Freshworks Q2 2024 Earnings Call: Strong Growth and AI-Driven Innovation

Earnings call: Freshworks Q2 2024 results reveal robust growth and AI focus By Investing.com

Freshworks Inc. (FRSH), a leading provider of customer engagement software, reported a strong financial performance in its second quarter of 2024 earnings call. CEO Dennis Woodside (OTC:WOPEY) announced that the company's revenue reached $174.1 million with a significant free cash flow margin of 19%. The quarter was marked by strategic moves, including the acquisition of Device42, which enhances Freshworks' IT asset management offerings, and the successful implementation of its AI product, Freddy Copilot. Looking ahead, Freshworks forecasts Q3 revenue between $180 million to $183 million and full-year revenue in the range of $707 million to $713 million. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Freshworks' second quarter of 2024 has demonstrated the company's ability to navigate market pressures and capitalize on strategic initiatives. The integration of Device42 and the continued success of Freddy Copilot are set to bolster Freshworks' offerings in the customer experience space. The company remains focused on expanding its AI capabilities and delivering solutions that meet the evolving needs of large organizations. With a solid financial foundation and a clear strategic direction, Freshworks is poised to maintain its growth trajectory in the coming quarters. InvestingPro Insights Freshworks Inc. (FRSH) has shown resilience in its Q2 2024 performance, and the InvestingPro data and tips provide deeper insights into the company's financial health and market position. With a market capitalization of $4.01 billion, Freshworks showcases its significant presence in the customer engagement software market. The revenue growth of 19.73% over the last twelve months, as of Q1 2024, underscores the company's ability to increase sales and expand its market reach. Moreover, the impressive gross profit margin of 83.33% illustrates Freshworks' strong operational efficiency and ability to control costs relative to revenue. InvestingPro Tips highlight several key factors for investors to consider. Freshworks holds more cash than debt on its balance sheet, suggesting a solid financial position to weather economic fluctuations and invest in future growth opportunities. Additionally, analysts have revised their earnings upwards for the upcoming period, indicating a positive outlook on the company's profitability. It's worth noting that Freshworks is expected to become profitable this year, which could be a pivotal point for investors seeking growth in their portfolios. For those interested in a more comprehensive analysis, there are 15 additional InvestingPro Tips available, providing an even deeper dive into Freshworks' financial and market performance. To explore these insights, visit: https://www.investing.com/pro/FRSH. These data points and tips from InvestingPro not only affirm the company's current achievements but also provide a promising outlook for Freshworks as it continues to innovate and grow in the competitive landscape of customer engagement solutions. Full transcript - Freshworks Inc (FRSH) Q2 2024: Operator: Good day, everyone. And thank you for standing by. Welcome to the Freshworks Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded. I will hand the call over to the Head of Investor Relations, Joon Huh. Please proceed. Joon Huh Thank you. Good afternoon and welcome to Freshworks second quarter 2024 earnings conference call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President, and Tyler Sloat, Freshworks' Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our second quarter 2024 performance and our financial outlook for our third quarter and full year 2024. 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 Freshworks' 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 a 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 our other periodic filings with 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 Dennis. Dennis Woodside: Thanks, Joon. And thank you everyone for joining us on the call today. I'm pleased with our results this quarter, which demonstrated continued growth, financial discipline, and innovation. We are well positioned for the expansive opportunities that are in front of us. In Q2, we delivered results that met or exceeded each of our previously provided financial estimates. We grew revenue to $174.1 million and delivered another quarter of strong free cash flow of $32.8 million, resulting in a free cash flow margin of 19%. This represents more than 600 basis points of year-over-year margin improvement and is reflective of our increasing operating leverage and discipline. We also welcomed notable customers into the Freshworks community, including Kayak, Davidson Kempner Capital Management, Paul Smith UK, and many others. Lastly, we completed the strategic acquisition of Device42, which adds advanced ITAM capabilities to our Freshworks solution in early June. During my first quarter as our CEO, I spent extensive time in India with our product and engineering teams, digging into our product roadmap and upcoming anticipated innovations. I also met with customers, partners, and other key stakeholders in New York, Boston, Chennai, and Bangalore, gathering feedback and better understanding what we do well and what we can do better. From those conversations, it's clear that customers are making buying decisions based on four criteria. First, they want to automate workflows with AI to increase efficiency across IT, customer support, sales, marketing, and beyond. Second, they want uncomplicated solutions that are simple to implement and to own. Third, they want to see rapid impact of their investments. And fourth, they want the flexibility of a platform they can modify and scale over time. Freshworks meets those needs. In addition to these external meetings, we've conducted our annual strategic review of the business with our leadership team. This review has confirmed our belief that we have a significant opportunity right in front of us across multiple markets. And by focusing on three strategic imperatives, we will continue to drive durable, profitable growth for years to come. The first imperative is that we play to one of our biggest strengths, IT and employee experience solutions, which includes ITSM, ITAM, IT Operations, and ESM. Even without taking Device42 into account, this is our largest business group with over $340 million of ARR and over a 30% growth rate year-over-year. Using Device42, we have over 17,000 IT customers with 670 customers spending more than $100,000 with us. More than two-thirds of our IT ARR is from the mid-market and enterprise segment. Our net dollar retention rates for this business exceed 110%, and we are seeing growth across the board for both small and large businesses. To capture the expansive IT and employee experience opportunity, we intend to prioritize investments of product and engineering resources to these solutions. This will allow us to create richer ITSM capabilities for the enterprise, capture the ITAM opportunity with Device42, and expand our business with a focus on ESM and automated workflows as we build for business teams beyond IT. For our IT and employee experience solutions, we continue to deepen our GTM capabilities to serve the mid-market and enterprise. We are now replacing incumbents whose companies were founded with a primary focus on the IT function for enterprise customers. In Q2 alone, we won 19 new and expansion deals of over $100,000, and we also saw a six-quarter high win rate in IT against our largest competitor. Against our two largest competitors, we won deals with a major software player, a large California state agency, a major real estate company, and many more. We have momentum in the marketplace for customers wanting an enterprise-grade workflow solution for IT without the high cost and hassle they're seeing with our competitors. In Q2, we saw continued momentum across all segments including enterprise, mid-market, commercial, and SMB as companies achieve high-value benefits without implementation and ownership complexities while delivering rapid impact at a competitive price. Large industry-leading organizations like Nucor (NYSE:NUE) Steel, Carrefour (EPA:CARR), Bridgestone Tires, Viessmann, Qualfon and Riverbed Technology are using our employee experience software to digitize their work and enable productivity gains, leading to more efficient processes and happier employees. For example, America's largest omni-channel specialty mattress retailer replaced their existing ITSM solution because the legacy software could not scale to meet their needs as they grew headcount across several functions. We won this deal over one of our top competitors. Since going live with Freshservice, the company has seamlessly onboarded staff across departments and reduced workflow changes from months with the incumbent to a single day with Freshworks. Our customer service customer retailer chose our unified platform to manage all internal requests, approvals, and ticketing throughout the inventory planning, buying, and merchandising processes. Freshservice helped unify multiple inventory management and merchandising teams on a single centralized service management platform, reducing operational costs by 10%, improving gross margins, and yielding a 20% improvement in ticket resolution time. Our third customer example is Creditsafe, the most used provider of business credit reports serving 430 million businesses worldwide. A long-time Freshdesk customer, Creditsafe was seeking a modern ITSM solution that could easily integrate with their existing tools. They evaluated Freshservice against one of our top two competitors. Freshservice proved to be easier to use and more cost effective than the competition. The native integration with Freshdesk and our historically strong partnership made selecting Freshservice a natural choice for Creditsafe as they more than doubled their account value with us. These successes demonstrate that we have the opportunity to become the digital platform that enables mid-market and enterprise customers to compete at global scale. On capturing the ITAM opportunity, Device42 provides a more comprehensive, up-to-date view of assets across an organization's entire IT infrastructure. We're excited about going to market with our joint solution as we see a lot of upside and strategic value from the acquisition. We now have both the opportunity to upsell advanced ITAM capabilities into our existing Freshservice customers and the opportunity to cross-sell Freshworks products into the Device42 customer base. With deeper enterprise capabilities, this also expands our addressable market as we're now able to win deals with a broader group of large, mature companies. Device42 is primarily an on-premise business today. So our first goal is to deliver an improved, seamless integration between Freshservice and Device42 by Q1 of next year. Second, we're working on turning Device42 into a cloud-native solution, which we anticipate could be ready by the end of next year. But we already see the great product market fit with larger customers that use both Device42 and Freshworks, like Kaiser Permanente, the State of Indiana, the University of Alberta, Hewlett Packard Enterprise (NYSE:HPE), and HD Supply. Let me share an example of how Freshservice plus Device42 is delivering value for our customers. A regional bank in the US operating 230 branches was looking for a long-term partner to support their IT needs cost-effectively. We beat a large competitor and replaced the legacy incumbent based on our ability to provide visibility into assets and apps, which was a key priority in the highly regulated risk-averse industry. This bank chose a multi-product solution consisting of Freshservice, Freshchat and Device42 based on the scalability and sophistication of the solution and time to value. The final component of playing to our IT business strength is expanding the business by focusing on ESM and automated workflows. We are seeing strong demand for our enterprise service management offering of Freshservice for Business Teams, which allows teams like HR, finance, and facilities to automate employee service delivery and benefit from the same uncomplicated solutions and rapid time to value as ITSM. We're seeing great traction in this category and expect that, with continued focus on this area, it can be a meaningful contributor to ARR in the coming years. Texas A&M, a top-ranked public university with world-class business, agriculture, and engineering programs, initially implemented Freshworks for IT service management. After seeing improvements in productivity and ticket resolution, they expanded Freshworks to include ESM, supporting both internal IT needs and external transit-related inquiries, which was particularly important during the football season when they needed to scale operations. Freshworks enabled Texas A&M to manage complex game day logistics, supporting up to 150,000 visitors and handling over 600 tickets daily with a 30% faster resolution time. Our second imperative is to build out our AI capabilities and bring them to market to thousands of customers. Customers are already seeing the value in the two Freddy AI products that are in the market today, with Freddy Self-Serve bots and Freddy Copilot. We are encouraged by the results we've seen since Freddy Copilot became generally available in mid-February. In Q2, we saw significant momentum in adoption, with now over 1,200 customers as Copilot numbers for both customers and ARR nearly doubled from the prior quarter. We're seeing over 40% attach rates for new deals of $30,000 or more. Customers are seeing on average a 30% productivity lift with the help of Freddy Copilot. We have thousands of licenses from Freshworks customers, with power users of Freddy Copilot seeing more than 40% improvement in average resolution time for IT instance. I'm pleased to say that we are monetizing ahead of our internal targets for Freddy Copilot, as this is now a core part of every sales conversation. We are seeing customers like European travel company, Digitrips, choose Freshworks as a scalable foundation for end-to-end cloud operations. Using Freddy Copilot, they improved their response times to customer inquiries by nearly 300%, even as ticket volume doubled during the same period. Gen AI is rapidly transforming how agents and customers are leveraging technology in customer service. The world's largest operator of open-top sightseeing tours in 26 cities globally, serving 6 million tourists each year, recently transitioned to Customer Service Suite powered by Freddy Copilot, which has resulted in an improved agent satisfaction score by 12 points with a nearly 20% reduction in resolution time for their customers. Freddy Self Service for customer support continues to be another strong area of value for our customers. We're starting to see traction on customer adoption, with over 900 customers for bot sessions, doubling from a year ago, and realizing an average deflection rate of around 40%. One example is Hinge Health, a virtual clinic that serves more than 200,000 patients. They chose Freshdesk with Freddy Copilot Self Service and Insights for its all-in-one customer service solution. Hinge Health started with eight seats and has since expanded to hundreds of seats on Freshdesk. With Freddy Self Service, they've increased their ticket handling capacity by more than 30-fold, achieving an impressive 85% CSAT score and lowering their first response time from hours to minutes. Today, we're focused on driving broad customer adoption and usage so they can realize value from our AI products, and we believe meaningful monetization will follow over time. Our third imperative is to accelerate growth for our customer experience solutions, which includes our customer service and sales and marketing products. SMB and commercial companies continue to be the most significant consumers of these offerings, which make up approximately $350 million in ARR, with a combined year-over-year ARR growth rate in the mid-to-high single digits as of the end of last quarter. To accelerate this growth, we are further simplifying the product experience to increase the ease of implementation and maintenance and improve time to value. We are also streamlining our go-to-market processes to be more customer segment-focused, including recruiting more partners that focus on the SMB and commercial space. Partners are driving meaningful growth for SMB and commercial new business today, and we are optimistic about the added growth our new partners will deliver. As mentioned previously, we are seeing increasing momentum for Freddy Copilot with our customer experience solutions. Among our SMB and commercial customers, we're achieving double-digit attach rates on new deals for Freddy Copilot. Leveraging the benefits of AI, our customers in all segments are able to deliver higher levels of customer satisfaction while enjoying improved efficiencies. Customers like Total Expert and Ashley Furniture have invested and are realizing immediate value. Another example is Canada's British Columbia Lottery, which selected Freshchat over our largest competitor to improve its customer experience. They chose Freshchat with Freddy Copilot for its easy to use interface that provides the team with analytics to help identify and solve challenges in the customer journey. Since implementing Freshchat with Freddy Copilot, British Columbia Lottery has seen an uptick to their customer experience scoring and an agent productivity increase of 20%. In Q2, customers continued to expand usage across our customer experience solutions portfolio with multi-product adoption ticking up to 27%. One example is a global leader in the logistics and transportation industry who has been a Freshdesk customer for eight years. Recognizing the value that Freddy AI delivers, they expanded their usage to include Freddy Copilot and Freshchat to maximize their service delivery at an affordable cost while simplifying their processes. Overall, it's been a tremendous first quarter as CEO. And with our strategic priorities in place, we believe we are well positioned to seize this massive opportunity in front of us and accelerate growth. I'm excited to lead our company of 5,000 talented employees into the next phase of Freshworks' growth journey as we work towards delivering innovative solutions that customers want and scaling the business to $1 billion in revenue and beyond. Now, I'll hand it over to Tyler to discuss the financial details. Tyler Sloat: Thanks, Dennis. And thanks to all of you joining on the call and via webcast. As Dennis mentioned earlier, we met or exceeded our key financial estimates in Q2, even without the Device42 results. Now with the addition of Device42 as part of the Freshworks family, we're excited to go after a broader set of customers in the mid-market and enterprise. We are sharpening our strategic focus to lead with the IT and employee experience business as we see strong customer demand and more attractive opportunities for this part of the business. We plan to fuel additional growth and better capitalize on the huge IT opportunity and other adjacent markets. At the same time, we're maintaining our focus to drive operational efficiencies that we expect will lead to durable and profitable growth in the business over time. For our call today, I'll cover the Q2 2024 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q3 and the full year 2024. I'll include constant currency comparisons for certain metrics to provide a better view of our business trends. As a reminder, we closed the Device42 acquisition on June 6, so our Q2 numbers include partial Device42 results for the quarter. Where there is meaningful contribution from the acquisition, I will break out specific metrics on a one-time basis to help provide a better understanding into our business performance. 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, total revenue in Q2 increased to $174.1 million, growing 20% for both as reported and on a constant currency basis. Professional services revenue contributed $2.5 million for the quarter, which was similar to Q1, as we continue to shift services revenue to our partner network. Device42 revenue contribution was approximately $3 million, as we recognized revenue for the partial quarter. We closed large IT opportunities with the upmarket customers, and this, once again, drove the majority of our ARR growth. We saw meaningful strength for our new business in the US and won a number of competitive six-figure deals in the field. Moving to margins. We maintained a strong non-GAAP gross margin of 85%, similar to Q1, as we remained diligent and efficiently scaling the business. This represents an improvement of nearly 100 basis points compared to the prior year. Our non-GAAP operating income came in at $13.1 million, representing a non-GAAP operating margin of approximately 8% and ahead of prior expectations. Most of the outperformance was a result of certain expenses pushing out to the second half of the year and lower personnel related costs. As a reminder, the Device42 results and associated transaction costs are included in these numbers, but these were not meaningful to the total operating results. Moving to the operating metrics. Our two key business metrics are net dollar and customers contributing more than $5,000 in ARR. From a macro and demand environment perspective, Q2 trends were generally similar to what we saw in Q1 as gross expansion continued to see pressure while overall churn remained steady quarter-over-quarter. Net dollar retention was 106% in the quarter, both as reported and on a constant currency basis and in line with our expectations. Looking forward, we estimated net dollar retention of approximately 105% for Q3 as we expect to see ongoing pressure on the expansion part of the business. For our second key business metric of number of customers contributing more than $5,000 in ARR, this metric grew 14% year-over-year to 21,744 customers, representing quarterly net adds of nearly 1,200 customers, with 631 of these customers coming from Device42. This customer cohort now represents 90% of our ARR. For our larger customer cohort contributing more than $50,000 in ARR, this cohort grew 30% year-over-year to 2,839 customers, representing quarterly net adds of 246, with 145 of these customers coming from Device42. This cohort now represents 50% of our ARR. For total customers, we added approximately 1,300 net customers in the quarter and ended with over 68,800 customers, with just over half of the new customers coming from Device42. Excluding customers from the acquisition, we added approximately 600 net customers in the quarter, pointing to signs of improvement for customer adds compared to 400 in Q1. Now let's turn to calculated billings, balance sheet, and cash items. Our calculated billings grew 17% on an as-reported basis and on a constant currency basis to $185.9 million in Q2. The Device42 billings contribution was $7.7 million for the quarter. So, excluding the impact of Device42, calculated billings grew 12%. Looking forward to Q3 2024, our initial estimate for calculated billings growth is 16%, which includes Device42 results. For the full year 2024, we expect calculated billings growth to be approximately 16%, with approximately 1 to 2 percentage points coming from Device42. Moving to our cash items, our largest use of cash during the quarter was $214 million for the acquisition. We generated $32.8 million in free cash flow for Q2, outperforming our estimates as we continue to drive our operational efficiencies in the business. Given our strong cash flow performance again this quarter, we are increasing our full year 2024 estimates to $132.5 million, with approximately $32.5 million expected in Q3. We continue to manage and offset share count dilution by net settling vested equity amounts by using approximately $15 million during the quarter. This activity is reflected in our financing activities and is excluded from free cash flow. As a result of these activities, we ended the quarter with cash, cash equivalents, and marketable securities of $1 billion. We plan to continue net settling vested equity amounts going forward, resulting in expected Q3 cash usage of approximately $13 million at current stock price levels. For the year, we expect to use approximately $63 million to net settle vested equity amounts. With our ongoing focus on operational efficiency and financial discipline, we expect to end the year with cash of well over $1 billion, maintaining a strong balance sheet and financial flexibility for the business. Turning to our share count for Q2. We had approximately 328 million shares outstanding on a fully diluted basis as of June 30, 2024, representing a share reduction compared to the prior year. The fully diluted calculation consists of approximately 301 million shares outstanding, 24 million related to unvested RSUs and PRSUs, and nearly 3 million shares related to outstanding options. Before providing our financial estimates for Q3 and full year 2024, let me provide background on how we're planning for Device42 results in our consolidated financials going forward. First, Device42 is primarily a term-licensed business today, which creates less predictability for our reported revenue quarter to quarter. Second, we expect specific partner business involving competitors to decline and ultimately go away. These factors may cause quarterly fluctuations to our total revenue, so we want to be prudent in our forecasting models. As we go forward, we will provide breakouts for metrics as required for disclosure or if they are meaningful to understand the underlying business fundamentals. Now on to the specific numbers for our forward-looking estimates. For the third quarter of 2024, we expect revenue to be in the range of $180 million to $183 million, growing 17% to 19% year-over-year. Non-GAAP income from operations to be in the range of $13 million to $15 million, and non-GAAP net income per share to be in the range of $0.07 to $0.08, assuming weighted average shares outstanding of approximately 304.2 million shares. For the full year 2024, we expect revenue to be in the range of $707 million to $713 million, growing 18.5% to 19.5% year-over-year. This includes estimates of approximately $11 million for Device42 for the year. Non-GAAP income from operations to be in the range of $60 million to $66 million, and non-GAAP net income per share to be in the range of $0.32 to $0.34, assuming weighted average shares outstanding of approximately 306.4 million. Our forward-looking estimates are based on FX rates as of July 26, 2024, so any future currency moves are not factored in. Let me close by saying that we believe we have the right strategy in place to capture