Hello. And welcome to Freshworks Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker’s presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker, Joon Huh, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon. And welcome to Freshworks fourth quarter and full year 2024 earnings conference call. Joining me today are Dennis Woodside, Freshworks Chief Executive Officer and President; and Tyler Sloat, Freshworks Chief Operating Officer and Chief Financial Officer. The primary purpose of today’s call is to provide you with information regarding our fourth quarter and full year 2024 performance, and our financial outlook for our first quarter and full year 2025. Some of our discussions 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 the timing of future repurchases of our Class A common stock 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. Such risks include but are not limited to our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand and to control costs and improve operating efficiency. For discussion of additional material risks and other important factors that could affect our results, please refer to today’s earnings release, our most recently filed Form 10-K and 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 call, 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 for historical periods 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, supplemental earnings slides, periodic SEC reports, a replay of today’s call or to learn more about Freshworks. And with that, let me turn it over to Dennis.

Thanks, Joon, and thank you, everyone, for joining us today on the call. Q4 was another great quarter across the board for Freshworks. We outperformed all our key metrics and exceeded our previously provided estimates for growth and profitability, finishing the year on a high note. We ended the year with over 72,200 customers who’ve chosen Freshworks CX and EX software to transform their business. Time and again, overpriced legacy software vendors with overcomplicated products drive customers directly into our hands. Customers choose Freshworks uncomplicated software to deliver powerful productivity gains for IT, customer support and other Business Teams. In Q4, revenue grew 22% year-over-year to $194.6 million, beating our previously provided estimates. We delivered a non-GAAP operating margin of 21% and generated adjusted free cash flow of $41.7 million, resulting in an adjusted free cash flow margin of 21% for the quarter, also outperforming expectations. We added over 2,600 net customers in Q4, representing the largest quarterly increase in four years. We welcomed and onboarded notable customers, including Mesa Airlines, retailers like New Balance and Rawlings Sporting Goods, and software companies like Sophos. We saw healthy expansion activity and maintained a similar net dollar retention of 105% on a constant currency basis compared to the prior quarter. We also succeeded in expanding our business with many existing large customers, including Amex GBT, Coherent, Klarna, EDF Renewables, and UCLA. Our strategy to drive durable and profitable growth is working. Our first imperative is investing in EX. We are doubling down on our largest, fastest-growing Employee Experience business, which includes ITSM, ITAM, ITOM, and ESM. Our second imperative is delivering AI capabilities across our products and platform. We are driving productivity improvements for our customers in both Employee Experience and Customer Experience. Our third imperative is accelerating growth for our Customer…

Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today. For our call today, I’ll cover the Q4 and full year 2024 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q1 and full year 2025. As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, restructuring charges and other adjustments. We will also talk about adjusted free cash flow, which excludes the cash outlay related to the restructuring costs in Q4. We are pleased to report another outstanding quarter and a strong finish to the year as we surpassed both our previously provided topline and bottomline estimates in Q4. We made significant improvements to our overall cost structure, expanding our non-GAAP operating margin by 800 basis points quarter-over-quarter to 21%, as well as growing our adjusted free cash flow 46% year-over-year to $41.7 million, which resulted in a strong adjusted free cash flow margin of 21%. These results reflect the successful execution of our strategic initiatives as we remain confident in our ability to drive profitable growth for our business. Let me first start with FX, as this had a meaningful impact on our reported numbers in Q4. We observed a notable shift in FX rates throughout the quarter, driven by the strengthening of the U.S. dollar. Q4 revenue impact was minimal, but this resulted in a 3-percentage-point negative impact to our ARR growth or $17.5 million reduction to our ARR. As such, I’ll include constant currency comparisons for many of the metrics to provide a better view of our underlying business trends. Starting with the income statement, total revenue in Q4 increased to $194.6 million, growing 22% on a reported basis and 21% on…

Thank you. [Operator Instructions] One moment for our first question. It comes from the line of Brent Bracelin with Piper Sandler. Please proceed.

Thanks for taking the question. I guess the first one here, I wanted to double-click into EX. This is now a $400 million AR business, 20% plus organic growth rate. How are you thinking about the growth potential here as you start the anniversary Device42? Do you think you could sustain 20% plus? What’s the opportunity here in EX? Double-click there if you could. Thanks.

