Great. Good morning, everyone. Thank you for joining us at the Morgan Stanley TMT conference. My name's Elizabeth Porter. I'm an analyst on the U.S. Software Equity Research team. I'm very pleased to have with us today Freshworks CFO, Tyler Sloat, and President, Dennis Woodside. Before we begin, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. We are going to take audience Q&A. At the end, there'll be some mics going around. With that, Tyler, Dennis, thank you so much for joining us. Thanks. Thanks for having us. Great. Before we dive into the business, you know, Dennis, you joined Freshworks in September last year as President. That's right. Some investors here may know you from your operational and leadership roles at Google, Dropbox, Impossible Foods, also from your board membership of ServiceNow. I wanted to just understand a little bit more of what attracted you to Freshworks. Yeah. What was it about the opportunity, and what really compelled you to join? I got a call from one of our investors, Sameer Gandhi, who also was an investor in Dropbox, and who I'd gotten to know quite well. He said, "Look, I'm involved with this company, Freshworks. We're in some very big markets, and we have this massive opportunity. We need someone to help come in and really focus on scaling the business, in particular, scaling go-to-market." He introduced me to Girish, and I was just blown away by the vision, right? You know, Girish's vision is to provide software that's simple, easy to use, good value for the customers, across a very broad range of products: IT, CX, CRM. When I dug in and started trying to understand the actual product set, I was pretty impressed with how far the product had matured. My kind of thesis coming in was, here's a business that's doing very well in SMB, has a good product-led growth motion, which Dropbox had as well, and has a real opportunity to migrate up-market. I think what's been a surprise for me coming in is how much progress the company had already made in starting to move into mid-market, which we look at as about 250 employees to 5,000. How much progress had already been made before I got there in terms of product maturity and growth. As we shared in Q4, about 60% of our growth is or 60% of our business now is coming from that mid-market segment. So far it's been really exciting to work with the team, to get to work with Girish, to get to work with our customers. I've been to India twice. I've been to Europe twice. I've probably spoken with over 100 customers in that time. Our customers love our products, which really is how you can build a great business. Great. I definitely wanna dig back into the moving up market piece in just a bit, but, you know, before we go there, as president, you have really broad responsibilities across the organization. What are you seeing in the business in kind of your six months that you've been there, and where are you spending your time? The way we operate, Girish and I are two in a box, so we're co-leading the company. Girish is focused more on technology and, you know, where are we taking the product over a multi-year course. I'm focused very much on how do we execute, how do we create a world-class go-to-market organization, how do we grow the business here and now. I've spent more of my time on the go-to-market side. I've spent quite a bit of my time bringing people in who I like to say, who have seen growth and who have seen great. Mm-hmm. We moved Paddy into the CRO role. He's done an amazing job. Recently brought on a leader who Shafiq Amarsi, who was the head of sales ops at Amazon for eight years. He saw for AWS. He saw AWS go from small to very large, saw great. Bringing those kinds of people into the organization, I think that's super important for us to scale. Been spending quite a bit of time with Paddy and our CMO, Stacey, on how do we create a very efficient path to market and path into this mid-market. And then spending quite a bit of time with Tyler on, you know, what's the plan for the year and how are we driving growth efficiently over the course of this year, next year. Great. I'd love to touch a bit on the demand environment. In Q4, just despite a difficult macro, Freshworks was able to deliver a really strong quarter of new business. You mentioned earlier about the product portfolio really focused on a great value and total cost of ownership and time to value. Can you just touch on, you know, how has demand evolved in recent months and just initial observations for the demand environment into 2023? I think a couple things have come together to lead to that result in Q4, where new business really was the driver of our growth. In many SaaS businesses, they're harvesting their existing customers, and that's where they're getting their growth. We're actually continuing to get new growth. The reason for that is our products have matured very rapidly over the last couple of years, both on the IT side and on the CX side. On CX, we've added conversational capabilities, so integration with WhatsApp and Apple Messages for Business to enable modern Customer Support interactions and created a