Freshworks delivers solid Q3 as multi-product deals take on more focus

Freshworks turned in a solid set of fiscal Q3 numbers, with revenue up 19% year-on-year to $153.6 million, with a net loss of $32.3 million, down from $57.3 million in the comparable year ago period.

Other stats of note: 

• Close to 1,000 net new customers were added in the quarter, resulting in a total of over 66,600.
• Customers paying more than $5,000 in ARR [Annual Recurring Revenue] now number 19,551, up 17% year-on-year. 
• Customers paying over $50,000 in ARR grew 32% year-on-year to hit 2,268.
• This category of customer now makes up 46% of total ARR. 
• A quarter of customers use more than one Freshworks product. 
• In customers with an ARR of $50,000+, more than half use multiple products. 

On the subject of multi-product deals, Freshworks Chief Operating Officer Dennis Woodside commented: 

We do see multi-product lands. They tend to be multi-products within the same family. So, an example would be a customer taking IT plus ESM or Freshchat and Freshdesk. Now, most of our expansion in those larger accounts tends to go cross true persona. So from IT to CS [Customer Support]. In fact, if we look at our largest expansions, those are true cross product expansions…So, as we continue to move up market, that expansion motion is becoming more and more important for us and that's going to be a big emphasis for us going into next year.

He added: 

We're finding more and more customers are looking to provision a single workflow engine for all of their departments. And often we can turn an IT-only discussion into an IT-plus, finance-plus legal department discussion, or we can go back to our customers that are just on ITSM and broaden the discussion to include other departments because we've proven that we've conserved their IT department. So that's a real clear motion for us that we're just making part of how we go to market.

You're seeing on the customer support side, moving customers into bots who previously may not have tried to automate their interactions with their customers. So we have a natural upsell for customers. Or maybe they have fairly rudimentary bots that are just handling a small fraction of their inbound inquiry. There's an opportunity there to educate them on how to automate more and more interactions with their customers, how to apply AI to those interactions to build bots and that's actually an upsell opportunity for us because it creates this consumption revenue stream.

Woodside offered up some examples of such multi-product expansions: 

One example is Giant Eagle, a retailer with more than 470 stores and approximately 36,000 team members. Giant Eagle chose Freshservice for its user friendly, results driven platform and this summer introduced Freshchat to better measure employee engagement. Building off an encouraging increase in self-service among team members, Giant Eagle is now eager to integrate other communication platforms like text.

Western Financial Group is another great example of Freshservice to Freshchat expansion. The Canadian insurer needed an enterprise tool to allow support teams to collaborate and respond effectively to frontline teams, keeping data and reporting separate. Moreover, they wanted to unlock tools for change, problem and asset management and CMDB. They chose Freshservice because of its vast automation opportunities, ease of use and clean interface. Most recently they have expanded and begun using FreshChat.

Meanwhile CEO Girish Mathrubootham pointed to promising take-up of the firm’s upgraded Customer Service Suite which launched during the quarter. In its first two months, more than 200 customers, existing and new, have signed on, he said, citing: 

An early adopter of the Customer Service Suite, Fastway Couriers in South Africa, delivers over 16 million parcels annually to an area nearly twice the size of Texas. The company is growing, but found its previous provider offering a disjointed customer service experience across different channels. Now, with the customer service suite, agents are able to better address this issue, can handle live chats with automation, and gain deep insights into ticket trends.

AI

As for the inevitable AI angle, Freshworks now has over 2,500 customers in beta with the firm’s Freddie Copilot and 4,000 customers using what it terms “some aspect” of Freddie Insights. Mathrubootham expanded on target audiences: 

If you look at the three pillars of our AI strategy, Freddy Self-Service, I think, will be really, really useful and adopted by larger customers, because they are the ones who have a large volume of support, like millions of customers coming in for support. So that's where the scope for automation is much higher. 

On the other hand, Freddy Copilot would probably be like more universally applicable to SMBs and mid- market customers, because every user can now become more productive and SMBs really want to do more with less. Freddy Insights is for leaders. Again, larger companies may benefit more because their needs for data from different teams could be larger. 

As to when the AI investment translates onto the bottom line, he said: 

We're not waiting for the macro [economic environment] to improve, we are focused on controlling the variables that we can. Like, our focus on four growth pillars - how can we use product innovation in AI? How can we cross-sell more into our existing base? How can we focus on larger deals and drive more operational efficiency? So that is our plan to keep executing while we wait for the macro to turn.

He added: 

Our plans for monetizing Freddy Copilot would be, we're thinking of Q1 2024 is when we would start charging for Copilot and that's an add-on to agency licenses. We are still working with customers on Insights, we have not finalized the pricing for Insights yet.

My take

A strong quarter, fleshed out by an important executive appointment in the shape of Mika Yamamoto who joins the firm as Chief Customer and Marketing Officer later this month. She’s a tech sector veteran with roles as Chief Customer Experience and Marketing Officer of F5, President of Marketo, Chief Digital and Marketing Officer at SAP, as well as stints at Amazon, Microsoft and Gartner.