Freshworks Crosses $1 Billion ARR With 30% Fewer Employees

Freshworks passed $1 billion in annual recurring revenue with roughly 30% fewer employees than it had in 2022, CEO Dennis Woodside told Fortune. The company ended its third quarter on Sept. 30 at about $992 million in ARR and crossed the billion mark in October after closing its acquisitions of Torii and Robusta, the company said. Freshworks doesn't disclose how much of its ARR came from those deals.

"$1 billion in ARR is a really important milestone for any software business," Woodside said in an interview ahead of the results. "It's a good indication of scale."

Woodside took over as CEO in May 2024 from founder Girish Mathrubootham. "I think we've added about $250 million in ARR in that time period," he said. Freshworks also reported $18.3 million in GAAP net income for the third quarter, its second straight profitable quarter, plus a record $73.9 million in adjusted free cash flow. "We'll be GAAP profitable this quarter and going forward," Woodside said.

What did Freshworks stop doing?

Getting there meant killing projects. "We wound up stopping a bunch of smaller projects," Woodside said, to "really focus on the business that had the biggest potential, has the biggest market, where we have the most distinctive competitive advantage."

The board's first ask was to "really revisit this strategy" because AI was coming, Woodside said. He decided IT software for larger companies — "the EX business" — was the future, and shifted resources within his first months. 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, growing 22% year over year. The customer-service business Freshworks was founded on, CX, accounted for $404 million.

The cuts hit named products: Freshping, Freshteams and Freshsurvey were deemphasized while resources concentrated on Freshservice, already generating several hundred million dollars in ARR. "We had a lot of entrepreneurial, you know, $5 million ideas," Woodside said. "We need $100 million ideas, right, if we're going to get to a billion [dollars in ARR]."

Headcount fell to roughly 3,800 full-time employees from a peak of about 5,400 in 2022, including an 11% cut announced in May. "That was hard for the company," Woodside said. Shutting down products was harder still: "When you wind down a product, to some degree, you're saying to somebody that your baby's ugly," he said. "And a real person is a product manager of that."

Woodside knows that call from both sides. At Motorola, he engineered the 2014 sale to Lenovo. "We sold it — which meant I sold it — which meant I sold myself out of a job," he told Fortune's Diane Brady at the COO Summit in June.

How is AI changing the work?

Wharton professor Ethan Mollick, who popularized the phrase "jagged frontier" in AI-adoption circles, framed the test as a question. "Have you stopped doing anything? With that being attested, almost every company has failed," he told Fortune. He worries about too many companies cutting headcount aggressively while productivity stays flat, and about the apprenticeship model breaking down because "interns are doing work with AI, and middle managers would rather turn to AI than interns," he told Charter this month.

Woodside's answer: "a lot of work that used to be done by kind of early-tenure employees, we are doing with AI." Designers build prototypes in Figma that convert directly into code, and testing that code "is mostly done by AI today as well." He called it survival, not choice: "If we hadn't done that very fast, we would simply not be competitive in what we're putting out there in the market."

McKinsey's State of AI survey shows most companies haven't moved yet: 39% of respondents expected AI to shrink headcount within a year, while only 14% said it already had.

Why did investors come back?

Freshworks shares were down about 31% for the year in late March, trading under $8. By late October they sat around $15 — a gain of more than 25% year-to-date through a period some called the "Saaspocalypse." Woodside thinks software's bottom came in February. "Businesses that are more focused on SMB in particular have been hurt," he said. "Software companies with simpler products, which are perceived to be more easily replicated with AI, they haven't come back."

Freshworks now targets what Woodside calls the "agile enterprise" — companies with up to 20,000 employees. "We are absolutely taking share from our larger competitors" there, he said. Customers paying over $100,000 a year rose 25% in the third quarter; those paying over $5,000 rose 6%.

Pricing is shifting too. Freshworks now charges by usage, by assets managed and by problems resolved. "We're seeing more and more of our growth coming from the elements that are not seat-based," Woodside said, though customers still want seats for budget predictability.

He dismissed the idea that AI-native startups will flatten incumbents overnight. "It doesn't mean that you can take a business that's generating, you know, tens of millions of dollars and turn it into tens of billions of dollars. That's actually really hard," he said. "They're competitive as hell."

The next target is already on the whiteboard: "We're now talking internally about, okay, well, what's the path to $2 billion and multiple billions?"