Thank you for standing by, and welcome to the Freshworks Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Joon Huh, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Freshworks Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining me today are Girish Mathrubootham, Freshworks' Chief Executive Officer; Dennis Woodside, Freshworks' President; and Tyler Sloat, Freshworks' Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our fourth quarter and full year 2022 performance and our financial outlook for our first quarter and full year 2023. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Freshworks' current expectations and estimates about its business and industry, including our financial outlook, macroeconomic uncertainties, management's beliefs and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For a discussion of the material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-Q and our other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this presentation, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release, which is available on our Investor Relations website at ir.freshworks.com. I encourage you to visit our Investor Relations site to access our earnings release, periodic SEC reports, a replay of today's call or to learn more about Freshworks. And with that, let me turn it over to Girish.

Thank you, Joon, and welcome, everyone. Thank you for joining us today on Freshworks' earnings call covering our fourth quarter and full year 2022. Overall, we executed well in the quarter. We exceeded expectations across our operating results for total revenue, non-GAAP operating income and free cash flow. We capped off a strong finish to the year with $133.2 million in quarterly revenue as we surpassed $500 million in annual recurring revenue. In this environment, as companies are seeking greater value for their IT spend, we are seeing the Freshworks' value proposition resonates more than ever. In Q4, we added approximately 1,800 new customers to our growing base and ended up with more than 63,400 total customers, including the San Francisco 49ers, Finchoice, Mahindra, Supara, St. Marche, and Yulu Bikes. I'm incredibly proud of how we grew the business. We also improved our non-GAAP operating margin by 8 percentage points in Q4 on a year-over-year basis, and we generated positive free cash flow of $4 million in the quarter. Our approach during this recent period of macroeconomic uncertainty, was to focus on driving our growth through 4 key strategies. We believe these 4 business drivers will continue to move us forward in 2023. First is our continued focus on product innovation. In 2022, we expanded our unified CRM platform to include Freshchat. We launched this service for business teams to extend first service beyond IT. And we made our bots smarter across our CX, IT and broader CRM products to help businesses engage their customers faster. Second, we saw results from our focus on larger customers, which is driving most of our growth. Today, nearly 60% of our business comes from mid-market and larger companies, with many of our Q4 deals starting with Freshservice. The third business driver is expansion.…

Thank you, Girish, and hello, everyone. Thanks for joining us today. I'm 5 months in at Freshworks, and I'm excited by the progress we're making in the business. We closed the year on a high note, beating our financial estimates and improving our operating efficiency. In a tougher market environment, we improved our execution to drive the highest new business quarter ever. We saw increased competition for many of our deals, and yet we still improved our win rates for our CX and ITSM products. This was especially true for our larger deals in the field, with Freshservice leading the way as a scalable and cost-effective solution that is delivering incredible value to our customers. G talked about our first of 4 business drivers: product innovation. I'll cover the next 2, our success with mid-market and enterprise customers and our expansion motion. I'll start with our enhanced focus on mid-market and enterprise customers. Over the last 18 months, we have made substantial investments in people and tools to expand our go-to-market motions. We believe those investments, which are now reflected in our cost base, are paying off in higher win rates participation in more deals and the expansion of our mid-market and enterprise business. In 2022, our new business wins increased, with companies spending more than $50,000 in ARR. And in Q4, this customer cohort grew 35% year-over-year and now represents 44% of our business. While our business was historically more in SMB, our revenue base has shifted over the years towards more mid-market and enterprise customers. Today, nearly 60% of our business is coming from mid-market companies, those with 251 to 5,000 employees, and enterprise customers with more than 5,000 employees. That's because our cost-effective yet powerful products are delivering real value fast. They can scale to serve thousands…

Thanks, Dennis. Looking back on our Q4 and full-year 2022 performance, I'm pleased with our ability to drive operational efficiencies in the business. Starting last year, we knew that 2022 would be a big investment year, building out our go-to-market teams, investing in product development and taking on a full year of G&A public company costs. What we didn't know was how the macro economy would play out and how that would impact the overall market for our products. During the year of a slowing demand environment, negative FX movements and pressure on small businesses, we still beat the high end of our 2022 estimates for revenue that we laid out one year ago by $3 million. More significantly, we effectively managed our costs throughout the year to beat the high end of our 2022 estimates for non-GAAP operating income by over $26 million. We believe we have a durable business model and we're improving our operational efficiency as we drive business growth. In Q4, we had another quarter of increased efficiency, with revenue beating expectations, non-GAAP operating loss outperformed expectations by $6.5 million in the quarter. We improved our non-GAAP operating margin year-over-year, and our business inflected to generate positive free cash flow of $4 million and non-GAAP EPS of $0.01 in the quarter. As I normally do, I'll review our Q4 financial results, provide background on key metrics and close with our expectations for the first quarter and full year 2023. I will also include constant currency comparisons to provide a better view of our business fundamentals. Most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles and other adjustments. Starting with the income statement. Revenue grew 30%, adjusting…

[Operator Instructions]. And our first question comes from the line of Pat Walravens from JMP Securities.

