Freshworks Inc.

Thank you for standing by and welcome to the Freshworks Inc's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, June Ha, Vice President, Investor Relations. Please go ahead.

thank you jonathan good afternoon and welcome to freshworks fourth quarter and full year 2021 earnings conference call joining me today are girish matrabutham 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 belief, 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 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 10Q, 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'll 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.

Thanks, Jun. 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. So 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, Fresh Service 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 7-11. Their customer support team had to deal with a wide variety of incoming requests from multiple channels. By switching to fresh desk, support desk, and contact center products, 7-11 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 7-11 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 interests of the native people of Southeast Alaska, is using both fresh service and freshness 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 introduce new product capabilities in IT operations management within FreshService. One of our customers, PowerSchool, is a leading provider of K-12 education technology in North America, serving over a thousand schools and supporting millions of students. They are using our new ITOM 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 increase coverage of digital channels, and also offer self-service bots across various new channels. So we'll also continue investing in core help desk capabilities and strengthen our support desk product. Our second priority is our expansion beyond the ITSM market. Businesses are rapidly moving their technology applications to their 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 to our fresh service product will help us further address the $34 billion IT operations management market opportunity. We plan to continue investing in our new 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 there is tremendous opportunity across all three markets we operate in, 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, G, and thanks to all of you joining on the webcast. As G 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 and 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 continue to see healthy expansion and upsell 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 were able to realize in our infrastructure spend and an 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 $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 fresh desk business, which, combined with our ongoing customer success initiatives, led to an improvement in our overall churn 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 are a billing duration mix of a positive 3%, early renewals and reserve activity adding up to 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 in 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 lockup release for vested equity on Monday, February 14th. and we expect to use approximately $150 million of cash to net settle shares and meeting our tax requirements. The gross number of shares that will be eligible for sale 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 Jean 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 fresh service product as we expand our capabilities to further address the ITOM market opportunity. What this means is that we will 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 a stronger U.S. dollar and based on current rates, we expect FX to have a negative impact to revenue growth of approximately one percentage point in both the first quarter and for full year 2022. 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 7 cents to 5 cents, assuming weight 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 finish the year 2021, and we're looking forward to a great year in 2022. With that, let's take your questions. Operator?

Certainly. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of DJ Heinz. Your question, please.

Hey, thanks, guys. Karish, maybe I can 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 attached versus seed expansion? I know seed expansion has been the driver to date. And how far off do you think that potential future might be? I know you're highlighting kind of growth being driven by higher ARPA, so I'm just curious to get some color on that front.

Yeah, thanks, DJ, for the question. So 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. So you notice 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... Our 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. So that is where we are 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 buying them. So we are confident that We will keep making incremental progress in terms of this number of customers who are using more than one product, and we're happy with the way things are going. Our natural go-to-market motion, the activities that our customer success groups are doing, also results in organic seed expansion as the business grows. So that's a natural expansion activity.

Yeah, yeah, okay.

And maybe as a follow-up, this is one of the questions I got a lot during the IPO Roadshow, was to help. kind of try and quantify the cost advantage that you have in running, you know, R and 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 maybe 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 down. This is Tyler. So from a, 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 kind of regarded as one of the top companies, especially kind of 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 kind of a relatively similar company, we have a broader set of products. that are all, you know, starting to get to scale. And that, you know, even though there is wage inflation, I think it's global. And so we're 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 kind of dealing with that. And they're, you know, clearly it's doing 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'd 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 closed from India, especially Chennai. So we have access to a top talent pool, and we are talking about sales, marketing, the entire go-to-market function being staffed from India. We see that also as a strategic advantage where they're able to sell to the long tail of the global SMB from our base in Chennai. So it's not just R&D.

Yeah, good distinction and point. Thank you, guys. I appreciate the color. You bet.

Thank you.

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

Thank you very much, and congrats on a strong finish to the year. I was looking at the Q4 billings growth, and it's quite solid, and it's above what we would have expected. There's 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.

