Investors may find Dennis Woodside a better chief for Freshworks

A former CEO of Motorola Mobility and chief operating officer of Dropbox, Woodside, 55, was already a known name among Silicon Valley investors and the analyst community.

Mathrubootham conceded this in a note to employees early Thursday, noting that the previous 18 months had been one of transition. While he’s transitioning into the role of executive chairman, Woodside has taken charge as CEO effective 1 May.

“A couple of years ago, I started talking with our board about my longer-term plans for Freshworks. I shared that when the time is right, I would like to shift my focus to our long-term product vision and invest in our presence in India. These are areas where I get the most energy and where I’m also playing to my strengths," he wrote.

“When I recruited Dennis to Freshworks, my hope was that he would eventually succeed me, and that we would work together to make a thoughtful and smooth transition, one that keeps the needs of our customers and employees front and center."

Both the executives addressed the transition during the company’s earnings call on Thursday. While Mathrubootham noted that Woodside as Dropbox’s COO had scaled it from $200 million to over $1 billion in revenue, Freshwork’s new CEO said the company’s founder had been focussed on AI (artificial intelligence) initiatives over the past year while he took charge of near-term strategies and scaling up. 

“Internally, (the transition) would not be viewed as sudden," Woodside said.

Public pressure

The transition may not have been a surprise to investors either. Among early backers of the Chennai-born, San Mateo-headquartered software-as-a-service, or SaaS, company are Accel and Peak XV. Both the investment firms did not respond to Mint's request for comments on Mathrubootham's transition out of the CEO role.

“It appears to be a really well-thought through plan for succession," said Sudarsan Ravi, founder of RippleHire, a SaaS firm, who described himself as 'inspired' by Mathrubootham. “Girish is also moving into an executive role, so he will stay in the system."

Mathrubootham founded Freshworks, originally named Freshdesk, in 2010 in Chennai and guided the company to go public on Nasdaq in 2021. His Freshworks co-founder and chief technology officer Shanmugam Krishnasamy left the company in 2022. 

In March this year, the Freshworks board cancelled Mathrubootham’s stock unit award of 6 million shares stating that stock price hurdles were too far ahead of the current stock price for the award to have the retention value expected at the time it was granted. 

The board blamed this on macroeconomic conditions that it said were “entirely outside the control of the company’s leadership".

Mathrubootham, though, has been under pressure from investors because Freshworks’ share price—which hit an all-time high of $50.25 per share in December 2021 a few months after the company’s listing on Nasdaq in September—has been on a steady decline, eroding investors’ wealth in the process. 

Freshworks' shares fell more than 25% in extended trading on Nasdaq following the announcements by the company, settling at $18.25 apiece. At 11.50 am on Nasdaq on 2 May, the stock dropped further to about $13.50 per share.  

The shares were trading at $18.25 apiece at the end of trade following the annoucement. 

Mathrubootham, who also runs an early-stage venture capital fund called Together Fund, holds about a 4.3% stake in the Nasdaq-listed software firm, news website Arc reported on Thursday.

“Girish can do nothing about the shares. He can only control the business performance, which has improved since the IPO," said in investor who tracks the SaaS industry. “The company priced the shares at $36. At the time the markets were high and there was exuberance so the shares popped. But the decline from $36 to $18 is not so bad."

This investor added that other SaaS companies had seen share price declines of 60-80%. On Mathrubootham's transition, this investor, declining to be identified, said: “In India it may be a big thing for a founder to step down, but in the US it is not such a big deal. Being the face of a public company is hard, takes a toll."

Sridhar Vembu, co-founder of Freshworks’ biggest Indian competitor Zoho Corp., in a post on X on Thursday, alluded to similar pressures in running a publicly listed company, although not in reference to Mathrubootham.

"Running a public company is a lot harder than running a private company; it is like being on the treadmill all the time. As a private company, we invest in long term R&D and infrastructure without worrying about how quarterly numbers would look," said Vembu, Mathrubhootham’s former boss while the latter was at Zoho, a three-decade-old software company that’s remained bootstrapped and private.

“... the pressure to manage the stock price would be brutal and then I would have to transmit that pressure to everyone else in the company. That relentless pressure leads to employee burnout and attrition," Vembu said, explaining why Zoho was still private.

Slowing growth

Freshworks said it expects its 2024 revenue at $695 million to $705 million, a year-on-year growth of 17-18%, although that’s slightly lower than the 18-19% revenue growth it had projected in February. At the time, the company had forecast a revenue of $703.5 million to $711.5 million for 2024.

Freshworks also said that its net dollar retention rate (a measure of how much money a company can retain from existing clients) in the March quarter stood at 106%, down from 108% in the first quarter of 2023.

For the January-March quarter, Freshworks reported a consolidated revenue of $165 million, up 20% year-on-year. Non-GAAP operating profit jumped to $21.8 million from $3.9 million in the year-ago period, when the company had announced its first full-year operating profit since listing publicly.

Focus on execution

Freshworks has flagged challenging macroeconomic conditions over the past 2 years, a situation that hasn’t spared other SaaS companies either. But investors have been focussed also on the ability of Freshworks’ management to execute.

“The area that I am very much focussed on is driving the execution of the business that we have now," Woodside said in response to a question from a Jefferies analyst during the company's earnings call. 

Woodside is taking charge after Freshworks said during its investor day last year that it wanted to be a $1-billion revenue company by 2026. Freshworks has also talked about driving cost efficiencies and outlined its path to profitability by achieving free cash flow, non-GAAP profitability, and then GAAP profitability.

(Non-GAAP numbers generally exclude certain expenses such as stock-based compensation expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles, and other adjustments.)

On Freshworks’ struggles in the small business segment, Woodside agreed the company needed to do more. “We need to do things differently in that space," he said, while elaborating on all the measures the company had taken over the past year to improve execution.

“A lot of changes that we brought in last year are to drive that execution," Woodside said during the call. 

In Freshworks’ investor day presentation in September, Woodside, who has been in charge of the company’s go-to-market strategy since he joined, had talked about some of these changes.

“We've sharpened our focus and our skill on bigger deals. We've brought in more experienced reps, more experienced leaders who are accustomed to those larger deals," Woodside said at the time. “We are really uniquely positioned to provide AI and to provide these solutions to SMB (small and medium businesses)."

Freshworks may need him to do more of this hereon.