Great. And congratulations. I have two, if that's okay. The first one is on the macro, which is just last quarter, you guys were talking a lot about companies reducing their growth forecast and headcount need. While your tone seems so much better now, did the macro -- I mean, I hate to even say this, but did the selling environment for you guys improve in some way in Q4? .

Pat, this is Tyler. I'll start the answer because -- is this the first part? Or do you want to ask the second question as well?

Yes. And the second part is just -- I think it would be great to have Dennis. I mean, obviously, he's on the Board to ServiceNow and he's in the Dropbox in Google, why you take this job? Let's throw that out there.

Well, let me start on the macro. Look, we had a really good quarter, especially on new business, right? And we called that out and that felt strong, which I just think is a testament to our products and the value that they can bring to customers, even in tough markets. The place that we continue to see pressure was on expansion. And that macro is still playing there, right? And that the expansion motion did slow down throughout the year, but we talked about that throughout the year. We expect to continue to see that for a while. But on the new business side, yes, we are upbeat because we're optimistic because we had a good quarter on the business. But I'll hand it over to Dennis.

Yes, just some commentary on the new business front. So I think over the last 18 months, we've made substantial investment in the products themselves. So if you think about our ITSM product, we announced enhancements that allow us to fulfill ITOM requirements in the second half of last year. We rolled out an ESM product. So we're able to address broader and broader needs of larger customers. And really, this is just a continuation of a trend and a set of investments that have taken place over the last 12 months or so that really are starting to pay off in terms of those new business wins. We are seeing better win rates, competitive win rates in Q4 than we did in Q3, both for Freshdesk and for Freshservice. And we're getting involved in more deals. So we're -- companies are looking to us when they're evaluating better solutions, solutions with lower total cost of ownership, everybody is looking for value. So we're getting more swings and we're hitting the ball more often. And I think that really started to show in Q4. In terms of why I joined, I see an opportunity to build a company that does serve every business in the world. Every business in the world has a need for the products that we currently build, we can serve companies, employees and customers equally well. And I think the vision that G has laid out and the products that he's built around creating a seemless, easy-to-use, easy-to-implement set of business software is super compelling. So that's why I joined.

And our next question comes from the line of Ryan MacWilliams from Barclays.

Tyler, I would love to hear about maybe how we should think about net retention as we move through this year. And just on your full-year guide, how does this contemplate the macro? And have you guys thought of a scenario where should things get worse from the economic perspective, plans to get to breakeven faster from here?

Yes. You bet, Ryan. So net dollar retention, to start off with, we did say something on the call there that we do expect that to decrease a little bit. The net dollar retention churn, there's two sides of that coin. We've been pretty open that we have made really good progress on gross churn over the last couple of years in Q3 and Q4 of this past year. The churn kind of remains stable and just essentially stayed flat, which -- churn includes downsell for us. So that was a good thing. Our goal right now is to try to keep it there because I do think that's going to see some additional pressure. The expansion motion, you guys know, our biggest form of upsell is agent addition. And we started to see that kind of after Q1, we talked about it last year, and we saw it throughout the year. And we expect to continue to see pressure on that, and that is what's driving the net dollar retention down. And we said it could come down in Q2 -- in Q1. It could come down a little bit after that in Q2, but obviously, we're going to work as hard as we can to normalize that. In terms of our guidance, we've built in everything that we see. And we're trying to call it as we see it. And we have -- we do expect that expansion motion to see some pressure. We are looking at other ways that we can expand with our customers, specifically like a Freshservice for teams, our new ESM application, we're really excited about that. And obviously, we're going to continue to lean in on new business, which was really good in Q4.

Great. And just a follow-up on Patrick's question. The customer adds above 5000 ARR appeared strong in the quarter. Just given what you mentioned on headwinds, the seat expansion, was the strength in these adds was probably from net new customers or perhaps maybe customers renewing larger with upsells or upgrading the plans just like the piece of part, the there?

