FRSH - NASDAQ

Hello, and welcome to the Freshworks Third Quarter 2023 Earnings Conference Call. At This time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President, Investor Relations, Joon Huh.

Thank you. Good afternoon and welcome to Freshworks' third quarter 2023 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 third quarter 2023 performance and our financial outlook for our fourth 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 Freshwork's 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. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand, and to control costs and improve operating efficiency. For discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-K and Form 10-Q, our Form 10Q for the quarters ended March 31, 2023, and June 30, 2023, 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 call, 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 for historical periods 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, supplemental earnings slides, 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 third quarter of 2023. We delivered another solid quarter of execution as we outperformed our previously disclosed estimates across our key financial metrics. Our revenue exceeded the high end of our financial outlook range, coming in at $153.6 million for the quarter. We surpassed our estimates for free cash flow with $22.1 million in Q3, and we improved our free cash flow margin to 14%. We also held our first Investor Day in September, where we showcased our products and outlined the path that we believe will drive us towards becoming a $1 billion company and beyond. Freshworks continues to reap the benefits of three industry tailwind. Businesses of all sizes are having to transform to compete digitally; expectations for customer and employee experience are evolving to center around modern messaging and AI is breaking down silos offering richer insights to help businesses understand much more about their customers and employees. This quarter, in particular, we added new generative AI capabilities across products and opened up our Freddy Insights beta program following Freddy Self-service and Freddy Copilot in Q2, which is intended to unlock more value out of our existing product suite. You'll hear me talk about AI quite a bit today, starting with customer support. I'm really excited by the traction we've been seeing since launching our customer service suite in August. It's our all-in-one solution to combine bot, modern messaging, and ticketing. In the first two months, our sales team signed on more than 200 customer service suite customers from new and existing customers. And we are seeing higher levels of engagement with the product than with Freshchat alone. The suite not only saw great traction with new customers, but also with longstanding ones, including a large US TV network and a high fashion jewelry company who decided to migrate to help them scale self-service features with our bot capabilities. 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. We continue to invest in cutting edge AI capabilities for our customer support users. In our initial beta for Freddy Copilot, we were predominantly focused on driving agent productivity. We have heard great feedback from our customers, including Monos, a luxury luggage brand we featured during our Investor Day. Thomas Cook, a popular global travel company in the UK using Freshdesk since 2021. And iCar, a business process outsourcing company with 40,000 employees, are beta testing Copilot features to further enhance agent productivity. Steady Copilot adoption and usage among customer service customers increased meaningfully from Q2. In Q3, we continue to see growing demand for our IT products with mid-market and enterprise customers. We've been to the unified service operations platform that enables customers to improve service reliability. Our customers, including ChildHope Group, Valley Children's Healthcare, and Travelopia, see great value in our unified product. ITOM, in particular, is gaining traction with momentum for Freshservice' major incident management feature. We added new capabilities to this feature and the customer base is growing. Almost 1,500 customers now take advantage of post-incident reports, automated major incident creation via Alert, and organizational updates through a branded status page. We continue to harness the power of generative AI to enable IT and other business users to focus on high value work by using auto generated ticket summary and ticket response suggestions. Our newest beta release includes GenAI-powered virtual agent that eliminate forms to create a more conversational experience for employees. Early adopters of these new AI features for Freshservice include existing customers, Restaurant365 and Confluent Health. Freshservice customer adoption of these features has more than doubled since Q2. Through our continued innovation to meet the IT needs of large enterprises on the mid-market, we believe we are increasing mindshare with CIOs and anticipate that this will enable us to execute on the broader ITSM opportunity. On to sales and marketing. We continue to execute on our vision of delivering an easy to use, quick to set up smart CRM that assists sales teams in generating leads, increasing conversion and accelerating revenue. In Q3, we made improvements to the inbound experience in our sales and marketing products. We revamped the UI of Freshsales to improve user efficiency, productivity and data accessibility. The upgraded interface for sellers helps boost context, AI-powered actions, and team collaboration for faster deal closures. For example, a local cabinet maker in Georgia named Click Studios uses both Freshsales and Freshdesk to help support their sales teams to collaborate better, which has helped Click Studios improve its sales cycle by up to 35%. We also continue to strengthen our AI capabilities for marketers to improve campaign creation, while boosting efficiency, conversion rate, and customer satisfaction. In summary, Q3 innovation was centered around unlocking more productivity for our customers through AI-powered customer service, IT, and sales and marketing products. And we will continue building an offering richer insights to help businesses understand their customers and employees. Now, over to Dennis, who will give more detail on the opportunities we are realizing with customers and the ongoing impact of changes we are making to our GTM operations.