Yeah, thanks, Mark. So I think... Where we are seeing these mid-market deals, what I was mentioning, was specifically in the ITSM space where our first service product is seeing strong traction in Q4. At this point, I would also like to remind everyone that our go-to-market motion is not specifically like enterprise-y. I like to say we hunt for deer and rabbits. We don't hunt for elephants. So we don't have a traditional enterprise sales motion in that sense. So while we focus on mid-market, we kind of tend to see a lot of larger companies actually come and pull us into the enterprise. So that's happening. And we are also, like, if you're specifically asking about demand trends, I think we are seeing both for Fresh Service and Fresh Desk, With customer engagement and employee engagement starting to become an area of focus for digital transformation, so we are continuing to see strong healthy demand in both these sectors. Okay. And, Krish, I'm sorry. One more point to add, sorry, is if you look at the number of customers who are paying us greater than $50,000 ARR, I think that's one of the metrics, they are now contributing to over 40% of our ARR. So we are seeing that number of customers increase 61%.

Okay, okay. Yes, it's interesting to see what's happening there. So the second part of my question is, are you then, are you steering your R&D investments for this year to support, you know, kind of band, um, and it sounds like you are. Um, and, and then if so, what are the most important enterprise capabilities that, that, um, your customers are asking you to build? Because I think you had mentioned you, you were talking about, uh, chatbots, um, but you were, you were also talking about, you know, integrated, um, ITOM and, and, and, you know, sort of some, some other, um, vectors of change, what is it that you're going to be investing most heavily in?

Yeah, our top three priorities, Mark, for the year are obviously in each one of those markets, right? In the customer service market, what we are seeing is a good trend where more and more business, every consumer-facing business is looking to engage with customers not only through traditional channels of phone and email, but also through digital channels, whether it's a Instagram or Facebook Messenger or WhatsApp in some parts of the world or text messaging in the U.S. So I think we are seeing that as a trend in our customers, and we are investing in that area in our CX products specifically to help businesses actually engage better with their customers on these digital channels. On the IT space, what we are seeing, again, are two trends. One is, okay, all employees are Every business is looking at how do we go hybrid, even if they open offices. So they have to be able to support employees working from remote locations, and they also have to do more for their, like, help enable their IT and DevOps teams to have a cloud-first solution. So that is where, if you look at the fresh service product, our investments are going to be around how do we enable IT teams to offer support through Slack and Teams, and we have all that capability already. And the new capability that we are adding is how do we get into enterprise service management, the ESM market, as well as ITOM, where we're able to help reduce those employee requests altogether by going more proactive on helping engineers and DevOps teams to understand what's happening and reduce those alarms in the first place. So those two are definitely big priority areas. And obviously the top priority for us is also How do we continue to deliver on the unified customer record, so the unified view of the customer? How do we help businesses get that so we are driving towards that and making good progress on that front 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. Krish, 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 not only have your R&D team in Chennai, but also your SMB team. So I just would be curious to hear from you just Generally, what you're seeing about SMB globally, there's a lot of cross-currents, but then 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.

Sure. So the general trend in India, I think there is definitely a ton of activity happening in startups from India. Building global products from India is now a trend. And you have investors pumping in a lot of VC money. We have seen that. And it's obviously a great thing for India. So we are definitely seeing growth. A lot of fintech, dev tools, startups, and B2B startups coming from India. So we are obviously like FreshTag. When we announced FreshTag last year in our refresh conference, I would like to remind you that FreshTag was actually a promotional bundle for startups, a pricing and packaging bundle, which combined our FreshDesk, FreshSales, and FreshMarketer products into one affordable bundle for startups because we wanted to get startups when they were really young and get them onboarded for the front office suite if they can get onto the fresh stack. So that was the idea. So we are seeing good early traction. We launched it in November, and we have a lot of startups using it, and we expect we have a full team, a startup program team, which not just for India, but globally they are promoting the startup package where we would like to get Freshworks products into the hands of these fast-growing startups at an earlier stage.

