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Freshworks has passed $1 billion in annual recurring revenue, CEO Dennis Woodside told Fortune. The software company, which started about 15 years ago in Chennai, India, as a help-desk tool for small businesses, ended its third quarter on Sept. 30 with about $992 million in annual recurring revenue. It crossed $1 billion in October after closing its acquisitions of Torii and Robusta, the company said. Freshworks doesn\u2019t disclose how much of its ARR came from acquisitions.<\/p>\n
\u201c$1 billion in ARR is a really important milestone for any software business,\u201d Woodside said in an interview ahead of the results. \u201cIt\u2019s a good indication of scale.\u201d<\/p>\n
Woodside took over as CEO in May 2024 from founder Girish Mathrubootham. \u201cI think we\u2019ve added about $250 million in ARR in that time period,\u201d he said. ARR measures contracted subscription revenue over the next 12 months, so it runs ahead of reported sales. Earlier today, Freshworks reported $18.3 million in GAAP net income for the third quarter, its second straight profitable quarter, along with adjusted free cash flow of $73.9 million, a record. \u201cWe\u2019ll be GAAP profitable this quarter and going forward,\u201d Woodside said. The company has described sustained GAAP profitability as a goal.<\/p>\n
Getting there meant deciding what Freshworks would stop doing. \u201cWe wound up stopping a bunch of smaller projects,\u201d Woodside said, to \u201creally focus on the business that had the biggest potential, has the biggest market, where we have the most distinctive competitive advantage.\u201d<\/p>\n
\u201cYou have to be willing to make those hard choices of what\u2019s not going to be important in two years, in five years,\u201d Woodside argued. \u201cAnd then invest in those areas that are going to be important,\u201d he said. \u201cI think that can be hard to do.\u201d <\/p>\n
Some of this is standard management theory, skating to where the puck is moving and seeing around the corner, but it has a counterintuitive element that thought leaders in the space argue isn\u2019t appreciated by enough companies.<\/p>\n
The best book about AI adoption is over 30 years old<\/p>\n
In an interview at McKinsey\u2019s global headquarters at 3 World Trade Center, two senior partners echoed Woodside\u2019s advice. \u201cAI is everywhere except in the EBIT line,\u201d Alex Panas, who leads McKinsey\u2019s industry practices globally, joked, describing what\u2019s around boardrooms and echoing the famous Robert Solow paradox about the computer age appearing everywhere except in the productivity statistics. <\/p>\n
Michael Park, a senior partner in Singapore who co-leads the firm\u2019s technology, media and telecom practice, chimed in. \u201cThe number of companies that have really rethought how they\u2019re doing work today, and then changing it to be whatever it should be or could be with AI, is very small.\u201d He shared the example of product development. In the old way, an idea moved down a line: marketing built a business case and PowerPoints, then HR weighed in, then operations. In the new way, a cross-functional team works separately with an AI agent and after a few weeks, Park said, the agent tells them, \u201cThere\u2019s like 20 things you guys agree on. But there\u2019s five things that you disagree on.\u201d Then the team meets about those five things.<\/p>\n
This is unsettling to people used to the old way of working, because the agent is suddenly the store of knowledge for the enterprise, not the management layer for each silo. Panas noted that org charts have barely changed since McKinsey\u2019s Gilbert Clee wrote the 1959 paper behind the matrix organization in the 1950s. \u201cThat\u2019s the last time somebody\u2019s actually thought about organizational structure,\u201d he said. Panas said he thinks the best book about AI was written in 1993: Reengineering the Corporation, the Hammer and Champy management bestseller. Its argument is that technology only pays off once you change the people and the processes around it.<\/p>\n
Woodside said the reason people don\u2019t do this is because it\u2019s essentially really unpleasant. Shutting down products meant telling people their work was over. \u201cWhen you wind down a product, to some degree, you\u2019re saying to somebody that your baby\u2019s ugly,\u201d he said. \u201cAnd a real person is a product manager of that. You have to say, \u2018No, I\u2019m sorry, we\u2019re not going to do that.\u2019\u201d<\/p>\n
What Freshworks stopped<\/p>\n
