Freshworks (FRSH) This fall 2024 Earnings Name Transcript

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Freshworks (FRSH -2.40%)
This fall 2024 Earnings Name
Feb 11, 2025, 5:00 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Members

Ready Remarks:

Operator

Hi there, and welcome to Freshworks fourth quarter and full yr 2024 earnings convention name. Presently, all contributors are in a listen-only mode. After the audio system’ presentation, there will likely be a question-and-answer session. Please be suggested that at present’s convention is being recorded.

I might now like handy the convention over to your first speaker, Joon Huh, head of investor relations. Please go forward.

Joon Huh — Vice President, Investor Relations

Thanks. Good afternoon, and welcome to Freshworks’ fourth quarter and full yr 2024 earnings convention name. Becoming a member of me at present are Dennis Woodside, Freshworks chief govt officer and president; and Tyler Sloat, Freshworks chief working officer and chief monetary officer. The first objective of at present’s name is to give you data relating to our fourth quarter and full yr 2024 efficiency and our monetary outlook for our first quarter and full yr 2025.

A few of our discussions and responses to your questions could comprise forward-looking statements inside the that means of the Personal Securities Litigation Reform Act of 1995. These forward-looking statements are based mostly on Freshworks’ present expectations and estimates about its enterprise and trade, together with our monetary outlook, macroeconomic uncertainties, administration’s beliefs, and the timing of future repurchases of our Class A standard inventory, and sure different assumptions made by the corporate, all of that are topic to vary. These statements are topic to dangers, uncertainties, and assumptions that might trigger precise outcomes to vary materially from these projected within the forward-looking statements. Such dangers embrace, however will not be restricted to, our capacity to maintain our progress, to innovate, to succeed in our long-term income objectives, to satisfy buyer demand, and to manage prices, and to enhance working effectivity.

For a dialogue of further materials dangers and different essential components that might have an effect on our outcomes, please check with at present’s earnings launch, our most not too long ago filed Type 10-Ok, and different periodic filings with the SEC. Freshworks assumes no obligation to replace any forward-looking statements with a view to mirror occasions or circumstances that will come up after the date of this name, besides as required by regulation. Throughout the course of at present’s name, we are going to check with sure non-GAAP monetary measures. Reconciliations between GAAP and non-GAAP monetary measures for historic durations are included in our earnings launch, which is out there on our investor relations web site at ir.freshworks.com.

I encourage you to go to our investor relations web site to entry our earnings launch, supplemental earnings slides, periodic SEC reviews, a replay of at present’s name or to study extra about Freshworks. And with that, let me flip it over to Dennis.

Dennis Woodside — President and Chief Govt Officer

Thanks, Joon, and thanks, everybody, for becoming a member of us at present on the decision. This fall was one other nice quarter throughout the board for Freshworks. We outperformed all our key metrics and exceeded our beforehand supplied estimates for progress and profitability, ending the yr on a excessive notice. We ended the yr with over 72,200 prospects who’ve chosen Freshworks CX and EX software program to rework their enterprise.

Repeatedly, overpriced legacy software program distributors with overcomplicated merchandise drive prospects instantly into our fingers. Clients select Freshworks’ uncomplicated software program to ship highly effective productiveness beneficial properties for IT, buyer help, and different enterprise groups. In This fall, income grew 22% yr over yr to $194.6 million, beating our beforehand supplied estimates. We delivered a non-GAAP working margin of 21% and generated adjusted free money circulate of $41.7 million, leading to an adjusted free money circulate margin of 21% for the quarter, additionally outperforming expectations.

We added over 2,600 web prospects in This fall, representing the biggest quarterly improve in 4 years. We welcomed and onboarded notable prospects, together with Mesa Airways, retailers like New Steadiness and Rawlings Sporting Items, and software program firms like Sophos. We noticed wholesome enlargement exercise and maintained an identical web greenback retention of 105% on a constant-currency foundation in comparison with the prior quarter. We additionally succeeded in increasing our enterprise with many current giant prospects, together with Amex GBT, Coherent, Klarna, EDF Renewables, and UCLA.

Our technique to drive sturdy and worthwhile progress is working. Our first crucial is investing in EX. We’re doubling down on our largest, fastest-growing worker expertise enterprise, which incorporates ITSM, ITAM, ITOM, and ESM. Our second crucial is delivering AI capabilities throughout our merchandise and platform.

We’re driving productiveness enhancements for our prospects in each worker expertise and buyer expertise. Our third crucial is accelerating progress for our buyer expertise options, together with our customer support and gross sales and advertising merchandise. Now I will share precisely how our execution in opposition to our technique led to the robust This fall outcomes. First, our investments in EX are paying off as we proceed to drive upmarket momentum.

This fall was one other robust quarter for our EX enterprise. We surpassed $400 million in ARR and grew 35% yr over yr on a constant-currency foundation. Our underlying enterprise fundamentals proceed to be robust. We did see significant FX impression on our reported numbers, which Tyler will cowl in higher element later within the name.

We ended the quarter with 18,300 prospects in EX. A number of traits inside our enterprise are driving progress, continued upmarket success, enlargement with ESM, attaching Device42 to new and current accounts, and constructing a management place in particular industries. First, increasingly more mid-market and enterprise prospects are turning to Freshworks as they go away behind our largest IT rivals. We imagine that is as a result of huge SaaS distributors are overcharging and underserving their prospects, significantly within the mid-market.

We provide the choice, software program that is enterprise-grade with out pointless complexity. Over 75% of the ARR in our EX enterprise comes from mid-market and enterprise firms, which we outline as organizations with 250 or extra workers. Iconic firms, main metropolis governments, and producers are turning their backs on legacy SaaS distributors and coming to Freshworks. Not too long ago, a multibillion-dollar exhausting drive producer dropped ServiceNow after a 13-year relationship to embrace Freshservice.

