Freshworks Inc. Q4 FY2022 Earnings Call

Thank you. Good afternoon, and welcome to Freshworks Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining me today are Girish Mathrubootham, Freshworks' Chief Executive Officer; Dennis Woodside, Freshworks' President; 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 2022 performance and our financial outlook for our first 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 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's 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. For a discussion of the 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 our 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, a replay of today's call or to learn more about Freshworks. And with that, let me turn it over to Girish.

Thank you, Joon, and welcome, everyone. Thank you for joining us today on Freshworks' earnings call covering our fourth quarter and full year 2022. Overall, we executed well in the quarter. We exceeded expectations across our operating results for total revenue, non-GAAP operating income, and free cash flow. We capped off a strong finish to the year with $133.2 million in quarterly revenue as we surpassed $500 million in annual recurring revenue. In this environment, as companies are seeking greater value for their IT spend, we are seeing the Freshworks' value proposition resonates more than ever. In Q4, we added approximately 1,800 new customers to our growing base and ended up with more than 63,400 total customers, including the San Francisco 49ers, Finchoice, Mahindra, Supara, St. Marche, and Yulu Bikes. I'm incredibly proud of how we grew the business. We also improved our non-GAAP operating margin by 8 percentage points in Q4 on a year-over-year basis, and we generated positive free cash flow of $4 million in the quarter. Our approach during this recent period of macroeconomic uncertainty was to focus on driving our growth through four key strategies. We believe these four business drivers will continue to move us forward in 2023. First is our continued focus on product innovation. In 2022, we expanded our unified CRM platform to include Freshchat. We launched this service for business teams to extend first service beyond IT. And we made our bots smarter across our CX, IT, and broader CRM products to help businesses engage their customers faster. Second, we saw results from our focus on larger customers, which is driving most of our growth. Today, nearly 60% of our business comes from mid-market and larger companies, with many of our Q4 deals starting with Freshservice. The third business driver is expansion. Despite the challenging macro economy, customers expanded through agent additions, cross-sells, and upgrades into larger deployments. In Q4, our net dollar retention was 110% on a constant currency basis. Finally, our focus on operating efficiency. We generated positive cash flow in Q4 and improved our non-GAAP operating margin. We plan to build on this momentum and improve our efficiency in the years ahead. During today's call, Dennis, Tyler, and I will go deeper on these four business drivers and how they played a role in our Q4 results and how we see them contributing going forward. Starting with our product innovation. We continue to make improvements last year across our IT, CX, and broader CRM solution. New business increased as companies chose Freshworks products as credible alternatives to expensive and bloated software. This is really important in the current environment that businesses want to control IT spend without sacrificing powerful functionality in mission-critical applications. In fact, positive reviews from our customers this quarter earned us TrustRadius Awards for Best Value for the Price and Best Feature Set. It is those two reasons why we believe Freshservice continues to grow and gain traction in the mid-market. Take Swire Coca-Cola, for example. Swire is one of the world's largest Coca-Cola bottling partners in the U.S. and Asia, and it chose Freshworks for the breadth of our features, fast deployment, and lower cost of ownership. Swire brought on Freshworks because they were looking for a platform that was comprehensive enough to support their complex needs while reducing their ITSM spend. Additionally, last quarter, we launched Freshservice for business, and in the past three months, we have seen strong early success. As businesses eliminate siloed support and service management platforms, other departments like HR and finance are able to use Freshservice to build a more modern and consolidated employee experience. New customers like Coherent Corporation, a semiconductor company with over 23,000 employees, chose Freshservice over a large incumbent, thanks to our integration and the ability to scale across IT and . In our CX business, we continue to enhance Freshchat and Freshdesk products, focusing on customer self-service and agent experience. In Freshdesk, we added new integrations with multiple telephony partners. Enterprises can now bring their own telephony solution into Freshdesk to create a comprehensive omnichannel customer service solution. In Freshchat, we introduced simpler ways to build bots. In Q4, we added more bot languages and industry-specific bot templates, extending the reach of our products to global markets. In Q4 alone, Freshchat powered hundreds of millions of bot conversations. With the rise of modern messaging apps, companies have rapidly shifted to engaging with customers over conversational messaging channels. We are an active lifestyle brand in the U.S., Canada, and Australia, started with Freshdesk and later bought Freshchat to handle repetitive support requests like returns and order status more efficiently by automating responses across email, chat, and calls via reduced resolution time by several levels. Turning to our broader CRM solutions in sales and marketing, we improved analytics and reporting. We launched a new revenue attribution capability to help marketers better understand the sales impact of their cross-channel marketing campaigns. We also added integration to analyze sales costs to scale the effectiveness of their customer conversation. I'm super proud of our product innovation in 2022 and our dedication to building new capabilities that can deliver value to our customers throughout a challenging macro environment. As we look ahead at our product priorities for this year, we will continue to differentiate Freshservice as comprehensive IT service, IT operations, and enterprise service management solutions. In CX, we will continue to deliver on the promise of an omnichannel customer support experience with self-service automation, conversational experience, and ticketing. Finally, we'll continue to build a unified CRM with an out-of-the-box customer data platform and AIML insight.