unified, basically a unified customer record that allows, like, a customer to take advantage of, you know, single pane of glass interaction. On the IT side, we've added ITOM. We've added an employee service management capability to enable us to serve customers outside of IT. Mm-hmm. That's all happened in the last 12- months. The products have matured tremendously. At the same time, our customers are increasingly looking for value. Yeah. You have customers who've had deployments with, let's say, a Service Cloud or Sales Cloud or ServiceNow. They're coming up for renewal. They're asking themselves, "Am I getting the value out of this product that I need to?" They're being pressed to reduce their budgets or at least not grow their budgets, and they're looking for an alternative. That's where we tend to do quite well. We had in larger and larger customers. We had an example of, you know, Carrefour's Belgium division, 11,000 employees, very sophisticated IT department, going with us for IT over one of the larger competitors. Addison Lee was an IT customer, went with us for CRM over a very large incumbent because they liked the fast time to value, the ease of use, and the lower overall TCO. That tends to be why we're winning in the market at a, at a high level. Great. When we think about the core customer base, you know, a lot of it has been more of the smaller businesses. You mentioned kind of where your priority is go-to-market, kind of scaling up bigger into those larger customers. You noted the success with 60% of new business actually coming from more mid-market, larger customers. When you think about what are the tactical things that you're changing, what are the drivers of that improved up-market activity, you know, what would you call out, and how do you view the longer-term customer targets for Freshworks and how that's evolving? Yeah. We have an inbound motion and an outbound motion. We started as a pure product-led growth company that was entirely focused on SMB as a company that was built in India, serving organizations around the world. That motion, it turns out, works for large organizations as well as small organizations. The example of Carrefour Belgium, they actually started through a trial that their IT department signed up for online with no sales interaction whatsoever. They started. They get a little bit of an idea of the product. We of course see that data. We can engage. We can develop that into a bigger opportunity. We can develop that into a sale. For us, we have to continue taking advantage of that, I would say, secret sauce of, you know, marketing and product that drive inbound leads that we can then develop into outbound sales when the customer is big enough. Some of the changes that we made, I think there was an opportunity to clarify that and to say, "Look, field is really supposed to be doing deals that we can't get through that product-led growth motion, and then close deals that come in through that product-led growth motion." We clarified that in part by changing the line between what our SMB team focuses on, which was previously companies with under 250 employees, to move that up to 500. We focused our field teams on very much hunting and growing, right? In the past, reps would have responsibility for both. We need people to develop the art of new customer acquisition, and again, that's partly what benefited us in Q4, and the art of true cross-sell and up-sell. Cross-sell is a big opportunity for us. Most of our expansion in the past has been natural seat additions that happened fairly organically. We haven't leaned into the motion of, "Okay, you're an IT customer. You're a CX. Let me tell you about CX. Let me get in touch with the buyer for CX software. When's your contract coming up?" All that stuff. We're leaning into that big time now, and I'm optimistic about that being a source of growth for years to come. I mean, you asked about what's the ideal customer kind of down the road. I think there's a huge opportunity in where we're focused right now, which is pretty much up to 5,000 employee companies, but then we have, you know, multiple opportunities in larger ones as well. Our kind of go-to-market motion is focused in that, you know, zero to 5,000 employee company where the big incumbents really are not focused there. They don't serve them well. The products in many cases are overbuilt for what those customers need, and we've got a great solution. Moving on to the competitive environment a little bit, one of the differentiation pieces for Freshworks has been that, you know, over 80% of headcount is based in India. How has that just allowed you to differentiate kind of your platform from like the cost perspective, and how easy would it be for, you know, another vendor to come in and replicate? I've been to Chennai twice now. I think if you were to visit us in Chennai, you know. That's our biggest office in India, 4,000 people. Mm-hmm. That's where nearly all of our development occurs. First of all, I don't think any company can replicate that kind of culture of, "Hey, this is a place where you can grow your career... Mm-hmm. F rom entry-level software engineer all the way up to product manager and product leader." Many other companies have a center in India, but it tends to be more back office, and the leadership of the product organizations tend to be in the U.S. That's a huge advantage for us longer term, and what that's resulted in is this more rapid innovation cycle. You know, two years ago, you wouldn't say that we were a viable competitor to a ServiceNow, right? Now, in the mid-market, we absolutely are, and that's because the product has gotten better and better faster than it could have had we been reliant on, let's say, a U.S.