Thanks, G, and thank you, everyone. We appreciate you joining us for today's call. As we talked about at our Investor Day, on top of product innovation, a few key growth drivers are helping us deliver on our targets for revenue, operating profit, and free cash flow. Let me provide some highlights from Q3. Firstly, our unique go-to-market approach efficiently serves the Fortune 5 million, combining an efficient inbound sales motion, growing field sales presence, and a partner ecosystem that's built to scale. Large customers like TriPoint Homes and Qualfon turned to Freshworks along with mid-market customers like Salvation Army Australia, ASPCA, and Jackson Family Wines. We added nearly 1,000 net customers in the quarter, resulting in a total of over 66,600. While we're addressing companies of all sizes, we're also targeting larger, higher-yielding customers. In Q3, Freshworks customers paying us over $50,000 in ARR grew 32% year-over-year or 30% on a constant currency basis. This cohort continues to represent 46% of our ARR as larger customers fuel the growth of our business. One example, a national home builder has $4 billion in annual sales and 6,000 employees. They needed a consolidated platform that manages ticketing, ITSM, and asset management to improve their efficiency given each of those was previously managed in disparate systems. They chose Freshservice and added marketplace integrations to help them scale their global service management needs. Another large company using Freshservice is Qualfon, a leading business processing outsourcer with 15,000 employees. They used a legacy provider's ITSM tool for years, but it never delivered on automation. Qualfon chose Freshservice because it is easy to use and supports employee needs right out of the gate. They can now automate over 2,000 requests per month and saw an average resolution time improvement of 70%. Looking at our opportunity for expansion, higher rates of multi-product adoption with larger customers are contributing to this growth driver. In Q3, 25% of our total customers used more than one product. In our larger customers, we're finding more than half of our $50,000 plus ARR customers are using multiple products. 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. Turning to our SMB opportunity, this remains large. As G mentioned earlier, we're taking advantage of that by enhancing our inbound motion with a view to driving higher conversions and attracting stickier customers. We saw encouraging signs in the SMB segment in Q3, as the churn rate improved year-over-year and also quarter-over-quarter. Millions of SMBs need to adopt AI and automation now to stay competitive, and we believe AI can greatly simplify customer and employee experiences. Underscoring this, many of our AI beta customers today are SMB and mid-market companies, including Ultrafabrics, an early pioneer of socially conscious fabric manufacturing, Jacob Stern & Sons, a distributor of specialty agricultural products since 1850, and Virtual Identity, a digital creative agency. Each of these customers uses Freddy Self-service to automate level 0 and level 1 support with modern virtual agent conversations. We're embedding AI capabilities across our products, as this is a critical growth driver for us. New features include contact scenario for Freddy Insights, which analyzes top contact scenarios in tickets and conversations and helps deploy bots for them. This is just one of many enhancements we released with Freddy AI to deliver more value to our customers in Q3. Our plan is to monetize increased automation through bot sessions in a consumption or usage based model. As automation frees up agents to focus on higher value work, we can also assist with our Copilot add-on that helps them be more productive. Our continued traction with larger customers over $50,000 in ARR, combined with our expansion motion and large SMB opportunity, create a go-to-market motion unique to Freshworks. We believe it is this combination of growth levers that gives us confidence in our ability to reach our goal of $1 billion in revenue in the next three years. I'm also excited to announce the upcoming appointment of a new management team member who will be crucial in helping us reach that big goal. Mika Yamamoto will join us as Chief Customer and Marketing Officer on November 20th. Mika has proven executive leadership experience at large public tech companies with deep technology, sales, and marketing experience, serving multiple buyers that are relevant to Freshworks. She was most recently the Chief Customer Experience and Marketing Officer of F5 and was previously the President of Marketo, Chief Digital and Marketing Officer at SAP and held senior roles at Amazon, Gartner, and Microsoft. Now over to Tyler to go through the Q3 financials and talk about how we're driving efficiency.