the market opportunity in front of us and drive durable long-term growth at Freshworks. We are prioritizing investments to our business that we believe will position us for better execution in IT and employee experience. We remain focused on product innovation, delivering on our AI initiatives, and improving the growth of our customer-facing solutions to deliver scalable solutions for our customers. We look forward to updating you on our progress, and we're excited for what's ahead. And with that, let us take your questions. Operator? Operator: [Operator Instructions]. One moment for our first question. And it comes from the line of Brent Bracelin with Piper Sandler. Brent Bracelin: Great to see the IT and employee experience business, now the largest segment. Dennis, for you, I wanted to double-click into Freddy AI momentum. I think you talked about customer adoption nearly doubling sequentially. I know it's still early to see AI show up in the application layer, but it sounds like you're starting to see it. Can you just walk through what is driving that? We're getting a lot of questions on ROI around AI. Can you just help us understand why you're seeing strong adoption there? And then a quick follow-up for Tyler, if I could. Dennis Woodside: First of all, we are seeing tremendous interest amongst all of our customers, at the very least, a discussion of AI and a trial of AI, and in particular, our Copilot product. So we are finding all of our customers are comfortable with the idea that AI can make their agents more productive. And when they see the value of the AI suggesting answers to customers for deeply technical questions that often take time for agents to research and resolve, the agents don't have the answers at the tip of their tongue. They see the value. So typically, a customer will do a small deployment during an evaluation phase, and they'll measure the actual productivity impact in terms of response rate, customer satisfaction with the response, and they'll quantify what that does for overall productivity. That will lead them to have conviction actually paying for our Copilot add-on. So that's what's driving our growth there. And like I said, we're seeing attach rates around 40% for large deals. Those are deals for us over $30,000 a year. Every conversation in a meaningful deal involves Copilot. And we're going back to all of our existing customers - and this is both on the CX and the IT side, and having that same conversation with our existing accounts. So we launched our product a year ago in beta. We went through beta for about six months. We went into GA in mid-February, so we've only been selling for a quarter and a half. But I'm really pleased with how the team's performed in Q1. And I think that's going to be a driver of growth for some time to come. Brent Bracelin: Tyler, for you as a follow-up here. It looks like you added, what, 600 net new customers ex-Device42. That's up from 400 last quarter. Can you talk through what drove the improvement there? Was it just sales productivity? Did you see a stronger close rate exiting the quarter? Just help us understand the uptick in net customer kind of lands here this quarter. Tyler Sloat: We were really pleased that we had a little bit of a turnaround on the customer side. It's still not to the levels that we saw a couple of years ago, but a little bit of top of funnel on the SMB side. Some stabilization on churn, where churn had actually driven some of the lower customer numbers in the prior quarter. Again, it wasn't as much dollar churn, but really logo churn for really that long tail. And then, yeah, execution. But again, the SMB, there's a little bit of noise in there. The pressures we talked about in terms of overall SMB kind of macro pressure as well as expansion still persists, but we were really pleased in Q2 with that uptick on the customer number. Pat Walravens: One of the big questions that investors have is just this whole trade-off between seat based pricing and consumption based pricing as AI kicks in and increases the productivity of the agents. Can you just talk a little bit about what you learned over the last quarter or so about that? Dennis Woodside: I would start by saying a lot of our focus has been on Copilot, although self-serve, we're seeing adoption grow there as well. And as I mentioned, we nearly doubled the number of customers that are paying for our self-serve bots. The dynamics are quite different for bots. Of course, they're paying for bot packages, which is a consumption like model. The more bot sessions that they buy, they're paying as they go, so to speak. Whereas the Copilot, a per seat adder. For both, we're not seeing meaningful changes in seat dynamics. In fact, we're seeing many customers are coming on board to us for the AI itself. But for existing customers that are adopting, we do not see meaningful changes in our overall seat counts, which is promising. In some cases, customers are redeploying or freeing up time for agents to handle higher order work or work that is more complex, requires more of a human touch. And in other cases, we have some customers who are trying to move their support teams into more of a revenue center. So they're adding tasks to the agents that are more about generating new business, not just addressing questions from existing accounts. I think it's still pretty early to see how this is going to play out. But for now, we haven't seen any change in the overall dynamics of our business. Pat Walravens: That's super helpful, especially the part about the support team has been to revenue centers is interesting. Operator: One moment for our next question. And it's from the line of DJ Haynes with Canaccord Genuity. DJ Haynes: I'll stick with the comments right here. Dennis, I guess based on the adoption trends and ROI efficiency you're driving with AI capabilities, do you feel like you've set Copilot and self-service pricing in the right spot? Dennis Woodside: Yeah. I think we have better data right now on Copilot. On Copilot, we're very pleasantly surprised with how the pricing has held up. So as a reminder, our Copilot edition is $29 a seat per month. We're seeing really positive pricing for that product. And again, I would go back to the impact. The impact is very measurable through a beta test or through pre-post, through a holdout of agents that are and are not using Copilot. So our customers are seeing the impact either during a trial pre-sale or, if they're an existing account, during a trial with a subset of their agents. And that's really driving the pricing. They're seeing the value in the AI. Again, it's only been one full quarter, but that's quite promising for us. And we're leaning into it. The entire sales team, whether you're talking about field sales and selling into the larger accounts, or our teams in India that are working on our existing business or selling into smaller accounts, everybody is pitching in Copilot and it's getting a really positive reception. DJ Haynes: Tyler, maybe a follow up for you on the guidance. So if you got $3 million from Device42 in a month that annualizes to about $21 million for the year, but the full year guidance increases about $10 million at the midpoint, so if my math is right, are you trimming the outlook for the core organic business or is that more the cushion you're adding for less predictability that comes with Device42? If you could just kind of talk through the dynamics on the guide, that would be helpful. Tyler Sloat: So the $3 million for the month, it's not quite that clear, right, because they are a term licensed business and they are relatively back-end loaded in terms of - because they're selling to larger customers. And so depending on, say, if it's a one, two, three year deal, it could have a little bit more revenue. That $3 million doesn't actually equate to that many deals. And so you can't take a linear assumption on that to get to your $21 million. We built in the $11 million. We did say, hey, we do expect some of that business to see disruption. And a lot of it is because they had a decent amount of their business through partner channels that are with competitors. And so naturally, we would expect some of that to go away. We'll will clearly learn more about that business as we go through the back half. So kind of in an eye of prudence, we built in $11 million for the whole year, inclusive of the $3 million. Operator: One moment for our next question. That comes from the line of Scott Berg with Needham & Company. Scott Berg: I'm going to follow up on DJ's last question there and not trying to get into the weeds on contract terms on this call necessarily, Tyler. But how much of the customer base at Device42 had multi-year contracts versus kind of singular annualized contracts? I think a common question tomorrow is trying to understand what that annualized number kind of looks like in terms of consistency, in terms of how to view that business. Tyler Sloat: Yeah, we haven't broken out - because they do have a mix of, I would say, one, two, and three-year deals. And they also have a portion of - a pretty immaterial amount of what we call periodic revenue, which is more usage-based. So it's not actually under a full multi-year contract. Scott, as we learn more, because we're also - as customers come up for renewal, we'll have opportunities to craft those renewals in terms of the terms, right? And the real goal here - we outline kind of what the product roadmap is for Device42. The first is to build a really deep integration. But the second is to really move it to a pure cloud offering. And that will do away with the term license to get it back to pure subscription, but that's probably towards the end of next year. And so, we'll have to provide some color each quarter going forward, if it is kind of a material impact one way or the other. Scott Berg: A question for Dennis. I know you're looking to have this cloud version ready next year. I'm sure a more tightly integrated solution at that point next year as well. But when you think of the go-to-market there and the partner base that Code42 is using, you mentioned that some of your competitors, that partner dynamic probably dissipates over time. But does this help you potentially unlock more partner opportunities, whether that Device42 is using those channel partners exclusively by themselves, or maybe the combined opportunity is even more appealing to more partners out there? Dennis Woodside: Yeah, absolutely. And I think there's a couple different vectors that we're exploring. We have some partners that are already working with Freshworks that are familiar with Device42 because we've already been co-selling with them. But there's a number of partners that are not. So introducing them to those partners, getting those partners to actively bring Device42 into deals is an opportunity. And then Device42 has built a partner-centric business, and a number of those partners are not as familiar with Freshworks. So we're systematically going to all those partners and introducing ourselves, our offering, and trying to get earlier into the sales cycle. Because typically, in many of those deals, a customer is considering an ITSM right alongside an ITAM offering. And now we can get in front of those deals that we weren't even seeing before. So a lot of the early work has been understanding the pipeline on both sides, the partner pipeline as well as our self-generated pipeline, and then making sure that we are bringing Device42 into every possible opportunity that we have and vice versa. Operator: Our next question comes from the line of Ryan MacWilliams with Barclays (LON:BARC). Ryan MacWilliams: Dennis, great to hear about your meetings with key stakeholders across the business, along with like the acceleration in ARR for Freddy Copilot in the quarter. Has your priorities changed here at all from either products or go-to-market side or anything now after the last quarter you think you want to double down on from here? Dennis Woodside: I think as I stated in the remarks earlier, I think it's really about optimizing our investment profile and making sure we're investing where we see the greatest return. And as I outlined in the prepared remarks, the first imperative is to win in that IT and employee experience business. That's where we have really solid product market fit, a lot of momentum. Like I said, most wins we've ever had against our biggest competitor over the last six quarters in Q2. Just seeing a lot of traction there and a lot of opportunities. So areas like managed service providers or MSPs, we have hundreds of MSPs using our product today. But we don't have a real full-fledged MSP offering that would enable them to scale faster, manage their accounts much more effectively. So we're going to go build. ITAM or ESM, we have an ESM product today that's doing really well, but it's not really deep. So if you think about like ESM for HR, there's a lot more we could be doing if we deepen our capabilities there. So we're going to invest there. Now we're going to do that by really optimizing within our existing resource profile. We've got well over a thousand super talented engineers. They're conversant and up to speed on how we develop products. So making sure we've got the right balance across our products is super important for us. I think the second big imperative is AI because we spent the last year building out our AI offerings, deepening them, testing them, ensuring that the quality of results is high. Now We're seeing it pay off and really putting the pedal of the metal on monetizing that AI opportunity, starting with Copilot, but we've got some exciting innovation coming around Freddy Self Serve as well that'll make deploying bots much easier towards the back half of this year. So those are the two really big priorities that we're leaning into. I think the customer experience products of CX and sales and marketing, that's more of an SMB oriented product today, as you know. And potentially, if SMB comes back, that business comes back. In the meantime, what we're trying to do is figure out how do we make those products work together better? So if I'm a CX customer, I can seamlessly upgrade or add a sales and marketing seat. Right now, that's harder than it needs to be. So there's work to be done there. But those first two priorities are real here and now opportunities and we're really leaning into them. Ryan MacWilliams: Tyler, two quick housekeeping questions on the net dollar retention rate. For the first quarter net dollar retention rate, was that inclusive of Device42? Tyler Sloat: The impact wasn't super significant. It helped slightly in Q2, but it wasn't off of what our expectations were, which we had said 105 to 106. Ryan MacWilliams: On the 3Q guide, was this something influencing this? Is this something you've seen in July so far or there are changes in linearity throughout the second quarter that influences that. Tyler Sloat: Not a lot of change in linearity. Our field business has become more and more back-end loaded, which is as expected, and that's been happening for a while. And I think in terms of SMB add, expansion, it's still kind of the same pressures that we've talked about for a long time now. So there's no significant changes. Operator: Our next question comes from the line of Elizabeth Porter with Morgan Stanley (NYSE:MS). Elizabeth Porter: I wanted to follow up on the guidance questions. And excluding the benefit from Device42, it looks like the revenue and billings guidance suggests the back half outlook on core growth is a bit softer than the prior guide implied. If so, it would be helpful to really understand where you're taking a more conservative view on the back half of the performance for the core business even it doesn't really sound like macro changed too much from Q2 to Q1. Tyler Sloat: The prior guide was at $710 million. We built in an estimate of $11 million for all of Device42 for the year. We said that, hey, that business we expect to have disruption there. So that is an estimate. In terms of the $710 million at the midpoint, kind of minus 11, but $713 million at the high, it's really nothing significantly different. We still see expansion pressures. And that is agent addition, which it has been, but primarily affecting our CX business, and still SMB pressures. And these are the same kind of things we've been talking about for a little while. So there hasn't been a dramatic change. We're adding a little bit of prudence into that number for the back half. But outside of that, there's no significant change, Elizabeth. Elizabeth Porter: On the SMB side, understanding that's still a challenge from the macro perspective, you guys have been making a lot of investments just to modernize that inbound motion. So any updates on the progress you're seeing there and when we could start to see those investments benefit the model? Dennis Woodside: I think you did see a tick up in total customer growth, excluding Device42, of around 600 net adds compared to, I think, under 400 net adds in the prior quarter. And so, you're starting to see some impact. But I think we still need to continue to improve that experience for customers. And part of that is also making it more seamless to - if you're a customer of our support product, to buy into sales and marketing or vice versa. And that's some of the things that we're working on. So we did see some improvement. But again, we're continuing to find ways to make incremental changes to our process to drive greater conversion of leads into customers. Operator: Our next question comes from the line of Pinjalim Bora with J.P. Morgan. Noah Herman: This is Noah on for Pinjalim. Dennis, in your remarks, you mentioned that you'll be streamlining the go-to-market, at least for the customer experience in sales and marketing products, to be a little bit more customer segment-focused. Just wanted to see if you could provide more color on that. And how long do you think some of these go-to-market initiatives would take, especially for those two segments? Dennis Woodside: For that specific change, the way our model works, we market our products on a global basis. And we have leads coming in by product. So let's say a Freshdesk lead. That lead previously would go to a geographic-oriented or aligned sales team, North America or EMEA or Asia-Pac. And they weren't product-aligned. And what we were finding is that our products are so different that the product depth really mattered a lot more than the regional specificity. So we reoriented. And this is just for that inbound team. We reoriented that inbound team to be product-centric. So a Freshservice lead goes to a Freshservice team, regardless of geo, and Freshdesk to Freshdesk regardless of geo. And our thinking is that that, over time, will drive greater specificity, greater expertise, and ultimately benefit in improved conversion rate in that inbound business, in particular. Those changes are finished. They've been made. And that's how we're going to market as of this quarter. Noah Herman: And maybe for our just quick housekeeping, but I think last quarter you mentioned that gross churn, I guess, was sort of in the mid-teens. Curious if there was any material change in Q2. Tyler Sloat: No, no material change. It's relatively stable. Operator: Our next question comes from the line of Brent Thill with Jefferies. Luv Sodha: This is Luv Sodha on for Brent Thill. Maybe the first one for you, Dennis. If you could parse out maybe the customer experience side of the business. Obviously, it's underperformed over the past year. I guess, as you look at that business, could you talk about what the impact of AI has been in terms of seat degradation and how much of it is macro impacted at this point? Dennis Woodside: We have not seen impact attributable to AI of seat degradation. In fact, we're seeing pretty strong attach rates both in SMB, which tends to be more - the CS customer base tends to be more SMB, in new customers coming in and in our larger customers, which - and I'm talking specifically about Copilot, which is a net adder to expansion. What we're seeing is that the rate of seat addition over the last 18 months has come down as businesses are not expanding at the same rate. They're under pressure because the cost of financing expansion is meaningfully higher. But the reason that I have confidence that it's not AI driven is we look at customers that have and have not adopted AI, both Self Serve and Copilot, and we don't see material differences in expansion rate, churn rate, or retention rates between those who have and have not adopted. So we don't think it's AI. We think it's continued macro pressure on the SMB, and that is more reflected in the CX business because our business skews more SMB in CX. Luv Sodha: A quick follow up for Tyler. Tyler, last quarter, you'd obviously guided billings to about 16%, and this quarter now it's 16% with one or two points from Device42. I guess, could you just talk about the framework there in terms of the guide? What are you baking in in terms of expectations for billings growth in the back half of the year? Tyler Sloat: We said 16% for the year, but we said 1% to 2% coming from Device42. So we do think that went back again. The Device42 business is a little bit less predictable for us right now as we just closed it, and we do expect some disruption. So we'll obviously update that at the end of Q3 based on what we're learning. But the billings growth, essentially, we've taken into account everything we know on billings. And, Luv, as you know, we don't think billings is a great metric, but we understand that it's important. Operator: Our next question comes from the line of Rob Oliver with Baird. Rob Oliver: Dennis, on Device42, can you just talk a little bit about how you plan to go to market on that and just refresh us on - is it the plan to roll it into the core Freshworks sales force? And then I think - and I might have misheard you versus Tyler relative to when it will move to a cloud native solution. I thought I heard you say Q1. And what are you guys assuming? Like, are customers going to be forced to move to the cloud native solution at that point? Is there a potential for incremental churn? And I guess a follow up question to that is do you have to wait until the cloud native solution to fully integrate your two products? So a lot there. I apologize. Dennis Woodside: Let me just walk through again our plan for Device42 from a product standpoint. So, today, we have a lightweight integration between Freshservice and Device42. That allows an agent to switch from the Freshservice experience into Device42 if they have to or they want to understand the assets of the organization that they're working in. That said, it's not seamless and it comes across and feels like a different product experience. The first product initiative that's underway right now is to create a better integration, a more seamless integration of the two products with D42 remaining on-prem and, obviously, Freshservice remaining in cloud. That's what is available early next year. The second product milestone is to create a cloud native version of Device42. And that is planned for the latter part of next year. Now, in terms of migration and all the ins and outs, that we're going to have to work through, but that's the product plan. In terms of how we're going to market now, we've been going to market with Device42 as a partner for some time where we see a customer with an advanced IT footprint, a mix of lots of assets on-prem and in cloud that they want to track. And we've had success selling them into many deals. Now that we've acquired the company, it's just an accelerated version of that. So we've gone through our entire pipeline of new business and wherever there is a prospect that could possibly benefit from advanced ITAM, we are introducing and bringing Device42 in. When we have expansion opportunities, same thing. And then we're also looking at Device42's pipeline for any opportunities to bring Freshservice in where they previously may not have considered us. So that's all underway right now. We've seen a couple of successes already. A large public university in Canada with 15,000 faculty took both Freshservice and Device42. We've got a lot of deals where Device42 is part of the mix. And so, it's a great opportunity for us to upsell D42 into our existing base as well as bring them into new deals and to bolster our overall position. Operator: And our last question comes from the line of Alex Zukin with Wolfe Research. Ryan Krieger: This is Ryan Krieger on for Alex. Just going back to the Freddy Copilot and Freddy Self Service customer metrics you provided, are there any segments or verticals where you're seeing increased or slower rate of adoption? On the NRR metrics, you talked about the macro being stable quarter over quarter, but you do expect to see further NRR compression in 3Q. So any solutions where that's a particular drag on that metric? Tyler Sloat: I'll take the net dollar retention. Yeah, we haven't seen change or reversal in expansion pressure in SMB. I think just the net dollar retention number to 105, which is not dramatically different than this quarter, is really just how the year-over-year numbers work on ARR and what we can see. Because every quarter, we kind of annualize the prior quarter, so we have a little bit more data. So I don't think there's any big change we're expecting on net dollar retention. I think it's just where the numbers are flowing. Churn is relatively stable and expansion is kind of where it is in terms of the pressures, in terms of agent addition. That being said, the work we have to do is to figure out, number one, Device42 to use that as a new expansion motion and how quickly we can get that going. And then things like ESM, selling into our Freshservice space, that has got great traction, along with continuing to sell Copilot. Dennis Woodside: On Copilot, the promising aspect - or another promising aspect of where Copilot is, is we're getting traction across our two largest products, both customer service and IT. So agents in both categories are finding value in the product, and it's not limited to any one industry or segment of our customer base. We're seeing traction in small business as well as in larger businesses. We're seeing traction in customers that are brand new to us, buying right off of our website and deciding to add Copilot after trialing it for just a few weeks, as well as larger customers that are doing much more sophisticated testing. So we think it's going to - it is a core part of what we're selling now. We think that, over time, every customer is going to benefit from what Copilot does for their agents, and that's going to be a big story for us over the course of the next year. Operator: And thank you. This concludes our Q&A session and conference for today. Thank you to all who participated, and you may now disconnect.

