Freshworks Inc. Q4 FY2021 Earnings Call

Thank you for joining us and welcome to Freshworks Inc.’s Fourth Quarter and Full Year 2021 earnings conference call. All participants are currently in listen-only mode. After the presentations, we will have a question-and-answer session. Please note that today’s program may be recorded. I would now like to introduce your host for today’s program, Joon Huh, Vice President of Investor Relations.

Thank you Jonathan. Good afternoon and welcome to Freshworks’ Fourth Quarter and Full Year 2021 Earnings Conference Call. Joining me today are Girish Mathrubootham, Freshworks’ Chief Executive Officer, and Tyler Sloat, Freshworks’ Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our fourth quarter and full year 2021 performance and our financial outlook for our first quarter and full year 2022. Some of our discussion and responses to your questions may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Freshworks’ current expectations and estimates about its business and industry, management's beliefs, and certain assumptions made about the company as of the date hereof, all of which are subject to change. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For a discussion of material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-Q, and other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this presentation, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release, which is available on our Investor Relations website at ir.freshworks.com. I encourage you to visit our Investor Relations Site to access our earnings release, periodic SEC reports, and a replay of today's call, or to learn more about Freshworks. And with that let me turn it over to Girish.

Thanks, Joon. And hello, everyone. Thank you for joining us today as we review the Fourth Quarter and full-year 2021 highlights for Freshworks and our priorities and guidance for this year. Q4 was another strong quarter, where revenue grew 44% to $105.5 million. This is also our first $100 million revenue quarter as a company. We had robust renewal activity in Q4, and our new business activity is seeing positive momentum with our field sales teams closing a number of sizable mid-market deals. We also had another good expansion quarter in Q4. It is encouraging to see that companies of all sizes are demanding Freshworks’ easy-to-use modern products that are designed with the user in mind. We accomplished a lot in 2021. We became a publicly traded company in September and ended the year with over 56,000 customers. We received industry validation from Gartner. Our flagship product Freshdesk was recognized as a visionary in the 2021 Gartner Magic Quadrant for CRM Customer Engagement Center, and Freshservice was recognized as a challenger in the ITSM Magic Quadrant. More recently, Freshservice was also recognized as a strong performer in The Forrester Wave for Enterprise Service Management. Last year, we also strengthened our board with three new independent directors and expanded our leadership team with proven public company experience. On the people front, I'm incredibly proud of our employees for their focus and dedication as we continue to innovate, put customers first and execute as a public company. Overall, 2021 was a great year for Freshworks. Now, turning to the GTM highlights in Q4, our field sales engine performed well, driving new logo acquisition and new revenue. Our inbound motion continues to be an efficient, high-velocity go-to-market engine catering to SMB and mid-market customers. We also saw positive momentum on multi-product adoption. As of Q4, 21% of our customers use more than one Freshworks product. In the cohort of customers paying more than $5,000 in annual recurring revenue, the multi-product adoption is even higher at 35%. A good example of multi-product usage is our customer 7-Eleven. Their customer support team had to deal with a wide variety of incoming requests from multiple channels. By switching to Freshdesk support desk and contact center products, 7-Eleven support agents saw significant productivity benefits from a modern tool, and managers were able to improve key support metrics with better insights. We are encouraged to learn that the 7-Eleven team is planning to expand their Freshworks product usage even further. Smaller organizations also see the value of working with multiple Freshworks products. The Southeast Alaska Regional Health Consortium, a nonprofit group serving the health interest of the native people of Southeast Alaska, is using both Freshservice and Freshdesk messaging products to manage their IT help-desk in rural locations across thousands of miles. Now, they can more easily onboard new users improving efficiency and record keeping. These multi-product trends have naturally led to higher revenue per account and contributed to improvements in churn for us. In November, we held Refresh, our annual user conference. We had over 18,000 online registrants. We had several mid-market customers showcase their unique product use cases live from Las Vegas. We also held our inaugural Champions of Delight Awards, recognizing customers who delivered innovative and delightful employee and customer experiences using our products. At Refresh, we also introduced new product capabilities in IT operations management within Freshservice. One of our customers, PowerSchool, is a leading provider of K-through-12 education technology in North America, serving over 1,000 schools and supporting millions of students. They are using our new item capabilities in Freshservice to increase their deployment frequency for the 40-plus products that they support and have reduced the rate of IT issues by over five times. This allows them to minimize downtime and enable children to keep learning. Overall, we had a strong fourth quarter and a good finish to 2021. Now, looking ahead to 2022, Freshworks has a big opportunity to grow in our target markets. Today, every consumer-facing business is exploring new and better ways to engage with customers across digital and social channels, like WhatsApp, text messaging, or Instagram. For 2022, we are prioritizing customer experience and CRM product enhancements around these changing market trends. Leading consumer brands like Discover, Klarna, Delivery Hero, and Paytm already use our messaging product to engage with their customers and automate support over digital channels. We will be increasing our product efforts to drive conversational agent experiences, and increased coverage of digital channels, and offer self-service bots across various new channels. So we will also continue investing in core helpline capabilities and strengthen our support base products. Our second priority is expansion beyond the ITSM market. Businesses are rapidly moving their technology applications to the cloud. And we frequently hear teams complaining about alarm fatigue, the overwhelming number of tools they have to use, and the manual activities leading to delays in identifying and fixing issues. Based on validation from our early customers, we plan to increase our efforts in offering an integrated IT operations management solution that enables IT and engineering teams to anticipate service disruption, prevent outages and minimize customer impact. These innovations in our Freshservice product will help us further address the $34 billion IT operations management market opportunity. We plan to continue investing in our Neo platform, which provides shared services and enables rapid product innovation. This includes allowing our customers to extend and integrate our products with their business processes and continued work towards our vision of a unified CRM product to break down the silos across marketing, sales, and support. To wrap up, we believe that there are tremendous opportunities across all three markets in which we operate. We are investing for the long term and will continue to deliver modern unified products that users actually love using. I will now turn it over to our CFO Tyler to share more on our financial results.