Thanks, Dennis, and thanks again to everyone for joining us. Before I get started, I want to thank you once again to everyone who attended our first Investor Day. It was great to spend time with many of you in person and to provide an update on the Freshworks story. Once again, we had another quarter of good execution in Q3. We beat our revenue growth estimates and continue driving additional leverage in the business to expand both non-GAAP operating and free cash flow margins quarter-over-quarter. We continue to realize the financial benefits resulting from the operational changes made earlier in the year, and we're creating a healthier position to drive profitable long-term growth for the business. For our call today, I'll cover the Q3 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q4 and the full year 2023. I'll also include constant currency comparisons for certain metrics to provide a better view of our business trends. As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses and other adjustments. Starting with the income statement, revenue grew 19% year-over-year to $153.6 million on a reported basis, and 18% adjusted for constant currency, as we're beginning to see the positive impacts on currency rates for the euro and pound against the dollar over the past year. ITSM deal activity continued to drive much of the growth in Q3, while expansion rates ticked down slightly in the quarter. Turning to margins, we had another strong quarter of non-GAAP gross margin of 84% as we efficiently scale the business. In Q3, we achieved a non-GAAP operating margin of 11%, which represents a 3 percentage point improvement quarter-over-quarter. This is driven by lower-than-expected headcount-related costs, some delays in spend, and ongoing improvements on operating expenses. Turning to our operating metrics, we have two key business metrics, net dollar retention and customers contributing more than $5,000 in ARR. Net dollar retention was 108% in the quarter which includes a 2 percentage point benefit from FX. In Q3, our overall churn came better than our initial estimates, slightly improving from the prior quarter. Looking ahead, we are planning for the lower net expansion trends to persist for the remainder of the year as we expect net dollar retention to be approximately 105% for both constant currency and, as reported, in Q4. Moving to our other key business metric of number of customers contributing more than $5,000 in ARR. This metric grew 17% year-over-year to 19,551 customers in the quarter and continues to represent 88% of our ARR. On a constant currency basis, this customer metric grew 16% year-over-year. For our larger customer cohort, contributing more than $50,000 in ARR, this cohort grew 32% year-over-year to 2,268 customers and represents 46% of our ARR. Adjusting for constant currency, this cohort grew at 30%. We added nearly 1,000 net customers in the quarter, which was an increase from Q2. We ended the quarter with a customer count of approximately 66,600, as we continued our focus on attracting higher yielding customers in building a healthier base and driving a higher ARPA. Moving to calculated billings, balance sheet and cash items. Calculated billings grew 21% year-over-year to $165.3 million and 19% on a constant currency basis. Factors including timing duration of contracts and revenue reserves in the quarter create a slight benefit of 1% to these growth numbers. Looking ahead to Q4 2023, our preliminary estimate for calculated buildings growth is 18% as reported and 17% on a constant currency basis. For the full year 2023, we expect calculated buildings growth to be similar to our expected annual revenue growth of approximately 20% for both as reported and constant currency. During the quarter, we generated $22.1 million in free cash flow, ahead of our estimates and reflective of the efficiency improvements we're making in the business. We ended the quarter with a similar balance for cash, cash equivalents, and marketable securities of $1.16 billion. We continued to net settle vested equity amounts using $24 million during the quarter, which is reflected in financing activities. And this activity is excluded from free cash flow. As we look forward to Q4, we plan to continue net settling invested equity amounts, resulting in Q4 cash usage of approximately $18 million using current stock price levels. For the year, we expect to use approximately $70 million to net settle invested equity amounts. Given the meaningful operational efficiencies we've realized so far this year, we are raising our free cash flow estimates for the full year 2023 by $15 million to $75 million. Turning to our share count for Q3. We had approximately 327 million shares outstanding on a fully diluted basis as of September 30, 2023. The fully diluted calculation consists of approximately 295 million shares outstanding, 29 million related to unvested RSUs and PRCs, and 3 million shares related to outstanding options. Let me now provide our forward-looking estimates. For the fourth quarter of 2023, we expect revenue to be in the range of $156.7 million to $159.3 million, growing 18% to 20% year-over-year. Adjusting for constant currency, this reflects growth of 17% to 19% year-over-year. Non-GAAP income from operations to be in a range of $5.5 million to $8.5 million, and non-GAAP net income per share to be in the range of $0.04 to $0.06, assuming weighted average shares outstanding of approximately 303.3 million shares. For the full year 2023, we expect revenue to be in the range of $593 million to $595.5 million, growing 19% to 20% year-over-year. Adjusting for constant currency, this reflects growth of 19% to 20% year-over-year. Non-GAAP income from operations in the range of $38.5 million to $41.5 million. And non-GAAP net income per share to be in the range of $0.23 to $0.25, assuming weighted average shares outstanding of approximately $300.1 million. Given the US dollar trends over the past year, we saw a slight positive impact to our growth rates in Q3. Our forward-looking estimates are based on FX rates as of October 27, 2023. So any future currency moves are not factored in. Let me close by saying, we continue to execute on our goals in Q3. We maintain our rapid pace of product innovation, realize the benefits of operational changes made earlier this year, and remain focused on the growth initiatives to help drive momentum into 2024. We're excited and look forward to our many opportunities ahead. And with that, let's take your questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Scott Berg with Needham & Company. Pardon me, Scott. Please check your mute button. Okay. One moment for our next question. And our next question comes from the line of Ryan MacWilliams with Barclays.