Freshworks Inc. (FRSH) Q2 2024 Earnings Call Transcript

Joon Huh - Vice President, Finance, Investor Relations and Treasury Dennis Woodside - Chief Executive Officer and President Tyler Sloat - Chief Financial Officer Good day, everyone. And thank you for standing by. Welcome to the Freshworks Second Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions]. Please be advised that today's conference is being recorded. I will hand the call over to the Head of Investor Relations, Joon Huh. Please proceed. Joon Huh Thank you. Good afternoon and welcome to Freshworks second quarter 2024 earnings conference call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President, and Tyler Sloat, Freshworks' Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our second quarter 2024 performance and our financial outlook for our third quarter and full year 2024. 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 Freshworks' 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 a 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 our other periodic filings with 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. Thanks, Joon. And thank you everyone for joining us on the call today. I'm pleased with our results this quarter, which demonstrated continued growth, financial discipline, and innovation. We are well positioned for the expansive opportunities that are in front of us. In Q2, we delivered results that met or exceeded each of our previously provided financial estimates. We grew revenue to $174.1 million and delivered another quarter of strong free cash flow of $32.8 million, resulting in a free cash flow margin of 19%. This represents more than 600 basis points of year-over-year margin improvement and is reflective of our increasing operating leverage and discipline. We also welcomed notable customers into the Freshworks community, including Kayak, Davidson Kempner Capital Management, Paul Smith UK, and many others. Lastly, we completed the strategic acquisition of Device42, which adds advanced ITAM capabilities to our Freshworks solution in early June. During my first quarter as our CEO, I spent extensive time in India with our product and engineering teams, digging into our product roadmap and upcoming anticipated innovations. I also met with customers, partners, and other key stakeholders in New York, Boston, Chennai, and Bangalore, gathering feedback and better understanding what we do well and what we can do better. From those conversations, it's clear that customers are making buying decisions based on four criteria. First, they want to automate workflows with AI to increase efficiency across IT, customer support, sales, marketing, and beyond. Second, they want uncomplicated solutions that are simple to implement and to own. Third, they want to see rapid impact of their investments. And fourth, they want the flexibility of a platform they can modify and scale over time. Freshworks meets those needs. In addition to these external meetings, we've conducted our annual strategic review of the business with our leadership team. This review has confirmed our belief that we have a significant opportunity right in front of us across multiple markets. And by focusing on three strategic imperatives, we will continue to drive durable, profitable growth for years to come. The first imperative is that we play to one of our biggest strengths, IT and employee experience solutions, which includes ITSM, ITAM, IT Operations, and ESM. Even without taking Device42 into account, this is our largest business group with over $340 million of ARR and over a 30% growth rate year-over-year. Using Device42, we have over 17,000 IT customers with 670 customers spending more than $100,000 with us. More than two-thirds of our IT ARR is from the mid-market and enterprise segment. Our net dollar retention rates for this business exceed 110%, and we are seeing growth across the board for both small and large businesses. To capture the expansive IT and employee experience opportunity, we intend to prioritize investments of product and engineering resources to these solutions. This will allow us to create richer ITSM capabilities for the enterprise, capture the ITAM opportunity with Device42, and expand our business with a focus on ESM and automated workflows as we build for business teams beyond IT. For our IT and employee experience solutions, we continue to deepen our GTM capabilities to serve the mid-market and enterprise. We are now replacing incumbents whose companies were founded with a primary focus on the IT function for enterprise customers. In Q2 alone, we won 19 new and expansion deals of over $100,000, and we also saw a six-quarter high win rate in IT against our largest competitor. Against our two largest competitors, we won deals with a major software player, a large California state agency, a major real estate company, and many more. We have momentum in the marketplace for customers wanting an enterprise-grade workflow solution for IT without the high cost and hassle they're seeing with our competitors. In Q2, we saw continued momentum across all segments including enterprise, mid-market, commercial, and SMB as companies achieve high-value benefits without implementation and ownership complexities while delivering rapid impact at a competitive price. Large industry-leading organizations like Nucor Steel, Carrefour, Bridgestone Tires, Viessmann, Qualfon and Riverbed Technology are using our employee experience software to digitize their work and enable productivity gains, leading to more efficient processes and happier employees. For example, America's largest omni-channel specialty mattress retailer replaced their existing ITSM solution because the legacy software could not scale to meet their needs as they grew headcount across several functions. We won this deal over one of our top competitors. Since going live with Freshservice, the company has seamlessly onboarded staff across departments and reduced workflow changes from months with the incumbent to a single day with Freshworks. Our customer service customer retailer chose our unified platform to manage all internal requests, approvals, and ticketing throughout the inventory planning, buying, and merchandising processes. Freshservice helped unify multiple inventory management and merchandising teams on a single centralized service management platform, reducing operational costs by 10%, improving gross margins, and yielding a 20% improvement in ticket resolution time. Our third customer example is Creditsafe, the most used provider of business credit reports serving 430 million businesses worldwide. A long-time Freshdesk customer, Creditsafe was seeking a modern ITSM solution that could easily integrate with their existing tools. They evaluated Freshservice against one of our top two competitors. Freshservice proved to be easier to use and more cost effective than the competition. The native integration with Freshdesk and our historically strong partnership made selecting Freshservice a natural choice for Creditsafe as they more than doubled their account value with us. These successes demonstrate that we have the opportunity to become the digital platform that enables mid-market and enterprise customers to compete at global scale. On capturing the ITAM opportunity, Device42 provides a more comprehensive, up-to-date view of assets across an organization's entire IT infrastructure. We're excited about going to market with our joint solution as we see a lot of upside and strategic value from the acquisition. We now have both the opportunity to upsell advanced ITAM capabilities into our existing Freshservice customers and the opportunity to cross-sell Freshworks products into the Device42 customer base. With deeper enterprise capabilities, this also expands our addressable market as we're now able to win deals with a broader group of large, mature companies. Device42 is primarily an on-premise business today. So our first goal is to deliver an improved, seamless integration between Freshservice and Device42 by Q1 of next year. Second, we're working on turning Device42 into a cloud-native solution, which we anticipate could be ready by the end of next year. But we already see the great product market fit with larger customers that use both Device42 and Freshworks, like Kaiser Permanente, the State of Indiana, the University of Alberta, Hewlett Packard Enterprise, and HD Supply. Let me share an example of how Freshservice plus Device42 is delivering value for our customers. A regional bank in the US operating 230 branches was looking for a long-term partner to support their IT needs cost-effectively. We beat a large competitor and replaced the legacy incumbent based on our ability to provide visibility into assets and apps, which was a key priority in the highly regulated risk-averse industry. This bank chose a multi-product solution consisting of Freshservice, Freshchat and Device42 based on the scalability and sophistication of the solution and time to value. The final component of playing to our IT business strength is expanding the business by focusing on ESM and automated workflows. We are seeing strong demand for our enterprise service management offering of Freshservice for Business Teams, which allows teams like HR, finance, and facilities to automate employee service delivery and benefit from the same uncomplicated solutions and rapid time to value as ITSM. We're seeing great traction in this category and expect that, with continued focus on this area, it can be a meaningful contributor to ARR in the coming years. Texas A&M, a top-ranked public university with world-class business, agriculture, and engineering programs, initially implemented Freshworks for IT service management. After seeing improvements in productivity and ticket resolution, they expanded Freshworks to include ESM, supporting both internal IT needs and external transit-related inquiries, which was particularly important during the football season when they needed to scale operations. Freshworks enabled Texas A&M to manage complex game day logistics, supporting up to 150,000 visitors and handling over 600 tickets daily with a 30% faster resolution time. Our second imperative is to build out our AI capabilities and bring them to market to thousands of customers. Customers are already seeing the value in the two Freddy AI products that are in the market today, with Freddy Self-Serve bots and Freddy Copilot. We are encouraged by the results we've seen since Freddy Copilot became generally available in mid-February. In Q2, we saw significant momentum in adoption, with now over 1,200 customers as Copilot numbers for both customers and ARR nearly doubled from the prior quarter. We're seeing over 40% attach rates for new deals of $30,000 or more. Customers are seeing on average a 30% productivity lift with the help of Freddy Copilot. We have thousands of licenses from Freshworks customers, with power users of Freddy Copilot seeing more than 40% improvement in average resolution time for IT instance. I'm pleased to say that we are monetizing ahead of our internal targets for Freddy Copilot, as this is now a core part of every sales conversation. We are seeing customers like European travel company, Digitrips, choose Freshworks as a scalable foundation for end-to-end cloud operations. Using Freddy Copilot, they improved their response times to customer inquiries by nearly 300%, even as ticket volume doubled during the same period. Gen AI is rapidly transforming how agents and customers are leveraging technology in customer service. The world's largest operator of open-top sightseeing tours in 26 cities globally, serving 6 million tourists each year, recently transitioned to Customer Service Suite powered by Freddy Copilot, which has resulted in an improved agent satisfaction score by 12 points with a nearly 20% reduction in resolution time for their customers. Freddy Self Service for customer support continues to be another strong area of value for our customers. We're starting to see traction on customer adoption, with over 900 customers for bot sessions, doubling from a year ago, and realizing an average deflection rate of around 40%. One example is Hinge Health, a virtual clinic that serves more than 200,000 patients. They chose Freshdesk with Freddy Copilot Self Service and Insights for its all-in-one customer service solution. Hinge Health started with eight seats and has since expanded to hundreds of seats on Freshdesk. With Freddy Self Service, they've increased their ticket handling capacity by more than 30-fold, achieving an impressive 85% CSAT score and lowering their first response time from hours to minutes. Today, we're focused on driving broad customer adoption and usage so they can realize value from our AI products, and we believe meaningful monetization will follow over time. Our third imperative is to accelerate growth for our customer experience solutions, which includes our customer service and sales and marketing products. SMB and commercial companies continue to be the most significant consumers of these offerings, which make up approximately $350 million in ARR, with a combined year-over-year ARR growth rate in the mid-to-high single digits as of the end of last quarter. To accelerate this growth, we are further simplifying the product experience to increase the ease of implementation and maintenance and improve time to value. We are also streamlining our go-to-market processes to be more customer segment-focused, including recruiting more partners that focus on the SMB and commercial space. Partners are driving meaningful growth for SMB and commercial new business today, and we are optimistic about the added growth our new partners will deliver. As mentioned previously, we are seeing increasing momentum for Freddy Copilot with our customer experience solutions. Among our SMB and commercial customers, we're achieving double-digit attach rates on new deals for Freddy Copilot. Leveraging the benefits of AI, our customers in all segments are able to deliver higher levels of customer satisfaction while enjoying improved efficiencies. Customers like Total Expert and Ashley Furniture have invested and are realizing immediate value. Another example is Canada's British Columbia Lottery, which selected Freshchat over our largest competitor to improve its customer experience. They chose Freshchat with Freddy Copilot for its easy to use interface that provides the team with analytics to help identify and solve challenges in the customer journey. Since implementing Freshchat with Freddy Copilot, British Columbia Lottery has seen an uptick to their customer experience scoring and an agent productivity increase of 20%. In Q2, customers continued to expand usage across our customer experience solutions portfolio with multi-product adoption ticking up to 27%. One example is a global leader in the logistics and transportation industry who has been a Freshdesk customer for eight years. Recognizing the value that Freddy AI delivers, they expanded their usage to include Freddy Copilot and Freshchat to maximize their service delivery at an affordable cost while simplifying their processes. Overall, it's been a tremendous first quarter as CEO. And with our strategic priorities in place, we believe we are well positioned to seize this massive opportunity in front of us and accelerate growth. I'm excited to lead our company of 5,000 talented employees into the next phase of Freshworks' growth journey as we work towards delivering innovative solutions that customers want and scaling the business to $1 billion in revenue and beyond. Now, I'll hand it over to Tyler to discuss the financial details. Tyler Sloat Thanks, Dennis. And thanks to all of you joining on the call and via webcast. As Dennis mentioned earlier, we met or exceeded our key financial estimates in Q2, even without the Device42 results. Now with the addition of Device42 as part of the Freshworks family, we're excited to go after a broader set of customers in the mid-market and enterprise. We are sharpening our strategic focus to lead with the IT and employee experience business as we see strong customer demand and more attractive opportunities for this part of the business. We plan to fuel additional growth and better capitalize on the huge IT opportunity and other adjacent markets. At the same time, we're maintaining our focus to drive operational efficiencies that we expect will lead to durable and profitable growth in the business over time. For our call today, I'll cover the Q2 2024 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q3 and the full year 2024. I'll include constant currency comparisons for certain metrics to provide a better view of our business trends. As a reminder, we closed the Device42 acquisition on June 6, so our Q2 numbers include partial Device42 results for the quarter. Where there is meaningful contribution from the acquisition, I will break out specific metrics on a one-time basis to help provide a better understanding into our business performance. 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, total revenue in Q2 increased to $174.1 million, growing 20% for both as reported and on a constant currency basis. Professional services revenue contributed $2.5 million for the quarter, which was similar to Q1, as we continue to shift services revenue to our partner network. Device42 revenue contribution was approximately $3 million, as we recognized revenue for the partial quarter. We closed large IT opportunities with the upmarket customers, and this, once again, drove the majority of our ARR growth. We saw meaningful strength for our new business in the US and won a number of competitive six-figure deals in the field. Moving to margins. We maintained a strong non-GAAP gross margin of 85%, similar to Q1, as we remained diligent and efficiently scaling the business. This represents an improvement of nearly 100 basis points compared to the prior year. Our non-GAAP operating income came in at $13.1 million, representing a non-GAAP operating margin of approximately 8% and ahead of prior expectations. Most of the outperformance was a result of certain expenses pushing out to the second half of the year and lower personnel related costs. As a reminder, the Device42 results and associated transaction costs are included in these numbers, but these were not meaningful to the total operating results. Moving to the operating metrics. Our two key business metrics are net dollar and customers contributing more than $5,000 in ARR. From a macro and demand environment perspective, Q2 trends were generally similar to what we saw in Q1 as gross expansion continued to see pressure while overall churn remained steady quarter-over-quarter. Net dollar retention was 106% in the quarter, both as reported and on a constant currency basis and in line with our expectations. Looking forward, we estimated net dollar retention of approximately 105% for Q3 as we expect to see ongoing pressure on the expansion part of the business. For our second key business metric of number of customers contributing more than $5,000 in ARR, this metric grew 14% year-over-year to 21,744 customers, representing quarterly net adds of nearly 1,200 customers, with 631 of these customers coming from Device42. This customer cohort now represents 90% of our ARR. For our larger customer cohort contributing more than $50,000 in ARR, this cohort grew 30% year-over-year to 2,839 customers, representing quarterly net adds of 246, with 145 of these customers coming from Device42. This cohort now represents 50% of our ARR. For total customers, we added approximately 1,300 net customers in the quarter and ended with over 68,800 customers, with just over half of the new customers coming from Device42. Excluding customers from the acquisition, we added approximately 600 net customers in the quarter, pointing to signs of improvement for customer adds compared to 400 in Q1. Now let's turn to calculated billings, balance sheet, and cash items. Our calculated billings grew 17% on an as-reported basis and on a constant currency basis to $185.9 million in Q2. The Device42 billings contribution was $7.7 million for the quarter. So, excluding the impact of Device42, calculated billings grew 12%. Looking forward to Q3 2024, our initial estimate for calculated billings growth is 16%, which includes Device42 results. For the full year 2024, we expect calculated billings growth to be approximately 16%, with approximately 1 to 2 percentage points coming from Device42. Moving to our cash items, our largest use of cash during the quarter was $214 million for the acquisition. We generated $32.8 million in free cash flow for Q2, outperforming our estimates as we continue to drive our operational efficiencies in the business. Given our strong cash flow performance again this quarter, we are increasing our full year 2024 estimates to $132.5 million, with approximately $32.5 million expected in Q3. We continue to manage and offset share count dilution by net settling vested equity amounts by using approximately $15 million during the quarter. This activity is reflected in our financing activities and is excluded from free cash flow. As a result of these activities, we ended the quarter with cash, cash equivalents, and marketable securities of $1 billion. We plan to continue net settling vested equity amounts going forward, resulting in expected Q3 cash usage of approximately $13 million at current stock price levels. For the year, we expect to use approximately $63 million to net settle vested equity amounts. With our ongoing focus on operational efficiency and financial discipline, we expect to end the year with cash of well over $1 billion, maintaining a strong balance sheet and financial flexibility for the business. Turning to our share count for Q2. We had approximately 328 million shares outstanding on a fully diluted basis as of June 30, 2024, representing a share reduction compared to the prior year. The fully diluted calculation consists of approximately 301 million shares outstanding, 24 million related to unvested RSUs and PRSUs, and nearly 3 million shares related to outstanding options. Before providing our financial estimates for Q3 and full year 2024, let me provide background on how we're planning for Device42 results in our consolidated financials going forward. First, Device42 is primarily a term-licensed business today, which creates less predictability for our reported revenue quarter to quarter. Second, we expect specific partner business involving competitors to decline and ultimately go away. These factors may cause quarterly fluctuations to our total revenue, so we want to be prudent in our forecasting models. As we go forward, we will provide breakouts for metrics as required for disclosure or if they are meaningful to understand the underlying business fundamentals. Now on to the specific numbers for our forward-looking estimates. For the third quarter of 2024, we expect revenue to be in the range of $180 million to $183 million, growing 17% to 19% year-over-year. Non-GAAP income from operations to be in the range of $13 million to $15 million, and non-GAAP net income per share to be in the range of $0.07 to $0.08, assuming weighted average shares outstanding of approximately 304.2 million shares. For the full year 2024, we expect revenue to be in the range of $707 million to $713 million, growing 18.5% to 19.5% year-over-year. This includes estimates of approximately $11 million for Device42 for the year. Non-GAAP income from operations to be in the range of $60 million to $66 million, and non-GAAP net income per share to be in the range of $0.32 to $0.34, assuming weighted average shares outstanding of approximately 306.4 million. Our forward-looking estimates are based on FX rates as of July 26, 2024, so any future currency moves are not factored in. Let me close by saying that we believe we have the right strategy in place to capture the market opportunity in front of us and drive durable long-term growth at Freshworks. We are prioritizing investments to our business that we believe will position us for better execution in IT and employee experience. We remain focused on product innovation, delivering on our AI initiatives, and improving the growth of our customer-facing solutions to deliver scalable solutions for our customers. We look forward to updating you on our progress, and we're excited for what's ahead. And with that, let us take your questions. Operator? [Operator Instructions]. One moment for our first question. And it comes from the line of Brent Bracelin with Piper Sandler. Brent Bracelin Great to see the IT and employee experience business, now the largest segment. Dennis, for you, I wanted to double-click into Freddy AI momentum. I think you talked about customer adoption nearly doubling sequentially. I know it's still early to see AI show up in the application layer, but it sounds like you're starting to see it. Can you just walk through what is driving that? We're getting a lot of questions on ROI around AI. Can you just help us understand why you're seeing strong adoption there? And then a quick follow-up for Tyler, if I could. Dennis Woodside First of all, we are seeing tremendous interest amongst all of our customers, at the very least, a discussion of AI and a trial of AI, and in particular, our