
It wasn't there was no real surprise there.
We expect that kind of that backend loaded nature of the quarters two to continue as we are.
Kind of doing that more of that field motion.
Nick Altman: Thank you. One moment, please, for our next question. Our next question comes from the line of Nick Altman with Scotiabane.
As we look into next year and you asked about hey in terms of budgets or we've seen.
Anything different there and we're not seeing anything different in part of our play is to you just mentioned is to be a great.
Kind of a great cost alternative and we're going to continue to try to flex that muscle as we go engage with customers, especially if they are seeing budget pressures, we feel that we can be a great alternatives some of their big heavy software that they might have.
Yeah, and then just a quick follow up around that.
Nick Altman: Awesome. Thanks, guys. I think earlier you had noted that, uh, churn has improved an SMB, both your year and quarter quarter. I was wondering if you could maybe talk about the expansion side and how that's trended. And then just as a follow-up, where any, you know, any of the changes that you've made to pricing earlier this year, has that been sort of a tailwind to NRR and if you could quantify that, if you're willing to disclose that, that'd be helpful.
So here's my copilot coming into <unk>.
The constructive I'm just curious based on the early traction you're seeing in beta and just how would you stack rank. What you guys would expect me the most impactful for 'twenty four numbers. If we think about impact from new spend are interested in getting our skus uplift improving gross retention spears like Directionally. How you guys are thinking about that thank you again.
So just a question on monetization.
Nick Altman: Thanks. Hey, Nick, this time, I'll take that one. So, yeah, you know, in turn, we're just doing better, kind of happened for a while, just because these are subtle improvements. And I just mentioned we made, you know, kind of a, you know, a company best ever in turn this past quarter. And, you know, it goes from SMB all the way up. I mean, part of that is because we have been moving to larger customers, they're signing annual deals.
It's so early even right we have our.
The amortization that is just starting essentially in fairly self service, which is again good reflected in chat.
We've talked about Q1 to being kind of rolling out <unk>.
Co pilot.
Which we'd start selling it I think Dennis just mentioned, we've got a lot of customers across the three.
Different AI play that we have that are in beta right now and we're planning to learn as we go and then start to roll. This stuff out. So I think the first time, we're really going to have anything that we would talk about as part of the first half of next year.
Nick Altman: So the makeshift of our customer base is changing part of it, fresh service in general, which plays in the larger markets that is growing faster and as great characteristics. When on the flip side of the question, you asked about expansion, expansion is, you know, it really hasn't changed and it's still a pretty tough environment for expansion and specifically around Asian addition. And so what we have been doing is looking at other ways to expand with our customer base.
Okay got.
Got it thank you guys and congrats again on the results.
Excellent.
Thank you one moment please for our next question.
And our next question comes from the line of Brent <unk> with Piper Sandler.
Nick Altman: One of those which you alluded to is that, you know, we did do some some price changes on our fresh service product, we did get some, you know, some benefit from that so far this year. And so that that has helped our net dollar retention slightly. And so, even though, you know, on one side, the expansion motion overall is coming down, we did, we did get some expansion benefit from price a little bit. But also benefit from turn. So hopefully that breaks it down for you.
Thank you good afternoon, Jay I'll start with you here it sounds like you're excited by the SCS suite product a couple of hundred customers deploying that this quarter.
Tyler Sloat: Awesome. Thanks guys. Thank you. One moment, please for our next question.
What is the HCV uplift as you think about a customer that moves to Ses suite.
Is there an ASP uplift.
When customers move or should we think about this more of a modernized stack and with no uplift.
Okay. Thanks Brent.
So.
First of all yes, there is an uplift.
Probably have to get back to you with exact numbers, but because of the pricing.
Brent Bill: Our next question comes from the line of Brent Phil with Jeffries. Tyler, on NRR, you mentioned it is going to moderate more in Q4 is Q4 going to be a bomb for that moderation and NRR and maybe for Dennis US and Mia held up really well that the APAC showed a pretty big slowdown anything going on in the pack that would describe what happened there. Thanks.