-based team with a much higher cost per engineer. Mm-hmm. When I think about the product portfolio, it's, you know, mainly those three segments we talked about, the customer service, ITSM, kind of sales and marketing, CRM. You highlighted that, you know, ServiceNow would be the competitor there. Between all of those markets, it does get pretty crowded. Can you just help us understand a little bit more of where does Freshworks, Freshservice, Freshsales, who you are actually competing with most? Second, have you seen any changes to the competitive environment as Zendesk has gone private, and there may just be less funding out there for some of those newer businesses? We compete in three broad spaces, as you mentioned, in IT, in CX, Customer Support, and then in CRM. The first two are by far the largest businesses that we have. On IT, at the high end, you've got ServiceNow. You know, they are very much focused on the top 2,000 largest companies in the world. That leaves quite a bit of space. You then have incumbent like on-prem providers like a Cherwell, and they're focused very much on maximizing their revenue per customer, driving price up, not so much on value. We're very confident of our competitive position there. How has competition changed in that segment? We are getting more swings at the bat in bigger deployments, and we're winning more of those deals than we have in the past. That goes back to the product maturity, the product getting more mature. Mm. Us having the right message right now, which is we're all about TCO. We're about faster time to implementation because the software is simpler and not needing to hire an army of consultants to get the product to work and deliver. Our time to value is much faster. Our TCO tends to be half as much. On the Customer Support side, we compete at the high end against a Service Cloud and Zendesk, to some degree, I would say they're more in market as well. There's a bunch of point solutions that are doing one of the many things that we do. They might be providing just bots to answer queries and deflect queries. They might be providing just the conversational layer on top. Not ticketing. Right? We provide a full stack solution from, you know, second-level ticketing to the actual conversational platform where agents can exchange in, text, emails, phone calls, it doesn't matter. All that information comes into a single pane of glass for the rep. Where we win there is again, total cost of ownership, ease of use, ease of deployment, and feature completeness. Yeah. Like a Gladly does not have a second-level ticketing solution. You could like a Haptik or some of these bot players, they don't offer anything other than that. If a customer wants to go stitch that together, they can. It gets very expensive, it takes a lot of time, or they can buy our product and we offer that kind of full feature functionality. How has competition changed there? I think, you know, similar dynamic, where we're getting more swings at the bat in bigger deployments, and we're seeing that kind of win rate kind of creep up over time, which is positive for us. The last area that we compete in is sales and marketing automation and, you know, classic CRM. That product set is kind of where ITSM was a couple of years ago, right? We've got some investment to make, some maturity to make. Very well suited for up to a 1,000-employee company, companies, and that's where we're having success. That primarily SMB-led motion, that primarily product-led growth, inbound-led growth, that's not where our field sales is 100% focused now. Mm. We're still seeing wins. We're seeing, you know, companies like Addison Lee, which were IT customers, they love the IT product, they love the value that they're getting out of it, and then they had their Salesforce contract come up for renewal and they said, "Hey, we want something that's more flexible, lower cost, and also faster time to value, and doesn't require us to hire these consultants every time we wanna change the product." They've migrated to our CRM solution. I think that's a big opportunity for us down the road. Uh-huh. Particularly with this large CX base and large IT, ITSM base. Great. Another area that you've kind of moved into more recently is, application for HR and Legal with Freshservice for Teams. That's right. That's an enterprise service management application for functions that are outside of what you typically had served. Why was that a natural extension for the product, and what are some of the synergies of expanding