Copilot product. So we are finding all of our customers are comfortable with the idea that AI can make their agents more productive. And when they see the value of the AI suggesting answers to customers for deeply technical questions that often take time for agents to research and resolve, the agents don't have the answers at the tip of their tongue. They see the value. So typically, a customer will do a small deployment during an evaluation phase, and they'll measure the actual productivity impact in terms of response rate, customer satisfaction with the response, and they'll quantify what that does for overall productivity. That will lead them to have conviction actually paying for our Copilot add-on. So that's what's driving our growth there. And like I said, we're seeing attach rates around 40% for large deals. Those are deals for us over $30,000 a year. Every conversation in a meaningful deal involves Copilot. And we're going back to all of our existing customers - and this is both on the CX and the IT side, and having that same conversation with our existing accounts. So we launched our product a year ago in beta. We went through beta for about six months. We went into GA in mid-February, so we've only been selling for a quarter and a half. But I'm really pleased with how the team's performed in Q1. And I think that's going to be a driver of growth for some time to come. Brent Bracelin Tyler, for you as a follow-up here. It looks like you added, what, 600 net new customers ex-Device42. That's up from 400 last quarter. Can you talk through what drove the improvement there? Was it just sales productivity? Did you see a stronger close rate exiting the quarter? Just help us understand the uptick in net customer kind of lands here this quarter. Tyler Sloat We were really pleased that we had a little bit of a turnaround on the customer side. It's still not to the levels that we saw a couple of years ago, but a little bit of top of funnel on the SMB side. Some stabilization on churn, where churn had actually driven some of the lower customer numbers in the prior quarter. Again, it wasn't as much dollar churn, but really logo churn for really that long tail. And then, yeah, execution. But again, the SMB, there's a little bit of noise in there. The pressures we talked about in terms of overall SMB kind of macro pressure as well as expansion still persists, but we were really pleased in Q2 with that uptick on the customer number. It comes from the line of Pat Walravens with Citizens JMP. Pat Walravens One of the big questions that investors have is just this whole trade-off between seat based pricing and consumption based pricing as AI kicks in and increases the productivity of the agents. Can you just talk a little bit about what you learned over the last quarter or so about that? Dennis Woodside I would start by saying a lot of our focus has been on Copilot, although self-serve, we're seeing adoption grow there as well. And as I mentioned, we nearly doubled the number of customers that are paying for our self-serve bots. The dynamics are quite different for bots. Of course, they're paying for bot packages, which is a consumption like model. The more bot sessions that they buy, they're paying as they go, so to speak. Whereas the Copilot, a per seat adder. For both, we're not seeing meaningful changes in seat dynamics. In fact, we're seeing many customers are coming on board to us for the AI itself. But for existing customers that are adopting, we do not see meaningful changes in our overall seat counts, which is promising. In some cases, customers are redeploying or freeing up time for agents to handle higher order work or work that is more complex, requires more of a human touch. And in other cases, we have some customers who are trying to move their support teams into more of a revenue center. So they're adding tasks to the agents that are more about generating new business, not just addressing questions from existing accounts. I think it's still pretty early to see how this is going to play out. But for now, we haven't seen any change in the overall dynamics of our business. Pat Walravens That's super helpful, especially the part about the support team has been to revenue centers is interesting. One moment for our next question. And it's from the line of DJ Haynes with Canaccord Genuity. DJ Haynes I'll stick with the comments right here. Dennis, I guess based on the adoption trends and ROI efficiency you're driving with AI capabilities, do you feel like you've set Copilot and self-service pricing in the right spot? Dennis Woodside Yeah. I think we have better data right now on Copilot. On Copilot, we're very pleasantly surprised with how the pricing has held up. So as a reminder, our Copilot edition is $29 a seat per month. We're seeing really positive pricing for that product. And again, I would go back to the impact. The impact is very measurable through a beta test or through pre-post, through a holdout of agents that are and are not using Copilot. So our customers are seeing the impact either during a trial pre-sale or, if they're an existing account, during a trial with a subset of their agents. And that's really driving the pricing. They're seeing the value in the AI. Again, it's only been one full quarter, but that's quite promising for us. And we're leaning into it. The entire sales team, whether you're talking about field sales and selling into the larger accounts, or our teams in India that are working on our existing business or selling into smaller accounts, everybody is pitching in Copilot and it's getting a really positive reception. DJ Haynes Tyler, maybe a follow up for you on the guidance. So if you got $3 million from Device42 in a month that annualizes to about $21 million for the year, but the full year guidance increases about $10 million at the midpoint, so if my math is right, are you trimming the outlook for the core organic business or is that more the cushion you're adding for less predictability that comes with Device42? If you could just kind of talk through the dynamics on the guide, that would be helpful. Tyler Sloat So the $3 million for the month, it's not quite that clear, right, because they are a term licensed business and they are relatively back-end loaded in terms of - because they're selling to larger customers. And so depending on, say, if it's a one, two, three year deal, it could have a little bit more revenue. That $3 million doesn't actually equate to that many deals. And so you can't take a linear assumption on that to get to your $21 million. We built in the $11 million. We did say, hey, we do expect some of that business to see disruption. And a lot of it is because they had a decent amount of their business through partner channels that are with competitors. And so naturally, we would expect some of that to go away. We'll will clearly learn more about that business as we go through the back half. So kind of in an eye of prudence, we built in $11 million for the whole year, inclusive of the $3 million. One moment for our next question. That comes from the line of Scott Berg with Needham & Company. Scott Berg I'm going to follow up on DJ's last question there and not trying to get into the weeds on contract terms on this call necessarily, Tyler. But how much of the customer base at Device42 had multi-year contracts versus kind of singular annualized contracts? I think a common question tomorrow is trying to understand what that annualized number kind of looks like in terms of consistency, in terms of how to view that business. Tyler Sloat Yeah, we haven't broken out - because they do have a mix of, I would say, one, two, and three-year deals. And they also have a portion of - a pretty immaterial amount of what we call periodic revenue, which is more usage-based. So it's not actually under a full multi-year contract. Scott, as we learn more, because we're also - as customers come up for renewal, we'll have opportunities to craft those renewals in terms of the terms, right? And the real goal here - we outline kind of what the product roadmap is for Device42. The first is to build a really deep integration. But the second is to really move it to a pure cloud offering. And that will do away with the term license to get it back to pure subscription, but that's probably towards the end of next year. And so, we'll have to provide some color each quarter going forward, if it is kind of a material impact one way or the other. Scott Berg A question for Dennis. I know you're looking to have this cloud version ready next year. I'm sure a more tightly integrated solution at that point next year as well. But when you think of the go-to-market there and the partner base that Code42 is using, you mentioned that some of your competitors, that partner dynamic probably dissipates over time. But does this help you potentially unlock more partner opportunities, whether that Device42 is using those channel partners exclusively by themselves, or maybe the combined opportunity is even more appealing to more partners out there? Dennis Woodside Yeah, absolutely. And I think there's a couple different vectors that we're exploring. We have some partners that are already working with Freshworks that are familiar with Device42 because we've already been co-selling with them. But there's a number of partners that are not. So introducing them to those partners, getting those partners to actively bring Device42 into deals is an opportunity. And then Device42 has built a partner-centric business, and a number of those partners are not as familiar with Freshworks. So we're systematically going to all those partners and introducing ourselves, our offering, and trying to get earlier into the sales cycle. Because typically, in many of those deals, a customer is considering an ITSM right alongside an ITAM offering. And now we can get in front of those deals that we weren't even seeing before. So a lot of the early work has been understanding the pipeline on both sides, the partner pipeline as well as our self-generated pipeline, and then making sure that we are bringing Device42 into every possible opportunity that we have and vice versa. Our next question comes from the line of Ryan MacWilliams with Barclays. Ryan MacWilliams Dennis, great to hear about your meetings with key stakeholders across the business, along with like the acceleration in ARR for Freddy Copilot in the quarter. Has your priorities changed here at all from either products or go-to-market side or anything now after the last quarter you think you want to double down on from here? Dennis Woodside I think as I stated in the remarks earlier, I think it's really about optimizing our investment profile and making sure we're investing where we see the greatest return. And as I outlined in the prepared remarks, the first imperative is to win in that IT and employee experience business. That's where we have really solid product market fit, a lot of momentum. Like I said, most wins we've ever had against our biggest competitor over the last six quarters in Q2. Just seeing a lot of traction there and a lot of opportunities. So areas like managed service providers or MSPs, we have hundreds of MSPs using our product today. But we don't have a real full-fledged MSP offering that would enable them to scale faster, manage their accounts much more effectively. So we're going to go build. ITAM or ESM, we have an ESM product today that's doing really well, but it's not really deep. So if you think about like ESM for HR, there's a lot more we could be doing if we deepen our capabilities there. So we're going to invest there. Now we're going to do that by really optimizing within our existing resource profile. We've got well over a thousand super talented engineers. They're conversant and up to speed on how we develop products. So making sure we've got the right balance across our products is super important for us. I think the second big imperative is AI because we spent the last year building out our AI offerings, deepening them, testing them, ensuring that the quality of results is high. Now We're seeing it pay off and really putting the pedal of the metal on monetizing that AI opportunity, starting with Copilot, but we've got some exciting innovation coming around Freddy Self Serve as well that'll make deploying bots much easier towards the back half of this year. So those are the two really big priorities that we're leaning into. I think the customer experience products of CX and sales and marketing, that's more of an SMB oriented product today, as you know. And potentially, if SMB comes back, that business comes back. In the meantime, what we're trying to do is figure out how do we make those products work together better? So if I'm a CX customer, I can seamlessly upgrade or add a sales and marketing seat. Right now, that's harder than it needs to be. So there's work to be done there. But those first two priorities are real here and now opportunities and we're really leaning into them. Ryan MacWilliams Tyler, two quick housekeeping questions on the net dollar retention rate. For the first quarter net dollar retention rate, was that inclusive of Device42? The impact wasn't super significant. It helped slightly in Q2, but it wasn't off of what our expectations were, which we had said 105 to 106. Ryan MacWilliams On the 3Q guide, was this something influencing this? Is this something you've seen in July so far or there are changes in linearity throughout the second quarter that influences that. Tyler Sloat Not a lot of change in linearity. Our field business has become more and more back-end loaded, which is as expected, and that's been happening for a while. And I think in terms of SMB add, expansion, it's still kind of the same pressures that we've talked about for a long time now. So there's no significant changes. Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Elizabeth Porter I wanted to follow up on the guidance questions. And excluding the benefit from Device42, it looks like the revenue and billings guidance suggests the back half outlook on core growth is a bit softer than the prior guide implied. If so, it would be helpful to really understand where you're taking a more conservative view on the back half of the performance for the core business even it doesn't really sound like macro changed too much from Q2 to Q1. Tyler Sloat The prior guide was at $710 million. We built in an estimate of $11 million for all of Device42 for the year. We said that, hey, that business we expect to have disruption there. So that is an estimate. In terms of the $710 million at the midpoint, kind of minus 11, but $713 million at the high, it's really nothing significantly different. We still see expansion pressures. And that is agent addition, which it has been, but primarily affecting our CX business, and still SMB pressures. And these are the same kind of things we've been talking about for a little while. So there hasn't been a dramatic change. We're adding a little bit of prudence into that number for the back half. But outside of that, there's no significant change, Elizabeth. Elizabeth Porter On the SMB side, understanding that's still a challenge from the macro perspective, you guys have been making a lot of investments just to modernize that inbound motion. So any updates on the progress you're seeing there and when we could start to see those investments benefit the model? Dennis Woodside I think you did see a tick up in total customer growth, excluding Device42, of around 600 net adds compared to, I think, under 400 net adds in the prior quarter. And so, you're starting to see some impact. But I think we still need to continue to improve that experience for customers. And part of that is also making it more seamless to - if you're a customer of our support product, to buy into sales and marketing or vice versa. And that's some of the things that we're working on. So we did see some improvement. But again, we're continuing to find ways to make incremental changes to our process to drive greater conversion of leads into customers. Our next question comes from the line of Pinjalim Bora with J.P. Morgan. Noah Herman This is Noah on for Pinjalim. Dennis, in your remarks, you mentioned that you'll be streamlining the go-to-market, at least for the customer experience in sales and marketing products, to be a little bit more customer segment-focused. Just wanted to see if you could provide more color on that. And how long do you think some of these go-to-market initiatives would take, especially for those two segments? Dennis Woodside For that specific change, the way our model works, we market our products on a global basis. And we have leads coming in by product. So let's say a Freshdesk lead. That lead previously would go to a geographic-oriented or aligned sales team, North America or EMEA or Asia-Pac. And they weren't product-aligned. And what we were finding is that our products are so different that the product depth really mattered a lot more than the regional specificity. So we reoriented. And this is just for that inbound team. We reoriented that inbound team to be product-centric. So a Freshservice lead goes to a Freshservice team, regardless of geo, and Freshdesk to Freshdesk regardless of geo. And our thinking is that that, over time, will drive greater specificity, greater expertise, and ultimately benefit in improved conversion rate in that inbound business, in particular. Those changes are finished. They've been made. And that's how we're going to market as of this quarter. Noah Herman And maybe for our just quick housekeeping, but I think last quarter you mentioned that gross churn, I guess, was sort of in the mid-teens. Curious if there was any material change in Q2. Our next question comes from the line of Brent Thill with Jefferies. Luv Sodha This is Luv Sodha on for Brent Thill. Maybe the first one for you, Dennis. If you could parse out maybe the customer experience side of the business. Obviously, it's underperformed over the past year. I guess, as you look at that business, could you talk about what the impact of AI has been in terms of seat degradation and how much of it is macro impacted at this point? Dennis Woodside We have not seen impact attributable to AI of seat degradation. In fact, we're seeing pretty strong attach rates both in SMB, which tends to be more - the CS customer base tends to be more SMB, in new customers coming in and in our larger customers, which - and I'm talking specifically about Copilot, which is a net adder to expansion. What we're seeing is that the rate of seat addition over the last 18 months has come down as businesses are not expanding at the same rate. They're under pressure because the cost of financing expansion is meaningfully higher. But the reason that I have confidence that it's not AI driven is we look at customers that have and have not adopted AI, both Self Serve and Copilot, and we don't see material differences in expansion rate, churn rate, or retention rates between those who have and have not adopted. So we don't think it's AI. We think it's continued macro pressure on the SMB, and that is more reflected in the CX business because our business skews more SMB in CX. Luv Sodha A quick follow up for Tyler. Tyler, last quarter, you'd obviously guided billings to about 16%, and this quarter now it's 16% with one or two points from Device42. I guess, could you just talk about the framework there in terms of the guide? What are you baking in in terms of expectations for billings growth in the back half of the year? Tyler Sloat We said 16% for the year, but we said 1% to 2% coming from Device42. So we do think that went back again. The Device42 business is a little bit less predictable for us right now as we just closed it, and we do expect some disruption. So we'll obviously update that at the end of Q3 based on what we're learning. But the billings growth, essentially, we've taken into account everything we know on billings. And, Luv, as you know, we don't think billings is a great metric, but we understand that it's important. Our next question comes from the line of Rob Oliver with Baird. Rob Oliver Dennis, on Device42, can you just talk a little bit about how you plan to go to market on that and just refresh us on - is it the plan to roll it into the core Freshworks sales force? And then I think - and I might have misheard you versus Tyler relative to when it will move to a cloud native solution. I thought I heard you say Q1. And what are you guys assuming? Like, are customers going to be forced to move to the cloud native solution at that point? Is there a potential for incremental churn? And I guess a follow up question to that is do you have to wait until the cloud native solution to fully integrate your two products? So a lot there. I apologize. Dennis Woodside Let me just walk through again our plan for Device42 from a product standpoint. So, today, we have a lightweight integration between Freshservice and Device42. That allows an agent to switch from the Freshservice experience into Device42 if they have to or they want to understand the assets of the organization that they're working in. That said, it's not seamless and it comes across and feels like a different product experience. The first product initiative that's underway right now is to create a better integration, a more seamless integration of the two products with D42 remaining on-prem and, obviously, Freshservice remaining in cloud. That's what is available early next year. The second product milestone is to create a cloud native version of Device42. And that is planned for the latter part of next year. Now, in terms of migration and all the ins and outs, that we're going to have to work through, but that's the product plan. In terms of how we're going to market now, we've been going to market with Device42 as a partner for some time where we see a customer with an advanced IT footprint, a mix of lots of assets on-prem and in cloud that they want to track. And we've had success selling them into many deals. Now that we've acquired the company, it's just an accelerated version of that. So we've gone through our entire pipeline of new business and wherever there is a prospect that could possibly benefit from advanced ITAM, we are introducing and bringing Device42 in. When we have expansion opportunities, same thing. And then we're also looking at Device42's pipeline for any opportunities to bring Freshservice in where they previously may not have considered us. So that's all underway right now. We've seen a couple of successes already. A large public university in Canada with 15,000 faculty took both Freshservice and Device42. We've got a lot of deals where Device42 is part of the mix. And so, it's a great opportunity for us to upsell D42 into our existing base as well as bring them into new deals and to bolster our overall position. And our last question comes from the line of Alex Zukin with Wolfe Research. Ryan Krieger This is Ryan Krieger on for Alex. Just going back to the Freddy Copilot and Freddy Self Service customer metrics you provided, are there any segments or verticals where you're seeing increased or slower rate of adoption? On the NRR metrics, you talked about the macro being stable quarter over quarter, but you do expect to see further NRR compression in 3Q. So any solutions where that's a particular drag on that metric? Tyler Sloat I'll take the net dollar retention. Yeah, we haven't seen change or reversal in expansion pressure in SMB. I think just the net dollar retention number to 105, which is not dramatically different than this quarter, is really just how the year-over-year numbers work on ARR and what we can see. Because every quarter, we kind of annualize the prior quarter, so we have a little bit more data. So I don't think there's any big change we're expecting on net dollar retention. I think it's just where the numbers are flowing. Churn is relatively stable and expansion is kind of where it is in terms of the pressures, in terms of agent addition. That being said, the work we have to do is to figure out, number one, Device42 to use that as a new expansion motion and how quickly we can get that going. And then things like ESM, selling into our Freshservice space, that has got great traction, along with continuing to sell Copilot. Dennis Woodside On Copilot, the promising aspect - or another promising aspect of where Copilot is, is we're getting traction across our two largest products, both customer service and IT. So agents in both categories are finding value in the product, and it's not limited to any one industry or segment of our customer base. We're seeing traction in small business as well as in larger businesses. We're seeing traction in customers that are brand new to us, buying right off of our website and deciding to add Copilot after trialing it for just a few weeks, as well as larger customers that are doing much more sophisticated testing. So we think it's going to - it is a core part of what we're selling now. We think that, over time, every customer is going to benefit from what Copilot does for their agents, and that's going to be a big story for us over the course of the next year. And thank you. This concludes our Q&A session and conference for today. Thank you to all who participated, and you may now disconnect.