When Woodside took over, he was already a Silicon Valley veteran. He had run Motorola Mobility and was chief operating officer at Dropbox when it went public. The first thing the board asked him to do, he said, was \u201creally revisit this strategy\u201d because AI was coming. The company had started as Freshdesk, and its founder had built it around customer support, \u201cand there\u2019s a lot of passion around that,\u201d Woodside said, but still, it was an inflection point. <\/p>\n
He decided IT software for bigger companies, \u201cthe EX business,\u201d was the future for Freshworks and they had to shift resources into that business, \u201cliterally in the first couple of months of being the CEO.\u201d<\/p>\n
About a month into his tenure, on June 6, 2024, Freshworks closed its purchase of Device42, an IT asset-management company. It has since bought FireHydrant, Torii and Robusta. EX made up 59% of ARR, or $588 million, as of Sept. 30, up from 35% at the 2021 IPO, and grew 22% from a year earlier, according to the company. The customer-service business it was founded on, CX, accounted for $404 million.<\/p>\n
Then he started cutting. \u201cWe had a lot of entrepreneurial, you know, $5 million ideas,\u201d he said. \u201cWe need $100 million ideas, right, if we\u2019re going to get to a billion [dollars in ARR].\u201d Woodside cited the examples of Freshping, Freshteams, and Freshsurvey as things he deemphasized, focusing on Freshservice, which was already generating several hundred million dollars in ARR when he took over as CEO.<\/p>\n
It also meant getting smaller, Woodside said, noting Freshworks now has roughly 3,800 full-time employees, down from a peak of about 5,400 in 2022, roughly a 30% reduction. (That includes an 11% cut announced in May.) \u201cThat was hard for the company,\u201d Woodside said. \u201cIt was also hard because we wound up reducing the staffing pretty significantly over time.\u201d<\/p>\n
He has been on the other end of that call. At Motorola, Woodside engineered the 2014 sale to Lenovo. \u201cWe sold it \u2014 which meant I sold it \u2014 which meant I sold myself out of a job,\u201d he told Fortune\u2019s Diane Brady at the COO Summit in June.<\/p>\n
Wharton professor Ethan Mollick, who popularized the phrase \u201cjagged frontier\u201d as he emerged as a thought leader on the topic of AI adoption, puts this as a question. \u201cThat\u2019s one of the big questions I ask,\u201d he told Fortune, echoing comments he made on a recent appearance on Peter Kafka\u2019s Channels podcast. \u201cHave you stopped doing anything? With that being attested, almost every company has failed.\u201d<\/p>\n
The \u201cmicro version\u201d of this is that \u201cthere\u2019s just some stuff you stopped doing,\u201d Mollick said, citing hand-written messages of compliance forms. \u201cThen there\u2019s the bigger question about what larger projects in your organization are now obsolete.\u201d<\/p>\n
When I put Mollick\u2019s question to Woodside, he responded that \u201ca lot of work that used to be done by kind of early-tenure employees, we are doing with AI.\u201d Designers now build prototypes in Figma that get turned directly into code, and testing that code \u201cis mostly done by AI today as well.\u201d What\u2019s left for people? \u201cThe humans get to think at a higher level about: what\u2019s the business problem that I need to go solve.\u201d<\/p>\n
He said it wasn\u2019t optional. \u201cIf we hadn\u2019t done that very fast, we would simply not be competitive in what we\u2019re putting out there in the market,\u201d he said. \u201cSo, for us, it was not a choice.\u201d<\/p>\n
Mollick has been vocal in saying he worries most about the bottom of the ladder: the old apprenticeship deal \u201call broke down because interns are doing work with AI, and middle managers would rather turn to AI than interns,\u201d he told Charter this month. Well, that\u2019s the other worrying outcome, right? Is like, in some ways, the least ambitious way of the well-worn path to using automation is replacing people.\u201dI think that there\u2019s some danger in that,\u201d Mollick told Fortune. He said he worries about too many companies heading down a path of being aggressive at cutting headcount while productivity stays the same; this is not the case with the strategy Woodside laid out, and Mollick was not commenting directly on any particular company.<\/p>\n
Woodside emphasized that \u201cearly-career talent remains essential to our business,\u201d but it won\u2019t continue to be the kind of \u201crepetitive, mechanical work\u201d that it has been historically. He said early-career workers are being asked to do more \u201cproblem-solving and product development.\u201d<\/p>\n