Hey guys, thanks for taking the question. Pleased to see you continue to work to improve profitability here. Just asking about how things moved through the third quarter. Like, how would you say your new business did in the month of September and how has October been so far? Thanks.

Hey, sorry about that, Ryan. Thanks, Ryan. I think the question is around linearity. And so, as we went through September, it kind of played out as we expected. Meaning that, we've been dealing with larger companies and larger deals. And over the last, let's call it, year, it become a little bit more back end loaded. So that was expected. October, the guidance that we just gave out is -- it takes into account everything we see or try to call it as we see it. So October is going as we expected as well.

Appreciate that. I know it's early, but we've heard a lot of customer interest around Freddy AI. So any more detail on the timing of the rollout there, any early expectations, or just any more additional commentary around how that can be initially adopted within your customer base, like maybe a penetration rate or what kind of customer you can see that first in. Thank you.

Sure, Ryan, I'll take that. This is Girish. So we have, actually, if you remember last quarter during Investor Day, we actually said that several of our customers were beta testing our Freddy AI, specifically Freddy Self-service, which is the self-service automation capability for customer service and employee service. That is being used by our customers. We are monetizing it through our bots in the customer service platform. And Freddy Copilot and Freddie Insights, this quarter we have actually put it in -- when I say this quarter, I mean Q3, we have actually put it in beta and to our customers. Thousands of customers are using it. 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.

Appreciate the color. Thanks, guys.

Thank you. One moment please for our next question. Our next question comes from the line of Scott Berg with Needham & Company.

Hi. Hopefully everyone can hear me this time. Congrats on the strong quarter and thanks for taking my questions. I guess a couple, Dennis, I wanted to start with you. Sales is quarter, you seem quite pleased with them. One of the trends I've noticed over the last couple of years is your third quarter kind of customer ads are -- you always have a seasonal dip versus the second quarter kind of results. And this year looks like it's very much the same. Can you help remind us what you see internationally that might be causing a little bit of that change from Q2 to Q3? My guess is that, it has something to do with just European sales cycles. But I didn't know if there's anything more nuanced to call out there in particular.

Yes. Thanks, Scott. Yes, nothing really nuanced there. I don't think we had anything this quarter related to European sales cycles. We continue to see strength in the larger accounts, continue to see strength in IT. And we did see an uptick in net ads to -- around a thousand net ads for the quarter from last quarter. So, we didn't see the kind of dip that perhaps we've seen in the past. Remember, last quarter -- in Q2 we had a free offering for our Freshsales product that we then pulled back, and that has resulted in the increase in the overall net ads for Q3.

Got it, helpful. And then I wanted to just follow-up on the question on improving win rates, or excuse me, improving churn down market. I think that's always super interesting because a point improvement there makes a big difference both on the top line and bottom line profitability. How should we think about your opportunity to improve that churn in that segment? SMB churn across software is always notoriously low. I know you all have had some success improving that number, but how do we think about what that kind of runway for improvement looks like maybe over the next several quarters?

Yes. Hey Scott, this is Tyler. You're right, we've actually done a really good job on churn just as a company over the last, I would call it, year plus. Well, we've had quarters where it kind of remained stable and then other quarters where we actually make some good improvement on it. This past quarter was a company best for us in terms of churn in general. And that's across the board, across the products. On the SMB side, I think it's more characteristic that the products are getting better and we're getting also better at kind of focusing on the right ICPs for ideal customer profiles for our customers, even on SMB, which has led to maybe slightly lower total number of customers, which we've seen in the last couple of quarters, but better customers in some cases. So I do think that going forward the improvements are going to be more subtle, but I do think that we do have a little bit of room to go in terms of improving turn over the next year, year and a half.

Excellent. Very helpful. Thanks for taking my questions and congrats in the strong quarter again.

Thanks, Scott.

Thank you. One moment please for our next question. And our next question comes from the line of Pinjalim Bora with JP Morgan.

Hey, guys. Thanks for taking the questions, and congrats on the quarter. I want to ask you on the bot side, can you help us maybe understand what portion of the overall ARR today is driven by bot-based pricing? And how should we think about kind of the changes in the pricing and packaging that went into effect in August, how is that going to be layered into the model?

Yes, I'll start with that, talk about the financial part. Pinjalim, this is Tyler. We changed the pricing at the end of Q2 in terms of our chat pricing, which then -- the bots are kind of embedded in that, which would also embed the Freddie Self-service capabilities. It's really, really new. And so, we don't have that much embedded in terms of the new feature functionality, we do have a decent amount of chat revenue, and we would expect that to continue to kind of increase as we progress here. The other AI capabilities, right, we haven't started charging for it, they're still in beta, and they will be coming out kind of Q1 and that's really Copilot will be the next one that's coming out. And so, every quarter we expect to have a little bit more increase on price of service, again, that's going to be reflected more in chat usage.