Thanks, Girish, and thanks to all of you joining us on the webcast. As Girish mentioned earlier, we had a strong finish to the year and delivered a good fourth quarter. Before diving into our financial results, I want to acknowledge all the great work in execution across all of our teams here at Freshworks over the past year. Our employees have really done a tremendous job, and we would really like to thank them. So thank you. Now for today's call. I'll cover the financial results from our fourth quarter and also provide some key business trends we saw over the past year in 2021. Afterward, I'll transition to our forward-looking commentary and close with our expectations for Q1 and for the full year of 2022. As I go through our financial results, I'll focus most of my discussion around non-GAAP numbers, as this better represents how we manage our business. These non-GAAP numbers exclude the impact of stock-based compensation and related expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles, and other adjustments. Starting with revenue, we delivered $105.5 million in Q4 representing strong year-over-year growth of 44% for the quarter and 49% for the full year 2021. In Q4, we continued to see healthy expansion and up-sell activity from our existing customers. The leading form of expansion continues to be driven by additional seats or agents. Our new business picked up momentum resulting in us closing more business early in the quarter, while also closing several larger mid-market type deals in the field. In terms of revenue contribution, nearly all of our revenue is subscription revenue, as our products are designed for easy onboarding, requiring little or no implementation costs. As a result, services revenue represented less than 5% of total revenue for the full year of 2021. In Q4, our non-GAAP gross margins maintained an impressive rate of nearly 83%. This is the result of the ongoing efficiencies we're able to realize in our infrastructure spend and improved revenue mix from higher-margin products, especially in the second half of the year. Our non-GAAP operating expenses increased by $37.4 million compared to the prior year to $98.2 million. The majority of this increase is the result of personnel costs, as we continue to hire and make investments across the company to support the rapid growth of our business over the past year, in addition to preparing us for public company operations. In terms of quarter-over-quarter comparisons, our non-GAAP sales and marketing expenses increased by $7.4 million, with notable items coming from personnel costs, user conference costs, and reseller commissions. Non-GAAP G&A expenses increased $6.9 million quarter-over-quarter to $17.9 million, partially driven by one-time costs related to a legal settlement in Q4. All of this led to a non-GAAP operating loss of $10.7 million for the quarter. For the full year 2021, non-GAAP operating loss was $18.3 million. As of December 31, 2021, we had approximately 322 million shares outstanding on a fully diluted basis using the treasury method. Turning to our operating metrics, net dollar retention was 114% in Q4, which was negatively impacted by 1% due to FX. For contrast, FX in Q3 had a 1% positive impact in the 117% figure. So on a constant-currency basis, net dollar retention ticks down 1% from Q3 to Q4. We feel good about this number as we expect to land in the 110 to low teens percentage range, given our natural expansion activity and the churn characteristics of our business. So speaking of churn, I'm pleased to say that this was an area where we're making progress with sustainable improvements. In Q4, we achieved our lowest churn rates for our Freshdesk business, which, combined with our ongoing customer success initiatives, led to an improvement in our overall trend rate to the high teens range at the end of the year. Our second operating metric of customers contributing more than $5,000 in ARR grew 28% in Q4, ending at 14,814 customers, and represents 85% of our ARR. For larger customers contributing more than $50,000 of ARR, this customer account maintained a high growth rate of 61%, ending at 1,416 customers and represents 41% of ARR. And finally, our total customers grew 15% ending the year at over 56,000, reflecting a net add of approximately 1,600 customers in the quarter. As we