Thank you, Girish, and hello, everyone. Thanks for joining us today. I'm five months in at Freshworks, and I'm excited about the progress we're making in the business. We closed the year on a high note, beating our financial estimates and improving our operating efficiency. In a tougher market environment, we improved our execution to drive the highest new business quarter ever. We saw increased competition for many of our deals, and yet we still improved our win rates for our CX and ITSM products. This was especially true for our larger deals in the field, with Freshservice leading the way as a scalable and cost-effective solution delivering incredible value to our customers. Girish talked about our first of four business drivers: product innovation. I'll cover the next two, our success with mid-market and enterprise customers and our expansion motion. I'll start with our enhanced focus on mid-market and enterprise customers. Over the last 18 months, we have made substantial investments in people and tools to expand our go-to-market motions. We believe those investments, which are now reflected in our cost base, are paying off in higher win rates participation in more deals, and the expansion of our mid-market and enterprise business. In 2022, our new business wins increased, with companies spending more than $50,000 in ARR. In Q4, this customer cohort grew 35% year-over-year and now represents 44% of our business. While our business was historically more in SMB, our revenue base has shifted over the years towards more mid-market and enterprise customers. Today, nearly 60% of our business comes from mid-market companies, those with 251 to 5,000 employees, and enterprise customers with more than 5,000 employees. That's because our cost-effective yet powerful products are delivering real value fast. They can scale to serve thousands of agents and millions of customer and employee interactions. These benefits resonate with companies of all sizes, especially in the current economy. The days of selecting a vendor only based on market share or brand awareness are over. Customers want rapid impact and lasting value at a reasonable cost, and Freshworks delivers. That's why Freshservice was chosen by Carrefour Belgium, a subsidiary of the eighth largest retailer in the world. Their team of 300 IT professionals now have a more simplified and nimble approach to IT service management to support more than 11,000 employees. While legacy incumbents are focused on the 2,000 largest companies in the world, Freshworks has the opportunity to serve hundreds of thousands of others who are dissatisfied or underserved by bloated and expensive software. We provide midsized organizations like Databricks, TaylorMade, and Georgetown University with a better choice, powerful yet cost-effective solutions. Turning to expansion, I'm pleased to say that despite the macro conditions, our customers are still expanding through seat additions, cross-sells, and upgrades. In Q4, net dollar retention was 110% in constant currency as the overall churn rate for our business remained in the high teens. We see better retention rates in our mid-market and enterprise customers, which helps our overall net dollar retention. While seat additions continue to drive the vast majority of our expansion today, we expect cross-sell to be a bigger contributor to our growth over time. The percent of customers using more than one product remained relatively the same as the prior quarter at 24%, with just a slight increase in Q4. We are implementing specific initiatives to create more bundling and cross-sell opportunities for our go-to-market team this year. Take Addison Lee, for example. The British private hire cab and courier company started as a Freshservice customer in 2015 and in 2022, added on Freshsales and Freshdesk. They believe their previous CRM system from a large incumbent caused low agent productivity and did not deliver sufficient value. Our Freshsales Suite was selected to replace the older CRM for our modern intuitive UI built for the end-user. Looking at our customer cohort of over $50,000 in ARR, we added a net 191 customers in Q4. While this customer number benefited from FX movement and new deals in the quarter, the biggest driver continued to be expansion as customers increased their spend on our products and especially for the ITSM market. An example is iCore, a managed services provider with more than 35,000 employees in 10 countries. As part of iCore's digital transformation strategy, the company expanded the use of Freshservice and Freshdesk bots to its IT, HR, and finance teams to immediately answer questions before transferring to a technology team member. The platform enables iCore team members to focus on more complex tasks and creates a better experience for both employees and customers. To me, it's customers like the ones you heard about today that validate my decision to join Freshworks. I believe we have the opportunity to build a large, impactful company that can serve hundreds of thousands of businesses over time. By focusing on the four business drivers of product innovation, mid-market and enterprise customers, expansion, and efficiency, we believe we can grow well beyond our current levels. I'm excited about the progress we've made to better align our go-to-market teams and the many opportunities ahead of us. Now over to Tyler to talk about how we are improving efficiency as Freshworks continues to grow.