Town and county of San Francisco and Mesa Airways additionally selected us over ServiceNow. In This fall, universities and healthcare suppliers are selecting Freshservice over others, too. Denver Well being, a number one supplier of hospitals, emergency care and neighborhood well being facilities, wanted to modernize its IT operations. By changing its legacy ITSM software with Freshservice, Denver Well being can defend the safety and privateness of affected person information whereas automating essential duties in order that workers can present affected person care.

The second huge development driving our EX enterprise is our ongoing success in ESM with Freshservice for Enterprise Groups. ESM is a key lever for enlargement and in new offers, the connect charge elevated to 25% in This fall. Monetization momentum continued to construct with ESM ARR rising 2.5x in 2024, and one out of 5 eligible prospects using Freshservice for Enterprise Groups. Alterra Mountain Firm, TeamViewer, Wake Forest College, and Coherent are all utilizing Freshservice in different areas of their companies, together with HR, advertising and finance to ship wonderful service experiences.

Alterra Mountain Firm, proprietor of the favored Ikon Ski Go, operates 18 year-round resorts. They wished a single know-how resolution to allow smoother collaboration between departments and areas. After seeing success with Freshservice of their IT surroundings, Alterra expanded its use of Freshservice throughout extra departments, together with HR, amenities, finance, gross sales, and advertising. Coherent, a worldwide producer of commercial and laser tools, transitioned 500 inner brokers and all ITSM workflows from a number of instruments together with ServiceNow, to Freshservice.

Coherent not too long ago expanded its use of Freshservice past IT to their HR division, supporting 25,000 workers. They’ve plans to broaden Freshservice to further groups similar to amenities and procurement. In This fall, we made product enhancements to additional strengthen our providing for groups outdoors of IT. We launched new connectors for main human capital administration instruments like UKG and Personio and have a powerful pipeline of integrations with extra HR apps, together with ADP and Paylocity going reside within the coming months.

The third EX progress driver is our superior ITAM providing with Device42. In This fall, we launched a brand new integration to create a extra seamless expertise for purchasers utilizing Freshservice with Device42. Firms can improve their operations with complete infrastructure auto-discovery and dependency mapping, delivering deeper, extra actionable insights to energy their IT operations. The mixed providing is less complicated to configure than the competitors, which contributed to a rise in upsell of superior ITAM capabilities into current Freshservice prospects.

Three of the highest 10 offers we closed in This fall included a Device42 connect factor, and This fall represented the best web new ARR quarter ever for the Device42 enterprise. Main sportswear model, New Steadiness is experiencing speedy progress and posted document gross sales in 2024. They utilized Freshservice Enterprise and Device42 to supply a worldwide on-line portal for all inner help wants. The combination of Device42 for superior asset administration and its CMDB provides New Steadiness an correct view of its IT infrastructure throughout areas.

AI-powered self-service capabilities accessible by means of the portal, Microsoft Groups and electronic mail will empower associates with an intuitive and fashionable help expertise. We proceed to draw training and sports activities organizations, solidifying our management place in these industries. In training, Wake Forest College, UCLA, and Manchester Metropolitan College use Freshservice for digital transformation. In skilled sports activities, nearly one-third of the Nationwide Soccer League and Main League Baseball groups use Freshservice.

The San Francisco 49ers, Kansas Metropolis Chiefs, Indianapolis Colts, and Arizona Cardinals are just some of our NFL prospects. In Main League Baseball, the San Francisco Giants, Cleveland Guardians, Minnesota Twins, and Houston Astros are prospects. We even have various European soccer golf equipment similar to Paris Saint-Germain and South Hampton as prospects and a number of F1 groups like McLaren Racing. We imagine that firms that care about their worker expertise select Freshservice, software program that is enterprise-grade with out enterprise complexity.

On to our second crucial, AI. We anticipate AI to be a tailwind for our enterprise as prospects are realizing tangible enterprise worth. After launching Freddy Copilot in February, we ended the yr with greater than 2,200 prospects, reflecting quarterly web provides of greater than 500 or 30% progress quarter over quarter. We’re seeing monetization payoffs for Copilot in its first yr, ending with ARR forward of our inner targets.

In a world of hype and jargon, we’re efficiently taking prospects from AI experimentation to execution. Take the Kansas Metropolis Chiefs, for instance. The Chiefs used Freddy AI Copilot with Freshservice to enhance productiveness throughout IT and finance departments. For a number of years, Freshworks has been serving to them discover methods to win off the sphere.

In This fall, we maintained over 50% Copilot connect charges for brand new offers of $30,000 or extra. Connect charges for SMB continued to be double digits and elevated quarter over quarter. With the launch of Freddy AI Agent for CX, we mixed our Freddy AI self-service options into this new product. By the top of the yr, over 1,300 prospects had been utilizing Freddy AI Agent, together with 100 prospects testing the most recent beta model.

As our AI brokers enhance, extra prospects are utilizing them and seeing constructive outcomes. Freshworks is dedicated to turning AI into ROI for companies of all sizes. Take AdaptHealth, for instance, a house healthcare firm that serves 4 million sufferers. The IT workforce makes use of Freddy AI Agent to hurry decision occasions and deflect tickets.

This frees up time for the workforce to give attention to bettering affected person outcomes. We’re excited in regards to the progress we have made and anticipate to see significant progress on AI monetization in 2025 with anticipated widespread adoption of Freddy AI. Lastly, I will cowl CX, our flagship enterprise that is been paving a greater method ahead for service software program for over a decade. That is one other space the place we see robust momentum, particularly within the SMB section, and was a major contributor to our web new buyer provides this quarter.

We ended the quarter for CX with over 58,200 prospects, producing over $360 million in ARR, rising at 7% yr over yr on a constant-currency foundation, just like the constant-currency progress charge in Q3. With an initiative that we began mid-Q3, we’re seeing ongoing conversion of free-to-paid prospects, largely within the SMB section. This initiative benefited the CX enterprise and considerably contributed to the shopper web provides for CX, which was greater than 2,000 for the quarter. We’re largely by means of the overwhelming majority of conversions so anticipate to see a smaller profit in Q1.