Yes, understood. And Tyler on that topic then it seems like you have a few tailwinds like going into next year, the bot-based pricing, the AI SKUs that I think Girish said will be monetizing in Q1, maybe potential stabilization on the NDR metric. Obviously macro and geopolitical climate is a wild card, but help us understand how are you thinking about 2024? What are the put and takes as we look forward?

Yes, so we haven't guided to anything for 2024 yet. In our Investor Day, we kind of talked about 2025 in terms of getting to Rule of 40 and then we talked about some revenue numbers for 2026. We'll give out the 2024 numbers at the end of this quarter. I do think you're right in terms of, [indiscernible] just said, I think we can make some slight improvements there, but it's definitely heading in the right direction. In terms of the AI SKUs, it's so new, we'll have to wait and see on those things. The one other comment you made on macro, we don't expect macro to immediately turn around. For us, that would be reflected in our expansion motion increasing with [indiscernible], meaning companies are going back to hiring. And we expect that to see continued pressure for a while, so we've kind of built that into our expectations.

Got it. Thank you.

Thank you. One moment please for our next question. Our next question comes from the line of Rob Oliver with Baird.

Great. Hi, good afternoon. Thanks for taking my questions. Dennis, one for you just on the comment around more than half of the $50,000 plus customers now using two products. Clearly great progress on that front for you guys. I think you said overall it's at 25%, which is kind of what you had said at the Analyst Day, which is great. Just curious, as you make that move sort of off-market, are you seeing more multi-product lands or are these still largely expands? And then can you talk a little bit about what you see in the pipe and if there's a mix of those. And then I had a quick follow-up.

Yes. Sure. So thanks, Rob. 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. In fact, if we look at our largest expansions, those are true cross product expansions. Some of them I think we talked about in the prepared remarks like Giant Eagle and Western Financial. 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.

Great, that's really helpful. Thanks for the color there. Yes, and then just on the macro, Tyler, I appreciate your comment in response to the last question just about how you're thinking about macro and around agent count. You kind of reiterated what you said at the Analyst Day, which is, hey, we're not really counting on those agent additions. And that sounds like that's the pressure that's likely going to remain here. But on the other hand, it does seem like you guys -- I mean, you deliver tremendous value for the price. So I'm just curious to get a sense as the execution's been strong here, is there a flip side to the sort of macro headwinds where some of those mid-market customers are feeling like that may be upper end can get a lot more value with you guys? Are you seeing some of that as well? Thanks.

Hey, Rob. I’ll take that. This is Girish. So first of all, I would like to say that from a macro standpoint, we're not seeing any significant change in Q3 compared to Q2. And one of this, clearly, when companies are still carefully considering their spends, we are a vendor of choice, because of our affordable pricing and lower total cost of ownership. So that may be in play, but that's not specific to Q3. That's pretty much our promise to our customers. And as we see continued demand for AI and even to offset. Moving forward, we hope that our AI strategy will help us make money when businesses are not hiring agents. We'll make money when businesses are hiring agents by making them more productive and also our Insights product helping open up a new skill for leaders.

Great. Thanks, G. Thanks everyone.

Thanks Rob.

Thank you. One moment please for our next question. Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.

Hi guys, thanks for taking my questions. Congrats on the quarter. I guess the first for me, you guys talked about your AI product. It may seem like that maybe SMEs might be the biggest early adopters of this. Is that how you're thinking about it? And do you think that could help maybe drive a step function improvement in churn at the lower end of the market?

So yes, I'll take that. So first of all, 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 with market customers, because every user can now become more productive and SMBs really want to do more with less. So -- and Freddy Insights is for leaders, again, larger companies may benefit more because their needs for data from different teams could be larger. So -- and specifically on AI helping us deal with the macro, I think we said this in the last earnings call. So we are focused -- we're not waiting for the macro to improve, we are focused on controlling the variables that we can. Like, our focus on four growth pillars, like 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 as -- while we wait for the macro to turn.

And just -- hey, it's Dennis, just to add some color there. Today, we're seeing -- even though our products are still in beta, we're seeing pretty broad adoption across all customer sizes for our AI products. So we have over 2,500 customers in beta using Freddie Copilot to improve agent productivity. We have over 4,000 customers using some aspect of Freddie Insights. And those range the gamut from our largest to our smallest customers. So I think AI is on the agenda for every CEO. They're all looking for improved outcomes. They're looking for improved efficiency in their operations. And all of our customers, whether you're a customer support leader or an IT leader, you have to have an AI strategy. So that's provoking a lot of discussions. And we're very optimistic about how this is going to play out over the next year.