Thanks, Dennis. Looking back on our Q4 and full-year 2022 performance, I'm pleased with our ability to drive operational efficiencies in the business. Starting last year, we knew that 2022 would be a big investment year, building out our go-to-market teams, investing in product development, and taking on a full year of G&A public company costs. What we didn't know was how the macroeconomy would play out and how that would impact the overall market for our products. During the year of a slowing demand environment, negative FX movements, and pressure on small businesses, we still beat the high end of our 2022 estimates for revenue that we laid out one year ago by $3 million. More significantly, we effectively managed our costs throughout the year to beat the high end of our 2022 estimates for non-GAAP operating income by over $26 million. We believe we have a durable business model, and we're improving our operational efficiency as we drive business growth. In Q4, we had another quarter of increased efficiency, with revenue beating expectations, non-GAAP operating loss outperforming expectations by $6.5 million in the quarter. We improved our non-GAAP operating margin year-over-year, and our business inflected to generate positive free cash flow of $4 million and non-GAAP EPS of $0.01 in the quarter. As I normally do, I'll review our Q4 financial results, provide background on key metrics, and close with our expectations for the first quarter and full year 2023. I will also include constant currency comparisons to provide a better view of our business fundamentals. Most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles, and other adjustments. Starting with the income statement. Revenue grew 30%, adjusting for constant currency, or 26% as reported, to $133.2 million. Although the FX trend for the dollar against the euro and pound reversed in Q4, we continued to see the trailing negative impact to revenue resulting from FX movements earlier in the year. As Dennis mentioned, we had a strong quarter of new business driven by Freshservice, while expansion continued to see pressure from the effects of the broader economic slowdown. Smaller customers continue to feel the pressure as churn rates increased slightly for the SMB segment, leading to slower growth. Overall, churn for the company remained relatively stable, ticking up less than 100 basis points in the quarter. As a whole, we have made good improvements to our gross churn rates over the past several years. In Q3 and Q4, we were able to keep gross churn relatively stable but do see potential risk of churn increasing slightly going into 2023. Moving to margins. Our non-GAAP gross margins were roughly similar to Q3, rounding up to 83% for the quarter. We continued to achieve strong non-GAAP gross margins with over 82% for the full year as we scale the business. In Q4, non-GAAP operating margins improved 8 percentage points year-over-year to negative 2%, driven mostly by lower R&D and G&A costs as a percentage of revenue. Specifically for G&A, expenses in the prior year included nonrecurring litigation settlement costs that were not included in the most recent quarter. On a quarter-over-quarter basis, we had a very small improvement to non-GAAP operating margins as we largely maintained our run rate cost base in matching the business growth. Similar to Q3, we had a one-time type benefit of approximately $4 million related to the reversal of accrued expenses from earlier in the year. Our revenue outperformance, combined with an improving cost base, led to a non-GAAP operating loss of $2.8 million in Q4. I'm pleased with our ability to control costs in the current market environment and expect to drive more operating leverage as we go forward. Turning to our operating metrics. Net dollar retention was 110% on a constant currency basis or 108% as reported and was largely in line with our commentary from the prior quarter. As expected, we saw expansion slow down in the quarter, reflective of the overall macroeconomic trend. Looking ahead, we expect the broader trend to continue, estimating Q1 2023 constant currency net dollar retention to be 107%, and holding FX rates constant, reported net dollar retention to be 105%. In terms of our customer metrics, customers contributing more than $5,000 in ARR grew 20% to 17,722 customers in the quarter and now represent 87% of our ARR. On a constant currency basis, this customer cohort grew 21% year-over-year. For larger customers contributing more than $50,000 in ARR, this customer count grew 35% to 1,908 and ticked up to represent 44% of our ARR. Adjusting for constant currency, this customer cohort grew at 38%. Lastly, we ended the quarter with a total customer count of more than 63,400, and our average revenue per account continued to increase. Moving to our billings, balance sheet, and cash, in Q4, calculated billings grew 21% to $147.8 million, and holding