Yes. We talked about the 50,000 that, that actually the biggest adds to the 50,000 were in expansion -- and that actually helps the 5000 as well, but the 50,000 I think was helped a little bit more. . We also -- there's a little bit of FX on both sides, but yes, also driven by new customer lands, which we had -- we really had a really strong new business quarter in Q4. And obviously, we're going to continue to lean in on that. But customers are still expanding. Net dollar retention was still -- it came down slightly, but it was still good. And even though there's pressure there, we do have customers who are growing on us. And that was the #1 reason for the greater than 50 and also helped the greater than 5.

And our next question comes from the line of Pinjalim Bora from JPMorgan.

I wanted to take it on the guidance a bit. Basically trying to understand if you added billings growth of about 29%, if I heard that correctly, adjusted. And the guidance is, I think, about 17.5% revenue growth next year. I'm trying to think, would you go -- are you expecting kind of a step down in macro from here? When I look at the additions to revenue, I think, in 2023 versus what you had in 2022 with something like a 33% decline, it seems pretty conservative. I mean, would you go as far to say, it is derisked at this point? Like how should we think about the guidance?

Yes. Again -- Pinjalim, this is Tyler. Again, on guidance in general, we are trying to call it as we see it. And that -- what we've done is we've taken into account that we expect to see continued pressure on the expansion motion and as our biggest form of upsell is agent addition. And when we look at that, the Q1 calculated billings, just said, 17% and 20% on a constant currency. And then obviously, if we see any adjustments like the 4% you mentioned that we talked about in Q4, I will add that at the end of the quarter to provide more color. But in general, we're calling as we see it. I can't say it's completely derisked because I don't know how long the macro conditions are going to hold. I think there's upside. If companies go back to growing, we would clearly expect to take advantage of that growth with them. But if things get worse, we could actually see pressure there as well.

Understood. And one for Girish, we recently hosted one of your partners, and he seemed pretty bold up on ITSM, and you're seeing good traction on the ITSM side. It seems like you're taking share. How do you see that the position of Freshservice at this point in the market? Maybe talk about it with respect to Atlassian seems like entering the market as well. And how should kind of investors think of that business -- sustainable growth of that business minus any macro?

So Pinjalim, from a Freshservice business standpoint, let me talk to you about the competitive landscape and our positioning and strength. So clearly, we know that ITSM is a huge market. And from a TAM standpoint, now we expanded into ITSM, ITOM as well as enterprise service management, so there's no doubt on how big the market is. . Now Freshservice is today the most credible alternative to ServiceNow in the industry. And we are seeing that come into play, especially in mid-market and enterprise companies, specifically in this environment where businesses are scrutinizing their spend very clearly, like every dollar of IT spend. So we are actually competing against and winning against ServiceNow, and we have also replaced ServiceNow anecdotally, even in the last quarter, multiple times. So that is on the enterprise side, where there is ServiceNow. Now before I comment on Atlassian, you should also understand that there is a ton of legacy out there like BMC Remedy and [indiscernible]. So we actually -- Mahindra, one of the largest conglomerates in India, moved off of a large legacy incumbent in 2022. So specifically with Atlassian, we are seeing them in some of the lower end of the mid-market deals. But we win -- Freshservice wins purely based on the fact that we are built from the ground up as a full-blown ITSM and ITOM solution, whereas Atlassian, I think, has made around 4 acquisitions, and they're trying to stitch together a unified product experience. I think our customers choose us because of the unified product experience.

And our next question comes from the line of Rich Hilliker from Credit Suisse.

So you mentioned it was the highest new business ever in this quarter. I think you talked about for some customers, they were expanding. I think you called out the ITSM side. Tyler, I think you mentioned some stable retention. The question is, I'm wondering, what portion of overall bookings would you say came from newer expansion versus renewal in this quarter? And maybe for the new business, can you give us a sense of the duration of those deals?

Yes. Rich, I'll take that. We don't break out the new versus expansion in terms of core, but we did have one of our best new business quarters ever. And we did say that where it's coming from Freshservice, it's still smaller than Freshdesk from an ARR perspective, but it continued its trend to be the biggest ARR contributor in the quarter, which it has been for the last couple of quarters, and is growing faster than Freshdesk. . On a duration perspective, we've got about, let's call it, 60% of our business roughly, those aren't exact, that are on annual contracts. And that there was no big change on that. Now what does happen is that the bookings mix can change, based on the expansion motion, right, because it depends on where you are within the contract on expansion and how much that billings would look like. But in terms of the new business, there wasn't any significant change. There has been this steady change of moving more to annual over the last couple of years.