I appreciate it. Thanks, guys.

Thank you. One moment please for our next question. Our next question comes from the line of Nick Altmann with Scotiabank.

Awesome. Thanks, guys. I think earlier you had noted that churn has improved in SMB both year-over-year and quarter-over-quarter. I was wondering if you could maybe talk about the expansion side and how that's trended. And then just as a follow-up, were any of the changes that you had made to pricing earlier this year, has that been sort of a tailwind to NRR? And if you could quantify that, if you're willing to disclose that, that'd be helpful. Thanks.

Hey, Nick. This is Tyler. I'll take that one. So yes, in churn, we're just doing better, [indiscernible] for a while, and these are subtle improvements. And I just mentioned we made kind of a company best ever in churn this past quarter. And it goes from SMB all the way up. I mean, part of that is because we have been moving to larger customers, they're signing annual deals. So the mix shift of our customer base is changing. Part of it, Freshservice in general, which plays in the larger markets, that is growing faster and that has great characteristics. When -- on the flip side of the question you asked about expansion, expansion is -- it really hasn't changed and it's still a pretty tough environment for expansion and specifically around agent addition. And so, what we have been doing is looking at other ways to expand with our customer base. One of those, which you've alluded to is that, we did do some price changes on our Freshservice product. We did get some benefit from that so far this year. So that has helped our net dollar retention slightly. And so, even though on one side the expansion motion overall is coming down, we did get some expansion benefit from price a little bit, but also benefit from churn. So hopefully that breaks it down for you.

Awesome. Thanks, guys.

Thank you. One moment please for our next question. Our next question comes from the line of Brent Thill with Jefferies.

Tyler, on NRR, you mentioned it is going to moderate more in Q4. Is Q4 going to be a bottom for that moderation in NRR? And maybe for Dennis, U.S. and EMEA held up really well, but the APAC showed a pretty big slowdown. Anything going on in the APAC that would describe what happened there. Thanks.

Hey, Brent. I'll take the first part of it. So, we have been calling, kind of coming out of Q1 even that we thought Q2 was going to go to 105%, 106% range. And we've been doing a little bit better. And part of the reason is because churn has been doing better because we've kind of -- the expansion has kind of come through as we expect. We're calling the kind of 105% for Q4. And based on what we see right now, we do hope that that's kind of the floor. And we'll obviously update that going into next year if anything changes. That kind of assumes that we'll be able to maintain the levels of churn and the expansion is not going to get dramatically worse. And so that's obviously the assumption going into that number.

Yes, just on the geography question, we really didn't see a slowdown in Asia-Pac. We had pretty consistent performance across our three big geos. So, no -- I would say no appreciable trend to call out there.

Great. Thanks. Operator Thank you. One moment please for our next question. Our next question comes from the line of Alex

Hey, guys. This is Ethan Bruck on for Alex. [indiscernible] congrats on solid results. I have two quick questions. Just first, so one of your peers earlier in the month noted that there's some growth slowdown in September. So I'm just curious, like what you're seeing in the environment, just given the solid results and like based on early customer conversations, around budgets, like what is the discussion been like for 2024? We've heard a lot around like two consolidation. So just curious how you guys saw them across the front office stack helping driving some larger strategic deals.

Hey, Ethan, I'll take that. So in terms of -- the first part of the question is around September. I already mentioned, hey, we become a little bit more back-end loaded as we've been dealing with larger customers, but it kind of came through as we expected. And it wasn't -- there was no real surprise there and we expect that kind of that back-end loaded nature of the quarters to continue as we are kind of doing that more of that field motion. As we look into next year and you asked about, hey, in terms of budgets, are we seeing anything different? We're not seeing anything different. And part of our play you just mentioned, is to be a great kind of a great cost alternative. And we're going to continue to try to flex that muscle as we go engage with customers, especially if they're seeing budget pressures. We feel that we came out to be a great alternative to some of their big heavy software that they might have.

Yes. And then just a quick follow-up around the AI suite. So hearing Copilot coming in 1Q is constructive. I'm just curious and based on the early traction you're seeing in beta. And just how would you stack rank? what you guys would expect to be the most impact in the 2024 numbers if you think about impact from new spend on just the Gen AI SKUs or through uplift just improving gross retention, surely directly how you guys are thinking about this. Thank you.

There's a question on monetization. Yes. I mean we -- it's so early, Ethan, right? We have our -- the monetization that's just starting essentially in Freddy Self-service, which is, again, going to be reflected in Chat. We talked about Q1 being kind of rolling out GA Copilot, which we'd start selling it. I think Dennis just mentioned, we've got a lot of customers across the three different AI plates that we have that are in beta right now, and we're planning to learn as we go and then start to roll the stuff out. So I think the first time we're really going to have anything that we would talk about is probably the first half of next year.