continue to scale and add to our customer base, our revenue growth is being driven more through a higher average revenue per account or ARPA, which is reflected in the expansion and multi-product trends we're seeing in the business. Moving to billings and balance sheet items. Our calculated billings growth increased to 45% in Q4 compared to 41% in Q3. Specific call-outs that impacted this growth rate were our billing duration mix of a positive 3%, early renewals and reserve activity adding up to a positive 3%, and FX movements of a negative 2%. So on a normalized basis, calculated billings growth for Q4 would be closer to the 41% figure. Given the number of factors that can impact this growth rate, we expect this figure may fluctuate quarter-to-quarter, but over a longer period of time, we believe it should track our revenue growth. Our balance of cash and cash equivalents remained at approximately $1.3 billion at the end of Q4, similar to the prior quarter. We generated positive free cash flow of $2.8 million in Q4, resulting in positive cash flow for the full year 2021 of just over $2 million. We continue to maintain a strong balance sheet, providing financial flexibility for the business. We have an efficient business model today, but we also recognize the tremendous growth opportunities in front of us. We plan to invest to capture this growth, and as such, we expect free cash flow to be approximately negative $25 million for the full year 2022. Factoring in specific timing of our business operations, we expect free cash flow amounts to be approximately negative $5 million in Q1 and negative $15 million in Q2, as this quarter includes the impact of our annual merit cycle, ESPP purchases, and incremental CapEx spend. In Q3, we expect to be approximately negative $5 million and then slightly positive free cash flow in Q4 as trends improve by the end of the year and going forward into future years. One quick reminder, which relates to our cash balance: there will be a final lock-up release for vested equity on Monday, February 14, and we expect to use approximately $150 million of cash to net settle shares and meet our tax requirements. The gross number of shares that will be eligible for sales is approximately 202 million, with a net settle amount of approximately 6.6 million shares, which reduces the total number of shares available in the market. This net settle shares activity will not impact free cash flow, but it will reduce our cash balance. As Girish mentioned earlier, we have a number of key business priorities for 2022 and we view this as an important investment year. We're investing in product enhancements and ongoing innovation for the customer experience and CRM market. We're also doubling down on our Freshservice product as we expand our capabilities to further address the ITOM market opportunity. What this means is that we expect to add and invest more in our most important asset, our people. Given the current macro environment and employment trends, we, like many other companies, expect the cost of retaining and attracting the best talent to increase in the upcoming year. Additionally, with the stronger U.S. dollar, based on current rates, we expect FX to have a negative impact on revenue growth of approximately 1% point in both our first quarter and for FY ‘22. Today, approximately a third of our revenue has currency exposure or is not collected in U.S. dollars. These impacts have all been factored into our estimates going forward. So now let me turn to our forward-looking guidance. For the first quarter of 2022, we expect revenue to be in the range of $107 million to $109 million. Non-GAAP loss from operations to be in the range of $12.5 million to $10.5 million, and non-GAAP net loss per share to be in the range of $0.07 to $0.05, assuming weighted average shares outstanding of approximately 278.1 million. For the full year 2022, we expect revenue to be in the range of $486.5 million to $495 million, non-GAAP loss from operations to be in the range of $56.5 million to $48.5 million, and non-GAAP net loss per share to be in the range of $0.23 to $0.19, assuming weighted average shares outstanding of approximately 286.5 million. Let me close by saying that we're super excited about how we finished the year 2021, and we're looking forward to a great year in 2022.