Okay. Great. Yes, that makes sense. And then maybe one last one here for you, Dennis. I was wondering if you can talk a little bit about your vision for unlocking multiline of business selling. I know you guys disclosed multiproduct, but multiline of business is kind of where I'm kind of zeroing in here. Maybe what do you still need to stand up or mobilize to ignite this even further?

Yes, thanks for the question. Well, first of all, I would just say that it's happening, right? One of the examples that we talked about was Addison Lee. Addison Lee distantly originally was a Freshservice customer for a couple of years, satisfied with the product. We were serving their IT department, and they decided they're not satisfied with their existing CRM, large incumbents, they're not getting value out of it, very expensive to continue to maintain. And so they look to us. And so that kind of situation we're seeing across the pitch. iCore, it was another account that was an expansion from Freshservice into Freshdesk. So it's happening right now. I think the focus has been very much on new business. But as we kind of continue to scale up and we continue to have success with these larger accounts, iCore is a company with 35,000 employees. There's lots of opportunities for ESM and for other product expansion there, we're going to be leaning into that motion much more. But like I said, so far, a lot of the emphasis has been on new business, and we're getting natural kind of product cross-sell, we call it persona cross-sell. That's going to become an increasingly important part of our business, going forward, and a big opportunity for us..

And our next question comes from the line of Brian Peterson from Raymond James.

Congrats strong quarter. So I just wanted to hit on the net adds. Obviously, I think it was better than what we were expecting. Is there any commonality in terms of the geo, where you guys are having more success or -- I actually love to understand to maybe what you guys are displacing in terms of what you're picking up from net new? I know it's different by product segment, but any color there would be helpful.

This is Dennis. So on net adds overall by geo, for Q4, we saw a pretty good performance across the board. Our North America business was actually a little bit stronger than the rest of the world than Europe and Asia PAC. But our European business performed well. We were pretty satisfied with kind of each of the geographic units. So I wouldn't say there's any specific trends geographically that is driving the business. In terms of who we're displacing, customers come to us with a wide variety of current IT footprints and situations. In some cases, we're displacing very much kind of old on-prem systems, think of BMC, that where the product, this is not scaling to what the customer needs, and they are looking to make a change. In other cases, we are displacing the likes of Zendesk or ServiceNow or Service Cloud, where the customer is no longer satisfied with the overall value proposition, especially in the current economy. And they're looking for much better value. They're looking for a simpler product that they can deploy quickly and get fast time to value, and they're looking for a product that doesn't require them to have a number of consultants or specialists on staff just to maintain the product and make sure it does what it's supposed to be doing. So it's -- there's not -- I wouldn't say there's one competitor. I wouldn't say there's one situation. It's really a fairly wide range of situations that's driving our growth.

And maybe a follow-up. I'm curious if you've seen any changes in the pricing environment over the last 90 days and maybe anything that you guys have seen so far in 2023?

Yes. So this is Dennis. We haven't seen any major change in pricing. I would say, the second half of last year on the Freshdesk side, the service clouds of the world and Zendesk have been very aggressive on pricing. But that was true in Q3 and really continued into Q4. I wouldn't say there's any discernible trends on the ITSM side to note.

And our next question comes from the line of Elizabeth Porter from Morgan Stanley.

You mentioned earlier just the better win rates. So I wanted to get a little bit more color if you're seeing any particular improvement at the low end versus the high end or if it's broad-based. I know you guys have been doubling down on functionality. And then second, just kind of within those competitive conversations. In your conversations, is there any bit more of a lean towards just the product functionality versus price being the incremental driver that tilts the deals you win?

Great. Dennis, I'll take that one. The trends that we're seeing on win rates are broad-based. So it's not confined to any one segment or any one product, both our Freshdesk and Freshservice products. And Q4 saw higher win rates than Q3. That said, for mid-market and enterprise -- the mid-market and enterprise segment, our win rates improved at a higher rate. So we saw meaningful improvement there. Now in terms of why are -- why is that happening? Well, most of the customers that we're talking to now, one of the number one things on their mind is value, either total cost of ownership. They're looking at -- they need a business case. And part of that equation is what is the cost to implement the products, what is the timeline for implementation? How fast can we get the value? And what's the ongoing maintenance cost to get the functionality out of the products that they need? And in many cases, we are superior on all 3 dimensions. Now from a product functionality standpoint, if you were to wind back the clock 12 or 18 months, we've done a lot in the last 12 months, 18 months to be able to compete on a feature-by-feature basis with the likes of a Zendesk or Service Cloud or ServiceNow. And the product functionality has gotten better. The robustness has gotten better. Product is scaling incredibly well. We support thousands of agents, millions of customer interactions across our customer base. All of those investments that we've made over the last 12 or 18 months are paying off, and that really is helping drive those win rates up. So we think it's quite promising for the future and for where our buyers are going. We think the product we have is the right product, the right strategy for where the market is today, and that's a big opportunity for us.

