Freshworks(FRSH) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q4 2022, the company reported quarterly revenue of $133.2 million, achieving over$500 million in annual recurring revenue [2][91] - Non-GAAP operating loss improved to $2.8 million in Q4, with non-GAAP operating margins increasing by 8 percentage points year-over-year to negative 2$147.8 million in Q4, with a normalized growth rate of approximately 29% after adjusting for billings duration mix [16][75] - The company generated $4 million in free cash flow in Q4, exceeding initial estimates [36][50] Business Line Data and Key Metrics Changes - The focus on larger customers has resulted in nearly 60$50,000 in annual recurring revenue (ARR) grew by 35% to 1,908, representing 44% of total ARR [35][86] - Freshservice was highlighted as a key driver of new business, with significant traction in the ITSM market [13][62] Market Data and Key Metrics Changes - The company noted a shift in revenue base towards mid-market and enterprise customers, with a strong performance in North America compared to Europe and Asia [8][123] - The overall churn rate remained stable, with slight increases observed in the SMB segment due to economic pressures [72][131] Company Strategy and Development Direction - The company is focusing on four key business drivers: product innovation, targeting mid-market and enterprise customers, expansion, and operational efficiency [51][62] - Freshworks aims to differentiate itself in the ITSM market, positioning Freshservice as a credible alternative to larger incumbents like ServiceNow [114][137] - The strategy includes enhancing product offerings and improving customer experience through integrated solutions [26][64] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the company's ability to navigate the current macroeconomic environment, citing strong new business performance in Q4 [100][101] - The expectation for Q1 2023 includes revenue growth of 16% to 18% year-over-year, with net dollar retention projected at 107% [19][15] - Management acknowledged potential risks of increased churn but remains focused on driving efficiencies and maintaining growth [33][68] Other Important Information - The company ended Q4 with approximately $1.1 billion in cash and marketable securities, indicating a strong balance sheet [36][77] - Freshworks plans to continue net settling vested equity amounts, impacting cash usage but not free cash flow [76][95] Q&A Session Summary Question: Did the selling environment improve in Q4? - Management noted a strong quarter for new business, indicating an improvement in the selling environment despite ongoing pressure on expansion [100][101] Question: How should net retention be viewed moving forward? - Management expects net dollar retention to decrease slightly but remains focused on controlling churn and driving expansion [107][131] Question: What portion of overall bookings came from new expansion versus renewal? - Management indicated that new business contributed significantly to bookings, particularly from Freshservice, which is growing faster than Freshdesk [118][121] Question: How is Freshservice positioned in the market? - Freshservice is seen as a credible alternative to ServiceNow, with the company winning deals against larger incumbents [114][137] Question: What are the expectations for ESM growth? - While ESM is not expected to surpass IT in the short term, the company sees significant opportunities for expansion into other departments [161]