constant currency over the past year, calculated billings grew 25%. The other factor impacting the growth rate was billings duration mix of negative 4%. Adjusting for this, the normalized calculated billings growth was approximately 29% in Q4. Looking ahead to Q1 of 2023, our preliminary estimate for calculated billings growth is 20% on a constant currency basis or 17% as reported on current FX rates. For the full year 2023, we expect calculated billings growth to be similar to our expected revenue growth for the year, of approximately 17%. Turning to our balance sheet and cash items, we maintained a steady cash balance as we ended the quarter with cash and marketable securities of approximately $1.1 billion. In Q4, we generated $4 million of free cash flow, coming in ahead of our estimates. Looking back on the full year, we outperformed our initial free cash flow estimate of negative $25 million by more than $10 million in 2022, despite a tougher economic environment, further demonstrating our ability to drive efficiencies in the business. We continue to net settle vested equity amounts and used nearly $16 million under financing activities for Q4. For the full year, we used approximately $167 million for the net settlement of nearly 9.8 million shares. As a reminder, this financing activity is excluded from free cash flow. We plan to continue net settle invested equity amounts, resulting in quarterly cash usage of approximately $17 million at current stock price levels. As we look forward to 2023, we expect to generate approximately $10 million of free cash flow for the year, with approximately $3 million in Q1. We have some seasonality in spend throughout the year, so we anticipate Q2 and Q3 will be near breakeven and the remainder of the free cash flow expected in Q4. With positive free cash flow now coming from the business, no debt, and a strong balance sheet, we believe we are well positioned to drive sustained growth into the future. Turning to our share count for Q4, we had approximately 324 million shares outstanding on a fully diluted basis as of December 31, 2022. The fully diluted calculation consists of 289 million shares outstanding, approximately 32 million related to RSUs and PRCs, and 3 million shares related to outstanding options. Let me now talk about our forward-looking estimates. I'll go through the numbers first and then provide background commentary afterward. For the first quarter of 2023, we expect revenue to be in the range of $133 million to $135 million, growing 16% to 18% year-over-year. Adjusting for constant currency, this reflects growth of 19% to 21% year-over-year. Non-GAAP loss from operations to be in the range of negative $9 million to negative $7 million, and non-GAAP net loss per share to be in the range of negative $0.03 to negative $0.01, assuming weighted average shares outstanding of approximately 290.2 million shares. For the full year 2023, we expect revenue to be in the range of $575 million to $590 million, growing 15% to 18% year-over-year. Adjusting for constant currency, this reflects growth of 16% to 19% year-over-year. Non-GAAP loss from operations to be in the range of negative $14 million to negative $6 million and non-GAAP net income or loss per share to be in the range of negative $0.01 to positive $0.03, assuming weighted average shares outstanding of approximately 293.8 million. We want to provide our best views of the business as we see it today. And in a changing market environment, it can be tough. So a couple of areas and assumptions to call out. First, on FX. The weaker dollar trend in Q4 created a slight benefit to revenue and billing metrics compared to the prior quarter. But on a year-over-year comparison, we still saw a negative impact. These estimates are based on FX rates as of February 3, 2023. So any future FX moves are not factored in. We started to hedge a small portion of our INR-based expenses in January 2023 and expect the impact of the hedging program to increase throughout the year, which will improve the predictability for operating expenses moving forward. Second, on profitability. I'm pleased that we delivered on our commitment to reach positive free cash flow by Q4 last year. Now as we head into 2023, we're driving additional efficiencies to show quarter-over-quarter improvement throughout the year. As such, we expect non-GAAP operating loss to improve to negative $6 million in Q2, near breakeven in Q3, and then turn positive by Q4. We plan to maintain sustained profitability in the years ahead. Let me close by saying I'm pleased with our execution in the quarter. Our ability to operate efficiently over the past year highlighted the durability and resiliency of our business. Our view is that we're well-positioned to execute through a changing market environment in the near term, and we remain bullish on our long-term opportunities. And with that, let us take your questions.