Freshworks (FRSH) Q2 2024 Earnings Call Transcript | The Motley Fool

Good day, everyone, and thank you for standing by. Welcome to Freshworks second-quarter 2024 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. I will hand the call over to the Head of Investor Relations, Joon Huh. Thank you. Good afternoon, and welcome to Freshworks second-quarter 2024 earnings conference call. Joining me today are Dennis Woodside, Freshworks' chief executive officer and President; and Tyler Sloat, Freshworks' chief financial officer. The primary purpose of today's call is to provide you with information regarding our second-quarter 2024 performance and our financial outlook for our third quarter and full year 2024. 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 Freshworks 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. 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 Dennis. Dennis Woodside -- President and Chief Executive Officer Thanks, Joon, and thank you, everyone, for joining us on the call today. I'm pleased with our results this quarter, which demonstrated continued growth, financial discipline and innovation. We are well positioned for the expansive opportunities that are in front of us. In Q2, we delivered results that met or exceeded each of our previously provided financial estimates. We grew revenue to $174. 1 million and delivered another quarter of strong free cash flow of $32. 8 million, resulting in a free cash flow margin of 19%. This represents more than 600 basis points of year-over-year margin improvement and is reflective of our increasing operating leverage and discipline. We also welcomed notable customers into the Freshworks community, including Kayak, Davidson Kempner Capital Management, Paul Smith UK, and many others. Lastly, we completed the strategic acquisition of Device42, which adds advanced ITAM capabilities to our Freshservice solution in early June. During my first quarter as our CEO, I spent extensive time in India with our product and engineering teams, digging into our product road map and upcoming anticipated innovations. I also met with customers, partners and other key stakeholders in New York, Boston, Chennai, and Bangalore, gathering feedback and better understanding what we do well and what we can do better. From those conversations, it's clear that customers are making buying decisions based on 4 criteria. First, they want to automate workflows with AI to increase efficiency across IT, customer support, sales, marketing and beyond. Second, they want uncomplicated solutions that are simple to implement and to own. Third, they want to see rapid impact of their investments. And fourth, they want the flexibility of a platform they can modify and scale over time. Freshworks meets those needs. In addition to these external meetings, we've conducted our annual strategic review of the business with our leadership team. This review has confirmed our belief that we have a significant opportunity right in front of us across multiple markets. And by focusing on 3 strategic imperatives, we will continue to drive durable, profitable growth for years to come. The first imperative is that we play to one of our biggest trends, IT, and employee experience solutions, which includes ITSM, ITAM, IT operations and ESM. Even without taking Device42 into account, this is our largest business group with over $340 million of ARR and over a 30% growth rate year-over-year. Including Device42, we have over 17,000 IT customers, with 670 customers spending more than $100,000 with us. More than 2/3 of our IT ARR is from the mid-market and enterprise segment. Our net dollar retention rates for this business exceed 110%, and we are seeing growth across the board for both small and large businesses. To capture the expansive IT and employee experience opportunity, we intend to prioritize investments of product and engineering resources to these solutions. This will allow us to create richer ITSM capabilities for the enterprise, capture the ITAM opportunity with Device42 and expand our business with a focus on ESM and automated workflows as we build for business teams beyond IT. For our IT and employee experience solutions, we continue to deepen our GTM capabilities to serve the mid-market and enterprise. We are now replacing incumbents, whose companies were founded with a primary focus on the IT function for Enterprise customers. In Q2 alone, we won 19 new and expansion deals of over $100,000, and we also saw a 6-quarter high win rate in IT against our largest competitor. Against our 2 largest competitors, we won deals with a major software player, a large California state agency, a major real estate company and many more. We have momentum in the marketplace for customers wanting an enterprise-grade workflow solution for IT without the high cost and hassle they're seeing with our competitors. In Q2, we saw continued momentum across all segments, including enterprise, mid-market, commercial and SMB, as companies achieve high-value benefits without implementation and ownership complexities, while delivering rapid impact at a competitive price. Large industry-leading organizations like Nucor Steel, Carrefour, Bridgestone Tires, Wiseman, Qualfon and Riverbed technology are using our employee experience software to digitize their work and enable productivity gains, leading to more efficient processes and happier employees. For example, America's largest omnichannel specialty mattress retailer replaced their existing ITSM solution because the legacy software could not scale to meet their needs as they grew head count across several functions. We won this deal over one of our top competitors. Since going live with Freshservice, the company has seamlessly onboarded staff across departments and reduced workflow changes from months with the incumber to a single day with Freshworks. As another example, an iconic fashion retailer chose our unified platform to manage all internal requests, approvals, and ticketing throughout the inventory planning, buying and merchandising processes. Freshservice helped unify multiple inventory management and merchandising teams on a single centralized service management platform, reducing operational costs by 10%, improving gross margins and yielding a 20% improvement in ticket resolution time. Our third customer example is Credit Safe, the most-used provider of business credit reports serving 430 million businesses worldwide. A longtime Freshdesk customer, Credit Safe was seeking a modern ITSM solution that could easily integrate with their existing tools. They evaluated Freshservice against one of our top two competitors. Freshservice proved to be easier to use and more cost-effective than the competition. The native integration with Freshdesk and our historically strong partnership made selecting Freshservice a natural choice for Credit Safe, as they more than doubled their account value with us. These successes demonstrate that we have the opportunity to become the digital platform that enables mid-market and enterprise customers to compete at global scale. On capturing the ITAM opportunity, Device42 provides a more comprehensive, up-to-date view of assets across an organization's entire IT infrastructure. We're excited about going to market with our joint solution as we see a lot of upside and strategic value from the acquisition. We now have both the opportunity to upsell advanced ITAM capabilities into our existing fresh service customers and the opportunity to cross-sell Freshworks products into the Device42 customer base. With deeper enterprise capabilities, this also expands our addressable market as we're now able to win deals in a broader group of large, mature companies. Device42 is primarily an on-premise business today. So our first goal is to deliver an improved seamless integration between fresh service and Device42 by Q1 of next year. Second, we're working on turning Device42 into a cloud-native solution, which we anticipate could be ready by the end of next year, but we already see the great product market fit with larger customers that use both Device42 and Freshworks, like Kaiser Permanente, the State of Indiana, the University of Alberta, Hewlett-Packard Enterprise and HD Supply. Let me share an example of how Freshservice plus Device42 is delivering value for our customers. A regional bank in the U. S. operating 230 branches was looking for a long-term partner to support their IT needs cost effectively. We beat a large competitor and replace the legacy incumbent based on or to provide visibility into assets and apps, which was a key priority in the highly regulated risk-averse industry. This bank chose a multiproduct solution consisting of Freshservice, Freshchat and Device42 based on the scalability and sophistication of the solution and time to value. The final component of playing to our IT business strength is expanding the business by focusing on ESM and automated workflows. We are seeing strong demand for our Enterprise Service Management offering of Freshservice for Business Teams, which allows teams like HR, finance, and facilities to automate employee service delivery and benefit from the same uncomplicated solutions and rapid time to value as ITSM. We're seeing great traction in this category and expect that with continued focus on this area, it can be a meaningful contributor to ARR in the coming years. Texas A&M, a top-ranked public university with world-class business agriculture and engineering programs, initially implemented Freshservice for IT service management. After seeing improvements in productivity and ticket resolution, they expanded Freshservice to include ESM, supporting both internal IT needs and external transit-related inquiries, which was particularly important during the football season when they needed to scale operations. Freshservice enabled Texas A&M to manage complex game day logistics supporting up to 150,000 visitors and handling over 600 tickets daily with a 30% faster resolution time. Our second imperative is to build out our AI capabilities and bring them to market to thousands of customers. Customers are already seeing the value in the 2 Freddy AI products that are in the market today, with Freddy Self Serve bots and Freddy Copilot. We are encouraged by the results we've seen since Freddy Copilot became generally available in mid-February. In Q2, we saw significant momentum in adoption with now over 1,200 customers as Copilot numbers for both customers and ARR nearly doubled from the prior quarter. We're seeing over 40% attach rates for new deals of $30,000 or more. Customers are seeing, on average, a 30% productivity lift with the help of Freddy Copilot. We have thousands of licenses from Freshservice customers with power users of Freddy Copilot seeing more than 40% improvement in average resolution time for IT incidents. I'm pleased to say that we are monetizing ahead of our internal targets for Freddy Copilot, as this thing is now a core part of every sales conversation. We are seeing customers like European travel company, Digitrips, choose Freshworks as a scalable foundation for end-to-end cloud operations. Using Freddy Copilot, they improved their response times to customer inquiries by nearly 300% even as ticket volume doubled during the same period. GenAI is rapidly transforming how agents and customers are leveraging technology and customer service, the world's largest operator of open-top sightseeing tours in 26 cities globally, serving 6 million tourists each year, recently transitioned to Customer Service Suite powered by Freddy Copilot, which has resulted in an improved agent satisfaction score by 12 points, with a nearly 20% reduction in resolution time for their customers. Freddy Self Service for customer support continues to be another strong area of value for our customers. We're starting to see traction on customer adoption, with over 900 customers for bot sessions doubling from a year ago, and realizing an average deflection rate of around 40%. One example is Hinge Health, a virtual clinic that serves more than 200,000 patients. They chose Freshdesk with Freddy Copilot, Self Service, and Insights for its all-in-one customer service solution. Hinge Health started with 8 seats and has since expanded to hundreds of seats on Freshdesk. With Freddy Self Service, they've increased their ticket handling capacity by more than 30-fold, achieving an impressive 85% CSAT score and lowering their first response time from hours to minutes. Today, we're focused on driving broad customer adoption and usage so they can realize value from our AI products, and we believe meaningful monetization will follow over time. Our third imperative is to accelerate growth for our Customer Experience Solutions, which includes our customer service and sales and marketing products. SMB and commercial companies continue to be the most significant consumers of these offerings, which make up approximately $350 million in ARR, with a combined year-over-year ARR growth rate in the mid- to high single digits as of the end of last quarter. To accelerate this growth, we are further simplifying the product experience to increase the ease of implementation and maintenance and improve time to value. We are also streamlining our go-to-market processes to be more customer segment-focused, including recruiting more partners that focus on the SMB and commercial space. Partners are driving meaningful growth for SMB and commercial new business today, and we are optimistic about the added growth our new partners will deliver. As mentioned previously, we are seeing increasing momentum for Freddy Copilot with our Customer Experience Solutions. Among our SMB and commercial customers, we're achieving double-digit attach rates on new deals for Freddy Copilot. Leveraging the benefits of AI, our customers in all segments are able to deliver higher levels of customer satisfaction while enjoying improved efficiencies. Customers like Total Experts and Ashley Furniture have invested and are realizing immediate value. Another example is Canada's British Columbia lottery, which selected Freshchat over our largest competitor to improve its customer experience. They chose Freshchat with Freddy Copilot for its easy-to-use interface that provides the team with analytics to help identify and solve challenges in the customer journey. Since implementing Freshchat with Freddy Copilot, British Columbia Lottery has seen an uptick to their customer experience scoring and an agent productivity increase of 20%. In Q2, customers continued to expand usage across our Customer Experience Solutions portfolio, with multiproduct adoption ticking up to 27%. One example is a global leader in the logistics and transportation industry, who has been a Freshchat customer for 8 years. Recognizing the value that Freddy AI delivers, they expanded their usage to include Freddy Copilot and Freshchat to maximize their service delivery at an affordable cost while simplifying their processes. Overall, it's been a tremendous first quarter as CEO. And with our strategic priorities in place, we believe we are well positioned to seize this massive opportunity in front of us and accelerate growth. I'm excited to lead our company of 5,000 talented employees into the next phase of Freshworks Growth Journey as we work toward delivering innovative solutions that customers want and scaling the business to $1 billion in revenue and beyond. Now I'll hand it over to Tyler to discuss the financial details. Tyler Sloat -- Chief Financial Officer Thanks, Dennis, and thanks to all of you joining on the call and via webcast. As Dennis mentioned earlier, we met or exceeded our key financial estimates in Q2, even without the Device42 results. Now with the addition of Device42 as part of the Freshworks family, we're excited to go after a broader set of customers in the mid-market and enterprise. We are sharpening our strategic focus to lead with the IT employee experience business as we see strong customer demand and more attractive opportunities for this part of the business. We plan to fuel additional growth and better capitalize on the huge IT opportunity and other adjacent markets. At the same time, we're maintaining our focus to drive rational efficiencies that we expect will lead to durable and profitable growth in the business over time. For our call today, I'll cover the Q2 2024 financial results, provide background on the key metrics and close with our forward-looking commentary and expectations for Q3 and the full year 2024. I'll include constant currency comparisons for certain metrics to provide a better view of our business trends. As a reminder, we closed the Device42 acquisition on June 6, so our Q2 numbers include partial Device42 results for the quarter. Where there is meaningful contribution from the acquisition, I will break out specific metrics on a onetime basis to help provide a better understanding into our business performance. 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. Total revenue in Q2 increased to $174. 1 million, growing 20% for both as reported and on a constant currency basis. Professional services revenue contributed $2. 5 million for the quarter, which was similar to Q1 as continue to shift services revenue to our partner network. Device42 revenue contribution was approximately $3 million as we recognized revenue for the partial quarter. We closed large IT opportunities with the upmarket customers, and this once again drove the majority of our ARR growth. We saw meaningful strength for our new business in the U. S. and won a number of competitive 6-figure deals in the field. Moving to margins. We maintained a strong non-GAAP gross margin of 85%, similar to Q1, as we remain diligent in efficiently scaling the business. This represents an improvement of nearly 100 basis points compared to the prior year. Our non-GAAP operating income came in at $13. 1 million, representing a non-GAAP operating margin of approximately 8% and ahead of prior expectations. Most of the outperformance was the result of certain expenses pushing out to the second half of the year and lower personnel-related costs. As a reminder, the Device42 results and associated transaction costs are included in these numbers, but these were not meaningful to the total operating results. Moving to the operating metrics. Our 2 key business metrics are net dollar retention and customers contributing more than $5,000 in ARR. From a macro and demand environment perspective, Q2 trends were generally similar to what we saw in Q1, as gross expansion continued to see pressure, while overall churn remained steady quarter-over-quarter. Net dollar retention was 106% in the group, both as reported and on a constant currency basis and in line with our expectations. Looking forward, we estimated net dollar retention of approximately 105% for Q3 as we expect to see ongoing pressure on the expansion part of the business. For our second key business metric of number of customers contributing more than $5,000 in ARR, this metric grew 14% year-over-year to 21,744 customers, representing quarterly net adds of nearly 1,200 customers, with 631 of these customers coming from Device42. This customer cohort now represents 90% of our ARR. For our larger customer cohort, contributing more than $50,000 in ARR, this cohort grew 30% year-over-year to 2,839 customers, representing quarterly net adds of 246, with 145 of these customers coming from Device42. This cohort now represents 50% of our ARR. For total customers, we added approximately 1,300 net customers in the quarter and ended with over 68,800 customers, with just over half of the new customers coming from Device42. Excluding customers from the acquisition, we added approximately 600 net customers in the quarter, pointing to signs of improvement for customer adds compared to 400 in Q1. Now let's turn to calculated billings, balance sheet and cash items. Our calculated billings grew 17% on an as-reported basis and, on a constant currency basis, to $185. 9 million in Q2. Device42 billings contribution was $7. 7 million for the quarter. So excluding the impact of Device42, calculated billings grew $0. 12. Looking forward to Q3 2024, our initial estimate for calculated billings growth is 16%, which includes Device42 results. For the full-year 2024, we expect calculated billings growth to be approximately 16%, with approximately 1 to 2 percentage points coming from Device42. Moving to our cash items. Our largest use of cash during the quarter was $214 million for the acquisition. We generated $32. 8 million in free cash flow for Q2, outperforming our estimates as we continue to drive our operational efficiencies in the business. Given our strong cash flow performance again in the quarter, we are increasing our full-year 2024 estimates to $132. 5 million, with approximately $32. 5 million expected in Q3. We continue to manage and offset share count dilution by net settling invested equity amounts by using approximately $15 million during the quarter. This activity is reflected in our financing activities and is excluded from free cash flow. As a result of these activities, we ended the quarter with cash, cash equivalents and marketable securities of $1 billion. We plan to continue net settling invested equity amounts going forward, resulting in expected Q3 cash usage of approximately $13 million at current stock price levels. For the year, we expect to use approximately $63 million to net settle vested equity amounts. With our ongoing focus on operational efficiency and financial discipline, we expect to end the year with cash of well over $1 billion, maintaining a strong balance sheet and financial flexibility for the business. Turning to our share count for Q2. We have approximately 328 million shares outstanding on a fully diluted basis as of June 30, 2024, representing a share reduction compared to the prior year. The fully diluted calculation consists of approximately 301 million shares outstanding, 24 million related to unvested RSUs and PRSUs and nearly 3 million shares related to outstanding options. Before providing our financial estimates for Q3 and full-year 2024, let me provide background on how we're planning for Device42 results in our consolidated financials going forward. First, Device42 is primarily a term license business today, which creates less predictability for our reported revenue quarter-to-quarter. Second, we expect specific partner business involving competitors to decline and ultimately go away. These factors may cause quarterly fluctuations to our total revenue so we want to be prudent in our forecast models. As we go forward, we will provide breakouts for metrics as required for disclosure or, if they're meaningful, to understand the underlying business fundamentals. Now on to the specific numbers for our forward-looking estimates. For the third quarter 2024, we expect revenue to be in the range of $180 million to $183 million, growing 17% to 19% year-over-year; non-GAAP income from operations to be in the range of $13 million to $15 million; and non-GAAP net income per share to be in the range of $0. 07 to $0. 08, assuming weighted average shares outstanding of approximately 304. 2 million shares. For the full-year 2024, we expect revenue to be in the range of $707 million to $713 million, growing 18. 5% to 19. 5% year-over-year. This includes estimates of approximately $11 million for Device42 for the year. Non-GAAP income from operations to be in the range of $60 million to $66 million and non-GAAP net income per share to be in the range of $0. 32 to $0. 34, assuming weighted average shares outstanding of approximately 306. 4 million. Our forward-looking estimates are based on FX rates as of July 26, 2024, so any future currency moves are not factored in. Let me close by saying that we believe we have the right strategy in place to capture the market opportunity in front of us and drive durable long-term growth at Freshworks. We are prioritizing investments to our business that we believe will position us for better execution in IT and employees' experience. We remain focused on product innovation, delivering on our AI initiatives and improving the growth of our customer-facing solutions to deliver scalable solutions for our customers. We look forward to updating you on our progress, and we're excited for what's ahead. And with that, let us take your questions. [Operator instructions] One moment for our first question, and it comes from the line of Brent Bracelin with Piper Sandler. Please proceed. Brent Bracelin -- Analyst Thank you. Good afternoon. Great to see the IT & Employee Experience business, now the largest segment. Dennis, for you, I wanted to double click into Freddy AI momentum. I think you talked about customer adoption nearly doubling sequentially. I know it's still early to see AI show up in the application layer, but it sounds like you're starting to see it. Can you just walk through what is driving that? We're going to get a lot of questions on ROI around AI. Can you just help us understand why you're seeing strong adoption there? And then a quick follow-up for Tyler, if I could. Dennis Woodside -- President and Chief Executive Officer Sure. So first of all, we are seeing tremendous interest among all of our customers in, at the very least, the discussion of AI and a trial of AI and, in particular, our Copilot product. So we are finding all of our customers are comfortable with the idea that AI can make their agents more productive. And when they see the value of the AI suggesting answers to customers for deeply technical questions that often take time for agents to research and resolve, the agents don't have the answers at the tip of their tongue, they see the value. So typically, a customer will do a small deployment during an evaluation phase, and they'll measure the actual productivity impact in terms of response rate, customer satisfaction with the response, and they'll quantify what that does for overall productivity. That will lead them to have conviction about actually paying for our Copilot add-on. So that's what's driving our growth there. And like I said, we're seeing attach rates around 40% for large deals. Those are deals, for us, over $30,000 a year. Every conversation in a meaningful deal involves Copilot, and we're going back to all of our existing customers, and this is both on the CX and the IT side, and then -- and having that same conversation with our existing accounts. So we're pretty -- we launched our product a year ago in beta. We had -- we went through beta for about 6 months. We went into GA in mid-February. So we've only been selling for 1. 