Certainly. Ladies and gentlemen, our first question comes from the line of DJ Haynes, Canaccord. Your question, please.

Hey, thanks, guys. Girish, maybe you could start with the cross-sell execution. I'm wondering if and when you think we get to the point where the majority of expansion is driven by incremental product attach versus seat expansion? I know seat expansion has been the driver to date. And how far off do you think that potential future might be? I know you're highlighting growth being driven by higher ARPA. So I'm just curious to get some color on that front.

Yeah. Thanks, DJ, for the question. From a long-term perspective, we clearly see that cross-sell will continue to grow. So let me just talk about and give you some color on the multi-product adoption trends that you're seeing today. You noticed that we mentioned that 21% of our customers use more than one product today. And that number to jog your memory was at 18% during the IPO time. So we are making steady progress, and we are happy with the progress that we're making. Most of the expansion or cross-sell today is coming from the Freshdesk family of products, where customers are adding new channels into their support, like chat and automation through bots. That is where we're seeing most of this coming. And you also have to remember that two of our biggest products, Freshdesk and Freshservice, even though they do not have a natural cross-sell motion between them, we are seeing customers are buying them. We are confident that we will keep making incremental progress in terms of this number of customers who are using more than one product. We are happy with the way things are going. Our natural go-to-market motion, the activity that our customer success groups are doing results in organic seat expansion as the business grows; though that's a natural expansion act.

Yeah. Okay. And maybe as a follow-up, this is one of the questions I got a lot during their IPO roadshow was to help try and quantify the cost advantage that you have in running R&D out of Chennai. And look, I think investors look at the line item at 20% of revenue and you talked about all the product stuff and ambitions you have to do this year. I think it's a fair question. So is there any way to help investors think about that? And then as part of it, you could talk about what you're seeing in terms of wage inflation in the region.

Yeah, DJ, I'll take that one, this is Tyler. From a cost advantage perspective, so we absolutely do have an advantage because we have access to an incredibly talented pool of capital. And I think now we're regarded as one of the top companies, especially new tech companies to work for in India. What it really does for us is it allows us to be able to innovate faster, but also innovate more. So if you look at how many products we have compared to a relatively similar company, we have a broader set of products that are all starting to get to scale. And even though there is wage inflation, I think it's global. And so we sure we see it in India we see it here, but we're not like any other company; we're like every other company right now that's dealing with that, and it's clearly providing a cost advantage for our employee base in India as compared to similar employee bases that would be here in North America.

So one point I would like to add DJ is India is not just an R&D center for us, it's also worth noting that our entire SMB business is actually close from India, especially Chennai. So we have access to a top talent pool, and we're talking about sales and marketing, the entire go-to-market function starts from India. We see that also as a strategic advantage where they are able to sell to the long tail of the global SMB from our base in Chennai, so it's not just hiring.

Yeah. Good distinction and point. Thank you, guys. I appreciate the color.

You bet.

Thank you. Our next question comes from the line of Mark Murphy from JP Morgan. Your question, please.

Thank you very much. And congratulations on the strong finish to the year. Now I was looking at the Q4 billings growth, and it's quite solid and it's above what we would've expected. It is a tough comparison and, Girish, you did mention closing a number of sizable mid-market deals. So I'm curious if you could shed any light on how sizable those deals might have been and just whether you see more of those in the 2022 pipeline.

Thanks, Mark. I think where we are seeing these mid-market deals, what I was mentioning, were specifically in the ITSM space, which is our first service product. The same strong traction was evident in Q4. At this point I would also like to remind everyone that our go-to-market motion is not specifically like enterprise. We don’t have a traditional enterprise sales motion in that sense. So while we focus on mid-market, we tend to see a lot of larger companies actually come and pull us into the enterprise. So that's happening. If you're specifically asking about demand trends, I think we are seeing strong, healthy demand in both these sectors, for Freshservice and Freshdesk, with customer engagement and employee engagement starting to become an area of focus for digital transformation. So we are continuing to see strong demand.

It's interesting to see what's happening. The second part of my question is whether you are directing your R&D investments this year to support the ongoing shift towards the $50K range. It seems that you are. If so, what are the key enterprise capabilities that your customers are requesting you to develop? You mentioned chatbots and integrated ITOM, among other areas of change. Which of these will you be prioritizing in your investments?

Our top three priorities for the year are focused on key markets. In customer service, we are observing a positive trend where more consumer-facing businesses want to engage with customers not only through traditional phone and email but also via digital channels like Instagram, Facebook Messenger, WhatsApp in certain regions, and text messaging in the U.S. We are investing in our customer experience products to help businesses improve their engagement through these digital channels. In the IT sector, we see two main trends. First, with all employees working remotely, businesses are exploring hybrid models as they reopen offices. They need to support employees working from different locations and enable their IT and DevOps teams to adopt cloud-first solutions. With our Freshservice product, we are focusing on enabling IT teams to provide support through platforms like Slack and Teams, and we are enhancing our capabilities to enter the Enterprise Service Management and IT Operations Management markets. This will allow us to proactively reduce employee requests by helping engineers and DevOps teams better understand and address issues before they arise. Our top priority also includes advancing the unified customer record, offering businesses a comprehensive view of their customers. We are committed to making progress in this area as well.