from more employee-facing functions to customer-facing functions, similar to what you did with Freshdesk and Freshservice? Should investors expect this type of portfolio expansion more going forward? I mean, we're very excited about the ESM end product, Freshservice for Teams. The reason we leaned into that product, we had customers already, like thousands of customers, already using our IT product to serve HR, Legal, et cetera. It's a workflow engine, that generalizable workflow engine is very effective in these other departments. The IT department typically is the one who's asked to create a solution for onboarding as an example, or contract management. We created a product that's specifically around business teams where the information in that team, the management of that team is separate from the IT. Mm. T eam management. The administration is actually separate, which you need if you wanna serve the HR department. It's very much a case of us following our customers. We've had some early customers, like there was a customer I'm talking to Friday in Europe, technology player, they have 1,700- employees. They have 1,000 licenses with us. Mm-hmm. That's because we started with IT, and their IT department found more and more uses, and they wanted to unify on a single platform. That ESM motion for us, we think is gonna be pretty exciting over time. I think in terms of the other cross-sell opportunities, the decision makers are different. You know, if you start with IT typically is influencing what you buy in CX and what you buy in sales and marketing, if even though they might not be the decision maker. If we start in IT, we think there's opportunities on the CX side as well. Remember, of our top 20 accounts, half of them have a CX and an IT deployment, and that just shows that, you know. Most of those accounts started in one or the other and grew pretty substantially over time. They typically start small and grow large. What we need to do now is to lean into that motion more systematically than we have in the past. I think in the past it's been much more opportunistic. Getting back to kinda creating a world-class go-to-market organization, that cross-sell motion is not how we've typically expanded in the past. It's been by organic seat addition. We see that as a big opportunity this year. Great. Tyler, I wanna get you involved in some of the financial questions. When I think about, you know, where you exited 2022, you had constant currency billings growth of nearly 30%. When I look out for 2023 revenue growth, constant currency revenue growth is in the about 17% range. Can you help us unpack what's included in guidance in terms of expectations around macro, kind of the retention from existing kind of customers and that new business piece? We started talking at the end of Q1 last year that we were starting to see some things happen in the macro and pressure on our expansion motion, expansion was a pretty big driver of growth for us, where we had kinda mid-teens net dollar retention kind of when we went public. Really, there was some FX tailwinds to that. We said, "Hey, think of us as kind of this low teens business." As we came out through the year, the expansion motion did fall off. We saw that, and we knew that was happening. At the same time, we kept churn where we had been making progress on churn. We kept churn kind of flat in Q3 and Q4. What that led to is obviously a decrease in our net dollar retention. What we talked about in Q3 and Q4, and Q4 in particular, that we had a record new business quarter in terms of new logo ACV. We expect that expansion motion to continue to see pressure. You know, we talked about net dollar retention coming down to about 105% is our expectation for Q1. We think there could be additional pressure in Q2. Hoping and thinking it could be a trough at that point. But in terms of our guidance, we've built in what we see, right? We built in the fact that we think there's gonna continue to be pressure on expansion. We are looking at other ways to expand with our customer base outside of agent addition, which is really, you know, Freshservice for Teams is a good example. It's really the first add-on product to Freshservice. We're actively, you know, going to engage with our current customer base. We're looking at specific cross-sell motions from Freshservice to Freshdesk, where that, you know, historically they're different buyers and we haven't really focused on that, and so we're focused on that now. In terms of our growth, a lot of it's gonna be driven on new logos. I mean, we're still expanding with customers, and we look at our greater than 50K customer base, which is growing at a really healthy rate. The biggest factor of growth in that greater than 50K in Q4 was still expansion. That's customers landing at 30K, 40K, and then, you know, growing with us. That's still continuous, just not at the pace that it has been, in, you know, prior to 2022. Yep. Excluding some of the macro headwinds that we're seeing now, how do you view the normalized growth algorithm? Mm-hmm. Y ou know, in a more normal environment, especially as some of