Sorry. Elizabeth, I just wanted to add on just -- this is Girish. So on the product functional basis, so it's important to note that if you take CX, for example, Freshdesk and Freshchat together offers the most comprehensive omnichannel customer service solution today, covering the whole spectrum of automational service, automational bot as well as conversational agent experience on modern messaging channels, combined with ticketing, right? If you take a Freshservice, like we have a unified single product across ITSM and ITOM and ESM, which is Freshservice for Business team. So I think that is the value that we're talking about, really, customers not having to buy 4 or 5 different tools and struggle with integrating all of that. So that is the superior product value, where everything is built organically in one platform.

Great. And then just following up, you mentioned just now the conversational kind of bots and the seamless kind of one platform. Earlier this week, there was the announcement just around the Meta kind of Messenger integration and bots. And there was a good amount of buzz in that in the market post that announcement. So just wanted to get a little bit more color from you on the opportunity around that function and feature set, do you see that add new customers or accelerate revenue per customer? Kind of how are we thinking about those capabilities, more specifically, that what recently announced?

Sure. I'll take that. So first of all, let me clarify by saying that our partnership with Facebook and Meta goes a long way since 2011, where we were the first -- Freshdesk was the first help desk to integrate Facebook Messenger when they introduced that. So the recent announcement that we did was more calling out some of the customers' usage of this. And we know that conversational has really been picking up in the last few years. And like the messenger apps under the Meta portfolio, like which is Whatsapp or Instagram or Facebook Messenger, so there are more than 1 billion messages every month that businesses are sending over these channels. And so this announcement was specifically to call out some of the customer wins that we have with our conversational product and -- showcasing how we are powering those conversational customer support experiences, specifically for B2C companies. So I just wanted to call out that it is -- our partnership with Meta, like it's not a new one, and it's been ongoing. And so this is more to showcase some of our customer work.

And our next question comes from the line of Scott Berg from Needham.

I have a couple. First is on kind of sales process as you look at calendar '23 here. We all know what's happening with the macro last year and into this year. But as you look at your sales processes and overall go-to-market strategies, outside of maybe just leaning into something like ITSM that's selling a little bit better, is there anything that you're changing in those processes that would be noteworthy to try to effectively maybe get some of these new customers over the line faster?

Scott, it's Dennis here. So yes, there are a number of things that we're doing. I think, before I get to the sales specific ones, I would just go back to the product side. A number of the features that and big enhancements that we launched in the second half of last year, we're really getting traction with now and into Q4, things like ITOM, things like ESM and the enhancements on the conversational side to Freshdesk that G referred to. So a lot of it is, "Hey, we've got products that really are well suited to the market." In terms of the field side, one of the -- a couple of the adjustments that we've made has been -- have been to focus on bigger deals and focus more squarely in the mid-market. So I would say, this is just an enhancement to the strategy that we've been pursuing for the last year or so. One of the things we did was we shifted our field team to focus on accounts with employees from 500 to 5,000 employees as the ideal customer profile. And in the past, the field team would focus from 250 to 500. We can serve those 250 to 500 employee companies very well and more efficiently through our operations through inbound. Many of them -- most of them are coming to us anyway through a response to a marketing message or coming to our website and signing up for a trial. So that was one pretty meaningful change. Another change, we've created a set of product specialists to focus on Freshchat and Freshsales in particular. Both of those products are fairly complex. The competitive set is complex. So we feel the specialization on the sales side is really important. And we think that, that will result in continued improvement in win rate for those products. And in general, the field team is pretty jazzed up about kind of what the product set looks like, the competitive positioning and kind of where we are in the market. So we're excited about this year, and I think we're going to see quite a few opportunities.

Got it. Very helpful there. And then from a follow-up perspective, Tyler, as you look at your guidance to start fiscal '23 here, have you changed it at all with regards to what you're seeing in the macro compared to maybe a year ago? I know you talked about you're trying to call it as you see it right now. But as you think about that general philosophy, just curious to know if there's anything different about it?