Got it. Thank you, guys. And congrats again on the results.

Thank you. One moment for our next question. Our next question comes from the line of Brent Bracelin with Piper Sandler.

Thank you. Good afternoon. G, I'll start with you here. It sounds like you're excited by the CS Suite product, a couple of hundred customers deploying that this quarter. What is the ASP uplift as you think about a customer that moves to CS Suite? Is there an ASP uplift when customers move? Or should we think about this more of a modernized stack and with no uplift. Thanks.

Okay. Thanks, Brent. And so first of all, yes, there is an uplift. I probably have to get back to you the exact numbers. But because the pricing is slightly higher for the CSS suite than standard Freshdesk or Freshchat alone, I would think it's probably, I would say, 10% to 20% higher, but actual realizations could be different. So -- but yes, in principle, there is an ASP uplift because the customer is getting bots and conversational agent experience as well as ticketing all in one package. So it's higher than Freshdesk stand-alone and Freshchat stand-alone and bots will add on usage-based pricing as well.

Got it. Helpful color there. And then Dennis, just as you think about the business here, there are there some moving parts? You guys are doing a good job of navigating a challenging environment. One of the things that stood out to me is clearly, you're talking about strength on the enterprise, strength in ITSM. We are looking across the industry seeing some weakness on the SMB side. If I look at net logo adds, it did look like enterprise was down slightly and the SMB space was up. Maybe if you could just give us an update on what you saw overall in the quarter relative to larger customer demand, SMB and update that PLG 2.0 initiative, is that starting to have a little bit of an impact here on net adds? Thanks.

Yes. So just to back up a bit, remember, the markets that we're competing in are massive between sales and marketing, customer support and IT and any business of any size needs what we provide, needs an IT solution, needs a customer support solution, need sales and marketing solutions. So the market is massive. And still, when you get into SMB, still relatively underpenetrated, about 40% of our revenue is from SMB today. . We -- in any given quarter, we're going to see fluctuations across SMB versus our large account acquisition. Also, if you think about like in enterprise, in particular, you tend to have a lot of buying cycles that take place at the end of the year as opposed to in the third quarter. So that potentially played into it for Q3. But in SMB, in particular, we've started to do some of the things that I talked about at the Analyst Day to improve the efficiency of our -- and the scale of our SMB business. We've spent this past quarter, Q3, diversifying some of the sources of leads in -- before the funnel. So early, think about like going into affiliate marketing and investing more in SEO to drive organically into our trial funnel. What we're doing this quarter is focusing on improving the efficiency of that funnel itself. And that's through things like creating more personalized journeys for a prospect that's in the trial itself using chat and other means to communicate to that trial is to help them get educated on the product and get to value faster. And we know if we get to value faster ideally in the first day or two of trying the product, you're much higher -- much more likely to convert. So, we think there's a lot of levers that we haven't really pulled there in optimizing that funnel, which will play out over the course of the next year. So I think we've got very broadly speaking, continue to be pushing into mid-market customers, lower end of enterprise, in particular, with our IT products, more and more emphasis on cross-sell and expansion of our existing base and then getting that SMB funnel humming through what we're calling PLG 2.0. Those are the three big levers we're really going to be playing with over the course of the next year and that we'll be talking about on our calls.

Super helpful color. Thank you.

Thank you. One moment please for our next question. And our next question comes from the line of Brian Schwartz with Oppenheimer & Company.

Thank you for taking my question. Tyler, just to button up the NRR guidance and the compression. I think you called out ITSM kind of being the expansion is weaker than expected in your introductory commentary. But then in the Q&A, it sounds like maybe it was a little more broad-based. So just wanted to get maybe some clarity on that if it's constrained to the ITSM business? Or you're seeing it across the product set. And then Dennis, one question for you just on the new customer adds. Can you shed any light on what you're seeing across industries? We heard about some weakness in automotive and suppliers. And just wondering if you're seeing any strength there or weaknesses across industries, given how horizontal the solution is? Thank you.

Brian, I'll take the first part. No, I don't think -- we didn't need to call out ITSM expansion in particular seeing pressure, mainly just saying the expansion motion in general continues to see pressure, which it has for over a year now, really the agent addition part of that. I think what we called out is that, on ITSM we actually had a little bit of price leverage this year and so that kind of offset a little bit of the agent additions that might have slowed. And so that was kind of more of a positive to ITSM in general, ITSM also has better churn characteristics as it's dealing with larger customers. So hopefully, that clarifies. We weren't trying to call out expansion pressure on ITSM specifically.