5 quarters, but I'm really pleased with how the team has performed in Q1. And I think that's going to be a driver of growth for some time to come. Brent Bracelin -- Analyst Very interesting color there. And then, Tyler, for you as a follow-up here. It looks like you added what, 600 net new customers, ex-Device42, that's up from 400 last quarter. Can you talk through what the improvement there? Was it just sales productivity? Did you see a stronger close rate exiting the quarter? Just help us understand the uptick in net customer kind of lens here this quarter. Tyler Sloat -- Chief Financial Officer Yeah. I mean, we were really pleased that we had a little bit of a turnaround on the customer side. It's still not to the levels that we saw a couple of years ago, but a little bit top of funnel on the SMB side, some stabilization on churn, where churn had actually driven some of the lower customer numbers in the prior quarter. Again, it wasn't as much dollar term, but really logo churn for really that long tail. And then yes, execution. But again, it's -- the SMB, there's a little bit of noise in there. The pressures we talked about in terms of overall SMB kind of macro pressure as well as the expansion still persist, but we were really pleased in Q2 with that uptick on the customer number. Next question, please? Operator Yes, I'm sorry. I was muted, sir. It comes from the line of Pat Walravens with Citizens JMP. Please proceed. Patrick Walravens -- Analyst Oh, great. Thank you, and congratulations, Dennis, on the start to the first quarter as CEO. It's great. One of the big questions that investors have is just this whole trade-off between seat-based pricing and consumption-based pricing as AI kicks in and increases the productivity of the agents. Can you just talk a little bit about what you learned over last quarter or so about that? Dennis Woodside -- President and Chief Executive Officer Sure. So I would start by saying a lot of our focus has been on Copilot, although Self Serve, we're seeing adoption grow there as well. And as I mentioned, we nearly doubled the number of customers that are paying for our Self Serve bot. The dynamics are quite different. For bots, of course, they're paying for bot packages, which is a consumption-like model. The more bot sessions that they buy, they're paying as they go, so to speak. And whereas the Copilot, is a per seat adder. For both, we're not seeing meaningful changes in seat dynamics. In fact, we're seeing many customers are coming on board to us for the AI itself. But for existing customers that are adopting, we do not see meaningful changes in our overall seat counts, which is promising. In some cases, customers are redeploying or freeing up time for agents to handle higher-order work or work that is more complex, requires more of a human touch. And in other cases, we have some customers who are trying to move their support teams into more of a revenue center. So they're adding tasks to the agents that are more about generating new business, not just addressing questions from existing accounts. So I think it's still pretty early to see how this is going to play out. But for now, we didn't -- we haven't seen any change in the overall dynamics of our business. Patrick Walravens -- Analyst That's super helpful, especially the part about the support team is moving to revenue centers is interesting. Thank you. One moment for our next question, and it's from the line of DJ Hynes with Canaccord Genuity. Please proceed. DJ Hynes -- Analyst I'll stick with the comment thread here. Dennis, I guess, based on the adoption trends and ROI efficiency you're driving with AI capabilities, do you feel like you've set Copilot and Self Service pricing in the right spot? Dennis Woodside -- President and Chief Executive Officer Yes. So I think we have better data right now on Copilot. On Copilot, we're very pleasantly surprised with how the pricing has held up. So as a reminder, our Copilot edition is $29 a seat per month. We're seeing really positive pricing for that product. And again, I would go back to the impact. The impact is very measurable through a beta test or through pre-post, through holdout of agents that are and are not using Copilot. So our customers are seeing the impact, either during a trial presale or, if they're an existing account, during a trial with a subset of their agents, and that's really driving the pricing. They're seeing the value in the AI. And again, it's only been one full quarter, but that's quite promising for us. And we're leaning into it. The entire sales team, whether you're talking about field sales and selling into the larger accounts or our teams in India that are working on our existing business or selling into smaller accounts, everybody is pitching in pilot, and it's getting a really positive reception. Yeah. That's great. And then, Tyler, maybe a follow-up for you on the guidance. So if you got $3 million from Device42 in a month, that annualizes to about $21 million for the year. But the full-year guidance increase is about 10% at the midpoint. So if my math is right, are you trimming the outlook for the core organic business? Or is that more the cushion you're adding for less predictability that comes with Device42? If you could just kind of talk through the dynamics in the guide, that would be helpful. Tyler Sloat -- Chief Financial Officer Yes. So the $3 million for the month, it's not quite that clear, right, DJ, because they are a term license business. So -- and they are relatively back-end loaded in terms of because they're selling to larger customers. And so depending on, say, if it's a 1-, 2-, 3-year deal, it could have a little bit more revenue. That $3 million doesn't actually equate to that many deals. And so you can't kind of linear -- pick a linear assumption on that to get to your $21 million. We built in the $11 million. We did say, "Hey, we do expect some of that business to see disruption. " And a lot of it is because they had a decent amount of their business through partner channels that are with competitors. And so naturally, we would expect some of that to go away. And we'll clearly learn more about that business as we go through the back half. So kind of in an eye of prudence, we booked an $11 million for the whole year, inclusive of the $3 million. Thank you. One moment for our next question, that comes from the line of Scott Berg with Needham & Company. Please proceed. Scott Berg -- Analyst Hi, everyone. Thanks for taking my question. I'm going to follow up on DJ's last question there and not trying to get into the weeds on contract terms on this call unnecessarily, Tyler. But how much of the customer base of Device42 had multiyear contracts versus kind of singular annual? I think a common question tomorrow is trying to understand what that annualized number kind of looks like in terms of consistency, in terms of how to view that business. Tyler Sloat -- Chief Financial Officer Yes. We haven't broken out because they do have a mix of, I would say, 1-, 2- and 3-year deals. And they also have a portion of a pretty immaterial amount of what we call periodic revenue, which is more usage based. So it's not actually under a full-multiyear contract. Scott, as we learn more, because we're also -- as customers come up for renewal, we'll have opportunities to craft those renewals in terms of the terms, right? And the real goal here, we outlined kind of what the product road map is for Device42. The first is to build a really deep integration. But the second is to really move it to a pure cloud offering. And that will do away with the term license, so get it back to pure subscription, but that's probably toward the end of next year. And so we'll have to provide some color each quarter going forward if it is kind of a material impact one way or the other. Scott Berg -- Analyst Got it. Helpful. And then a question for Dennis. I know you're looking to have this cloud version ready next year. I'm sure a more tightly integrated solution at that point next year as well. But -- when you think of the go-to-market there and the partner base that "42" is using, you mentioned that some of your competitors, that partner dynamic probably dissipates over time. But does this help you potentially unlock more partner opportunities, whether that Device42 is using those channel partners exclusively by themselves or maybe the combined opportunity is even more appealing to more partners out there? Dennis Woodside -- President and Chief Executive Officer Yes, absolutely. And I think there's a couple of different vectors that we're exploring. We have some partners that are already working with Freshworks that are familiar with Device42 because we've already been co-selling with them, but there's a number of partners that are not. So we're introducing them to those partners, getting those partners to actively bring Device42 into deals is an opportunity. And then Device42 has built a partner-centric business, and a number of those partners are not as familiar with Freshworks. So we're systematically going to all those partners and introducing ourselves, our offering, and trying to get earlier into the sales cycle. Because typically, in many of those deals, a customer is considering an ITSM right alongside an ITAM offering and now we can get in front of those deals that we weren't even seeing before. So a lot of the early work has been understanding the pipeline on both sides, the partner pipeline as well as our self-generated pipeline, and then making sure that we are bringing Device42 into every possible opportunity that we have and vice versa. Thank you. Our next question comes from the line of Ryan MacWilliams with Barclays. Please proceed. Ryan MacWilliams -- Barclays -- Analyst Hey, thanks for taking the question. Dennis, great to hear about your meetings with key stakeholders across the business, along with like the acceleration in ARR for Freddy Copilot in the quarter. Has your priority changed here at all from either a product or go-to-market side or anything? Now after the last quarter, do you think you want to double down on from here? Dennis Woodside -- President and Chief Executive Officer Yes. I think as I stated in the remarks earlier, I think it's really about optimizing our investment profile and making sure we're investing where we see the greatest return. And as I outlined in the prepared remarks, the first imperative is to win in that IT & Employee Experience business. That's where we have a really solid product market fit, a lot of momentum. Like I said, most wins we've ever had against our biggest competitor this -- over the last six quarters in Q2, just seeing a lot of traction there and a lot of opportunities. So areas like managed service providers, or MSPs. We have hundreds of MSPs using our product today, but we don't have a real full-fledged MSP offering that would enable them to scale faster, manage their accounts much more effectively. So we're going to go build that. ITAM or ESM, we have an ESM product today that's doing really well, but it's not really deep. So if you think about like ESM for HR, there's a lot more we could be doing if we deepen our capabilities there. So we're going to invest there. Now we're going to do that by really optimizing within our existing resource profile. We've got well over 1,000 super talented engineers. They're conversant and up to speed on how we develop products. So making sure we've got the right balance across our products is super important for us. I think the second big imperative is AI because we spent the last year building out our AI offerings, deepening them, testing them, ensuring that the quality of results is high. Now we're seeing it pay off and really putting the pedal to the metal on monetizing that AI opportunity, starting with Copilot. But we've got some exciting innovation coming around Freddy Self Serve as well that will make deploying bots much easier toward the back half of this year. So those are the 2 really big priorities that we're leaning into. I think the Customer Experience products, so CX and Sales & Marketing, that's more of an SMB-oriented product today, as you know, and potentially, if SMB comes back, that business comes back. In the meantime, what we're trying to do is figure out how do we make those products work together better. So if I'm a CX customer, I can seamlessly upgrade or add a Sales & Marketing seat. Right now, that's harder than it needs to be. So there's work to be done there. But those first 2 priorities are real here-and-now opportunities, and we're really leaning into them. Ryan MacWilliams -- Barclays -- Analyst I appreciate that detail. And then, Tyler, two quick questions on the net dollar retention rate. For the first-quarter net dollar retention rate, was that inclusive of Device42? The impact wasn't super significant. It helped slightly in Q2, but it wasn't off of what our expectations were, which we had said $105 million to $106 million. Ryan MacWilliams -- Barclays -- Analyst Perfect. And then on the 3Q guide, what is influencing this? Is this something you've seen in July so far? Or are there changes in linearity about the second quarter that influences that? Tyler Sloat -- Chief Financial Officer Not a change in linearity. It's -- our field business has become more and more back-end loaded, which is as expected, and that's been heading for a while. And I think in terms of SMB and expansion, it's still kind of the same pressures that we've talked about for a long time now. And so there's no significant changes. Thank you. Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Elizabeth Porter -- Morgan Stanley -- Analyst Great. Thank you so much. I wanted to follow up on the guidance questions. And excluding the benefit from Device42, it looks like the revenue and billings guidance suggest the back-half outlook on core growth is a bit softer than the prior guide implied. So it would be helpful to really understand where you're taking a more conservative view on the back half of the performance for the core business, even it doesn't really sound like macro changed too much from Q2 to Q1. Thank you. Tyler Sloat -- Chief Financial Officer Yes. I mean the prior guidance at $710 million, we built in an estimate of $11 million for all of Device42 for the year. We said that, hey, we're -- that business, we expect to have disruption there. So that is an estimate. In terms of the $710 million at the midpoint, kind of minus $11 million, but $713 million is the high. It's really nothing significantly different, right? We still see expansion pressures, and that is agent addition, which, it has been but primarily affecting our CX business, and still SMB pressure, right? And these are the same kind of things we've been talking about for a little while. And so nothing -- there hasn't been a dramatic change. We're adding a little bit of prudence into that number for the back half. But outside of that, there's no significant changes. Elizabeth Porter -- Morgan Stanley -- Analyst Got it. And then on the SMB side, I understand that's still challenged from a macro perspective. You guys have been making a lot of investments just to modernize that inbound notion. So any updates on the progress you're seeing there and when we could start to see those investments benefit the model? Dennis Woodside -- President and Chief Executive Officer Yes. I think you did see a tick up in total customer growth, excluding Device42, of around 600 net adds compared to, I think, under 400 net adds in the prior quarter. And so you're starting to see some impact, but I think we still need to continue to improve that experience for customers. And part of that is making -- also making it more seamless to -- if you're a customer of our support product, to buy into Sales & Marketing or vice versa. And that's some of the things that we're working on. So we did see some improvements. But again, we're continuing to find ways to make incremental changes to our process to drive greater conversion of leads into customers. Thank you. Our next question comes from the line of Pinjalim Bora with J. P. Morgan. Hey, this is Noah on for Pinjalim. So Dennis, in your remarks, you mentioned that you'll be streamlining the go-to market, at least, for the Customer Experience and Sales & Marketing products to be a little bit more customer segment focused. Just wanted to see if you could provide more color on that. And how long do you think some of these go-to-market initiatives would take, especially for those two segments? Dennis Woodside -- President and Chief Executive Officer Yes. So for that specific change, we -- the team -- the way our model works, we market our products on a global basis, and we have leads coming in by product. So let's say, a Freshdesk lead. That lead previously would go to a geographic-oriented or line sales team, North America or EMEA or Asia Pac. And that -- they weren't product aligned. So -- and what we were finding is that our products are so different that the product depth really mattered a lot more than the regional specificity. So we reoriented -- and this is just for that inbound team. We reoriented that inbound team to be product-centric. So a Freshservice lead goes to a Freshservice team, regardless of geo, and Freshdesk to Freshdesk, regardless of geo. And our thinking is that, that, over time, will drive greater specificity, greater expertise and ultimately benefit in improved conversion rate in that inbound business in particular. Those changes are finished. They've been made, and that's how we're going to market as of this quarter. Noah Herman -- JPMorgan Chase and Company -- Analyst Great. And maybe just quick housekeeping, but I think last quarter, you mentioned that gross churn, I guess, is sort of in the mid-teens. Curious if there was any material change in Q2? Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed. Luv Sodha -- Jefferies -- Analyst Thank you. This is Luv Sodha on for Brent Thill. Maybe the first one for you, Dennis. If you could parse out maybe the Customer Experience side of the business. Obviously, it's underperformed over the past year. I guess, as you look at that business, could you talk about what the impact of AI has been in terms of seat degradation and how much of it is macro impacted at this point? Dennis Woodside -- President and Chief Executive Officer So thanks for the question. So we've not seen impact attributable to AI or seat degradation. In fact, we're seeing pretty strong attach rates both in SMB, which tends to be more -- the CS customer tends to be more SMB in new customers coming in and in our larger customers, which -- and I'm talking specifically about Copilot, which is a net adder to expansion. What we're seeing is that the rate of seat addition over the last 18 months has come down as businesses are not expanding at the same rate. They're under pressure because the cost of financing expansion is meaningfully higher. But the reason that I have confidence that it's not AI-driven is we look at customers that have and have not adopted AI, both Self Serve and Copilot, and we don't see material differences in expansion rate, churn rate or retention rates between those who have and have not adopted. So we don't think it's AI. We think it's continued macro pressure on the SMB, and that is more reflected in the CX business because our business skews more SMB in CX. Luv Sodha -- Jefferies -- Analyst Got it. That's perfect. And then a quick follow-up for Tyler. Tyler, last quarter, you'd obviously guided billings to about 16%, and this quarter, now it's 15%, with 1 or 2 points from Device42. I guess, could you just talk about the framework there in terms of the guide? What are you baking in, in terms of expectations for billings growth in the back half of the year? Tyler Sloat -- Chief Financial Officer Yes. I mean we built in -- we said 16% for the year, but we said 1% to 2% for coming from Device42. So we do think that will impact again. The Device42 business is a little bit less predictable for us right now as we just closed in, we do expect some disruption. So we'll obviously update that at the end of Q3 based on what we're learning. But the billings growth, essentially, we've taken into account everything we know on billings. And Luv, as you know, we don't think billings is a great metric, but we understand that it's important. Thank you. Our next question comes from the line of Rob Oliver with Baird. Please proceed. Robert Oliver -- Analyst Great. Good afternoon. Thanks for taking my question, guys. Dennis, on Device42, can you just talk a little bit about how you planned to go to market on that? And just refresh us on is it rolling in -- the plan to roll it into the core Freshworks sales force? And then I think -- and I might have misheard you versus Tyler relative to when it will move to a cloud-native solution. I thought I heard you say Q1. And what are you guys assuming? Are customers going to be forced to move to the cloud data solution at that point? Is there a potential for incremental churn? And I guess, a follow-up question to that is, do you have to wait until the cloud-native solution to fully integrate your two products? So a lot there, I apologize, but thank you very much. Dennis Woodside -- President and Chief Executive Officer Yes. Let me just -- so thanks. Let me just walk through again our plan for Device42 from a product standpoint. So today, we have a lightweight integration between Freshservice and Device42. That allows an agent to switch from the Freshservice experience into Device42, if they have to or they want to understand the assets of the organization that they're working in. That said, it's not seamless, and it comes across and feels like a different product experience. The first product initiative that's underway right now is to create a better integration, a more seamless integration of the 2 products, with D42 remaining on-prem and, obviously, Freshservice remaining in cloud. That's what is available early next year. The second product milestone is to create a cloud-native version of Device42. And that is planned for the latter part of next year. Now in terms of migration and all the ins and outs, that we're going to have to work through, but that's the product plan. In terms of how we're going to market now, we've been going to market with Device42 as a partner for some time, where we see a customer with advanced IT footprint, a mix of lots of assets on-prem and in cloud that they want to track, and we've had success selling them into many deals. Now that we've acquired the company, it's just an accelerated version of that. So we've gone through our entire pipeline of new business. And wherever there is a prospect that could possibly benefit from advanced ITAM, we are introducing and bringing Device42 in. When we have expansion opportunities, the same thing. And then we're also looking at Device42's pipeline for any opportunities to bring Freshservice in, where they previously may not have considered us. So that's all underway right now. We've seen a couple of successes already. A large public university in Canada with 15,000 faculty took both Freshservice and Device42. We've got a lot of deals, where Device42 is part of the mix. And so it's a great opportunity for us to upsell D42 into our existing base as well as bring them into new deals and to bolster our overall position. Thank you. And our last question comes from the line of Alex Zukin with Wolfe Research. Please proceed. Ryan Krieger -- Wolfe Research -- Analyst Hey, guys. This is Ryan Krieger on for Alex. Thanks for taking the question. Just going back to the Freddy Copilot and Freddy Self Service customer metrics you provided. Are there any segments or verticals where you're seeing increased or a slower rate of adoption? And then on the NRR metrics, you talked about the macro being stable quarter-over-quarter, but you do expect to see further NRR compression in 3Q. So any solutions where that's a particular drag on that metric? Thanks. Tyler Sloat -- Chief Financial Officer Yes. I'll take the net dollar retention one. Yes, we haven't seen change or reversal and expansion pressure in SMB. And I think just the net dollar retention number kind of to $105 million, which is it's not dramatically different than this quarter, is really just how the year-over-year numbers work on there and what we can see. So every quarter, we kind of annualize the prior quarter, so we have a little bit more data. So I don't think there's any big change we're expecting on net dollar retention. I think it's just where the numbers are flowing. Churn is relatively stable. And expansion, it's kind of where it is in terms of the pressures in terms of agent addition. That being said, the work we have to do is to wrap, number one, Device42 to use that as a new expansion motion and how quickly we can get that going. And then things like ESM, selling into our Freshservice space, that has got great traction, along with continuing to sell Copilot. Dennis Woodside -- President and Chief Executive Officer So on Copilot, the promising -- or another promising aspect of where Copilot is, is we're getting traction across our 2 largest products, both Customer Service and IT. So agents in both categories are finding value in the product. And it's not limited to any one industry or segment of our customer base. We're seeing traction in small business as was in larger businesses. We're seeing traction in customers that are brand new to us, buying right off of our website and deciding to add Copilot after trialing it for just a few weeks, as well as larger customers that are doing much more sophisticated testing. So we think it's going to -- it is a core part of what we're selling now. We think that, over time, every customer is going to benefit from what Copilot does for their agents, and that's going to be a big story for us over the course of the next year.