There's no change in philosophy, Scott, I mean like trying to take everything into account that we know. A year ago, we did not know the impact of kind of macro, right? We did not expect the expansion motion to slow down the way it did throughout the year. And so now, it's kind of the opposite. We actually expect it to continue to be tough for a while, and we've built that in. And we'll see how it goes throughout the year. And obviously, we're going to do our best to find other ways to grow with customers. But in terms of the philosophy itself, there is no big change.

And our next question comes from the line of Brent Thill from Jefferies.

This is Luv Sodha on for Brent Thill. Just wanted to ask one for Girish. On ESM, could you maybe -- to categorize that opportunity, could you maybe give us an attach rate to core Freshservice? How should we think about the opportunity within the installed base that you already have?

So if you really think about Freshservice for Business Teams, one of the things I would like to tell you is even before the launch, we knew that almost 4,000-plus customers of Freshservice were actually using it outside of IT, like in departments like HR facilities, legal and finance. So I think that gave us the real product validation that we needed to create the new module to kind of price it separately, give the workspaces that are required. So we actually think there is tremendous opportunity to go into all of the existing customer base and actually encourage them to use Freshservice inside those other themes. And also, the Freshservice for Business Teams is actually priced lower than an IT agent, so we think it will be attractive for that. So that is an expansion motion play, which we will be taking on to take this to existing customers. Having said that, we also have multiple new lands where we are landing in multiple departments, not just IT. So I think both of this will allow us to extend Freshservice for Business Teams into multiple departments within the company.

Got it. And then one quick follow-up for Dennis. In terms of the go-to-market organization is, I know last quarter, obviously, Patty was appointed as the interim CRO. Any other changes, I guess, in terms of the organization itself? And do you feel like you have all the resources you need to execute this year?

Yes. So first of all, Patty has done an amazing job taking on the CRO role. And a number of the changes that I described earlier around, the focus on 500 to 5,000 employee companies, crisping the team's focus on larger deals, winning larger deals, some upskilling that's going on across the organization, that all is being driven by Patty and all very positive. And I think it's incremental changes from where we were, but it's really meeting the customers where they are coming to us. And as I've said earlier, as our product market fit is becoming much more apparent to the market, that's creating a lot of opportunity for us to move up. So we're very pleased with where things are in the go-to-market side right now.

And our next question comes from the line of DJ Hynes from Canaccord.

Maybe I could just follow up on Luv's question there around the broader ESM strategy. I mean, how much attention do you think investors should be putting on that today? Like if we fast-forward, could ESM be ultimately a bigger opportunity than core IT? Like how are you thinking about sizing the two relative opportunities within the Freshservice portfolio?

So I think right now, it is still early days for us. So -- and also we are landing ESM through IT departments, side. We are not actually starting a go-to-market motion where we're trying to sell this to HR teams or finance teams. So I think in that sense, we are -- our go-to-market is go to IT and then focus on organizations where IT is helping HR, legal and finance teams to do that. So I don't expect ESM to be much bigger than IT in the short or in the coming, say, short term. So I would still say that we will land with IT and then expand into other or maybe and into multiple departments.

Yes. Yes. Okay. Okay. That makes sense. And then, Tyler, on the sales and marketing side, how much of your spend is variable versus fixed? And I'm really getting at kind of that inbound side, which I think is largely driven by digital marketing spend. Like how much flexing up and down can you do there to control margins? And where are you on that spectrum today?

Yes. We don't think of it as flexing up and down. We do look at the digital marketing spend, we plan it out, and then we do we do kind of change it if we're seeing big changes in auction rates or conversions. And -- but it's not one that we're using as a margin lever necessarily because it does feed one whole side of the business, right, which is that kind of that SMB that lower than 250, a lot of that is fed by digital marketing spend. And outside of that, that's a variable component. And for the SMB, it's the biggest kind of cost on the flip side for the field and where most of our business is coming from now, which is that field business, which is kind of the greater than 500, the variable component there is commissions, but it's all headcount, right? And that's mainly headcount driven. It is important to note that we spent a lot of kind of end of '21 and a lot of last year building out that field presence. And we have -- we think we have a lot of those piece parts in place right now. We still are hiring quota-bearing reps, where we think we need them. But we have built out a lot of that already.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Joon Huh for any further remarks.

Great. Thanks, everybody, for joining us today. If you have any other questions, please feel free to call or e-mail. We look forward to catching up with you throughout the quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.