Great. That's really helpful. Thanks, Karish. And then, Tyler, just for you, appreciate the breakdown of the color on the – Billings growth and the variability there. I was wondering, to the extent that you can provide a little bit on the kind of free cash flow thoughts relative to this year, also very helpful the way you kind of 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 Garish just repeated, and then the additional costs and hiring. But wondering if you could just add a little bit more color around that. some of the variability in that kind of free cash flow outlook for the year. Thank you, guys.

Yeah, you bet. Hey, Rob, thanks for the question. So, yeah, we kind of broke down how we're thinking about spend this year a little bit. You know, we were really happy about the performance last year, free cash flow positive, produced some cash for the year, and we said we're going to burn about $25 million this year. There's a couple things to note there. So we broke out the quarterly spend where we said $5 million in Q1, $15 million in Q2. Kind of 5M in Q3 in terms of burn, but then we said we'll be positive in Q4 and expect to be positive going after. And so, so why, why did we, why are we increasing spend a couple of reasons? 1 number 1, we think there's a huge opportunity in front of us. And part of the reason to go public was to make sure that we have the resources and capital capture that opportunity. And we said, hey, as long as we think we can do it efficiently, we're going to do so, which which we are. But there's a couple other nuances as well. So we built in, number one, the cost of being a public company. Think about D&O insurance just period. That alone is pretty considerable cost. We'll have a full year of that. Second, we also think that some things are going to come back to pre-COVID levels in terms of travel and facilities. And we've built that expectation in as well. So if you kind of go back to, you know, we now have a year and a half, us along with every other company, of no travel and facilities, we think that's going to kind of go back to kind of pre-COVID levels there. So we built those costs. And if you look at, you know, that incremental spend compared to earlier, it's really, we are being really pretty efficient. We also have some CapEx spend that's going to happen during the year. But again, the expectation is that we exit, you know, cash flow positive in Q4 and therefore going forward as well.

Okay. That's really helpful. Thanks, Tyler. Thanks, Karish. Appreciate it. Thank you.

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

Good afternoon. Thanks for taking the question here. I 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. So can you walk through maybe the ramp and 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 kind of step on the gas here given the opportunity? I appreciate that obviously return to work and travel expenses will continue to kind of inflate that line, but just trying to understand from a headcount perspective, sales capacity perspective, funnel perspective, how are you feeling kind of heading into next year?

Sure, Brett. I'll take it down. This is Tyler. So total headcount, we ended the year just over 4,600 headcount globally, with the majority, you know, 4,000 of which are in India. We're investing across all of our functions. Clearly, you know, functions like G&A, we want to see efficiencies, but you have to build up the infrastructure to support kind of the global nature. So when we look at product and engineering, we're going to, you know, fully invest to innovate and continue to build. But one of the areas that we are really investing in is our go-to-market presence. And you look at that, it's kind of, you know, a couple of different areas. One, driving and help to drive that PLG growth motions, a lot of that is through marketing spend and ad spend to drive the funnel for trials, which then, you know, convert to customers primarily in the SMB side. However, a lot of that inbound also feeds our field pipeline. And then we're, you know, really focused on building out the capacity, continuing mainly still in North America and Europe, but other places around the globe. And we're doing it because we do see the demand. And, you know, we're going to do it efficiently, meaning that we want to, you know, get enough headcount so we have quota capacity to meet that demand. And then, you know, we will always kind of pause as we go. We don't break out the number of sales head that we have or quota-bearing reps and things like that. But as you can imagine, we are hiring kind of as rapidly as we can in that area.

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

I would say we like to hire when we have the pipe, and so we are hiring, and we see really strong demand for our products. I mean, you look at our fresh service product, which is really playing squarely in the kind of mid-market enterprise space. We think there's a ton of upside there in terms of what we can go capture. And we're going to act like kind of a lot of, quote-unquote, enterprise companies when you think about that. We're a higher enterprise. We have a pipeline coverage ratio that we want to target, and, you know, we will digest and pause. Right now we are kind of, you know, we see spaces that we can hire to, and we're actively trying to do that.