Superb giant organizations are selecting Freshdesk, together with Airbus and AMC Networks. Satair, a completely owned subsidiary of Airbus, adopted Freshdesk to successfully talk and resolve tickets from prospects, suppliers, and workers. They’ve seen a 40% discount in common ticket dealing with time and a dramatic discount in onboarding time from one month beforehand to 2 to 4 days with Freshdesk. In This fall, we made updates to Freshdesk’s help admin options, in addition to our supervisor expertise, which delivers superior analytics to our prospects.

We additionally launched integrations with PlayBox Workforce Administration, an essential characteristic for purchasers like Sew Repair. It’s clear to us that these product enhancements contributed to stable retention charges which remained steady from Q3. We imagine our CX merchandise have a number of robust enlargement paths: first, CX prospects are main the cost in adopting our AI merchandise; second, we noticed progress in our whole agent rely throughout the enterprise as seats elevated quarter over quarter; third, CX prospects are additionally shopping for EX and vice versa. For instance, Dune London, a rising footwear and accent retailer, wished a unified resolution to help buyer inquiries and handle inner IT processes.

Dune first had success with Freshdesk and Freddy AI, which deflected 40% of tickets. They not too long ago added Freshservice with Freddy AI Copilot to help their IT workforce. iPostal1 is the biggest supplier of digital mailbox companies and has been utilizing Freshdesk for years as a scalable resolution to handle its increasing buyer base of over 1 million. After seeing the worth of Freshdesk of their enterprise, they adopted Freddy AI and Freshservice to streamline inner operations.

Freddy AI Brokers are saving their brokers time and resolving 54% of their queries. iPostal1 has additionally expanded their use of Freshservice to authorized, product administration, operations, and HR. In This fall, we welcomed our new chief product officer, Srini Raghavan, to the Freshworks govt management workforce. Srini, who brings in depth expertise main AI and automation initiatives at RingCentral, Five9, and Cisco will form the subsequent chapter of innovation at Freshworks and can play a key position in shaping our CX and EX merchandise going ahead.

Final week, we additionally welcomed Venki Subramanian, SVP of product administration, to the CX management workforce. Venki has held management roles at SAP and ServiceNow the place he launched and scaled their buyer expertise and CRM merchandise. We proceed to draw world-class expertise in each operate, all centered on delivering for our prospects’ uncomplicated options. Trying forward, we’re driving new avenues of progress by means of strategic partnerships which might be unlocking a extra various pool of shoppers.

Right this moment, now we have greater than 500 energetic companions globally from giant value-added resellers, resolution suppliers, system integrators, distributors and gross sales consultants. Our companions touched one-third of our ARR in 2024 and lots of extra prospects by means of gross sales and repair implementations. We’re excited to announce a brand new strategic settlement with Unisys, a number one world SI companion. Unisys was searching for a contemporary IT resolution to ship for his or her giant and mid-market prospects.

And after finishing a aggressive evaluate course of, they selected Freshservice. Initially, Unisys will companion as a reseller of our merchandise with future plans of leveraging our options for an MSP providing. We’re excited to work with Unisys, and this partnership highlights our robust momentum with mid-market and enterprise firms. As we evolve and execute on our companion technique, we anticipate to see elevated efficiencies in our go-to-market efforts, resulting in further margin enhancements within the enterprise.

I’m extremely excited in regards to the alternative forward and in 2025. We’ve got a aggressive benefit with our enterprise-grade software program that delivers outcomes quick. We’ve got an skilled and proficient management workforce. We’re centered on effectively scaling and are well-positioned to be a number one enterprise software program firm.

Thanks to our prospects, companions, workers, and shareholders in your ongoing help. Now let me flip it over to Tyler to undergo the operational and monetary particulars.

Tyler Sloat — Chief Monetary Officer

Thanks, Dennis, and thanks, everybody, for becoming a member of on the decision and through webcast at present. For our name at present, I will cowl the This fall and full yr 2024 monetary outcomes, present background on the important thing metrics, and shut with our forward-looking commentary and expectations for Q1 and full yr 2025. As a reminder, most of our dialogue will likely be centered on non-GAAP monetary outcomes, which exclude the impression of stock-based compensation bills, restructuring fees, and different changes. We may even speak about adjusted free money circulate, which excludes the money outlay associated to restructuring prices in This fall.

We’re happy to report one other excellent quarter and a powerful end to the yr as we surpassed each our beforehand supplied top-line and bottom-line estimates in This fall. We made vital enhancements to our total value construction, increasing our non-GAAP working margin by 800 foundation factors quarter over quarter to 21%, in addition to rising our adjusted free money circulate 46% yr over yr to $41.7 million, which resulted in a powerful adjusted free money circulate margin of 21%. These outcomes mirror the profitable execution of our strategic initiatives as we stay assured in our capacity to drive worthwhile progress for our enterprise. Let me first begin with FX as this had a significant impression on our reported numbers in This fall.

We noticed a notable shift in FX charges all through the quarter, pushed by the strengthening of the U.S. greenback. This fall income impression was minimal however this resulted in a three-percentage level detrimental impression to our ARR progress or $17.5 million discount to our ARR. As such, I will embrace fixed foreign money comparisons for lots of the metrics to supply a greater view of our underlying enterprise traits.

Beginning with the revenue assertion. Whole income in This fall elevated to $194.6 million, rising 22% on a reported foundation and 21% on a constant-currency foundation. Skilled companies income contributed $2.4 million within the quarter as we continued to shift companies income to our rising companion community. Device42 income contribution was roughly $10.3 million for the quarter.

Half of the online new ARR for Device42 originated from the Freshworks subject workforce as we realized cross-sell synergies from the acquisition. Our EX enterprise stays our main driver of total progress for the enterprise, which as Dennis famous, has now surpassed $400 million in ARR, rising 33% yr over yr on an as-reported foundation and 35% on a constant-currency foundation. Excluding Device42, EX progress was 22% yr over yr on an as-reported foundation and 25% on a constant-currency foundation. Our CX enterprise is at over $360 million in ARR and continues to carry out properly, rising at 6% yr over yr on an as-reported foundation and seven% yr over yr on a constant-currency foundation.

