“Its Worst Day Since It Went Public 3 Years Ago” – What’s Going on at Freshworks?

At the start of the month, Freshworks stocks plummeted by 27 percent.

The plunge occurred after the CRM stalwart made a spate of significant announcements during its Q1, 2024, earnings call.

These included a CEO transition, the acquisition of Device42, and a cut back on its revenue guidance for the financial year 2024.

Covering the news on May 2, 2024, Bloomberg Television stated:

Investors [are] bailing out of the stock, sending it down on its worst day since it went public about three years ago.

The extreme market reaction may come as somewhat of a surprise. After all, Freshworks did beat earnings estimates in the last quarter, achieving revenues of $165.1MN. That’s up 20 percent year-over-year (YoY).

However – alongside the announcement slew catching everyone off guard – investors appear concerned that generative AI (GenAI) and automation may threaten user numbers across Freshworks’ bread-and-butter customer service offerings.

Indeed, Brian Schwartz, Managing Director at Oppenheimer, wrote in an investor note: “The issues with the customer service business and product-led growth motion look more structural than transitional, with generative AI adoption a threat to seat-compression.

In our view, Freshworks has become a transition story with new leadership and execution challenges pushing out reinvigorating top-line growth anytime soon.

That said, some may disagree with such assertations. After all, 61 percent of customer service leaders expect headcount reductions of only five percent or less due to GenAI – as per Gartner.

Given such research, there is a case for the market over-hyping GenAI’s short-term impact on seat counts. Indeed, it may have overreacted.

Nevertheless, the other announcements may have also incited the fluster, as explored below.

The CEO Transition

On May 2, Freshworks named Dennis Woodside its new CEO, taking over from Girish Mathrubootham, who will become Executive Chairman.

Mathrubootham led Freshworks from a startup to a global CX player, with 67,000 global customers.

That’s quite the rise, and – given the now former CEOs success – his transition perhaps did have a significant impact on the stock.

However, Mathrubootham has pledged to remain engaged with Freshworks’ product vision, customers, and employees.

Moreover, his replacement has spent 18 months under Mathrubootham’s wing as President.

Now, Woodside – who has leadership experience at Dropbox and Google – aims to defy Schwartz’s prediction and quickly reinvigorate growth.

First, he strives to do that with a mid-market expansion while building out its portfolio of enterprise-grade products.

That slow progress to enterprise will mark a strategy shift. After all, as Mathrubootham stated in 2022: “We hunt for deer and rabbits. We don’t hunt for elephants.”

A $230MN Acquisition

As announced in the earnings call, Freshworks has agreed to acquire Device42 for $230MN.

Device42 specializes in IT infrastructure management, providing organizations with insights into the performance of their systems. It also recently added carbon emissions tracking to its services.

While the acquisition is Freshworks’ first since going public, it has kept the fanfare to a minimum. Indeed, the vendor has yet to share a formal press release to inform customers and partners.

Nevertheless, Mathrubootham told analysts that the acquisition chiefly aims to strengthen its Freshservice offering with enhanced IT asset management capabilities.

Lower Revenue Guidance

Finally, Tyler Sloat, Chief Financial Officer at Freshworks, revealed that the business had lowered its revenue guidance during the Q1 earnings call.

Indeed, his Q2 revenue outlook of $168MN to $170MN fell short of the anticipated $172.1MN.

Moreover, for the full fiscal year, Sloat shared a revenue forecast of $695MN to $705MN – lower than the $703.5MN to $711.5MN Freshworks estimated in February.

When a business lowers its guidance, a stock drop often occurs. Yet, as it sunk 27 percent, many factors seemingly came into play.

In better news, Freshworks recently featured as one of the 20 top vendors to consider for CRM in 2024 in the CX Today Marketplace.

To deep dive on more of the major CX providers, check out our complete Marketplace Series, which extends beyond CRM and across the customer experience space.