these things like the cross-sell motion and the moving up market really start to play into the model? Yeah. If we're coming to 105% in Q1, and we're still guiding to 17% growth, and churn is relatively stable, if expansion comes back, you know, we're a mid-teens net dollar retention business. If you, if you add that to kind of what we think is normalized growth, and specifically in the three markets that we play in, which, you know, these are massive markets, with, you know, well over $100 billion in TAM, we don't see any reason why we can't get back to that kind of 30% sustainable growth rate. We just need to have it coupled with expansion along with new business. I mean, just to add to that, the products that we sell, every company in the world over, let's say, 20- employees needs. Right. Every company has an IT department. They need to manage their queries coming in and any kind of crises and outages, and that's what our product does. Every company has a Customer Support team. Most do have a Customer Support team. They need technology to enable them. They need things like AI and bots to deflect queries and drive customer satisfaction over time. Everybody who has a sales force needs to automate it. That's the big opportunity for us long term. We're not in a nice-to-have product category. I think that's why we're continuing to win in new business. We're in a pretty much a must-have product category, and that benefits us greatly. Mm-hmm. Great. I'll ask another question, and then we'll open up for audience Q&A. On operating margins, Q4 was notably above expectations, and you gave guidance for operating loss to reach break even in Q3 and turn positive in Q4 later this upcoming year. What are the key levers to achieving this goal? In a scenario where macro gets a little bit worse, do you have incremental levers to pull to protect kind of that profitability? Yeah. I think we demonstrated last year where, you know, we still beat revenue on, based on initial year guidance for the year. It wasn't an incredible beat, but we beat on the bottom, you know, substantially on operating margin. We were able to do that because we were actually hiring very rapidly. Mm. You know, we did slow down hiring. We did focus on efficiency as we saw things start to change. Because we were hiring, we felt we'd really built out a lot of infrastructure. You know, Dennis had come in, and we're really focused in Q4 on a lot of tweaks that we're making to the model coming into this year, but they weren't, like, substantial changes. We're able to look at the investments that we had, and now we feel like we've made a lot of those investments, and we don't have to incrementally invest that much more. I think, you know, you'll see our headcount, you know, not grow substantially as it has in the past. What that's allowed us to do is, you know, we're still growing on our top line and really, you know, drive efficiencies, and we're gonna continue to do that. We think of it as kind of a three step process. Let's get sustainably free cash flow positive. We said we're gonna be free cash flow positive in Q4 and then for the entire of 2023 with some nuance on the quarters, which we detailed out. We feel like we've done that. We've kind of all gotta go do it. Second was, you know, non-GAAP operating margin, and create profit there. We said, you know, "Hey, we expect to be there kind of by the end of the year." Third is GAAP. The thing about Freshworks is that it's always been in the DNA of the company to be efficient, is one of our competitive advantage. In fact, you know, for fiscal 2021, we produced cash that year, we made large investments, now we're gonna digest them, I think we're in actually in pretty good shape. Great. Do we have any audience questions? One in the back. Given that the macro is, you know, in flux right now, both positive and negative, when you talk to your customers on the puts and takes of kind of their, you know, initial budgets, is this kind of a quarterly review when you talk to, you know, your clients on whether they're, you know, increased budgets or further cut budgets, or is it a kind of a second half kind of review process? Kind of how fast is kind of the feedback loop? Thank you very much. You wanna take that? Yeah, I can. You can go ahead. Yeah. I think there's two aspects to that. If for new business, what tends to happen is there is some event, triggering event, that leads to an evaluation, that leads to an opportunity for us, and that could be a contract expiring or a merger where you need to integrate a number of solutions. That's one sense, and there, that's a, that's a point in time where we have to get in and win that kind of a deal. On the, on the existing customer side, it really varies. Some of our contracts are many of our contracts are annual contracts, so at the renewal is both an opportunity to upsell or cross-sell. Some of our contracts like our SMB business tends to be much shorter duration, and there you can buy our product monthly, you can buy our product on an annual basis as well. It just depends on what segment you're talking about and whether you're talking