Our first question comes from Pat Walravens from JMP Securities.

Great. And congratulations. I have two questions, if that's okay. The first one concerns the macro environment. Last quarter, you discussed companies lowering their growth forecasts and reducing headcount. While your tone seems much more positive now, has the selling environment improved for your team in the fourth quarter?

Pat, this is Tyler. I'll start the answer. We had a really good quarter, especially on new business, right? And we called that out, and that felt strong, which I just think is a testament to our products and the value that they can bring to customers, even in tough markets. The place that we continue to see pressure was on expansion. And that macro is still playing there, right? And that the expansion motion did slow down throughout the year, but we talked about that throughout the year. We expect to continue to see that for a while. But on the new business side, yes, we are upbeat because we're optimistic because we had a good quarter on the business. But I'll hand it over to Dennis.

Yes, just some commentary on the new business front. Over the last 18 months, we've made substantial investments in the products. Our ITSM product has enhancements that allow us to fulfill ITOM requirements in the second half of last year. We rolled out an ESM product. So we're able to address broader and broader needs of larger customers. And really, this is just a continuation of a trend and a set of investments that have taken place over the last 12 months or so that really are starting to pay off in terms of those new business wins. We are seeing better win rates, competitive win rates in Q4 than we did in Q3, both for Freshdesk and Freshservice. We're getting involved in more deals. Companies are looking to us when they evaluate better solutions with lower total cost of ownership; everybody is looking for value. So we're getting more swings, and we're hitting the ball more often. I think that really started to show in Q4. In terms of why I joined, I see an opportunity to build a company that serves every business in the world. Every business in the world has a need for the products that we currently build; we can serve companies, employees, and customers equally well. I think the vision that Girish has laid out and the products that he's built around creating a seamless, easy-to-use, easy-to-implement set of business software is super compelling. So that's why I joined.

And our next question comes from the line of Ryan MacWilliams from Barclays.

Tyler, I would love to hear about maybe how we should think about net retention as we move through this year. And just on your full-year guide, how does this contemplate the macro? And have you guys thought of a scenario where should things get worse from the economic perspective, plans to get to breakeven faster from here?

Yes, Ryan. To begin with net dollar retention, we did mention that we expect it to decrease slightly. The net dollar retention churn has two aspects. We have been quite transparent about our significant improvements in gross churn over the last couple of years, particularly in Q3 and Q4 of the previous year. Churn has remained stable and essentially flat, which includes downsell for us. That is a positive development. Our current aim is to maintain this stability, although I do anticipate some additional pressure ahead. The primary driver of our upsell is through agent additions, which we began to observe after Q1, as discussed last year, and this trend continued throughout the year. We expect this pressure on expansion to contribute to the decline in net dollar retention. We mentioned it could decrease in Q2 and potentially a bit thereafter, but we are committed to working hard to stabilize it. Regarding our guidance, we have incorporated everything we observe and are reporting as accurately as possible. We do foresee pressure on our expansion efforts. We are also exploring new avenues for growth with our customers, such as our Freshservice for teams, our new ESM application, which we are really excited about. Additionally, we will continue to focus on acquiring new business, which performed well in Q4.

