Freshworks beats expectations again as generative AI fuels large customer acquisition

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Customer service and support software company Freshworks Inc. delivered impressive fourth-quarter financial results today, attributing the strong performance to its adoption of new artificial intelligence features baked into several of its main applications.

The company reported earnings before certain costs such as stock compensation of eight cents per share on revenue of $160.1 million, up 20% from a year earlier. Both numbers were better than expected, with Wall Street analysts calling for earnings of just five cents per share on lower revenue of $158.5 million. All told, the company delivered a net loss of $40 million, down from a net loss of $60.6 million one year ago.

Freshworks also reported total fiscal 2023 revenue of $596.4 million, up 20% and beating the Street’s consensus estimate of $594.7 million.

Looking ahead to the March quarter, Freshworks said it’s expecting sales of between $162.5 million and $164.5 million. The midpoint of that range came in just ahead of the Street’s call for revenue of $163 million. Meanwhile, the company is expecting first-quarter earnings of between seven cents and eight cents per share, also ahead of the six-cents-per-share analyst forecast.

For fiscal 2024, officials said they’re looking at total revenue of $703.5 million to $711.5 million, once again just ahead of the Street’s forecast of $704.9 million. Full-year profits are expected to total 29 to 31 cents per share, while the Street is looking for 31 cents per share.

Although the results and forecasts are encouraging, investors were apparently not all that impressed, as Freshworks’ stock barely moved, gaining just over a percentage point in the extended trading session.

Freshworks competes with much larger rivals such as Salesforce Inc., Workday Inc., Zendesk Inc. and Oracle Corp. in the customer relationship management software segment. However, its platform is more narrowly focused on helping businesses to acquire new clients, close deals and maintain long-term relationships. In particular, Freshworks has found its niche with midsized enterprises rather than larger organizations, with its tools said to be more user friendly, easier to implement and more cost-effective than traditional CRMs.

In an interview with Barron’s, Freshworks President Dennis Woodside revealed that the company has made some progress in its efforts to increase the average size of its customers. He said 40% of the customers it serves now have fewer than 250 employees, a portion that is shrinking steadily as it grows its client base each month. All told, the number of customers spending at least $50,000 a year on its software has increased to 31%, underscoring that trend.

The company is taking a “slow and steady wins the race” approach as it attempts to move upmarket to larger enterprises, said analyst Liz Miller of Constellation Research Inc. She added that it’s a risky strategy that has burned many other companies that have tried to break down the barrier between mid-sized enterprises and larger players. “But Freshworks is proving to be the right niche tool that fits into the larger enterprise stack, with its open architecture and partner-based marketplace mindset,” Miller added. “The strengthening of its partnership with AWS is a sign that this strategy will remain in place, giving enterprise customers in AWS environments a convenient, cost-effective and easy to deploy tool that spans the entire CX landscape.”

Woodside told Barron’s that another reason for the company’s continued growth is its addition of generative AI functionality to its platform. He said AI helped to accelerate during the quarter, adding that customers see it as key to improving the productivity of their customer service agents. “It comes up in every conversation we have with larger customers,” Woodside said. “They are looking to find solutions that future-proof them when it comes to AI.”

Woodside also said AI is also a key factor in the expansion of customer’s information technology budgets this year. “CEOs and CFOs are more than willing to invest in AI when they see the returns, both in avoided costs and improved responses,” he said.

Freshworks Chief Executive Girish Mathrubootham (pictured) said fiscal 2023 had proven to be a “defining year” for the company, and one in which it beat all of its financial targets. “We unleashed the power of the latest generative AI across our product portfolio to deliver tangible value for our customers,” he said, adding that these moves “helped us win more upmarket deals.”

Looking ahead, Miller believes the coming year will likely be another proving ground for Freshworks, as it has recently added new leadership in  marketing and field operations. She said the company will need to sharpen its focus and create intentional playbooks and quick-start use cases for mid-market and larger enterprise customers, without abandoning its roots in small market, fast-movers.

“This is necessary as Salesforce is readying multiple offerings and enticements to help smaller businesess stand up their data strategies to be AI-ready, without the terrifying costs that are traditionally associated with getting data clouds up and running,” Miller explained. “I expect to see Freshworks hone in on its messaging and offerings that appeal to fast-moving, service-centric enterprises.”

Prior to today’s after-hours move, Freshworks’ shares were down 8% for the year, but up 33% over the last 12 months.

Photo: USISPF Communications/YouTube

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