Great. And then my last question here from Chris here. What are you seeing on the competitive front? Obviously, I apologize that this question has been asked, but I'll 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 are you seeing the competition do? Are they responding with price? I would love to hear any sort of 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 first thing I would say is we are not seeing a lot of difference or change in the competitive landscape in the last three months. In the CX market, I think we see Zendesk and Salesforce as cloud predominantly, and we continue to see them. As I mentioned in my talk track, One of the trends that we are seeing is smaller startups who are offering companies the ability to do conversational support, like on channels like WhatsApp or Facebook, and that's one of the areas where we are investing in. So on the ITSM side, we feel really that's 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 are squarely focused on being that mid-market alternative, and we are seeing larger customers. So we feel confident about that opportunity going forward. And 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 that journey, and we see HubSpot, and we see all the other standalone CRM players as well. But as I said, it's early days for us.

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

Thank you. Our next question comes to the line of Stan Zalosky from Morgan Stanley. Your question, please.

Hi. You have Ryan Bressner on for Stan Zalosky here. Just wondering if you could ask a quick question on maybe the breakdown of ARR by product or just maybe some sort of additional color on how those have been trending and how we can think about those growth rates heading into 2022?

Hey, Ryan. This is Tyler. Thanks for the question. We actually, you know, we don't break down the ARR byproducts right now. You know, what we had said in the past is that our fresh test products is over 200 and our fresh service products over 100. This is something that, you know, if we plan to do an analyst day later this year, which we're contemplating, like that's a candidate, right, for what we would talk about and get more detail. But right now we're not breaking down ARR byproducts. But I can say what we have also said in the past is that, you know, our fresh service product, we talk about it. It's, you know, it is smaller than FreshDesk, but it is growing faster. It's, you know, a great opportunity. FreshDesk is really doing well. We talked about the cross-sell motion and how a lot of that's being driven from a lot of our customers, you know, adopting omni-channel as they want different methods of communication with their customers. And then we've mentioned that, you know, our fresh market and sales product is still relatively new, but we're excited about the opportunity there.

Okay, thank you for taking my question.

Thank you. Our next question comes from the line of Alex Zilkin from Wolf Research. Your question, please.

Hey, guys. Thanks for taking the question. I guess maybe just the first one for – actually, maybe two for you, Tyler. The follow-up on the cross-sell opportunity, you mentioned that 21% of customers have more than one product versus 18% at the IPO, Garish, etc., How much of that is from customers landing with more than one product versus existing customers upgrading or expanding their deployments to multiple products? And more importantly, how do we think about that dynamic going forward for next year and the impact on NRR?

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

Got it. And then I guess Given this is the first kind of look at next year as a public company, obviously a lot of people ask about billings, look at billings. There's a lot of volatility, variability in your numbers quarter to quarter. There's also a number of adjustments. I know you're not guiding there, but how do we think about the flow and the seasonality for the year with respect to billings You know, do we compare it to this year, prior year? Is there a good rule of thumb? Just given, you know, you kind of have two COVID-impacted years, if you will, with respect to that metric.

Yeah, so I think in general, revenue – so in general, we would expect billing to track revenue growth. And, you know, there's nuances, and we called out some of the nuances from Q4 because we know that everybody – you know, tracks billings and looks at it. We did talk about growth this year that, you know, we think it's going to be impacted negatively by FX by 1% for Q1 and for the full year. And also, Q1 and Q2, just in terms of comparisons to prior year, a pretty tough comparison for us this year. You know, the prior year benefited from, you know, a weak, you know, COVID year the year before, so those growth rates looked great. And then, so I think we're going to, you know, we're going to have just a tougher compare in our Q1 and Q2. That being said, like, we think we're doing really well, and we're super excited about the opportunity here. And, you know, the way we think about guidance is we have a lot of visibility kind of into Q1, you know, and then it gets less and less, and we're just trying to guide to what we see. And then, obviously, we're going to update it as we go along. Got it. Got it. Perfect.