Great. And just a follow-up on Patrick's question. The customer adds above 5000 ARR appeared strong in the quarter. Just given what you mentioned on headwinds, the seat expansion, was the strength in these adds was probably from net new customers or perhaps maybe customers renewing larger with upsells or upgrading the plans just like the piece of part, there?

Yes. We discussed the 50,000 mark, and the largest contributions to that were from expansion, which also benefited the 5,000 figure, though the 50,000 saw a bit more support. Additionally, there was some foreign exchange impact on both sides, but the growth was also driven by new customer acquisitions, as we had a very strong new business quarter in Q4. We will continue to focus on this area. Customers are still expanding. Net dollar retention did decrease slightly, but it remains positive. Even with some pressures, we have customers that are continuing to grow with us. This was the primary reason for the growth above 50,000, which also contributed to the growth above 5,000.

And our next question comes from the line of Pinjalim Bora from JPMorgan.

I wanted to discuss the guidance a bit. I'm trying to understand if you reported billings growth of about 29%, if I heard that correctly, adjusted. The guidance for next year seems to be around 17.5% revenue growth. Are you expecting a decline in the macro environment from here? When I compare the revenue additions in 2023 to those in 2022, which saw a decline of about 33%, it appears rather conservative. Would you say it is derisked at this point? How should we interpret the guidance?

Yes, this is Tyler. Regarding our guidance, we are providing our insights based on current observations. We anticipate that the expansion efforts will continue to face challenges, particularly since adding agents is our main method of upselling. In the first quarter, our calculated billings were around 17% to 20% when adjusted for constant currency. If there are any changes, like the 4% adjustment we mentioned in the fourth quarter, I will include that information at the end of the quarter for further clarity. Overall, we are stating what we see. While I can't guarantee it's entirely derisked due to uncertainty about how long the macroeconomic conditions will persist, I believe there is potential for upside. If companies begin to grow again, we would certainly aim to benefit from that growth alongside them. However, if conditions deteriorate further, we might also experience additional pressure.

Understood. And one for Girish, we recently hosted one of your partners, and he seemed quite optimistic about ITSM, noting that you're seeing good traction in that area. It appears that you are gaining market share. How do you view Freshservice’s position in the current market? Could you discuss this in relation to Atlassian, who also appears to be entering the market? Additionally, how should investors consider the sustainability of that business amid macroeconomic factors?

From a Freshservice business perspective, I'd like to discuss our competitive landscape and strengths. The ITSM market is substantial, and we've broadened our reach into ITSM, ITOM, and enterprise service management, highlighting the market's size. Freshservice stands out as the most credible alternative to ServiceNow in the industry. We are increasingly recognized, especially among mid-market and enterprise companies, particularly as businesses reassess their IT expenditures. We are not only competing with but also winning against ServiceNow, and we have made several replacements of ServiceNow just last quarter. In the enterprise sector where ServiceNow operates, we also face competition from legacy systems like BMC. In some lower-mid-market deals, we encounter Atlassian, but Freshservice prevails because we are fundamentally designed as a comprehensive ITSM and ITOM solution, while Atlassian has pursued multiple acquisitions to piece together a cohesive product experience. Our customers prefer us for our unified product experience.

And our next question comes from the line of Richard Hilliker from Credit Suisse.

So you mentioned it was the highest new business ever in this quarter. I think you talked about for some customers, they were expanding. I think you called out the ITSM side. Tyler, I think you mentioned some stable retention. The question is, I'm wondering, what portion of overall bookings would you say came from newer expansion versus renewal in this quarter? And maybe for the new business, can you give us a sense of the duration of those deals?

Yes. Rich, I'll take that. We don't break out the new versus expansion in terms of core, but we did have one of our best new business quarters ever. We did say that where it's coming from Freshservice; it's still smaller than Freshdesk from an ARR perspective, but it continued its trend to be the biggest ARR contributor in the quarter, which it has been for the last couple of quarters, and is growing faster than Freshdesk. On a duration perspective, we've got about, let's call it, 60% of our business roughly, those aren't exact, that are on annual contracts. And that there was no big change on that. Now what happens is that the bookings mix can change based on the expansion motion, right, because it depends on where you are within the contract on expansion and how much that billings would look like. In terms of the new business, there wasn't any significant change. There has been this steady change of moving more to annual over the last couple of years.