Transferring to margins. We improved our robust non-GAAP gross margin for This fall to over 86% as we continued to effectively ship our options and help our prospects. This represents an enchancment of roughly 200 foundation factors in comparison with the prior yr. Our non-GAAP working revenue for This fall got here in at $40.3 million, representing a non-GAAP working margin of roughly 21% and forward of prior expectations.

The robust efficiency is pushed by a mixture of income outperformance, in addition to value advantages from decrease personnel-related bills within the quarter. As a reminder, our non-GAAP outcomes don’t embrace a one-time restructuring expense of $9.7 million. Transferring to working metrics. Our two key enterprise metrics are web greenback retention and prospects contributing greater than $5,000 in ARR.

On account of the FX impression, web greenback retention was 103% on a reported foundation. And we carried out barely higher than our expectations at 105% on a constant-currency foundation. Trying ahead and based mostly on anticipated strain on enlargement, we estimate web greenback retention of roughly 103% on an as-reported foundation and 104% on a constant-currency foundation for Q1. For our second key enterprise metric of variety of prospects contributing greater than $5,000 in ARR, as of the top of This fall, this metric grew 11% yr over yr on an as-reported foundation and 13% yr over yr on a constant-currency foundation to 22,558 prospects.

This buyer cohort continues to signify 90% of our ARR. For our bigger buyer cohort contributing greater than $50,000 in ARR, as of the top of This fall, we noticed progress of twenty-two% yr over yr on an as-reported foundation and 24% yr over yr on a constant-currency foundation to three,053 prospects. This cohort represents 50% of our ARR. For whole prospects, we added over 2,600 web prospects within the quarter and ended with over 72,200 prospects.

Roughly 2,000 of the purchasers are the outcomes of our latest initiatives to enhance free-to-paid conversions. We anticipate these conversions to have a slight profit to Q1 as nearly all of the conversions occurred in This fall. Now let’s flip to calculated billings, stability sheet, and money gadgets. Our calculated billings grew roughly 23% yr over yr on each an as-reported and constant-currency foundation to $222.5 million in This fall.

Excluding the impression of Device42, calculated billings grew 17% yr over yr. As we mentioned final quarter, our calculated billings embrace the reported income plus the change within the whole deferred income within the quarter. In This fall, this features a long-term deferred income improve of round $600,000 that’s included in different liabilities on the stability sheet. Waiting for Q1 2025, our preliminary estimate for calculated billings progress is 13% and 14% on a constant-currency foundation.

For the complete yr 2025, we anticipate calculated billings progress to be roughly 13% yr over yr on an as-reported foundation and 14% on a constant-currency foundation. We wish to name out a couple of components for the Q1 billings progress charge comparability quarter over quarter. This contains two share factors from early renewal exercise pulled into This fall, 1.5 share factors from FX, and 1 share level from one-time free-to-paid conversion subsiding in Q1. Transferring to our money gadgets.

We generated $41.7 million in adjusted free money circulate for This fall, outperforming our estimates, because of robust assortment actions and continued enhancements in our operational efficiencies. This resulted in an adjusted free money circulate margin of 21%, which represents an 800-basis-point enchancment yr over yr. As a reminder, these outcomes don’t embrace a one-time use of money of $7.3 million associated to restructuring prices. For the complete yr 2024, we practically doubled our adjusted free money circulate to $153.3 million in comparison with the prior yr.

For the complete yr 2025, we anticipate to generate roughly $210 million of free money circulate, with roughly $50 million in Q1 and Q2 and barely increased quantities in Q3 and This fall. Pursuant to our beforehand introduced program to repurchase as much as $400 million of our widespread inventory that was accredited by our board in November 2024, we repurchased $15.5 million of our shares in This fall at a mean worth of $15.77 per share. As a common observe, we are going to replace our repurchase exercise on the finish of every quarter. We stay dedicated to executing on an applicable capital allocation technique and delivering long-term worth to our shareholders.

We proceed to handle and offset share rely dilution by net-settling vested fairness quantities through the use of roughly $11 million throughout the quarter and $60 million for the complete yr 2024. Since our IPO, now we have used practically $300 million to net-settle roughly 17.5 million shares. This exercise is mirrored in our financing actions and is excluded from our free money circulate. Trying forward, we are going to proceed to net-settle vested fairness quantities and anticipate Q1 money utilization of roughly $18 million utilizing present inventory worth ranges.

For the complete yr, we anticipate to make use of roughly $71 million to net-settle vested fairness quantities. We ended the quarter with money, money equivalents, and marketable securities of $1.07 billion. Turning to our share rely for This fall. We had roughly 328 million shares excellent on a completely diluted foundation as of December thirty first, 2024, representing share progress of lower than 1% from the prior yr.

The absolutely diluted calculation consists of roughly 303 million shares excellent, which grew lower than 3% yr over yr, 22 million associated to unvested RSUs and PRCUs, and three million shares associated to excellent choices. We’re conscious of share rely dilution and plan to proceed managing this thoughtfully with net-settle actions and share repurchases into the long run. Now on to our forward-looking estimates. For the primary quarter of 2025, we anticipate: income to be within the vary of $190 million to $193 million, rising 15% to 17% yr over yr.

Adjusting for fixed foreign money utilizing FX charges from Q1 of final yr, this displays progress of 16% to 18% yr over yr; non-GAAP revenue from operations to be within the vary of $32.5 million to $34.5 million; and non-GAAP web revenue per share to be within the vary of $0.12 to $0.14, assuming weighted common shares excellent of roughly 307.3 million shares. For the complete yr 2025, we anticipate income to be within the vary of $809 million to $821 million, rising 12% to 14% yr over yr. Adjusting for fixed foreign money utilizing FX charges from Q1 of final yr, this displays progress of 13% to fifteen% yr over yr. Since our Q3 earnings name in November, FX charges have additionally modified meaningfully, impacting our monetary estimates.