Thanks a lot, Todd.

You betta. Thank you. Once again, ladies and gentlemen, if you have a question, please press star then one. Our next question comes from the line of Brent Thill from Jefferies. Your question, please.

Hi, this is Mav Soda on for Brent Thill. Thank you for taking my questions. I wanted to maybe ask first to reach, you know, one of the things we hear from investors is about the pull forward and demand for you know, the front office app space in 2021. Maybe could you talk a little bit about how you look, how you think about demand expectations for next year, and is there any pull forward within the markets that you operate in?

Hey, thanks for the question, Love. We have heard about some reports talking about pull forward in demand, but we have not actually noticed a big change in demand or experience of pull forward at Freshworks. So, in fact, we actually see a healthy demand environment, and we are focused on capturing that, especially in the mid-market. So in Q4, we saw strong demand signals for press service in particular. And more than anything, the demand trend that we are seeing is as companies get out of the pandemic and COVID, we are thinking that, hey, employees, are starting to get back, but companies still have to deal with remote. And every business now has to engage with customers on multiple channels. Online customer buying patterns are here to stay. So we see this as an acceleration of digital transformation, and that's going to continue both in customer engagement and employee engagement. So that's what we believe gives us this massive opportunity to keep going.

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

Hey, Lev, thanks for that question. So, you know, 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, hey, it's going to come down. Actually, we're really pleased with the progress we've made. I think, you know, 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, you know, we had 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 kind of 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. You know, our Fresh Desk product had the best churn quarters ever had. Fresh service was already at great turn levels, and the investments we made in the customer success group over the last year are truly starting to pay off. And so we'll 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 Howe from Bank of America Securities. Your question, please.

Oh, hey, guys. This is Brad Sills from BBA Securities. Thanks so much for taking the question. I wanted to ask about fresh sales. I recall a pretty good user base on the free version. I know it's still an early. It wasn't material to ARR at the time of IPO. Just curious, you know, when might we see those conversions perhaps contributing more material to revenue? Is it this year or should we be thinking further out? Thanks so much.

Thanks for the question, Brad. So let me clarify that fresh sales, this is the first full year of the re-architected new fresh sales product where we actually unified marketing sales, chat, and telephony into one platform with a unified customer record. So the numbers that we put out in the IPO, the number of customers using fresh sales, that's actually paying customers. It's not free customers. But we still feel that it's early years. We are extremely happy with the validation that we are getting from customers who are seeing the value of this unified product. And as Tyler mentioned earlier, like later this year, we are contemplating an analyst day. And I think that would be the right time where we'll probably be ready to break out the customer numbers and hopefully revenue on the fresh sales product as well. But as you all know, CRM is a massive market, and we are super excited about this opportunity.

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

Yeah, I mean, I think we had mentioned earlier, you know, made a lot of investments over the last year under Patty, our chief customer officer, in a customer success group. And so when you look at that team and the engagement model that we've created for our customers combined with all of the innovation that we came out with the last year, right, we now, you know, have a mechanism to have that engagement and then the feedback loop on feature functionality that our customers need and then, you know, with our pace of innovation to really put out you know, stuff into the products that our customers want, and that is bearing fruit, right? So they're staying with us, and then, you know, once what we know about our customer base is when they stay, they tend to grow. And you, you know, saw that in the cohort analysis that we had in the S1. So, you know, we potentially can get a double impact from it. And it feels good, right? We've made a lot of progress, and, you know, we still have a ways to go, but definitely on the right trajectory there. Thanks so much, Tyler.

You bet, Brad. Thank you. Thank you. Our next question comes from the line of Remo Lenschau from Barclays. Your question, please.