Thanks, Brent. So it’s Dennis. We think the opportunity is huge. And that -- our EX business is squarely focused on the mid-market and lower end of enterprise. Our ICP is a company with anywhere from 250 to 20,000 employees. And that part of the market, if you think about the IT department, you have sophisticated demands. Typically, these businesses are global. They need ITAM, they need ITOps, they need what we have. And the biggest competitor obviously is ServiceNow. That product is very complex and requires a lot of work to get up and running, a lot of work to get value from. We hear this all the time. So those companies in that segment, they’re looking for something that’s enterprise grade without the enterprise complexity, and that’s fast time to value and overall lower total cost. So, the reason that we had, I think it was 40 plus $100,000 wins last quarter is because that mid-market is responding and we’re starting to get a flywheel of customers that are switching or if they were coming off of a legacy provider like an Avanti or ShareWell, they’re choosing us over a ServiceNow. So, we think that market is huge. Just in the U.S. alone, the mid-market as we’ve defined it account for about $10 trillion in economic activity. We think we can build a very big business there. In terms of the product, I think Device42, we’ve only really been selling it, with a real effort behind it in Q4. Q3 was spent building the pipeline and kind of getting all the post-merger stuff out of the way. But now, we enter Q1 with a pipeline that’s roughly double what we entered Q4 with and there’s a lot of interest from companies because companies need to get a better handle on their assets. They’re looking for a tool to help them on the security side as well. We think that’s going to be an accelerant. And we think AI is absolutely an accelerant to that IT business as well. So, a lot of good levers to pull going into 2025 and I’m very proud of the performance in Q4. It puts us in a good place going into this year.

Absolutely. And then, Tyler, one quick follow-up for you, if I could. Great to see the 20% plus op margin milestone this quarter, even with the acquisition. How are you thinking about balancing where you invest? I know the guide implies 16% op margin next year. That looks conservative. But with over a $1 billion in cash, would you consider more M&A to complement and help accelerate the product roadmap while still maintaining a prudent and efficient growth model here in margins? Walk us through the thought process around the cash, use of some of the investments going forward now that you’ve crossed over that 20% op margin milestone? Thanks.

Yeah. Thanks, Brent. Yeah. You’re right. I think we’re doing really, really well on efficiency perspective this past year, just free cash flow, as well as operating margin. We’re going to really continue to have that theme in terms of efficiency. But we’ve also been really clear, we will look at opportunities -- inorganic opportunities as they come up. Device42 was the first deal we’ve done in I think six years and the first substantial one, and we’ll continue to look at those. We’re clearly digesting Device42 and really trying to optimize what we can get for that. The same time, we’re going to exercise, continue to execute on our share repurchase and continue to do the net settles, which we use a good portion of cash this year. And we also said, when we went through kind of our restructuring in Q4 that we were planning to reinvest a lot of that into the business, really focused on making sure that we have the right people in the right places and investing for growth in a lot of areas. So I think we can do both. I think we can kind of make prudent investments and really kind of invest where we feel like we’re going to get the biggest returns while also bringing better bottomline performance.

Thank you. One moment for our next question, please. It comes from the line of David Haynes with Canaccord Genuity. Please proceed.

Hey. Good evening, guys. Dennis, can you touch on the 50K plus customer adds and kind of the slowdown in the metric there? I mean, it makes me feel like maybe the IT ESM business didn’t have the best net new quarter, but I realize also that metric doesn’t capture upsell, cross-sell of customers that may already be ahead of that threshold. So just help me kind of interpret that data point relative to the bookings that you saw on the IT side of the business?

Yeah. So thanks for the question. First of all, remember, we had a disproportionate FX impact in Q4. We’re more FX exposed than a lot of other players because we’ve got around 40% of our revenue coming from Europe and about 15% from rest of world. So that’s one that affected that 50K number. The second is we were lapping in Q4 against a pretty strong prior year Q4 and that had an effect as well. And the other thing is that we are landing more larger deals, but fewer of them. So we had in Q4 our most deals over 200K. We had a large number of deals over 100K and those are both expansion and renewals. So all of those things affect just the absolute number of customers with over 50K in revenue. So if you look at the ARPA for that cohort, that’s actually up. And that’s also something that, that we look at closely. So I think that this time through, that metric definitely was affected by some other factors, but we’re pretty comfortable with our upmarket momentum. You just look at the stable of customers that we’re gathering that are sophisticated global players, like a New Balance, and we continue to see opportunities to press upmarket.