Making use of foreign money charges from November, our full yr 2025 income estimate can be $5.6 million increased or one share level increased in progress. Non-GAAP revenue from operations to be within the vary of $131 million to $139 million, and non-GAAP web revenue per share to be within the vary of $0.52 to $0.54, assuming imply weighted common shares excellent of roughly 306.4 million shares. Our monetary outlook relies on a few assumptions that we wish to name out. First, our forward-looking estimates are based mostly on FX charges as of February seventh, 2025, so any future foreign money strikes will not be factored in.

Second, as we glance to 2025 by quarter, we anticipate to see increased income progress charges within the first half of the yr in comparison with the second half as we anniversary the Device42 acquisition. As such and utilizing the midpoint of the vary for Q1 estimates, we anticipate income progress charges of roughly 16% and 14% in Q1 and Q2, respectively, and 11% in Q3 and This fall. For non-GAAP working margin by quarter and utilizing the midpoint for Q1, we anticipate roughly 17%, 13%, 16%, and 19% for Q1, Q2, Q3, and This fall, respectively, in 2025. This displays a rise in value base beginning in Q2 in reference to our annual benefit cycle, adopted by margin enhancements as we scale the enterprise.

Our outcomes from final quarter display the power of our enterprise and our efficient execution in opposition to our strategic priorities. We’re pleased with the progress we have made in driving progress and innovation whereas additionally sustaining a disciplined strategy in bettering our profitability. We’re excited in regards to the alternatives forward as we place Freshworks for long-term success. And with that, allow us to take your questions.

Operator?

Questions & Solutions:

Operator

Thanks. [Operator instructions] One second for our first query. It comes from the road of Brent Bracelin with Piper Sandler. Please proceed.

Brent Bracelin — Analyst

Thanks for taking the query. I assume the primary one right here, I wished to double-click into EX. That is now a $400 million ARR enterprise, 20%-plus natural progress charge. How are you eager about the expansion potential right here as you begin to anniversary Device42? Do you suppose you possibly can maintain 20%-plus? What is the alternative right here in EX? Double-click there, in the event you may.

Thanks.

Dennis Woodside — President and Chief Govt Officer

Thanks, Brent. So, it is Dennis. We expect the chance is large and that our EX enterprise is squarely centered on the mid-market and decrease finish of enterprise. Our ICP is an organization with anyplace from 250 to twenty,000 workers.

And that a part of the market, if you consider the IT division, you could have subtle calls for. Sometimes, these companies are world. They want ITAM, they want ITOps. They want what now we have.

And the most important competitor, clearly, ServiceNow, that product could be very complicated and requires loads of work to rise up and working, loads of work to get worth from. We hear this on a regular basis. So, these firms in that section, they’re searching for one thing that is enterprise-grade with out the enterprise complexity, and that is quick time to worth and total decrease whole value. So, the explanation that we had, I believe it was 40-plus $100,000 wins final quarter is as a result of that mid-market is responding.

And we’re beginning to get a flywheel of shoppers which might be switching or in the event that they had been coming off of a legacy supplier like Ivanti or Cherwell, they’re selecting us over a ServiceNow. So, we predict that market is large. Simply within the U.S. alone, the mid-market, as we outline it, account for about $10 trillion in financial exercise.

So, we predict we will construct a really huge enterprise there. When it comes to the product, I believe Device42, we have solely actually been promoting it with an actual effort behind it in This fall. Q3 was spent constructing the pipeline and sort of getting all of the post-merger stuff out of the way in which. However now we enter Q1 with a pipeline that is roughly double what we entered This fall with.

And there is loads of curiosity from firms as a result of firms have to get a greater deal with on their property. They’re searching for a software to assist them on the safety facet as properly. We expect that is going to be an accelerant. And we predict AI is completely an accelerant to that IT enterprise as properly.

So, loads of good levers to drag going into 2025, and I am very pleased with the efficiency in This fall. It places us in place going into this yr.

Brent Bracelin — Analyst

Completely. After which Tyler, one fast follow-up for you if I may. Nice to see the 20%-plus op margin milestone this quarter even with the acquisition. How are you eager about balancing the place you make investments? I do know the information implies 16% op margin subsequent yr, that appears conservative.

However with over $1 billion in money, would you contemplate extra M&A to enrich and assist speed up the product street map whereas nonetheless sustaining prudent and environment friendly progress mannequin right here in margins? Stroll us by means of the thought course of across the money, use of a few of the investments going ahead now that you’ve got crossed over that 20% op margin milestone. Thanks.

Tyler Sloat — Chief Monetary Officer

Positive, thanks, Brent. Yeah, you are proper. I believe we’re doing actually, very well on an effectivity perspective. This previous yr, simply free money circulate, in addition to working margin, we’ll actually proceed to have that theme when it comes to effectivity.

However we have additionally been actually clear, we are going to take a look at alternatives, inorganic alternatives as they arrive up. Device42 is the primary deal we have accomplished in, I believe, six years and the primary substantial one, and we’ll proceed to take a look at these. We’re clearly digesting Device42 and actually attempting to optimize what we will get for that. On the similar time, we’ll train, proceed to execute on our share repurchase, and proceed to do the online gross sales, which we use portion of money this yr.

And we additionally stated once we went by means of sort of our restructuring in This fall that we had been planning to reinvest loads of that into the enterprise, actually centered on ensuring that now we have the suitable individuals in the suitable locations and investing for progress in loads of areas. So, I believe we will do each. I believe we will sort of make prudent investments and actually sort of make investments the place we really feel like we’ll get one of the best returns whereas additionally bringing higher bottom-line efficiency.

Operator

Thanks. One second for our subsequent query please and it comes from the road of David Hynes with Canaccord Genuity. Please proceed.

David Hynes — Analyst

Hey, good night, guys. Dennis, are you able to contact on the 50K-plus buyer provides and the sort of the slowdown within the metric there? I imply, it makes me really feel like possibly the ITSM enterprise did not have one of the best web new quarter. However I notice additionally that metric would not seize upsell, cross-sell of shoppers that will already be forward of that threshold. So, simply assist me sort of interpret that information level relative to the bookings that you simply noticed on the IT facet of the enterprise.