about a new opportunity or a new customer or an existing customer. I'll add that our sales cycles are smaller than most enterprise businesses. The SMB sales cycle is less than 30- days, right? It's a trial-based process. Even on the mid-market enterprise, we're not talking about year-long sales cycles or even six months. In most cases, they're within quarter. When we look at that, you know, they are pretty rapid sales cycles. When we talk about macro, though, we've always had the strategy of building incredible software at incredible value, when times, you know, are more difficult, we actually see that there is potential advantage for us when we are going and competing and being able to provide a customer a great software at a great value and being able to replace something that's much more expensive for them. We do lean in to that, and we are leaning into it now. You know, the new customer logos, you know, as we mentioned, you know, best new ACV quarter ever in Q4. When expansion comes back, 'cause it will come back, those are the customers that are gonna expand. I'd much rather be growing right now through new logo growth than expansion growth, because that will be additive in the future for us. Oh, go ahead. Am I up first? Oh, okay. I guess you touched on kind of the third step being GAAP profitability. Mm-hmm. I know the topic that's top of mind for a lot of investors in the software space is the stock-based compensation expense. I think for Freshworks in 2022 was running at about 14% of sales. I guess the question is just how does the company think about stock-based compensation expense, you know, normalized levels, what that's gonna look like in the future, dilution to shareholders. Yeah, just how they think about that and the timelines to ultimately achieve GAAP profitability. Yep. So we haven't detailed out the timeline. I know we have to do some work with the investor base to model out the SBC that we have, but also the dilution. I can say we're very focused on dilution right now. You know, we had said kind of when we went public, "Hey, think of us as between 3% - 5% dilution every year." Clearly if you're hiring fewer people, right, you have fewer grants to make, and you know that is gonna happen. Most of the stock-based comp that we have today, it's not like we can make it disappear. A lot of that is being driven by the grants were made before we went public that has a tail of four years that we have to actually live with now. What we need to do is be able to model that out for everybody to be able to show. I can say we are very focused on it. We spent about $170 million last year doing net exercises of RSUs. Those RSUs never enter the market. It's just over nine million shares. We're gonna continue to do that. We think it's gonna be high teens in terms of dollar value, every quarter this year, and we think it's a good use of capital. It's essentially almost like a buyback without being a buyback because those shares don't enter the market. We are focused on doing things like that and focused on dilution and probably, I think, better than stock-based comp is more, you know, free cash flow per share is what fully outstanding shares is what we're gonna be looking at. Great. Just a couple of questions. Going back to that 150%, well, mid-teens NDR, can you break that down between how much you expect from sort of seed expansion versus modules or sort of cross-sell into different products? On your net new, it's great to see such strength. How much is greenfield or call it Excel really tool replacement versus you're going and replacing a more, you know, relevant competitor? Okay. There's two big questions there. On a net dollar retention, there's really two sides to a coin, right? Churn and expansion. On the churn side, we're pretty open about, you know, we went public, we were low 20s as a company. We brought it down to high 10s. I'd say Q3 and Q4, it's stable. You know, you can do the math on, you know, if it's going to be 105% this quarter, how you get to that. I can say that we don't break out where the expansion's coming for, but by far, the majority of our expansion today is agent addition or seed addition. You can think about it that way, and again, we're focused on that cross-sell motion. Do you wanna answer the second piece? I didn't quite understand the second question. Repeat it? Greenfield. Yeah, yeah. It's you can answer, but it's different by product, right? In the CRM, on the Freshsales and Freshmarketer, you know. Greenfield. Yeah. typically greenfield. They could be using Excel or some little solution. In our CX solutions, that does sell from the SMB all the way up. As you get to that mid-market and up, they typically have something, and you know, we're competing against Zendesk and Salesforce in that market. In Freshdesk, I'm sorry, Freshservice, which is actually, really great, there's a lot of legacy in there still, and we think that's a huge opportunity for us. Legacy, the BMC, Remedy, Ivanti, Cherwell kind of tools that are there. Great. That brings us on our time. Thank you so much for joining us today and sharing your insights. Thank you.