Hey, thanks for squeezing me in and congrats from me as well. Two questions. One for Tyler. How do you kind of maybe could you remind us how you're handling currency because you obviously have a lot more international exposure than some of the other players and we're starting to see an impact that you need to manage. Talk a little bit about how you're handling it in terms of hatching, how your pricing works, et cetera. And maybe it's worth almost thinking about constant currency breaking it out rather than you having to do it for us. And then, Garish, one for you. If you think about ITS, and like one of the things that the ServiceNow guys have done is obviously there's a lot of automation on that enterprise level. how do you think about automation on the SMB side? Would that be an overkill or would that be like an extra selling opportunity as you go along in the future with your product development?

Thank you. Yeah. Hey, Raymond, why don't I take the ITSM product question first? Yeah. Because it's more interesting. Yeah. Yeah, enough. So... So one thing it's important to clarify is our fresh service product, the 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, you're talking about a company with 1,000 employees, right, or maybe 500, 750, or 1,000 employees. So the fresh service product has a very interesting dynamic where we don't have a lot of really small companies. These are smaller teams. The IT teams are very small, but in mid-market companies. And the way we are able to build automation is, so we have an orchestration layer built into the product which actually handles a ton of this automation. So this is like a drag-and-drop interface similar to a low-code, no-code, where frequent runbook automation tasks like spinning off new cloud instances or, let's say, creating a ticket if there's an alert in the monitoring system. A lot of that IT automation capabilities are natively built in Fresh Service and our mid-market customers actually like us. And that's what makes us a credible alternative to ServiceNow.

Yeah, okay. Yeah, I'll take the currency one. So, yeah, so... We do have some currency impact. We've got about 32% of our ARR that's in non-USD kind of 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. And then we are also looking at putting some hedging programs in place. that would kind of, you know, mitigate risk and just kind of smooth things out. And so both of those options we're looking at right now. As you can see, we're trying to be as transparent as possible with numbers right now based on the impact. And, you know, clearly if we put in hedging, it'll solve some of that. But, you know, it takes a little while to put in those structures. So until we do that, we'll try to continue that transparency. Perfect. Thank you very much.

Congrats.

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

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

So thanks for the question, Steve, I think, or Chase. Chase, yeah. I didn't get the name right. So on the ITOM functionality, the first thing is we actually started building ITOM after hearing – like from our customers on why they thought it made sense to be in the first service product so they were all using other third-party tools and they felt it would make a great value addition so so this was actually built in partnership with some of our customers so just to clarify what are the capabilities that we have released so in fact we have a unified incident response management with on-call scheduling and automated alert grouping, which is powered through our AIOps. So basically what it helps is most IT teams, instead of reacting to customers' complaints about what's not working, so we are helping them really get proactive by understanding all the alerts that are coming in from the monitoring system, but take out the false positives really help them understand what's going on and be proactive. So this is like a super value add to IT teams and our customers. We are hearing encouraging reports from our customers like PowerSchool. And I think we definitely think this is going to, 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 fresh service.

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 wrapping the quarter. Just kind of curious if you could provide some additional color into what extent the fresh service 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 of this product at all? And then second, as you expand on kind of the capabilities of this platform, how do you think about packaging that going forward? Thank you very much.

So I think fresh service pretty much follows the rest of overall products in terms of it also gets a ton of inbound leads, and we have an outbound field team which is actually generating mid-market leads. So the customer profile is more mid-market for first service, but from a lead gen standpoint, we actually have both inbound, or I should say inbound, outbound, and partner-generated leads. So from a how are we packaging ITOM standpoint, I think currently we are having it as an add-on module that... Because this is bringing additional users into the system who, in an ITSM system, the DevOps folks or the engineers will not actually be added. So this is being offered as an asset management add-on with a per-agent licensing, but this will be additive in the number of users from other teams that it is bringing.

Great. Thanks, guys. Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star then 1. And this does conclude the question and answer session of today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Everyone have a great day.