Dennis Woodside — President and Chief Govt Officer

Yeah, so thanks for the query. Initially, keep in mind, we had a disproportionate FX impression in This fall. We’re extra FX uncovered than loads of different gamers as a result of we have got round 40% of our income coming from Europe and about 15% from remainder of world. So, that is one — that affected that 50K quantity.

The second is we had been lapping in This fall in opposition to a fairly robust prior-year This fall, and that had an impact as properly. And the opposite factor is that we’re touchdown extra bigger offers however fewer of them. So, we had, in This fall, our most offers over 200K. We had a lot of offers over 100K, and people are each enlargement and renewals.

So, all these issues have an effect on simply absolutely the variety of prospects with over 50K in income. So, in the event you take a look at the ARPU for that cohort, that is truly up and that is additionally one thing that we take a look at carefully. So, I believe that this time by means of, that metric positively was affected by another components. However we’re fairly comfy with our upmarket momentum.

You simply take a look at the steady of shoppers that we’re gathering, which might be subtle world gamers, like a New Steadiness, and we proceed to see alternatives to press upmarket.

David Hynes — Analyst

Yeah. Yeah, that is smart. That is a useful rationalization. Possibly as a follow-up, you talked about the Unisys partnership and possibly the chance to evolve that to an MSP alternative over time.

Possibly you possibly can simply broadly contact on sort of the MSP alternative, how significant that could possibly be on the IT facet of the enterprise? And are you there from a product perspective at present to help that sort of buyer?

Dennis Woodside — President and Chief Govt Officer

Yeah. So, we’re actually enthusiastic about Unisys. I had an opportunity to exit and meet with their CEO in This fall. And they’re a GSI.

They’ve a big cohort of firms which might be proper in our candy spot, proper in that mid-market, decrease finish of enterprise house. And people firms had been coming to them searching for an alternate. And Unisys spent a yr evaluating each product out there as a result of they wished to have the ability to construct a service line round an IT product and produce it to market, and so they selected us. And what we’re doing now’s engaged on a co-sell movement.

We have already had our first couple of offers that we have developed and landed with Unisys, in addition to constructing — they are going to be constructing an MSP round our Freshservice product. And we have been investing for some time now within the MSP performance of our product. We’ve got a set of releases which might be popping out in Might that can improve the performance for an MSP, issues like multi-account administration, and so forth. We have already got over 1,000 MSPs utilizing the product regardless that we have not actually, up till not too long ago, been constructing performance that is particular for MSP.

So, we predict the chance there may be fairly giant, and I am fairly enthusiastic about it.

David Hynes — Analyst

Wonderful. Thanks very a lot.

Operator

Thanks. Our subsequent query is from the road of Elizabeth Porter with Morgan Stanley. Please proceed.

Elizabeth Porter — Analyst

Nice, thanks a lot for the query. On the NRR facet, the outlook nonetheless appears slightly bit pressured from enlargement. And simply given it has been a couple of years that we have had that enlargement strain, I wished to get a way for at what level are prospects sort of working lean sufficient that they might begin to reexpand? And in addition, what is the alternative for the innovation cycle that we’re seeing with AI and AI additionally shifting extra towards monetization turn out to be a lever to drive that enlargement facet to begin to get better?

Dennis Woodside — President and Chief Govt Officer

Possibly I will take the second. So, Elizabeth, it is Dennis. I will take the second half after which we’ll speak about it in ARR. I believe that, that innovation cycle is basically simply beginning to play out.

We’re seeing very wholesome double-digit connect charges of our Freddy AI merchandise in our SMB section. And also you noticed the expansion in whole web provides for the quarter, finest quarter in 4 years. A big a part of these conversations now entails AI. After which we’re systematically going into our buyer base of 70,000 prospects and promoting in AI, each Freddy AI Agent and Freddy Copilot to these prospects as properly.

So, we predict that there is a huge alternative there to drive progress from that section going ahead. And in addition, we do really feel we’re nonetheless actually early within the AI adoption cycle. However this yr is the yr when we’ll see that proceed to speed up. And Tyler can speak about NDR.

Tyler Sloat — Chief Monetary Officer

Hey, Elizabeth. So, yeah, we got here in at 105% for web greenback retention on fixed foreign money so it is truly slightly bit higher than what we thought. We have been speaking about how we have been doing very well on churn and churn for — throughout all merchandise is now within the sort of stable mid-teens. That being stated, we had additionally talked about, hey, we have been seeing strain on our largest enlargement movement, which remains to be agent addition.

We’ve got strain on that for years. Now we did see the decline within the enlargement charge for sort of agent addition begin to sort of cease in sort of the again half of the yr, however we nonetheless have a decline from a year-over-year examine. So, that is sort of why we’re nonetheless calling 104% for Q1. That is sort of what we see proper now if enlargement and churn is available in, what we see — the way in which we see it.

So, clearly, Dennis simply talked about on the Freddy merchandise, these are doing very well. From a monetization perspective, we nonetheless have to do some work on getting them to our current put in base, however on connect charge for brand new enterprise are actually, actually wholesome. Device42, we predict, has loads of capability to enter our current Freshservice base. After which our ESM providing for enterprise brokers for our Freshservice prospects, these are the sort of add-on merchandise that we’re actually centered on going into ’25 which might be going to be the complement to agent addition.

Elizabeth Porter — Analyst

Nice. And simply as a follow-up, I wished to double-click on the SMB facet. It seems like the advance in web provides was loads of execution on the free-to-paid conversion. So, I hoped to get simply an replace on the broader SMB demand surroundings.

Is the advance that we began to listen to about final quarter one thing that is persevering with? And sort of what’s your outlook into 2025?

Dennis Woodside — President and Chief Govt Officer

Yeah. I might say, Elizabeth, that the demand is steady to bettering. And I believe you see that within the ARR determine for CX the place we have seen, on a constant-currency foundation, two quarters of round 7% yr over yr. So, I believe that SMBs nonetheless are constrained in that charges for them, rates of interest are fairly excessive relative to historical past.