And our next question comes from the line of Dennis Woodside from Credit Suisse.

Yeah, thanks for the question. Well, first of all, I would just say that it's happening right now. One of the examples that we talked about was Addison Lee. Addison Lee started out as a Freshservice customer for a couple of years, satisfied with the product. They were serving their IT department and decided they weren't satisfied with their existing CRM from a large incumbent, which didn’t provide value and was very expensive to maintain. So they looked to us. We're seeing similar situations across the pitch. iCore was another account that expanded from Freshservice into Freshdesk. The focus has been very much on new business. As we continue to scale up and have success with larger accounts like iCore — which has 35,000 employees — there's lots of opportunities for ESM and for other product expansion. We're leaning into that motion much more.

And our next question comes from the line of Brian Peterson from Raymond James.

Congratulations on a strong quarter. I wanted to discuss the net additions. Clearly, they exceeded our expectations. Is there any common thread regarding the regions where you are experiencing more success? I would also like to understand what you are capturing from new net additions. I realize this varies by product segment, but any insight you can provide would be appreciated.

This is Dennis. On net adds overall by geo, for Q4, we saw pretty good performance across the board. Our North America business was a little bit stronger than the rest of the world, in Europe and Asia PAC. Our European business performed well. We were satisfied with each of the geographic units. I wouldn't say there's any specific trends geographically that are driving the business. In terms of what we're displacing, customers come to us with a wide variety of current IT footprints and situations. In some cases, we're displacing very much kind of old on-prem systems like BMC where the product is not scaling to the customer needs. They are looking to make a change. In other cases, we are displacing the likes of Zendesk or ServiceNow, where the customer is no longer satisfied with the overall value proposition, especially in the current economy. They're looking for much better value; they demand a simpler product that they can deploy quickly and get a fast time to value; they want a product that doesn't require them to have a number of consultants or specialists on staff just to maintain the product and make sure it does what it's supposed to do. Therefore, there is not one competitor or situation; it's a fairly wide range of scenarios that are driving our growth.

And maybe a follow-up. I'm curious if you've seen any changes in the pricing environment over the last 90 days and maybe anything that you guys have seen so far in 2023?

Yes. We haven't seen any major changes in pricing. I would say, in the second half of last year, the Freshdesk side, the service clouds of the world, and Zendesk have been very aggressive on pricing. But that was true in Q3 and really continued into Q4. I wouldn't say there are any discernible trends on the ITSM side to note.

And our next question comes from the line of Elizabeth Porter from Morgan Stanley.

You mentioned earlier just the better win rates. So I wanted to get a little bit more color if you're seeing any particular improvement at the low end versus the high end or if it's broad-based. I know you guys have been doubling down on functionality. And then second, just kind of within those competitive conversations. In your conversations, is there any bit more of a lean towards just the product functionality versus price being the incremental driver that tilts the deals you win?

Great. Dennis, I'll take that one. The trends that we're seeing on win rates are broad-based. So it's not confined to any one segment or product; both our Freshdesk and Freshservice products. Q4 saw higher win rates than Q3. That said, for the mid-market and enterprise segment, our win rates improved at a higher rate. We observed meaningful improvement there. Now in terms of why this is happening, most of the customers that we're talking to now, one of the number one things on their mind is value, either total cost of ownership. They're looking at that; they need a business case. Part of that equation is what is the cost to implement the products, what is the timeline for implementation? How fast can we get the value? What's the ongoing maintenance cost to get the functionality out of the products that they need? In many cases, we are superior on all three dimensions. Now from a product functionality standpoint, if you wind back the clock 12 or 18 months, we've done a lot in the last 12 or 18 months to compete on a feature-by-feature basis with the likes of Zendesk or Service Cloud or ServiceNow. The product functionality has improved; the robustness has improved; the product is scaling incredibly well. We support thousands of agents, millions of customer interactions across our customer base. All of those investments that we've made over the last 12 or 18 months are paying off, and that really is helping drive those win rates up. We think it's quite promising for the future and for where our buyers are going. We believe our product is the right product and strategy for where the market is today, and that's a big opportunity for us.