Okay. Very clear, thank you very much.

Thank you. Our next question comes from the line of Rob Oliver from Baird. Your question please.

Great. Thank you very much for taking my questions. Girish, I'll start with you. Just on the SMB environment, one of the things that's come across to us has just been the torrid pace of Unicorn development in India, and that pace has continued even amid choppy markets here in the U.S. to start the year. I know you called out earlier in response to I think it was DJ's question about the fact that you guys not only have your R&D team in Chennai, but also your SMB team. So just would be curious to hear from you, generally what you're seeing about SMB globally, there's a lot of crosscurrents. But it's specifically about India and a follow-up to that would be like any early momentum around the Freshstack offering, which seems particularly compelling for that group. And then I had a quick follow-up for Tyler as well.

The general trend in India shows a significant increase in startup activity, with many companies focusing on building global products. Investors are actively investing a substantial amount of venture capital, which is certainly beneficial for the country. We are noticing a rise in FinTech, development tools, and B2B startups emerging from India. For example, when we introduced Freshstatus during our Refresh Conference last year, it was designed as a promotional bundle specifically for startups. This bundle combined our Freshdesk, Freshsales, and Freshmarket products into an affordable package to support young startups with their front office needs. We launched it in November, and the initial response has been promising, with numerous startups already utilizing the service. We have established a dedicated startup program team to promote this package not only in India but globally, aiming to get Freshworks products into the hands of rapidly growing startups at an early stage.

Great, that's really helpful. Thanks, Girish. And then Tyler, just for you. Appreciate the breakdown of the color on the billings growth and the variability there, but was wondering to the extent that you can provide a little bit on the cut of free cash flow thoughts relative to this year. Also, very helpful the way you broke it out by quarter. Is the incremental spending there? Any color just to understand. I know that you guys have laid out some product initiatives, which Girish just repeated and then the additional costs and hiring, but wondering if you could just add a little bit more color around some of the variability in that free cash flow outlook for the year. Thank you guys.

Thank you for your question, Rob. We have provided some insight into our spending for this year and are pleased with our performance last year, achieving positive free cash flow. We expect to burn approximately $25 million this year, breaking it down to $5 million in the first quarter, $15 million in the second, and another $5 million in the third quarter, with a positive outlook for the fourth quarter and beyond. We are increasing our spending because we see significant opportunities ahead, and going public has allowed us to secure the necessary resources and capital to pursue these opportunities efficiently. Additionally, we need to account for the costs associated with being a public company, such as directors and officers insurance, which will be a considerable expense for a full year. We also anticipate a return to pre-COVID levels for travel and facilities expenses, having had a year and a half without those costs. Our incremental spending remains efficient compared to earlier periods, and we also have some capital expenditures planned for the year. Overall, we expect to end the year with positive cash flow in the fourth quarter and continue that trend moving forward.

That's really helpful. Thanks, Tyler. Thanks, Girish.

Thank you.

Thank you. Our next question comes from the line of Brent Bracelin from Piper Sandler. Your question please?

Good afternoon and thanks for taking the question here. Really wanted to start out around the pipeline of opportunities and funnel looking into ’22 under the context of pretty heavy sales investments and a buildup here over the last couple of quarters. Can you walk through maybe the ramp in headcount over the last let's say nine months? Is that now starting to contribute to a larger pipeline going into next year? And as you think about the existing sales capacity, how much more do you plan to step on the gas here, given the opportunity? I appreciate that, obviously, return to work and travel expenses will continue to inflate that line, but just trying to understand from a headcount perspective, sales capacity perspective, funnel perspective, how you're feeling heading into next year?

Sure, Brent, I'll take that one. This is Tyler. We finished the year with a total headcount of just over 4,600 globally, with about 4,000 of those in India. We are investing across all of our functions. While we aim for efficiencies in areas like General and Administrative, it’s important to build the infrastructure that supports our global nature. In product engineering, we plan to fully invest to foster innovation and development. One major focus is on enhancing our go-to-market presence, which involves driving product-led growth through marketing and advertising efforts aimed at increasing trial conversions, especially in the SMB segment. Additionally, a significant portion of this inbound activity supports our field pipeline. We are concentrating on expanding our capacity primarily in North America and Europe while also looking at opportunities globally due to the growing demand. We aim to do this efficiently by aligning our headcount with the quota capacity necessary to satisfy that demand, and we will continually assess our progress. We do not disclose the specific number of sales representatives with quotas, but we are hiring as quickly as possible in that sector.