However on the opposite facet of it, they’re beginning to notice that AI may also help. And AI may also help them be extra environment friendly, more practical, particularly the SMBs which might be slightly bit bigger within the 100- to 200-employee vary the place they’ve an IT division and so they have a buyer help workforce. And that is actually the place our enterprise is concentrated. So, I am optimistic for 2025.

I can not offer you like a very clear sign by hook or by crook, however we positively had been pleased with the progress that we made in This fall.

Elizabeth Porter — Analyst

Nice. Thanks a lot.

Operator

Thanks. And as a courtesy to different analysts, please, we ask that you simply restrict your questions to 1. One second for our subsequent query. It comes from the road of Pinjalim Bora with J.P.

Morgan. Please proceed.

Unknown speaker — J.P. Morgan — Analyst

Hey, guys. That is Noah on for Pinjalim. Thanks for taking our query. Are you able to simply possibly present slightly bit extra shade round what you are embedding within the 2025 steering as we take a look at each the CX enterprise, in addition to the Freshservice facet of the enterprise as properly? Thanks.

Tyler Sloat — Chief Monetary Officer

Yeah. Noah, that is Tyler. We did not get away between the 2 totally different merchandise. We have been speaking about EX remains to be doing very well.

We had a query earlier on what’s the sustainability of sort of 20% progress there, and we predict that is an enormous market. And CX has sort of stabilized. We’re at that sort of 7% progress is what we stated it was in This fall. And that is one which we have been very open about what we’re doing there when it comes to very centered efforts on an ICP.

After we take a look at the steering for the yr, the income steering, clearly, that is the primary steering for the yr. We’ve got much more constancy into Q1 than we do for the complete yr, and we’ll clearly replace it as we go all year long. I believe the one factor that we did name out is that we’re going to be annualizing the Device42 acquisition, so the compares from a income perspective do get harder within the again half of the yr than they’re within the entrance. We additionally famous that there are some nuances to the working margin actually round our benefit cycle in Q2.

And we might anticipate to proceed to drive efficiencies to the again half of the yr, and that is why we anticipate that to go up. So, we known as out as a lot nuances as we learn about proper now. Clearly, as we get to the top of this quarter, and may mirror efficiency from this quarter. For the yr, we are going to replace steering for the remainder of the yr after this quarter.

Operator

One second for our subsequent query please and it comes from the road of Patrick Walravens with Residents JMP. Please proceed.

Patrick Walravens — Analyst

Nice, thanks. And let me add my congratulations. Dennis, I am curious, with kind of the latest advances that we have seen on the AI entrance with DeepSeek after which at present, Mistral, hastily, is ramping as much as the highest of the App Retailer record. Have you ever guys had time to kind of wrap your arms round what meaning when it comes to what you possibly can possibly do in your prospects, which you did not suppose you possibly can do earlier than? And in addition, what the implications are for the fee that you simply guys incur once you ship AI throughout the shopper base?

Dennis Woodside — President and Chief Govt Officer

Undoubtedly, Pat. Thanks. So, look, competitors is sweet for us in — amongst LLMs, and competitors has already pushed pricing down and can proceed to drive pricing down. We have constructed our tech stack in order that we will and already do take a look at and take a look at numerous LLMs because the house continues to innovate.

So, we rely at present for conversational functionality on Azure OpenAI. And that is as a result of there are specific protections which might be inbuilt with respect to information with respect to hallucinations that Microsoft gives that we discover a worth, after which now we have our personal protections on high of that. However we even have examined Anthropic. We’ve got examined Google’s AI for, particularly, photos.

And we’re all the time taking a look at different fashions which might be on the market. We will stability value, efficiency, information safety, all of these issues are essential to our prospects. And the competitors is total simply one thing that is going to assist us ship a greater product at a decrease value over time. So, thus far, all of that’s good for us, all the developments are good, and we’re consistently evaluating all of the fashions which might be popping out.

Patrick Walravens — Analyst

All proper, tremendous useful. Thanks.

Operator

Thanks. Our subsequent query is from the road of Scott Berg with Needham and Firm. Please proceed.

Rob Morelli — Analyst

Hello. That is Rob Morelli on for Scott Berg. Thanks for taking the query and congrats on the quarter. Nice to listen to about a few of the momentum with the SMB and CX.

With this in thoughts, how do you consider your go-to-market investments for 2025? Is the big proportion nonetheless going towards ITSM or are there alternatives to spend money on CX with this latest momentum? Thanks.

Dennis Woodside — President and Chief Govt Officer

Yeah. So, we stability our investments throughout CX and EX relying on the place we see the chance. For the CX enterprise, that at present is about two-thirds SMB, and so we proceed to speculate in opposition to advertising, particularly, to drive demand among the many SMB neighborhood into CX. And the EX enterprise tends to be extra of a mid-market and decrease finish of enterprise enterprise.

So, these investments are going into subject and the like. So, I believe the way in which we take a look at the enterprise, we’ll allocate funding the place we see momentum, the place we see alternative, and frequently regulate all year long relying on what sort of outcomes we’re seeing. And over the course of the final yr, we have been very conscious about each the payback and the economics of all these investments to ensure that it is smart. And also you see that when it comes to the gross sales and advertising as a share of income coming down and us persevering with to drive effectivity in that gross sales and advertising line merchandise.

Rob Morelli — Analyst

Received it. Thanks.

Operator

Thanks. One second for our subsequent query. It comes from the road of Brent Thill with Jefferies. Please proceed.

Brent Thill — Analyst

The 50% connect for Freddy Copilot could be very spectacular. Is there any method to quantify the ACV uplift, what you are seeing on these on common?

Tyler Sloat — Chief Monetary Officer

We’ve got not damaged out the {dollars} but on the connected charge when it comes to quantification. And the connect charge actually is to new enterprise on the bigger offers, the double-digit connect charge for the SMB offers. As we undergo this yr, particularly most likely in our Investor Day, which goes to be firstly of the again half of the yr, we will look to supply extra sort of the monetization technique for our Freddy merchandise. As a reminder, now we have the Copilot, which is an add-on worth to our brokers, which is at $29, however we even have our Freddy AI Agent, which is extra of a consumption-based mannequin.