Sorry. Elizabeth, I just wanted to add on just — this is Girish. On the product functionality basis, it's important to note that if you take CX, for example, Freshdesk and Freshchat together offer the most comprehensive omnichannel customer service solution today, covering the whole spectrum of automation service, automation bot, and conversational agent experience on modern messaging channels, combined with ticketing. If you take Freshservice, we have a unified product across ITSM, ITOM, and ESM, which is Freshservice for Business teams. I think that is the value we're talking about: customers not having to buy four or five different tools and struggle with integrating all of that. This is the superior product value, where everything is built organically on one platform.

Great. And then just following up, you mentioned just now the conversational bots and the seamless kind of one platform. Earlier this week, there was the announcement just around the Meta kind of Messenger integration and bots. And there was a good amount of buzz in that in the market post that announcement. So just wanted to get a little bit more color from you on the opportunity around that function and feature set, do you see that add new customers or accelerate revenue per customer? Kind of how are we thinking about those capabilities, more specifically, that what recently announced?

Sure. I'll take that. First, let me clarify that our partnership with Facebook and Meta dates back to 2011, when Freshdesk was the first help desk to integrate Facebook Messenger upon its introduction. The recent announcement we made highlighted some customer usage of this. We recognize that conversational messaging has significantly increased in the past few years. Businesses are now sending over 1 billion messages every month across Meta's messaging platforms, including WhatsApp, Instagram, and Facebook Messenger. This announcement specifically aimed to showcase some of our customer successes with our conversational product, illustrating how we are enhancing those conversational customer support experiences, particularly for B2C companies. I want to stress that our partnership with Meta is longstanding; this was primarily to highlight some of our customer initiatives.

And our next question comes from the line of Scott Berg from Needham.

I have a couple. First is on kind of sales process as you look at calendar '23 here. We all know what's happening with the macro last year and into this year. But as you look at your sales processes and overall go-to-market strategies, outside of maybe just leaning into something like ITSM that's selling a little bit better, is there anything that you're changing in those processes that would be noteworthy to try to effectively maybe get some of these new customers over the line faster?

Scott, it's Dennis here. We are doing a number of things. Before I get to the sales specific ones, I'll go back to the product side. Many features and big enhancements we launched in the second half of last year are getting traction now and into Q4, things like ITOM, things like ESM and enhancements on the conversational side for Freshdesk. We're focusing on bigger deals more squarely in the mid-market. We shifted our field team to focus on accounts with employees from 500 to 5,000 employees as the ideal customer profile. Previously, our field team would focus from 250 to 500. We serve those 250 to 500 employee companies well through our operations through inbound. Most of them come to us in response to marketing or by signing up for a trial. This was a meaningful change. Another change involves creating a set of product specialists focusing specifically on Freshchat and Freshsales. Both of those products are complex, and the competitive set is complex. We believe that specialization on the sales side is crucial. The field team is energized about the product set, competitive positioning, and where we are in the market. We're excited about this year and believe we're going to see plenty of opportunities.

Got it. Very helpful there. Then from a follow-up perspective, Tyler, as you look at your guidance to start fiscal '23 here, have you changed it at all with regards to what you're seeing in the macro compared to maybe a year ago? I know you talked about trying to call it as you see it right now. I'm just curious to know if there's anything different about it?

There's no change in philosophy, Scott; we are trying to take everything into account that we know. A year ago, we did not know the impact of the macro, right? We did not expect the expansion motion to slow down the way it did throughout the year. It's now kind of the opposite. We actually expect it to continue to be tough for a while, and we've built that into our plans. We'll see how it goes throughout the year. We'll do our best to find other ways to grow with customers, but in terms of the philosophy itself, there is no big change.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Joon Huh for any further remarks.

Great. Thanks, everybody, for joining us today. If you have any other questions, please feel free to call or email. We look forward to catching up with you throughout the quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.