Good color, and then just as a follow-up to that, Tyler, as you think about those investments, is that converting into a pretty robust pipeline going to next year? How quickly are some of those investments converting to pipeline?

We prefer to hire when we have sufficient pipeline. Currently, we are hiring and witnessing strong demand for our products. Specifically, for our Freshservice product, which targets the mid-market enterprise segment, we see significant potential for growth. We plan to operate similarly to other enterprise companies, aiming for a specific pipeline coverage ratio. While we are currently pausing to digest our progress, we identify areas where we can hire and are actively pursuing those opportunities.

Great. And then my last question here for maybe Girish here. What are you seeing on the competitive front? Obviously, I apologize if this question has been asked, but all go ahead and ask it again. Are you seeing a distracted competitor, more opportunities? Maybe just touch base a little bit about the in the trenches battle right now. What do you see the competition do? Are they responding with price? We'd love to hear any color as you think about the competitive dynamic over the last let's say three to six months.

Sure. I'll take that Brent. So the first thing I'd say is we're not seeing a lot of difference in the competitive landscape in the last three months. In the CX market, I think we see Zendesk and Salesforce Service Cloud predominantly, and we continue to see them. As I mentioned in my talk track, one of the trends that we're seeing is smaller startups offering companies the ability to do conversation and support like on channels like WhatsApp or Facebook, and that's one of the areas where we are investing in. On the IT side, it feels really like our strongest opportunity right now, as we are seeing that we are a credible alternative to ServiceNow, and we continue to see ServiceNow and their focus is really on the large enterprise. We're squarely focused on being that mid-market alternative. We are seeing larger customers, so we feel confident about that opportunity going forward. In sales and marketing, I think it's still early on, but we see good validation for that story of the unified customer. We are still on the journey, and we see a spot and we see all the other stand-alone CRM players as well, but as I said, it's early days for us.

Well, great to hear and thanks for the color. Thank you.

Thank you. Our next question comes from the line of Stan Zlotsky from Morgan Stanley. Your question please?

Hi, you have Ryan Bressner for Stan Zlotsky here. Just wondering if you ask a quick question on maybe to break down ARR by product or just maybe some additional color on how those have been trending and how it can be above growth rates at the end of 2022?

Hi, Ryan. This is Tyler. Thanks for your question. Currently, we do not provide a breakdown of ARR by products. In the past, we have indicated that our Freshdesk product exceeds 200, while Freshservice is over 100. This is something we might address during Analyst Day later this year, which is under consideration as a potential topic for more detail. At the moment, we're not providing an ARR breakdown by product. I can say that Freshservice is smaller than Freshdesk, but it is experiencing faster growth and presents a great opportunity. Freshdesk is performing very well. We've discussed the cross-sell strategy, which is largely driven by our customers adopting omni-channel solutions for various communication methods with their customers. Additionally, our Freshmarket and sales product, though still relatively new, presents exciting opportunities.

Thank you for the opportunity to ask a question. I have a couple of follow-ups regarding the cross-sell opportunity you mentioned, noting that 21% of customers now have more than one product compared to 18% at the IPO. Can you clarify how much of this increase is due to new customers acquiring multiple products versus existing customers upgrading or expanding their use of products? Additionally, how should we view this trend as we look ahead to next year and its potential effect on net revenue retention?

Hey, Alex. This Tyler. It's actually coming from both. We are seeing customers when they're landing that they are choosing omnichannel as the main land, which is as opposed to just a pure desk solution that they want all the capabilities, specifically messaging, which Girish has talked about just in terms of a thesis of what a lot of the new modern day kind of communication with the next generation of customers is going to be. And so that's following what we've forecasted and we think that will continue. In terms of the other cross-sell motions, like we've talked about, it's still early, but the motion between our marketing sales product to desk, we think that's going to be a natural motion going forward. That's really going to be kind of down the road; that's about the vision of this unified customer record and the value that we can provide to our customers with them being if we have all this information around this 360 view of their customer. So we're excited about that, but it's still pretty early.

Got it. This is the first look at next year as a public company, and many people have questions about billings. There's quite a bit of volatility and variability in the numbers from quarter to quarter, along with several adjustments. I understand you’re not providing guidance on that, but how should we approach the flow and seasonality for the year in terms of billings? Should we make comparisons to this year or the previous year? Is there a general rule of thumb? Considering you have had two years impacted by COVID, how should we view that metric?

