Freshworks (NASDAQ:FRSH) Chief Financial Officer Tyler Sloat said the software company is sharpening its focus on its employee experience business, describing Freshworks as an “AI-enabled, unified service operations” platform company during a Needham-hosted discussion with Scott Berg, who leads SaaS and enterprise software research at the firm.
Sloat said Freshworks has undergone “a little bit of a pivot” over the past couple of years, with its main product now centered on an employee experience, or EX, offering sold to CIOs. He said that business, Freshservice, represents about $540 million in annual recurring revenue and is growing in the mid-20% range, including acceleration in the most recent quarter on a constant-currency basis.
The company also continues to operate its customer experience, or CX, business through Freshdesk. Sloat described that as a roughly $390 million customer support offering focused on mid-market and higher-end small and medium-sized businesses, generally companies with 50 to 500 employees. He said the CX segment is growing in the low single digits and remains “a very profitable business” for Freshworks.
Freshservice Growth Driven by Product Depth and Enterprise Motion
Sloat said the acceleration in EX reflects three factors: deeper product capabilities, a more mature enterprise sales motion and a broader product portfolio. He said Freshworks can now serve enterprise organizations up to about 20,000 employees, while still emphasizing quick implementation and ease of use.
On product depth, Sloat pointed to IT asset management, including capabilities stemming from Freshworks’ acquisition of Device42 two years ago. He said Freshworks has rewritten the configuration management database within Freshservice and can now offer those capabilities to customers.
Sloat also said the company has made progress building an enterprise sales motion. Freshworks closed what he described as the two largest EX deals in company history during the first quarter, and he said he does not view those deals as an anomaly.
Freshworks’ EX strategy now includes four pillars, according to Sloat: Freshservice, enterprise service management, IT asset management and IT operations management. The ITOM component includes FireHydrant, which Freshworks acquired earlier this year. Sloat said the integrated FireHydrant product has not yet been announced, but the company hopes to have it by the end of the year.
Enterprise Service Management Seen as Natural Expansion
Sloat said Freshworks spent about a year rearchitecting Freshservice to allow expansion into other functions on the same platform. The closest adjacency has been human resources, where Freshservice can be used in a dedicated workspace with appropriate security parameters.
He said HR workflows such as employee onboarding and offboarding align closely with IT processes, including issuing computers and managing access. Sloat also said Freshworks plans to announce new products at its Refresh user conference, including EX AI Agent Studio, which will include prebuilt integrations such as one with Workday.
Beyond HR, Sloat said the company sees opportunities in finance, procurement, workplace resources and payroll, particularly in functions involving ticketing and workflow routing.
CX Business Remains in Transition
On the customer support side, Sloat acknowledged disruption in the CX market as investors scrutinize the impact of artificial intelligence. He said Freshworks does not view Freddy AI as displacing the CX business. Instead, he described AI offerings including a front-end agent priced on usage, a Copilot add-on for support agents and an insights product for managers.
Sloat said Freddy Copilot customer numbers grew 80% across the company, and he described attach rates on new business, particularly larger deals, as strong. He also said AI capabilities have become “table stakes” for winning new customers.
Freshworks is also replatforming its CX products onto the new Freshdesk product line. Sloat said the company is about 80% through migrating customers from what he described as effectively five different CX products. The remaining 20% are expected to take until the end of the year and tend to be the largest and most complex customers.
For the rest of the year, Sloat said Freshworks has guided to low single-digit growth in CX. He said the company is “cautiously optimistic” internally about returning the business to better growth but is not modeling that externally until it is demonstrated. Freshworks also plans to run CX “very profitably,” he said.
Workforce Reduction and Margin Goals
The discussion also covered Freshworks’ recently announced 11% reduction in workforce. Sloat said much of the reorganization was driven by go-to-market changes, including making the field organization fully focused on EX. Marketing priorities, outbound efforts and brand awareness will also be EX-focused, he said, while CX will be approached with more discipline.
“If anything, we’re going to be spending more” on the EX field motion, Sloat said, adding that Freshworks wants to build quota capacity and capabilities to pursue what it views as a large opportunity.
Sloat said Freshworks remains focused on efficiency across functions and has invested in infrastructure to reduce manual processes. He expressed confidence in the company’s ability to run an efficient business while funding growth. He also noted that Freshworks raised its free cash flow outlook for the year from $250 million to $265 million and referenced a mid-20s cash flow margin.
Asked about operating margins, Sloat said the recent organizational changes affected every function and should support the company’s long-term margin targets. He added that Freshworks would be transparent if it chose to spend more to accelerate growth.
AI Costs and Gross Margins
Sloat said Freshworks is not yet seeing gross margin pressure from increased AI adoption, noting that the company has gross margins in the mid-80% range. He said token costs may rise over time as customers and internal teams use more AI, but Freshworks has so far absorbed those costs through savings elsewhere.
He said the company has built its products to switch between large language models and use lower-cost models for certain tasks. Over time, Sloat said, AI token costs may resemble cloud service provider costs and could become more commoditized if multiple vendors remain available.
Sloat said Freshworks wants to drive as much AI adoption as possible while monitoring the margin impact. He added that while some companies may see gross margin degradation from AI, they may also become more efficient in other operating expense lines, helping overall operating margins remain stable or improve.
About Freshworks (NASDAQ:FRSH)
Freshworks, Inc is a global provider of cloud-based customer engagement software designed to help businesses streamline customer support, sales, marketing, and IT service operations. The company's integrated suite of solutions enables organizations of all sizes to deliver seamless experiences across multiple channels, including email, chat, phone, and social media. Freshworks' platform is built on modern, user-friendly interfaces and offers native automation, AI-powered insights, and analytics to improve efficiency and customer satisfaction.
The company's flagship product, Freshdesk, serves as a helpdesk solution for customer support teams, while Freshservice addresses IT service management needs.
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