I think -- so just on the industry question, for the reasons that I was just talking about the fact that we address such a broad market, the fact that the market is very horizontal. If you have an IT department or a customer support department, you need to automate it. We don't have any single industry that really drives a lot of concentration for us today. we tend to get -- I would say, on the larger accounts, we tend to get a nice reference cycle where we get two or three travel companies. Next thing, we've got 10 travel companies, we've seen that with industrial recently where we had a handful of industrial companies, some in steel, some in manufacturing, all of a sudden, we've got a lot going on there. And then the other area that we have seen, I would say, fairly continued strength over the course of the last several quarters is in higher ed and education where lots of universities are trying to automate all aspects of their business. They're trying to become more efficient as well, typically have very fragmented IT stacks across different departments, University of Pennsylvania is an example of one that we referred to where that was an expansion of an existing account where they're trying to put everybody on the school and the same platform. So those are the kinds of things that we're seeing across the board. But I wouldn't say that there's any specific industry that showed particular strength or weakness given the broad base of customers that we have.

Thank you for taking my question.

Thank you. One moment for our next question. Our next question comes from the line of Pat Walravens with JMP Securities.

Great. Thank you and congratulations on the results. So billings growth was 19% in constant currency in Q3 versus 21% in Q1 and Q2. So Dennis, is it fair for us to assess that sales attainment was good in Q3, but maybe not quite as good as in the first half?

So overall, look, we are pleased with the quarter in terms of where we landed. Of course, we kind of -- we set high goals for ourselves. And I think we said this at the at the Investor Day, we're not satisfied with the growth rates that we're seeing now. We think we can do much better. We've got a lot going on to get there. I think the addition of Mika Yamamoto as our new Chief Customer and Marketing Officer, that's a big add for us because a lot of what we need to do also is in that marketing space. So yes, I mean our aspiration, our goals are to continue to grow the business at rates that are higher than what we're seeing now, and that's what we're going to continue to do.

All right. Great. That's helpful. And then at the Analyst Day, you guys -- and I know you're very specifically not breaking out by segment. But at the Analyst Day, IT was growing in the low 40s and customer service in the low to mid-teens and sales less than 10. Is that still like overall or roughly accurate assessment of the business? Or was there some change?

Yes. So we shared that data at the Analyst Day, specifically to give investors some sense as to the size and scale of the different parts of our business. We don't intend to update those numbers on a quarterly basis, potentially at a future Investor Day. But broadly speaking, the trends that we -- and the data that we shared back in September, the trends that we shared are consistent with what we've seen this quarter in Q3 as well.

All right. Great. Thank you very much.

Thank you. One moment for our next question. And our next question comes from the line of Adam Bergere with Bank of America.

Hi. Thanks for taking my question. So with the focus on cross-sell, what are some of the biggest initiatives or investments there? And just naturally, what products have you found to be more common pairings that you're kind of pushing for? Thanks.

Yes, I'll take that. So I think one of the motions that we highlighted last quarter that started to really help is that IT and ESM. So 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 that 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. That's really where we're going to be spending a lot of time this quarter and then next year because we have a lot of customers that have sizable consumer bases in particular -- this is -- in particular B2C, it does apply to B2B as well, but particularly B2C who have not automated as many workflows as they can or they've automated only the rudimentary workflows. AI allows you to automate a lot more. And that, in turn, creates a revenue stream for us. So that's a little bit of a flavor of the big motions that we're focused on.

Yes. That’s awesome color. Thank you.

Thank you. One moment please. And our final question comes from the line of Taylor McGinnis with UBS.

Hi. Thank you so much for squeezing me in. Just a question on -- you kept the medium -- the median of the constant currency revenue guide for 4Q unchanged, but you lowered the high end of the range. So is that a reflection at all of any areas being a tad softer than expected? Perhaps maybe there was something at the end of the quarter. . And if you look at the upside of billings, it was a bit lighter than what we saw last quarter. So maybe that header? I know earlier you mentioned things being more back-end loaded, but maybe you can help us bridge those two metrics. Thanks.

Taylor, this is Tyler. I wouldn't read too much into it. I think in general, yes, I mean, there is still macro pressures on expansion, right? So we are cautious still. And we -- every quarter, we've kind of been like that as we go in as we want to see things play out. In terms of the guidance, we are just trying to call it as we see it. On the billing side, we have had this shift to kind of slightly larger deals, but those tend to play annual in advance, which does help your billing cycle. But then again, we still do have a really decent expansion motion and a lot of that's unpredictable as it comes through based on the proration of those contracts. So I wouldn't read in too much on the midpoints and whatnot. But going into Q4, I mean, we're still going to be cautious on the expansion side of it, but new businesses. It came in Q3, the numbers that net adds were good and we just need to execute this quarter.