In general, we expect billings to align with revenue growth, but there are some nuances, particularly from Q4, which we highlighted since many people track billings closely. We anticipate that growth this year will be negatively affected by foreign exchange by 1% for Q1 and for the entire year. Additionally, comparing Q1 and Q2 to the previous year will be challenging due to the prior year benefiting from a weaker COVID impact. Despite these challenges, we believe we are performing well and are very enthusiastic about the opportunities ahead. Our approach to guidance is based on the visibility we have for Q1, which diminishes thereafter, and we aim to provide guidance based on what we observe. We will update it as necessary as we progress.

Hi. This is [Indiscernible] on for Brent Thill. Thank you for taking my question. I wanted to ask Girish about the feedback we hear from investors regarding the advanced demand for the front office update in 2021. Could you share your thoughts on demand expectations for next year? Is there any advanced demand in the markets you operate in?

Thank you for the question. We have heard some reports discussing pull-forward in demand, but we have not observed a significant change in demand or experienced a pull-forward at Freshworks. In fact, we see a healthy demand environment and are focused on capturing that, particularly in the mid-market. In the fourth quarter, we noted strong demand signals for Freshservice specifically. The demand trend we are witnessing as companies emerge from the pandemic is that employees are returning, but companies still need to manage remote work and engage with customers across multiple channels. Online customer buying patterns are here to stay. We view this as an acceleration of business transformation, which will continue in both customer engagement and employee engagement. This presents us with a significant opportunity for growth.

Got it. And maybe one question for Tyler, if I may, Tyler thank you for the commentary on the churn rates improving. How should we think about the pathway forward for net retention? Are you still thinking of a 110 to low teens even as we roll into next year? Or should we expect the improvements in churn to translate into higher net retention?

Hey, thanks for the question. We went public, we said, 'Hey, we want to be thought of as 110 to low teens,' and net dollar retention is obviously higher at that time. But we said it's going to come down. Actually, we're really pleased with the progress we've made. I think we gave some color; we're at 114%, but that included 1% impact from FX. It would have been 115%, in the last quarter had a positive impact, and so really just moved 1%. Churn being half of it, where we have previously talked about kind of being a low 20s, to high teens in terms of churn and now we're solidly in the high teens. We're not ready to say, 'Hey, you should model out more than the 110 to low teens in terms of net dollar retention run rate.' But things are going in the right direction and we feel really good about it. We've made some great progress in terms of churn. Our Freshdesk product had the best churn quarters ever had. Freshservice was already at great churn levels and the investments we made in the customer success group over the last year are truly starting to pay off. We will update that as we think you guys should be modeling something different, but it feels really good right now.

Got it. Perfect. Thank you.

Thank you. Our next question comes from the line of Natalie Hall from Bank of America Securities. Your question, please.

Hey, guys. This is Brad Sills from BofA Securities. Thanks so much for taking the question. I wanted to ask about Freshsales. I recall a pretty good user base on the free version. I know it's still early. It's not material to ARR at the time of IPO. Just curious, when might we see those conversions perhaps contributing more material to revenue? Is it this year or should we think further out? Thanks so much.

Thanks for the question, Brad. Let me clarify that Freshsales, this is the first full-year of the re-architected new Freshsales product, where we actually unified marketing, sales, chat, and telephone into one platform with a unified customer record. The numbers we put out in the IPO, the number of customers using Freshsales that are actually paying customers is not free customers. However, we still feel that it's early years. We are extremely happy with the validation that we're getting from customers who are seeing the value of this unified product. As Tyler mentioned earlier, later this year, we are contemplating an Analyst Day, and I think that will be the right time to potentially break out the customer numbers and hopefully revenue on the Freshsales product as well. But as we all know, CRM is a massive market, and we're super-excited about this opportunity.

That's great to hear. Thanks so much Girish, and then one more if I may on the churn commentary, I think Tyler, you'd alluded to some progress you've made with this investment and customer success. Could you just elaborate a little bit more there, and what drove the improvement there? Thanks again.

We mentioned earlier that we made substantial investments over the past year in the customer success group under Patty, our Chief Executive Officer. The team, along with the engagement model we established for our customers and all the innovations we introduced last year, has given us a way to foster engagement and gather feedback on the features our customers need. Our pace of innovation enables us to deliver what our customers want, and we are seeing positive results. Customers are staying with us, and when they do, they tend to expand their usage. This trend was evident in the cohort analysis from our S1. We could potentially see a double impact from this, which feels promising. We have made significant progress, although there is still a long journey ahead. However, we are definitely moving in the right direction.

Thanks so much, Tyler.

You bet, Brad. Thank you.

Thank you. Our next question comes from the line of Raimo Lenschow from Barclays. Your question please?