Informatica Inc. (INFA) Q2 2024 Earnings Call Transcript

Victoria Hyde-Dunn - Vice President, Investor Relations Amit Walia - Chief Executive Officer Mike McLaughlin - Chief Financial Officer Good afternoon. Thank you for joining today's Informatica Fiscal and Q2 2024 Lender Call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I'd now like to turn it over to Victoria Hyde-Dunn, Vice President of Investor Relations. You may proceed. Victoria Hyde-Dunn Thank you. Good afternoon. And thank you for joining Informatica's second quarter 2024 earnings conference call. Joining me today are Amit Walia, Chief Executive Officer; and Mike McLaughlin, Chief Financial Officer. Before we begin we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the IR website after the conference call concludes. During the call we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks please review the company's SEC filings including the section titled Risk Factors including our most recent 10-Q and 10-K filing for the full year 2023. These forward-looking statements are based on information as of today and we assume no obligation to publicly update or revise our forward-looking statements except as required by law. Additionally, we will be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon's press release and our slide presentation available on Informatica's Investor Relations website. With that, it is my pleasure to turn the call over to Amit. Amit Walia Thank you, Victoria, and everyone for joining us today. I will start today's call by summarizing three key points. First, we had a solid second quarter. Our results were within or above all second quarter guidance metric ranges. This was driven by continued strong customer momentum and consistent execution from our cloud-only, consumption-driven strategy. Second, we continue to deliver the best data management products on the industry's only AI-powered platform. After a 12-month extensive private preview, we launched CLAIRE GPT, our generative AI chat interface, on the IDMC platform. Informatica is now the industry's only cloud data management platform with AI and GenAI capabilities for modern enterprises, and it is the Switzerland of Data and now, as well as for AI. Third, given our strong execution in the first half of the year, we are raising cloud subscription ARR, subscription ARR, non-GAAP operating income and adjusted unlevered free cash flow after-tax guidance for the full year. We remain focused on supporting our customers' digital transformation, cloud modernization and now their GenAI initiatives. Starting with our second quarter results, total revenue grew 6.6% year-over-year. Subscription ARR grew 15% year-over-year and cloud subscription ARR grew 37% year-over-year, both exceeding the high end of our guidance range. We delivered a record $703 million in cloud subscription ARR, exceeding the $700 million mark for the first time. We strengthened our cash position and grew non-GAAP operating income by over 31% year-over-year, above the midpoint of the guidance range. The macro-environment remained stable in the second quarter, consistent with the prior quarter. Approximately 74% of cloud net new ARR in the trailing 12 months came from new cloud workloads and expansion. We are attracting new customers, expanding opportunities with existing customers and driving new workloads in the G2K market, supported by our robust partner ecosystem and healthy cloud pipeline. Customers that spend more than $1 million in subscription ARR increased 28% year-over-year to 272 customers. Customers spending more than $5 million in subscription ARR grew 30% year-over-year. We saw continued strong growth in our average subscription ARR per customer, which reached $321,500, a 17% increase year-over-year. Let me share two customer stories. American Airlines is the largest airline in the world offering safe, dependable and friendly air transportation to its' customers along with numerous loyalty services. Dedicated to making every flight something special, American Airlines purchased Cloud Data Quality to improve real-time customer experience and retention through excellent loyalty program incentives such as low fare options, mileage redemption, in-flight entertainment and more. One of the world's largest graphics processing unit suppliers or GPU suppliers selected Informatica's IDMC platform, which includes MDM, Data Quality, Data Integration and Data Governance capabilities. Next, approximately 26% of cloud net new ARR in the trailing 12 months came from on-premise to cloud migrations or modernizations, as we say. This is still a very small portion of our on-premise install base, but it continues to provide us with the opportunity to modernize our customers and grow our cloud business. We see strong customer adoption of PowerCenter Cloud Edition, representing over 80% of all modernization deals in Q2. Let me share two customer stories. Westpac, which is Australia's first bank and a major player in New Zealand, managing numerous legacy applications following acquisitions. To support its business strategy, which focuses on data-driven decision-making, automation and AI, the bank has expanded its partnership with Informatica, transitioning from PowerCenter to the IDMC platform. This will help Westpac reduce data management costs, expedite automation initiatives and elevate the customer experience across branches, online platforms and call centers. As a leading medical technology company, Siemens Healthineers is committed to improving access to healthcare for underserved communities worldwide and is striving to overcome the most threatening diseases. The company is principally active in the areas of imaging, diagnostics, cancer care and minimally invasive therapies, augmented by digital technology and AI. Siemen Healthineers opted to modernize their on-premise Informatica Data Governance and Catalog Solutions to IDMC and further expand their footprint to include Cloud Data Quality to address regulatory requirements and provide trustworthy data to the enterprise. At Informatica World earlier in May this year, we welcomed thousands of global customers, prospects, ecosystem partners and GSI partners. They had the opportunity to engage, collaborate and see firsthand how Informatica empowers enterprises to democratize data. They also heard testimonials about how the powerful combination of data and AI can deliver unprecedented business outcomes. We featured Scott Guthrie, EVP of Cloud+AI Group Microsoft, as a mainstage speaker. We announced the public preview of IDMC as an Azure Native ISV service, the private preview of our Data Quality Native app for Microsoft Fabric and the general availability of our Cloud Data Access Management support for Azure. We also featured Sridhar Ramaswamy, CEO of Snowflake, on mainstage and announced our Gen AI Blueprint for Snowflake Cortex and our new Native SQL ELT for Snowflake. At Snowflake Summit, we announced the general availably of our Snowflake Native app, the Enterprise Data Integrator for high-speed replication of critical enterprise data to Snowflake, expansion of our Native SQL ELT to support Snowflake GenAI functions, and our Cloud Data Access management support for Snowflake integrated with Snowflake Horizon governance capabilities. We were awarded Databrick's 2024 Data Integration Partner of the Year at their Data and AI Summit, where we announced our GenAI Blueprint for Databricks DBRX, full verification of Unity Catalog support across IDMC, our new Native SQL ELT capability for Databricks and the availability of our Cloud Data Integration no-cost service tier via Databricks Partner Connect. We were awarded MongoDB's 2024 Partner -- Build with Partner of the Year. We launched our Cloud Data Governance and Catalog service natively on Oracle Cloud. We also expanded or rather extended our support for open table formats in Apache Iceberg. Iceberg adoption is in the early stages of growth across our cloud data ecosystem partners, from Snowflake to AWS and Microsoft Fabric, and now, with the acquisition of Tabular by Databricks. Informatica's new open table format connectors support advanced data ingestion and integration use cases to drive large-scale data engineering operations for high-performance analytic and ML projects. Turning to GSI partners, some of our largest partners have experienced significant growth within their Informatica practices and are expanding their data and AI practices. We have seen growing interest in developing and taking solutions to market based on IDMC. For instance, LTIMindtree launched a solution to assist non-Informatica businesses with legacy, on-premises Data Integration products in modernizing and transitioning to IDMC. As part of our ongoing strategy, we are seeing more partners assume a greater role in implementation services work supporting our customers, and we welcome that. We continue to be the leading innovators in our industry. Over the years, we've invested over a $1 billion in R&D and are the biggest investors in data management engineering in our space. We've innovated many categories in data management. We were pleased to be recognized by IDC as the market share Leader in the 2023 Worldwide Report for both the data integration and data intelligence markets. We were also recognized as Champions in the Bloor Research 2024 MarketUpdate reports for Data Fabric, Data Quality and Test Data Management. Now, let me turn to GenAI, which is at the top of customers' minds. As I speak with CDOs, CIOs and digital leaders across the globe, there is a universal agreement that, everyone is ready for GenAI, except your data. Data management brings AI to life, ensuring trust, responsibility, ethical use and value creation. Our efforts to assist customers with their AI strategic initiatives are two-fold, Informatica for GenAI and GenAI from Informatica, both available on the IDMC platform. Now, Informatica for GenAI includes all of IDMC capabilities, Data Integration, Data Governance, Data Quality, Master Data Management, App Integration and Cataloging, which are critical to processing mission-critical workloads. In June, IDMC processed 97 trillion cloud transactions per month, growing 59% year-over-year. At Informatica World, we unveiled new features and product enhancements, including building no-code GenAI apps with prompt engineering, RAG and ReAct AI agent support. We support popular LLMs and VectorDBs with enterprise-grade scalability and governance. We included new capabilities for contextualizing LLMs on enterprise data, including chunking, embedding and ingestion into Vector DBs. IDMC will add support sources for documents, images and video sources, with full integration across cloud data access management policies, data quality rules, catalog and integration pipelines. IDMC is LLM agnostic, future-proofed and has out-of-the-box connectors for easy navigation of any model, from hyper-scalers to smaller providers. A few fantastic real-life use cases include. A California-based credit union uses IDMC to optimize sentiment analysis with customer support training. It provides proactive customer service by identifying customer support KPIs, reducing customer handling time through automated analysis of large volumes of phone interactions and providing decision support using OpenAI. A large marketing company uses IDMC to build GenAI-based incident management, alleviating the burden on the incident management team by automating incident risk, incident assessment and providing actionable insights with sentiment analysis using LLM with the RAG framework. A large pension firm in Canada is using IDMC to build a GenAI-based intelligent chatbot, improving employee productivity by reducing the processing time for queries on insurance proposals and claims through automated analysis and decision support using locally hosted LLM. Now turning to GenAI from Informatica, we launched CLAIRE GPT, the first GenAI-powered data management assistant grounded by enterprise metadata intelligence leveraging core IDMC capabilities. In May, we announced general availability in North America after an extensive 12-month preview program. CLAIRE GPT is ChatGPT for enterprise data, providing capabilities like data discovery, metadata exploration, finding data quality, data lineage and even creating ELT pipelines. Along with CLAIRE GPT, we also have Claire copilot capabilities, embedded in all the products that sit on IDMC providing in-context product data assistant with Claire-generated classifications. One of Informatica's key differentiators is its metadata system of record, which provides valuable insights into data assets' location, quality and relevance for analytics and data science use cases. This is more than just Informatica metadata; it is metadata across the enterprise, data warehouses, applications, BI tools or mainframes from trained LLMs and SLMs. CLAIRE, our AI engine, is now leveraging over 49 petabytes of active metadata in the cloud. Customers are in the early stages of piloting CLAIRE GPT. Since its launch, over 150 enterprise customers have consumed IPUs on CLAIRE GPT usage, primarily for data discovery and exploration use cases. To give you a few examples, SSM Healthcare uses CLAIRE GPT to enhance data literacy with a natural language interface for data discovery, examine data lineage and thoroughly assess data quality. With CLAIRE GPT, they provide a self-service interface for Medical Information Officers to effortlessly get insights on their data, such as the number of orthopedic providers in the network, ensuring appropriate patient coverage. A global supply chain company's data analysts use CLAIRE GPT to monitor, maintain and report on product movements, such as receipt, dispatch and storage, without needing SQL. These examples provide just a glimpse into the real-life use cases and stories that customers share feedback with us. To further show our commitment to helping enterprise customers embrace trusted and holistic data for their AI initiatives, we are introducing a new promotion in August to drive broad CLAIRE GPT adoption. This offer is for eligible North American customers to use CLAIRE GPT at no additional cost through the end of 2024. Now, looking ahead to the second half of the year, we are pleased to raise four guidance metrics for the full year, including cloud subscription ARR to 35.5% from 35% earlier. We had good execution and momentum in the first half of the year and believe our operational health remains strong, as evidenced by our predictable cloud subscription revenue business model, our strong customer base, healthy cloud pipeline and retention rates, and growing unlevered free cash flow. Our growth priorities continue to center around three key strategic initiatives outlined at Investor Day. First, data-driven digital transformation is crucial for our customers to achieve digital leadership. In fact, with GenAI on the horizon, customers are accelerating those. Second, modernizing legacy data estates to help enterprises harness the advantages of being a digital business. And lastly, delivering GenAI capabilities and assisting customers in exploring the intersection of data and AI for data management. These important initiatives for modern enterprises are a tailwind to Informatica for many years to come. As I wrap up, I want to thank all my Informatica colleagues, our partners, our customers and our shareholders for their ongoing support. With that, let me turn the call over to Mike. Mike, please take it away. Mike McLaughlin Thank you, Amit, and good afternoon, everyone. Q2 was another solid financial quarter across the Board, with all key growth and profitability metrics within or above our guidance metrics. I'll begin my discussion of Q2 results with a quick review of the components that make up Informatica's annual recurring revenue or ARR. Our ARR falls into three categories; cloud subscriptions, which grew 37% year-over-year; self-managed subscriptions, which we no longer actively sell and therefore are gradually declining; and maintenance for on-premises perpetual licenses that we no longer actively sell, which is also in gradual decline. With that in mind, let's start with total ARR, which was $1.67 billion, an increase of 7.8% over the prior year. This growth was driven primarily by new cloud workloads, strong cloud net expansion with existing customers and stable self-managed subscription and maintenance renewal rates. Foreign exchange rates negatively impacted total ARR by $2 million. Cloud subscription ARR was $703 million, a 37% increase year-over-year and 10%, sorry, $10.6 million above the midpoint of our May guidance. New cloud workloads and strong net expansion with existing customers drove cloud subscription net new ARR of $190 million year-over-year and $50 million sequentially. Cloud subscription ARR now represents 42% of total ARR, up from 33% a year ago. Foreign exchange negatively impacted cloud subscription ARR by about $720,000. Our cloud subscription net retention rate remained very strong in Q2. At the end-user level, it was 119%, up 3 percentage points year-over-year and flat versus last quarter. Cloud subscription net retention rate at the global parent level was 126%, up 4 percentage points year-over-year and up 2 percentage points versus last quarter. Self-managed subscription ARR declined in the quarter, as expected, to $494 million. This was down 2% sequentially and down 7% year-over-year, somewhat better than our expectations coming into the quarter. Subscription ARR, which is simply the sum of cloud ARR and self-managed ARR, grew 15% year-over-year to $1.2 billion, which was $18.5 million above the midpoint of our May guidance. Foreign exchange rates negatively impacted subscription ARR by approximately $1.1 million. The third component of total ARR is maintenance for on-premise perpetual licenses sold in the past, which now represents 28% of total ARR. Maintenance ARR was down approximately 7% year-over-year to $472 million. This was in line with our expectations for the quarter. Modernizing our on-premise customer base to Informatica's Intelligent Data Management Cloud is a large opportunity for us. As of the end of Q2, we have migrated 6.1% of our maintenance and self-managed ARR base to cloud, up from 5.5% last quarter. We have a life-to-date average two-to-one ARR uplift ratio on these migrations, including PowerCenter and Master Data Management migrations. In Q2, we closed a similar number of cloud modernization deals as in Q1. In the first half year of this year, the number of modernization deals grew 58% year-over-year and in the second half of the year, we expect modernization growth to be above our average cloud subscription ARR growth rate. To summarize our Q2 ARR performance, the three components of our ARR summed to 7.8% total ARR growth year-over-year. cloud subscription ARR growth of 37% drove this increase, offset by gradual self-managed subscription and maintenance ARR declines. We expect similar trends to continue throughout the second half of 2024 as a direct result of our cloud-only strategy. Now, I would like to review our revenue results for the second quarter. GAAP total revenues were $401 million, an increase of 6.6% year-over-year. Foreign exchange rates negatively impacted total revenues by approximately $1.6 million on a year-over-year basis. Our revenues were approximately $1.4 million below the midpoint of our May guidance due to two primary factors. First, as a direct result of our strategy to shift more of our customers' implementation and support work to our professional services partners, professional service revenues were lower than our original forecast. This is a positive development for Informatica, as our services partners are an important go-to-market channel and the services related to our software are an attractive business for those partners. To illustrate the importance of this channel, for the first half of the year, closed wins in which partners brought Informatica into the opportunities represented more than 30% of total bookings. The second factor impacting our GAAP total revenue this quarter was a somewhat lower average term length of self-managed subscription renewals. This resulted in less upfront-recognized self-managed subscription revenue per the ASC 606 accounting standard than our previous forecast. As most of you know, ASC 606 accounting for self-managed subscription revenue does not impact ARR, billings or cash flow. Shorter term lengths on renewals mean less GAAP revenue is recognized up-front per ASC 606, but ARR, billings and cash flow are not affected. We expect these two trends, lower professional services revenue and shorter self-managed renewal terms to continue for the remainder of the year, and therefore, we are lowering our full year 2024 GAAP total revenue forecast accordingly, as we will discuss in a moment. Subscription revenue which includes cloud subscriptions and self-managed subscriptions increased 16% year-over-year to $264 million, representing 66% of total revenue, compared to 61% a year ago. Our quarterly subscription renewal rate was 90%, down 2 percentage points year-over-year due to lower self-managed subscription renewal rates offset by higher cloud subscription renewal rates. Our subscription renewal rates have been largely consistent with our expectations so far this year. Revenues in our maintenance and professional services category were $136 million. Maintenance revenue of $116 million represented 29% of total revenue for the quarter and our Maintenance renewal rate was 96%, up 2 percentage points year-over-year. Professional services revenues, which include implementation, consulting and education, make up the remainder of this category and are down almost $4 million year-over-year. As I mentioned a moment ago, our implementation services revenue has been declining as our services partners assume a greater share of that work for our customers and we expect this trend to continue in the second half of the year. Cloud Subscription revenue was $161 million or 61% of subscription revenues, growing 35% year-over-year. As a reminder, due to the timing difference between revenue and ARR recognition, the relative growth rates of these two metrics may differ from period-to-period. Turning to the geographic distribution of our business, U.S. revenue grew 7% year-over-year to $256 million, representing 64% of total revenue, while international revenue grew 5% to $144 million. Using exchange rates from Q2 last year, international revenue would have been approximately $1.6 million higher in the quarter, representing international revenue growth of 6.5% year-over-year. Informatica's consumption-based pricing unit, the IPU, represented approximately 58% of second quarter cloud new bookings. The remainder of cloud -- of Q2 cloud bookings were primarily for customer or supplier records for our MDM products, which is also a multiyear committed, consumption-based pricing model. We added three new IPU services, including CLAIRE GPT to our IDMC platform this quarter. We now have 36 data management capabilities that our customers can access and consume on our unified platform using IPUs. Now, I would like to move on to our profitability metrics. Please note that I will discuss non-GAAP results unless otherwise stated. In Q2, our gross margin was 82%, an increase of over 1.6 percentage points year-over-year. We remain focused on maintaining healthy gross margins as our business transitions to the cloud. Operating expenses were consistent with expectations. Operating income was $115 million, growing 31% year-over-year and exceeding the midpoint of our May guidance by almost $2 million. Operating margin was 28.7%, a 5.4 percentage point improvement from a year ago. Adjusted EBITDA was $119 million and Net Income was $71 million. Net income per diluted share was $0.23, based on approximately 315 million outstanding diluted shares. Basic share count was approximately 301 million shares. Adjusted unlevered free cash flow after tax was $71 million, better than expected due to faster cash collections and other working capital dynamics. Combined with Q1 results, unlevered free cash flow for the first half 2024 was in line with historical linearity. I will update our expectations for the full year in a moment. Cash paid for interest in the quarter was $38 million, in line with expectations. In June, we repriced our $1.8 billion outstanding term loan, reducing the applicable margin by 50 basis points and eliminating the Credit Spread Adjustment related to the transfer from LIBOR to SOFR. This repricing will save approximately $11 million in pre-tax interest expense on an annual basis. We ended the second quarter in a strong cash position with cash plus short-term investments of $1.13 billion, an increase of $307 million year-over-year. Net debt was $704 million and trailing 12 months of adjusted EBITDA was $529 million. This resulted in a net leverage ratio of 1.3 times at the end of June. Now, I will turn to guidance, starting with the full year 2024. We are very pleased with our execution in the first half of 2024 and we have good momentum going into the second half of the year. This reflects confidence in our cloud-only, consumption-driven strategy, supported by strong customer momentum and renewal rates. Therefore, we are raising FY 2024 cloud subscription ARR by $3 million and subscription ARR by $4 million at the midpoint. We now expect cloud subscription ARR to be in the range of $829 million to $843 million, representing approximately 35.5% year-over-year growth at the midpoint of the range. We now expect subscription ARR to be in the range of $1.265 billion to $1.299 billion, representing approximately 13.2% year-over-year growth. We are reaffirming total ARR to be between $1.718 billion and $1.772 billion, representing approximately 7.3% year-over-year growth. Turning to total revenues, we expect the same dynamics regarding professional services and self-managed renewal duration as we saw in Q2 to continue for the remainder of the year. We estimate this impact to be approximately $21 million, about evenly split between these two dynamics. Additionally, due to the recent strengthening of the U.S. dollar against the euro, pound and yen, we now expect increased FX-related headwinds -- revenue headwinds of approximately $4 million compared to previous assumptions. Taking this all together, we are updating GAAP total revenues downward by approximately $25 million to the range of $1.66 billion to $1.68 billion, representing approximately 4.7% year-over-year growth at the midpoint of the range. It is very important to understand that this reduction in total revenue guidance does not reflect any changes in our expectations for our core recurring revenue software business. Lower expectations for lower -- for low margin professional services revenues and lower up-front self-managed revenue recognition pursuant to ASC 606, along with FX, are the cause. We delivered better-than-expected bottomline results and are raising guidance for non-GAAP operating income by $5 million and adjusted unlevered free cash flow after tax by $10 million at the midpoint. We now expect non-GAAP operating income to be in the range of $538 million to $558 million, representing approximately 18.5% year-over-year growth at the midpoint and we now expect adjusted unlevered free cash flow after-tax to be $545 million to $565 million, representing 23% year-over-year growth. Turning to the third quarter, we are establishing guidance for the third quarter ending September 30, 2024, as follows. We expect GAAP total revenues to be in the range of $412 million to $428 million, representing approximately 2.8% year-over-year growth at the midpoint of the range. We expect subscription ARR to be in the range of $1.199 billion to $1.219 billion, representing approximately 12.2% year-over-year growth. We expect cloud subscription ARR to be in the range of $738 million to $748 million, representing approximately 35.2% year-over-year growth. We expect non-GAAP operating income to be in the range of $139 million to $151 million, representing approximately 13.2% year-over-year growth. All of those growth rates are at the midpoint. For modeling purposes, I would like to provide a few more pieces of additional information. First, we expect total ARR for the third quarter to be in the range of $1.66 billion to $1.69 billion, representing approximately 6.3% year-over-year growth at the midpoint of the range. Second, we expect unadjusted, sorry, we expect adjusted unlevered free cash flow after-tax for the third quarter to be in the range of $110 million to $130 million. Third, we estimate cash paid for interest will be approximately $36 