Slightly higher for the CSS suite than standard Flash desk.
<unk> alone I would think.
Tyler Sloat: Hey, Brent, I'll take the first part of it. So, you know, we have been calling kind of coming out of Q1 even that without Q2, it's going to go to 105-106 range and, you know, we've been doing a little bit better and part of the reasons because Turner's been doing better because we're kind of, you know, the expansions kind of come through as we expect, you know, we're calling the kind of 105 for Q4 and based on what we see right now, we do hope that that's kind of kind of be kind of the four, you know, going in.
Tyler Sloat: We'll obviously update that, you know, going into next year if anything changes. That kind of assumes that, you know, we'll be able to maintain the levels of turn and the expansion is not going to get dramatically worse and so that's, you know, obviously the assumptions going into that number.
Dennis Woodside: Yeah, just on the geography question, we really didn't see a slowdown in Asia back. We have pretty consistent performance across our three big Geos. So, you know, no, I would say no appreciable trend to call out there. Great. Thanks. Thank you.
Ethan Brock: What moment, please, for our next question. Our next question comes from the line of Alex Zookin with Wolf Research. Hey guys, this is Ethan Brock on trial to get in there and bring back on the solve results.
Tyler Sloat: I have two quick questions. I just first saw one of your peers earlier than one to know that there's some growth slowdown to September. So just curious, like what you're seeing in the environment, just given the solve results and like based on early customer conversations on budgets, like what's the discussion then like the 2024. We've heard a lot around a true consolidation, so curious how you guys saw them across the front off the stack helping driving some larger strategic fields.
Tyler Sloat: Hey, you know, I'll take that so in terms of the first part of the questions around September, you know, I already mentioned he would become a little bit more back and loaded, you know, as we've been dealing with larger customers, but it kind of came through as we expected and, you know, it. It wasn't, you know, there was no real surprise there. And we expect that kind of, you know, that back and loaded nature of the quarters to continue as we are, you know, kind of doing that more of that field motion.
Tyler Sloat: As we look into next year and you asked about, hey, in terms of budgets, are we seeing, you know, anything different, we're not seeing anything different. And, you know, part of our place to you just mentioned is to be a great, you know, kind of a great cost alternative. And we're going to continue to try to flex that muscle as we go engage with customers, especially if they're seeing budget pressures, we feel that we can be a great alternative to some of their big heavy software that they might have.
Tyler Sloat: Yeah, and then just a quick follow up around the AIC. So, you know, copilot coming in one few is the constructors. I'm just curious. And based on the early traction, you're seeing data and just how would you stack or what you guys would expect the most impact of the 24 numbers, if you think about impact from you spend on just beginning. And AIC is all to uplift, including those connections. Here's like directly how you guys are thinking about this. And thank you.
Tyler Sloat: There's a question on monetization. So, I mean, we, the, it's so early, even right, we have our, the monetization that is just starting essentially in Friday self service, which is again, good reflected in chat. We talked about Q1 to being kind of rolling out GA of copilot, which we'd start selling it. I think, you know, Dennis just mentioned we've got, you know, a lot of customers across the three different AI plates that we have that are in beta right now.
Tyler Sloat: And, you know, we're planning to learn as we go and then start to roll the stuff out. So, I think the first time we're really going to have anything that we will talk about as part of the first half of next year. Thank you. Thank you guys. Thank you.
Brent Bracelin: Thank you for our next question. Our next question comes from the line of Brent Bracelin with Bipersandler. Thank you, good afternoon.
Garrish Mathrubootham: Gee, I'll start with you here. Sounds like you're excited by the CS suite product, a couple hundred customers deploying that this quarter. What is the ACV uplift? Did you think about a customer that moves to CS suite? Is there an ASP uplift when customers move or should we think about this more of a modernized stack and with no uplift? Thanks. Thanks, Brent.
Garrish Mathrubootham: And so, first of all, yes, there is an uplift.
I probably have to get back to the exact numbers, but because the pricing is slightly higher for the CSS suite than standard fresh desk or fresh chat alone, I would think it.