Hi. Thank you for including me, and congratulations to everyone. I have two questions. The first is for Tyler. Can you remind us how you are managing currency fluctuations, considering your significant international exposure compared to others in the market? We are beginning to notice an impact that needs to be addressed. Could you explain your approach to hedging and pricing? Perhaps we should consider presenting constant currency figures separately as well. The second question is for Girish. Regarding ITSM, the ServiceNow team has implemented a lot of automation at the enterprise level. How do you view automation in the SMB sector? Do you think it would be excessive, or could it represent an additional sales opportunity as you continue to develop your products? Thank you.

Hey, Raimo, why don't I take the ITSM product question first? Because it's more interesting.

Yeah. Fair enough.

One thing that's important to clarify is our service product's customer base is inherently more mid-market. It's not necessarily SMB because you have to understand that even if you're selling a 10-seat license, we're talking about a company with a thousand employees, right? Or maybe 500, 750, 1000 employees. The Freshservice product has a very interesting dynamic where we don't have a lot of really small companies. These are smaller teams, the IT team is a bit small but in mid-market companies. We are able to build automation; we have an orchestration layer built into the product, which actually handles a ton of the automation. This is like a drag-and-drop interface, similar to a low-code/no-code, where frequent runbook automation tasks are spinning off new cloud incentives. Creating a ticket if there is a lot in the marketing system, a lot of that IT automation capabilities are natively built in Freshservice, and our mid-market customers actually like us. That’s what makes us a credible alternative to ServiceNow.

I will take the currency one. Yes, we do have some currency impact. We've got about 32% of our ARR that's in non-USD currencies. So you asked, what are we doing about it? Number one, thinking about constant currency. We have discussed that internally, so we might be presenting numbers like that. We're obviously not doing it right now. We're also looking at putting some hedging programs in place that would mitigate risk and just kind of smooth things out. So both of those options we're looking at right now. As you can see, we are trying to be as transparent as possible with numbers right now based on the impact, and clinically putting in hedging will solve some of that, but it takes a little while to put in those structures. Until we do that, we would try to continue that transparency.

Perfect. Thank you very much. Congrats.

Thanks very much.

Thank you. Our next question comes from the line of Brian Peterson from Raymond James. Your question, please?

Hi, guys. This is Chase Donovan on for Brian Peterson. Just had one on the ITOM product launch. You guys launched it back in November, but you highlighted the PowerSchool in your prepared remarks. Just curious on any broad feedback that you've heard from customers early on. And then can you help investors frame the opportunity there? How do we think about potential upsell opportunity to the almost 9,000 Freshservice customers that you have today? Thanks.

Thanks for the question, Chase. On the item functionality, the first thing is we actually started building ITOM after hearing from our customers on why they thought it made sense to be in the Freshservice product. They were all using other third-party tools, and they felt it would make a great value addition. This was actually built in partnership with some of our customers. So just to clarify what capabilities we released, we've unified incident response management with on-call scheduling and automated grouping powered through our AOPS. Basically, this helps IT teams instead of reacting to customers' complaints about what's not working, we're helping them really get proactive by understanding all the alerts coming in from the monitoring system. This allows us to take out false positives and help them understand what's going on and be proactive. This is a super value add to IT teams. We are hearing encouraging reports from our customers like PowerSchool. We definitely think we’ll be able to take this module as an add-on to all of our existing customers as well as land new teams with Freshservice.

Perfect. Thanks.

Thank you. Our next question comes from the line of Scott Berg from Needham. Your question please?

Hey, everybody. This is John on for Scott. Appreciate you taking my question and congrats on the quarter. Just curious if you could provide some additional color on to what extent that Freshservice product is influenced by the inbound kind of PLG motion versus the outbound efforts. And are you seeing an evolution around who the actual buyer is with this product at all? And then second, as you expand on the capabilities of this platform, how do you think about packaging that going forward? Thank you very much.

Freshservice is similar to our other products in that it attracts a lot of inbound leads, and we also have an outbound sales team generating leads in the mid-market. The customer base for Freshservice primarily consists of mid-market clients, and from a lead generation perspective, we have a mix of inbound, outbound, and partner-generated leads. Regarding our ITOM packaging, it is currently offered as an add-on module that is well-received because it brings additional users into the system who might not typically be included, such as DevOps team members or engineers who are not added in a traditional ITSM system. This add-on is intended for asset management with a per-agent licensing model and is expected to increase the number of users from various teams.

Thank you. And this does conclude the Q&A session of today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Everyone have a great day.

Thank you, everybody.