million in the third quarter and approximately $146 million for the full year, using forward interest rates based on one-month SOFR. Fourth, with respect to taxes, our Q2 non-GAAP tax rate was 23% and we expect that rate to continue for the full year 2024. And lastly, our share count assumptions. For the third quarter, we expect basic weighted-average shares outstanding to be approximately 304 million shares and diluted weighted-average shares outstanding to be approximately 312 million shares. For the full year, we expect basic weighted-average shares outstanding to be approximately 302 million shares and diluted weighted-average shares outstanding to be approximately 313 million shares. In summary, we are very pleased with our second quarter performance and the first half of the year. We are focused on executing our cloud-only, consumption-driven strategy and delivering our 2024 guidance. [Operator Instructions] Our first question is from Matt Hedberg with RBC. Your line is now open. Matt Hedberg Oh! Great. Thanks for taking my questions, guys. I guess, and maybe for either of you, congrats on the results. I think, obviously, Mike, you called out some of the revenue items that impacted you guys, but I think, it certainly looks like core underlying strength and subscription in cloud ARR was strong. I guess I wanted to ask a little bit more about your increased cloud ARR guidance. What are the primary reasons for this optimism? I mean, I think, you mentioned maybe pipeline, just general customer interest. Is there a macro element to this as well? Just sort of curious on that because it certainly would look good to us? Amit Walia Sure. Thanks for the question, Matt. Look, I think, we -- macro, I said, like we look, the macro looked appeared to be the same to us in last quarter as in Q1. I think what we are seeing is definitely pipeline has been very healthy. This year Informatica World, some of you were there, was the biggest Informatica World ever. And coming out of the pipeline of that Informatica World was the biggest pipeline that we've ever had. And going back to the three initiatives that customers are spending on, ongoing digital transformation, modernization and now GenAI, it's actually become a Venn diagram. I think I said that before. To get to GenAI, customers have to modernize even faster and they have to get to digital faster, and then only they get the benefit of GenAI. And of course, the early innings in GenAI are also playing a role. People have to set their data states in place. So, and with IDMC, they can do the current initiative that they are currently on and they can start experimenting GenAI. That has allowed customers to be feel very future-proofed in what they are implementing here. All of those are we are seeing as being the tailwind to pipe create and healthy deal closure. And also, you see big deals, like the $5 million-plus deals we talked about, ARR, as well as the $1 million, pretty healthy growth over there. Matt Hedberg Got it. That makes sense. And then, Mike, just maybe one for you on the strategic shift to more PS revenue going to partners. I guess I'm curious, is there a benefit to your margins over time due to this? And I guess secondarily, can you give us a sense for, after this updated assumption, how much of your PS revenue is left, I guess, as we think, towards calendar 2025 and beyond? Mike McLaughlin Yeah. Sure. So, it's going to be essentially margin-neutral. We're a software company, not a professional services company. And while we have a great professional services organization, and we're really proud of them, it's not a profit center for us. It's there to ensure the successful implementation of the software and to ensure that the customers realize the value that they should from the software once they own it. So, we're very happy for our GSI and regional services partners to do that business instead of us, if our customers want them to. We don't pay commissions to our salespeople to sell PS. It's more of a pull from our customers when they want it. So, this decline is a natural trajectory. It's gone a little faster than we expected. It's declined over the last three years and we thought this year was going to be the bottom, but it's actually declining faster than that. And so, we lowered guidance accordingly. I think the number, if you look last year for our professional services, including our education services, was $97 million, and we had thought it was going to be about flat and we were taking it down, as I said in the remarks, by low-double digits, $10 million, $11 million $12 million for the year. Our next question is from Alex Zukin with Wolfe Research. Your line is now open. Unidentified Analyst Hey. This is Patrick [ph] on for Alex. Just wanted to clarify, maintenance renewal rates are going higher, but duration is down. So, can you just explain the dynamics there? Are self-managed customers renewing, but you're just seeing more one-year and two-year deals versus three-year -- two-year and three-year deals prior? I'm curious as to how or if you can try to further accelerate that migration story? Thanks. Mike McLaughlin Yeah. Sure, Patrick. So, let's start with a clarification, because it's important to keep maintenance, which is on on-prem perpetual licenses and self-managed, which is essentially on-prem subscriptions separately, because the dynamics in terms of renewal are a little different. Maintenance contracts are almost all one year. They have been since the dawn of time and the renewal rate there is very constant. The term of those renewals actually doesn't matter, because maintenance is recognized readily, because it is a service, not a software license. It's all in the self-managed piece, which is on-prem subscription contracts and that the amount that's recognized up front per ASC 606 is hefty, and a change in the duration from three years to two years to one year or anywhere in between has a remarkably large impact on the GAAP revenue recognition. So, we had expected it to come down. It's a natural thing as we end of sale the product and more and more folks are preparing themselves to move to the cloud, if not today, maybe at the next renewal, and we see that trend of reduced renewal term actually as a confirmation that migrations are going to continue to move rapidly and hopefully move even faster, because the customers are setting themselves up to move as indicated by voting with their feet, as you will, by shorter durations on the self-managed contracts. So, it's all self-managed on-prem, not maintenance, and the revenue -- the GAAP revenue reduction that we've established puts it, we think, a realistic level for the rest of the year, and I can't end this answer, though, by reminding everybody that it doesn't affect ARR, it doesn't affect billings, it doesn't affect cash flow. As you can see, we've actually increased our bottomline guidance despite the fact that GAAP revenue is coming down. Unidentified Analyst And then a quick follow-up, if you don't mind, in terms of what is contemplated in the implied second half net new cloud ARR guide, any way to directionally think about whether there's more or less migration baked into that number given the implied ramp? Thanks. Mike McLaughlin So, we haven't sort of explicitly changed our expectations for the pace of migrations through the year. As I mentioned in my remarks, we expect the growth of our migration, both in terms of deals and dollars, year-over-year, to be faster than our average cloud subscription growth. We're guiding to 35.5% cloud subscription overall. Migrations will grow faster than that, reflecting all the things we've talked about over time, including PowerCenter Cloud Edition, making it easier, faster, less risk for our customers to move and we remain confident in that forecast. We're optimistic that it will maybe go faster than that, and particularly in 2025, we see lots of reasons to be optimistic, but for now, we're not changing our explicit expectations for migrations for the rest of the year. We have a question from Kash Rangan with Goldman Sach. Your line is now open. Kash Rangan Hey. Thank you very much. Congrats on the quarter. It looks like the cloud momentum is picking up. So, Amit, high-level question for you. As you approach 2025 with cloud ARR firmly above 20% of total ARR and with the cleanup done with respect to the ASC 606 revenue recognition of the on-prem, then lowering the guide is the right thing to do. But how does this set you up for accelerating revenue growth rate potentially into double digits for next year? Thank you so much and that's it for me. Amit Walia Look, I think, it sets us up well for accelerating revenue growth, but double digits in 2023, this isn't official guidance, but... ... 2025, so thank you, is probably not realistic, but accelerating revenue growth we do feel good about and that's all consistent with what we talked about last December or yesterday when we set out our medium-term guidance. We still feel good with that medium-term guidance, and that, as you may recall, was calling for double-digit revenue growth by the end of 2026 or into 2027 with double-digit ARR growth in 2026. So, that all still feels good to us. Kash, if you're there, you may be on mute. Kash Rangan No. That was it. Thank you so much. That was the question that I had. Appreciate it. We have a question from Koji Ikeda with Bank of America. Your line is now open. Koji Ikeda Yeah. Hey. Great. Thanks guys for taking the question. A couple from me. So, I am looking at your investor presentation, Slide #48. It's the maintenance to cloud migration illustrative example. I think this is a new slide and it does give the -- in your prepared remarks, you did talk about 20%, 6% of net new cloud ARR coming from migrations, but in this slide, it talks about the effects of credits. And so, I guess the question here is, is there a way to maybe qualitatively or quantitatively talk about how much higher the percentage of net new ARR would have been this quarter or maybe on a trailing 12-month basis if there were not credits given and the effect to cloud ARR? Mike McLaughlin Yeah. Well, thank you for digging all the way to Page 48 into the deck. It is a new slide and we produced it because we got so many questions on this, and it's hard to answer well without a little bit of a visual aid. You've got it right that the credits that are offered for existing maintenance, and in some cases, professional services for migration lower the ARR that we recognize in cloud during the term of the initial cloud deal, sort of average two and a half years, some are two years, some are three years, some are longer, and then the full ARR is not fully realized or unlocked, as we say internally, until that first renewal. There's really not a great way for you to model it. You can certainly try and we can give you some things to think about. Primarily, the fact that it's six months is the PowerCenter Cloud Edition transition period, so we give folks credit for their maintenance in full for that six months of maintenance. That's the primary variable. And so you certainly can take a stab at modeling and we model it internally, but it gets complicated and the lines are spread, so you get pretty complex pretty fast. Koji Ikeda That's very helpful. Thank you for that. And follow-up here, you did talk about CLAIRE GPT being available now on IPUs, so great to see your customers have a low-friction adoption way for CLAIRE GPT. I guess the question here is that will you be able to see usage of CLAIRE GPT through the IPU, and is there the potential for CLAIRE GPT to be broken out as a percentage of IPUs in the future? Thank you. Amit Walia The first answer is yes. Customers can consume CLAIRE GPT through the IPU model. That's the intent, which is why I mentioned that, and the examples I gave you are the examples of customers who started using CLAIRE GPT with the IPU model. So our goal right now is to obviously drive as much adoption of the CLAIRE GPT service because that in general obviously will be driving more of IDMC services and its usage, and we feel very good about it. I think, Koji, for now, we're not looking to break that at all. I mean, we don't break any of our services in general in the IPU model. Obviously, when we come to the next any session, we can keep giving you guys more information around where we are headed in that direction and more things, but right now, we don't have any plans to break the CLAIRE GPT IPU consumption from regular IPU consumption like we haven't broken for any other service. Koji Ikeda Got it. Thank you, Amit. Thanks guys for taking the questions. Our next question is from Andrew Nowinski with Wells Fargo. Your line is now open. Andrew Nowinski Thank you. Good afternoon, everyone. So, I want to ask a question on your cloud ARR is clearly very strong this quarter and your guidance for cloud ARR was also very impressive, which seems to be the opposite of what we saw from Azure tonight. Does that signify the durability of your cloud ARR segment and how it can continue growing at a high pace despite some of the weakness we're seeing at the hyperscalers? Amit Walia Thanks, Andrew, for the question. Look, I think if you step back, one of the things that we've always said, first of all, the uniqueness for Informatica is that we serve every hyperscaler platform, every data platform, every use case across the industry. So, it's not necessary that whether an Azure or a GCP or an AWS or a Snowflake or a Databricks, any of their individual things directly impact us quarter in or day in, day out. Obviously, we serve a broad ecosystem. So, obviously, our strength and durability is that we serve across all of the Switzerland of Data, as I said, and as you heard from me, becoming the Switzerland of AI in the new world. And that's the strength of the durability of the business. And customers, the other one is that, look, we're a very unique place. We've got the best of breed products. We're the only platform that brings it all together and with AI, GenAI, and that. In our industry, which is massively fragmented in data management, there isn't even one that remotely comes to us and I think that's another thing that's obviously benefiting us, and not forgetting modernization. So, I think all of those are playing into the momentum we are seeing. Andrew Nowinski Okay. Thank you. And just to follow up, maybe just a clarification, I guess it is, that you cited, I think, a new stat. You said 26% of cloud ARR came from migrations this quarter. Was that an improvement relative to last quarter? How has that changed? Thank you. Amit Walia It's actually not a new stat. We introduced it at our Investor Day in December and we've mentioned it on our calls the last or at least in Q1 and this is the second call of the year. So, back in, at our Investor Day, I think that stat was 17%, maybe 18%, and it was 24% in Q4 and it's 26% now. So, it's going up. There's quarter-to-quarter volatility in that and it's -- in any given quarter, a lot of small numbers, relatively speaking. So, but it continues to be very strong and that -- and our medium-term expectations, we've also talked about, is we expect the contribution from migrations over the multiyear period to be 30% to maybe as much as a third of our total ARR. We have a question from Pinjalim Bora with JPMorgan. Your line is now open. Pinjalim Bora Oh! Great. Thanks for taking the questions. Congrats on the quarter. Amit, I want to ask you a high level question. There seems like there's some confusion among the investor base around kind of table formats and how the adoption of table formats might or might not impact the data integration space. I know it's early and there are kind of three different formats at this point, but I'd love to hear if you think, how do you think of it? Is it a net positive, neutral, negative to the overall integration space? Amit Walia Pinjalim, back to the question. Net positive. So I think, look, overall for us, it has -- it's a net positive. For us, any time anything new has come, it creates more work to be done. New table format does not change the need that there is a massive amount of data sits within a large enterprise. Look, we serve the enterprise, right? Fragmented, large, complex infrastructure running around multiple databases, multiple instances of those databases with transactional data, non-transactional data. Even if you have to bring into one of these tables for analytic purposes, they have to be prepared. They have to be formatted. They have to be put in the right quality. And then only some analytic work can happen whether these tables are in a warehouse or a lake. The second one is that, remember, it's a constant piece of work to be done. When the core system keeps adding new data, a new thing, they have to be constantly updated and prepared to bring it back to this table again for any analytic workload to happen. And then from there, just to continue the workflow within an enterprise, data has to be taken out of these tables to pass it to the BI layer for visualization, which we also participate in. And then, of course, that's just a core pipelining data integration part. Don't forget that governance and all of those things sits on top of it. So we look at this as a net positive. We already support it. We have the connectors that support it, connectors to bring data in, take data out, support the open data formats, all of those things. So that's how we look at it at a very high level Pinjalim. I'm happy to share more, but we are -- we don't see this at -- and we see this as a net positive overall. Pinjalim Bora Got it. Thank you. One follow-up for Mike. Mike, can you talk about the IPU cohort that renewed this year, how has been the adoption rate across products and is there any difference in the expansion characteristics with that cohort of customers using IPUs versus non-IPUs? Mike McLaughlin Well, as time goes on, we have more and more IPU renewal experience. We only began selling IPUs, I don't know, three and a half years ago, something like that, maybe four years. And so last year, the number of IPU renewals was not a lot of deals, but it's a really good about our experience. We have a good handle on what utilization, both absolute levels and patterns lead to high probability of renewal, and we have a pretty good handle on what the early warning indicators are in the utilization data that we can see that suggest we should get a customer success person into that account well in advance of renewal so that we can help them get value out of the software and improve the chance of renewal when the time comes. So I wouldn't say that we have a, there's not a cohort difference in 2024 versus 2023 renewals that we can see. They're both in line with expectations. We think they're very good, both on a relative and an absolute basis. And we're getting better at it every day as we learn more and more from the telemetry we get from the usage of IPUs. Amit Walia The only thing I'll add to that is to what Mike was saying is that we, with the bigger, broader base of IPUs out there right now that we end up renewing, the thing that we are very pleased to see is that expansion of those IPUs is definitely increasing. So we see more expansion happening to customers who bought IPUs, which allow, which basically both cross-sell upsell, and that definitely, we are seeing an increase in momentum this year and last year. So that clearly more IPUs, better renewals, better usage, more expansion. That's the, that's what we are seeing as a trajectory of our business. Mike McLaughlin And I'll just add, when we use the word expansion, we mean in-term expansions, so not a renewal. So, this is between -- this is before the renewal comes up, the customer's doing great using lots of IPUs and they come back to us and ask for more, and that's a really low cost to market. It's a really high value sale for us and for them and the momentum there is super encouraging. Our next question is from Will Power with Baird. Your line is now open. Will Power Great. Thanks. Amit, I wonder if you could kind of talk about the nature of your customer conversations in this climate where there's a lot of questions around the health of software spend broadly. How they're thinking about the prioritization around data and AI spend, and obviously, your IDMC platform specifically. I mean, the cloud numbers suggest that that continues to be prioritized, but just, it'd be great to kind of hear your perspective on what -- how customers are thinking about prioritizing their spend in the current environment? Amit Walia Thanks for the question. I think I'd separate that into two categories. So one is the broader customer spend environment and what the, how they are prioritizing data and AI, and then particularly tied to us. Look, I think without doubt, I think customers have realized that they have to spend in this area. And I've said that many before that customers are moving more towards spending offensively in transformational projects, but that doesn't mean that customers are net increasing their overall IT spend by a very wide margin. Customers are obviously looking within their spend area and saying, hey, I got to prioritize these couple of things, but then that means that I have to be find a better way to be more effective in the existing spend I have, and of course, in some cases, deprioritization also happens. Absolutely, we see that, but data and AI remains definitely a top three spend category along with security in particular. The unique thing we are seeing is that, that the data layer is becoming a key enabler for GenAI and anything to do in that area. There's tremendous mindshare for that. Everybody wants to do. That's not a matter of if, it's a matter of when. And number two is that in our case, what's very unique is customers don't have to look left and right. The same IDMC platform allows them to do GenAI work and the existing three GenAI digital transformation that's going on. So they're very future-proof and with IPU, they can seamlessly start experimenting gen AI workloads while they are running the current project. They don't have to make an either or decision. And as I said, within IDMC, they can use IDMC for GenAI. We shared that at Informatica World, some of the demos, and now CLAIRE GPT is also available on the IPU model in the same platform to basically do next new GenAI projects. So that definitely is a very unique thing to us. That's obviously showing up in our cloud pipeline and the strong cloud AI adversaries. Will Power That's helpful. Thanks. And maybe if I could just ask a second one for Mike, anything to call out with respect to linearity? I know you all indicated the macro was pretty stable in Q2, but anything to call out in June and maybe even into July versus trends you might've seen in April and May? Mike McLaughlin Hey, Will. Very consistent with last year. Almost on the screws. It's software. Our business usually isn't that predictable, but it's been, again, very similar to last year. We think the macro feels similar, deal cycle feels similar and pipeline build also looks very similar. We have a question from Howard Ma with Guggenheim. Your line is now open. Howard Ma Great. Thanks for taking the question. I have one for Mike and a follow-up for Amit. For Mike, I think you might have kind of already answered this in the last response, but it's on the cloud ARR top side and the raise. So by raising less than the beat, I just want to be clear, is that just a matter of being prudent? And then perhaps in reality, there's less risk in the back half and especially given migrations are likely to step up or is there potentially something more nefarious that you're seeing in the future? Mike McLaughlin I would say it's prudence and derisking. There's nothing more to it than that. Okay, Howard. Howard Ma Okay. Great. Great. I just wanted to be clear. And for Amit, I want to ask you about another type of catalog, so not open table formats, but around Databricks open sourcing their Unity Catalog. So really, how impactful is this on the entire Data Catalog space and on Informatica specifically? So is it more of like a rising tide lifts all boats situation and then you expect it to increase overall awareness of the importance of Data Catalogs or could this be a threat to Informatica? Thank you. Amit Walia Howard, we created the Data Catalog category, and I think, I've always said that our catalog is a very different catalog. It's a catalog of catalogs. When enterprises look for a catalog provider, they look at one metadata system record creator, which is what we become. Data doesn't sit only in Databricks, only in Snowflake. In fact, more data sits out of Databricks and not all data will go to Databricks. We love them. We partner with them, but that's just practical reality. We support Unity, so customers can have metadata catalog within Unity. It's like everybody has to have that. I think sometimes we get confused about the same word. Like I've said, databases have to have Data Governance too. That's a very different governance for databases. Without that, a database does not become a database, but Data Governance at the CDO level across an enterprise is a very different thing. So words can be very different, although they can be used very similarly. Unity is open source now. I think that's what I last I checked is what Databricks has done, which is good for the Databricks ecosystem, but we absolutely see our catalog growing very, very strongly because the use cases we serve, no other catalog is even remotely close to what we serve, because it's not just a catalog. It serves enterprise-grade governance, enterprise-grade metadata system record on which an enterprise GenAI initiative will sit and that's what we're seeing the deal went to us. Howard Ma Thanks, Amit. That's excellent color. Thanks so much. We have a question from Patrick Colville with Scotiabank. Your line is now open. Patrick Colville Good afternoon and thank you for squeezing me in. So, Mike, the disclosure you guys give on the proportion of net new ARR from migrations is super helpful. So, 26% of TTM net new ARR this quarter. Last quarter, it was a tad higher. It was 28%. Why would that be? Would it kind of kick down very slightly versus last quarter? Mike McLaughlin Yeah. Thanks for reminding me. I misquoted that earlier in the call. I thought it was 23%. Look, it's quarter-to-quarter variability. You'll also notice in my script that I mentioned that the number of migration deals this quarter was about the same as what we saw last quarter, whereas last quarter, it was more than double on a year-over-year basis. So it's quarter-to-quarter variability is what it is and that's why we use a TTM number instead of a quarterly number, because we don't want folks to get confused or panicked about what may be noise, not signal. We -- and as I said, we expect that contribution to -- or the growth of the migrations on a year-over-year basis in terms of contribution to NAR to grow faster than our average cloud growth rate. So, it's all consistent with what we expected during the year and I would just encourage you not to get too obsessed with quarter-to-quarter volatility. I know it's hard, but do your best. Patrick Colville Okay. Okay. And -- but I guess the key message and this is your answer to Andy's question earlier, is you expected the increase from here, right? I think you said 30% to 33% of net new ARR is expectation in the future. Mike McLaughlin Yeah. That's our medium-term expectation of the steady state through the 2026 medium-term period. We're out of time for questions, so I'll pass the call back to the management team for any closing remarks. Amit Walia Well, thank you. Well, look, I really appreciate everyone taking the time today. As you can see, we're extremely thrilled with our solid performance in Q2 and obviously over the course of first half. First half is an important checkpoint for the year where we are. We remind everybody we run an annual business, not a quarterly business, so we feel very good, which is why when we look at the second half and we look at the year, we've raised our guidance for cloud ARR, subscription ARR, non-GAAP op-in [ph] and unlevered free cash flow after tax. So we feel very good about the business where we sit. All the three vectors of growth, whether it's digital transformation, modernization of GenAI, continue to help increase pipeline and drive our business. We look forward to obviously Q3 and rest of the year, but I think we're in great shape and we remain confident to close out a strong year. Thank you very much. That concludes today's call. Thank you all for your participation. You may now disconnect your line.