Just as most companies are not evaluating what to stop doing, they also haven\u2019t acted on significant headcount reductions. In McKinsey\u2019s State of AI survey, 39% of respondents expected AI to shrink their headcount over the next year, while only 14% said it already had.<\/p>\n
Evolve, or get marked down<\/p>\n
Investors have rewarded the change so far. Software stocks were hit hard early this year as AI-native startups went after the incumbents\u2019 customers, and Freshworks fell with them. In late March its shares were down about 31% for the year, trading under $8. By late October they were around $15. In a year marked by the so-called \u201cSaaspocalypse\u201d coming for companies a lot like Freshworks, it has returned more than 25% year-to-date.<\/p>\n
Woodside told Fortune in general terms that he thinks software\u2019s bottom was in February. Since then, he argued, investors have sorted the sector. \u201cBusinesses that are more focused on SMB in particular have been hurt,\u201d he said, referring to small and medium-sized businesses. \u201cSoftware companies with simpler products, which are perceived to be more easily replicated with AI, they haven\u2019t come back.\u201d Small business is exactly the market Freshworks started in and the strategy the board asked him to revise years ago.<\/p>\n
Park argued that the old moats are shrinking because too many executives still think about AI \u201clike enterprise software,\u201d where a system, once installed and customized, \u201cis very difficult to get it out.\u201d Now a company can ask an AI model to help migrate it from one system to another, he noted. He said he thinks companies should move past an idea that AI is \u201cjust like automation 2.0,\u201d saying it\u2019s less about costs and efficiencies and more about \u201cdoing more things.\u201d That cuts both ways for Freshworks: it\u2019s how an attacker takes share, and it\u2019s how the next attacker could take it back.<\/p>\n
From Woodside\u2019s perspective, Freshworks is positioned for that kind of disruption. He said it\u2019s now aiming at what he calls the \u201cagile enterprise\u201d: companies with up to 20,000 employees. \u201cWe are absolutely taking share from our larger competitors\u201d in that segment, he told Fortune. Customers paying more than $100,000 a year rose 25% in Freshworks\u2019 third quarter, while those paying more than $5,000 rose 6%.<\/p>\n
The pressure comes from both directions. AI-first startups are going after the help desk, the layer Freshworks was built on, while investors fear the model of pricing per seat being hollowed out by AI. Freshworks now prices by usage, by the number of assets managed and by problems resolved. \u201cWe\u2019re seeing more and more of our growth coming from the elements that are not seat-based,\u201d Woodside said, although customers still want seats for budgeting. \u201cOur customers want predictability. Seats offer a predictable element.\u201d<\/p>\n
Woodside said he doesn\u2019t think the big software players should be counted out in this moment. Startups, he said, find it \u201calways a smart strategy \u2026 to throw dirt at the incumbent because you get attention.\u201d But \u201cit doesn\u2019t mean that you can take a business that\u2019s generating, you know, tens of millions of dollars and turn it into tens of billions of dollars. That\u2019s actually really hard.\u201d He gave the incumbents more credit, saying they\u2019re \u201cfilled with incredibly ambitious, incredibly smart people. And they\u2019re competitive as hell.\u201d<\/p>\n
Panas cited lessons learned from the dot-com era: \u201cWe overestimated the short term. We underestimated the long term.\u201d <\/p>\n
Woodside used the same logic about his own company. \u201cIt\u2019s very easy to overestimate the short-term impact on some of these larger successful organizations, such as us,\u201d he said. \u201cAnd it\u2019s easy to underestimate how successful the company could continue to be if they get the shift right. In this case, the shift to AI.\u201d<\/p>\n
The next number is already on the whiteboard, according to Woodside. \u201cWe\u2019re now talking internally about, okay, well, what\u2019s the path to $2 billion and multiple billions?\u201d<\/p>\n
#Freshworks #passes #billion #ARR #CEO #Dennis #Woodside #company #stopped<\/p>\n","protected":false},"excerpt":{"rendered":"
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