And that one will get monetized extra as our prospects use it. We additionally talked about what number of of these prospects are literally now paying prospects, which is over 1,300 prospects that at the moment are paying for added bot periods. So, once more, we have not damaged out the precise {dollars}. I believe it is nonetheless slightly bit early, however the progress is basically, actually constructive.

Dennis Woodside — President and Chief Govt Officer

Yeah. Only one factor so as to add there. If you’re promoting CX at present, you could have various choices to drive enlargement or to drive a much bigger sale. You possibly can add Freddy AI Agent to resolve L1 help issues.

You possibly can add Freddy AI Copilot, the per-seat license, to enhance the productiveness of the brokers that you simply’re serving. You possibly can — in the event you’re promoting IT, you may provision our ESM product, Freshservice for Enterprise Groups, to handle a broader set of workers inside the firm, or you may convey Device42 in. So, there’s loads of enlargement choices that now we have at our fingertips now that frankly, two years in the past, we did not have which might be serving to us drive the enterprise ahead and serving to us drive constant progress.

Brent Thill — Analyst

Thanks.

Operator

Thanks. Our subsequent query is from the road of Rob Oliver with Baird. Please proceed.

Robert Oliver — Analyst

Nice. Thanks, Dennis. I wished to ask on Device42 as properly after your remark and possibly a follow-up to Brent’s query earlier. However are you seeing out there kind of enchancment in win charges now that you simply guys have the chance to come back to the desk with an ITAM resolution? What has that accomplished to the aggressive alternative for you guys in ITSM? And the way does that assist that? After which are you able to simply remind us of what different deadlines or milestones now we have this yr to look ahead for Device42? I do know Tyler talked about the anniversary of it however I believe there’s additionally some technological or monetary milestones that we must always pay attention to as properly.

Thanks.

Dennis Woodside — President and Chief Govt Officer

Sure. So, let me begin with the milestones. The primary one was met in — earlier in January. We launched a revamped integration between Freshservice and Device42 that enables for extra seamless synchronization of information throughout these two platforms.

So, I could be working in Freshservice and see information that is being pulled from Device42, which you could not do earlier than. You wanted to modify purposes and so forth. So, that was the primary milestone. The second milestone is a cloud model of Device42, which we’re slating for late this yr or early subsequent yr, and that is on monitor as properly.

These are the 2 technical milestones to bear in mind. When it comes to the aggressive dynamics, the explanation that we went out and seemed for an IT asset administration resolution was that we had been shedding offers within the mid-market and decrease finish of enterprise over performance for IT asset administration. A whole lot of firms, once they’re shopping for their ITSM, wish to purchase their asset supervisor together with it. And what we have seen is that we’re capable of transfer into these bigger and bigger deployments.

instance is New Steadiness. And New Steadiness got here to us once we had a partnership with Device42 however we hadn’t initially bought the corporate. After which throughout the course of the sort of discussions with them, we did and now they’re implementing Device42 as a part of their world resolution. And that is the sort of buyer that we wish and that we’re constantly profitable now.

One other one was the exhausting drive producer that I referenced, 13-year buyer of ServiceNow. An enormous element of that sale is Device42. So, we’re completely seeing it as important for our progress and for us to make that upmarket movement. And once more, it is solely been — keep in mind, it is solely been one quarter once we’ve been absolutely promoting collectively, however the truth that 3 of our largest 10 offers concerned Device42 is an actual constructive.

The truth that we entered this quarter with twice the pipeline we had final quarter and final quarter was fairly good only for Device42 is that is constructive. After which simply the — I might say the excitement among the many gross sales workforce about Device42 and the flexibility to convey that to market has been tremendous constructive as properly.

Robert Oliver — Analyst

That is nice shade. OK. Thanks quite a bit. Recognize it.

Operator

Thanks. And our final query comes from Ryan MacWilliams with Barclays. Please proceed.

Ryan MacWilliams — Analyst

Hey, guys, thanks for the query. Tyler, how ought to we take into consideration the form of web retention for this yr as implied by the information? And the way ought to we take into consideration the Device42 income contribution for 2025? Thanks.

Tyler Sloat — Chief Monetary Officer

Yeah. So, we talked about web greenback retention for sort of Q1 is 104%, and we did not actually speak — give steering for the complete yr. However proper now, we do not see something totally different for the complete yr. And so we predict it may be comparatively constant.

Clearly, as we get extra constancy on that quantity every quarter, as enlargement charges and churn charges, as we see that we are going to replace that. However proper now, I might simply mannequin it out as we get them out for Q1. When it comes to Device42, we truly don’t plan to interrupt out the Device42 quantity. As we indicated within the script, proper, 3 of the highest 10 offers in This fall included Device42, and half of the online new Device42 offers had been truly bought by Freshworks groups, which implies that they’re bought in bundle with Freshservice.

And as such, that is a extremely constructive indicator that the explanation we did the deal is beginning to come to fruition. It is all beginning to be included as one product, one united product, and it may be very tough to sort of disassociate income from one to the opposite as we undergo that. So, if there’s any big anomalies, we’ll name them out. However typically, we do not plan to tell apart.

Ryan MacWilliams — Analyst

Is smart. Thanks, Chris.

Tyler Sloat — Chief Monetary Officer

Thanks, Ryan.

Operator

Thanks. And this concludes our Q&A session and program for at present. [Operator signoff]

Period: 0 minutes

Name contributors:

Joon Huh — Vice President, Investor Relations

Dennis Woodside — President and Chief Govt Officer

Tyler Sloat — Chief Monetary Officer

Brent Bracelin — Analyst

David Hynes — Analyst

Elizabeth Porter — Analyst

Unknown speaker — J.P. Morgan — Analyst

Patrick Walravens — Analyst

Rob Morelli — Analyst

Brent Thill — Analyst

Robert Oliver — Analyst

Rob Oliver — Analyst

Ryan MacWilliams — Analyst

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