Yeah. Yeah. That makes sense. That’s a helpful explanation. Maybe as a follow-up, you mentioned the Unisys partnership and maybe the opportunity to evolve that to an MSP opportunity over time. Maybe you could just broadly touch on kind of the MSP opportunity, how meaningful that could be on the IT side of the business and are you there from a product perspective today to support that type of customer?

Yeah. So, we’re really excited about Unisys. I had a chance to go out and meet with their CEO in Q4 and they are a GSI. They have a large cohort of companies that are right in our sweet spot, right in that mid-market, lower-end of enterprise space and those companies were coming to them looking for an alternative and Unisys spent a year evaluating every product in the market because they wanted to be able to build a service line around an IT product and bring it to market, and they chose us. And what we’re doing now is working on a co-sell motion. We’ve already had our first couple of deals that we’ve developed and landed with Unisys, as well as building, they’re going to be building an MSP around our Freshservice product, and we’ve been investing for a while now in the MSP functionality of our product. We have a set of releases that are coming out in May that will enhance the functionality for an MSP, things like multi-account management and so forth. We already have over 1,000 MSPs using the product, even though we haven’t really, up until recently, been building functionality that’s specific for MSPs. So we think the opportunity there is quite large and I’m pretty excited about it.

Excellent. Thank you very much.

Thank you. Our next question is from the line of Elizabeth Porter with Morgan Stanley. Please proceed.

Great. Thank you so much for the question. On the NRR side, the outlook still seems a little bit pressured from expansion and just given it’s been a few years that we’ve had that expansion pressure. I wanted to get a sense for at what point are customers kind of running lean enough that they could start to re-expand? And also, what’s the opportunity for the innovation cycle that we’re seeing with AI and AI also shifting more towards monetization become a lever to drive that expansion side to start to recover? Thank you.

Maybe I’ll take the second. Hey. So, Elizabeth, it’s Dennis. Maybe I’ll take the second part and then we’ll talk about NRR. I think that that innovation cycle is really just starting to play out. We’re seeing very healthy double-digit attach rates of our Freddy AI products in our SMB segment. And you saw the growth in total net adds for the quarter, best quarter in four years. A large part of those conversations now involve AI. And then we’re systematically going into our customer base of 70,000 customers and selling in AI, both AI Agent and Freddy Copilot to those customers as well. So we think that there’s a big opportunity there to drive growth from that segment going forward. And also, we do feel we’re still really early in the AI adoption cycle, but this year is the year when we’re going to see that continue to accelerate. And Tyler can talk about NDR.

Hey, Elizabeth. So, yeah, we came in at 105% for net dollar retention on constant currency. So it’s actually a little bit better than what we thought. We’ve been talking about how we’ve been doing really well on churn and churn for across all products is now in the kind of solid mid-teens. That being said, we’d also talked about, hey, we’ve been seeing pressure on our largest expansion motion, which is still agent addition. We have pressure on that for years. Now, we did see the decline in the expansion rate for kind of agent addition start to kind of stop in kind of the back half of the year, but we still have a decline from a year-over-year compare. So that’s kind of why we’re still calling 104% for Q1. That’s kind of what we see right now if expansion and churn comes in the way we see it. So obviously, Dennis just mentioned on the Freddy products, those are doing really well. From a monetization perspective, we still need to do some work on getting them to our existing install base, but on a tax rate for new business, they’re really, really healthy. Device42, we think, has a lot of capacity to go into our existing Freshservice base. And then our ESM offering for business agents for our Freshservice customers. These are the kind of add-on products that we’re really focused on going into 2025 that are going to be the supplement to agent addition.

Great. And just as a follow-up, I wanted to double-click on the SMB side. It sounds like the improvement in net adds is a lot of execution on the free-to-paid conversion. So I was hoping to get just an update on the broader SMB demand environment. Is the improvement that we started to hear about last quarter something that’s continuing and kind of what’s your outlook into 2025?

Yeah. I would say, Elizabeth, that the demand is stable to improving, and I think, you see that in the ARR figure for CX, where we’ve seen on a constant currency basis two quarters of around 7% year-over-year. So I think that SMBs still are constrained in that rates for them, interest rates, are quite high relative to history. But on the other side of it, they are starting to realize that AI can help and AI can help them be more efficient, more effective, especially the SMBs that are a little bit larger in the 100 to 200 employee range, where they have an IT department and they have a customer support team. And that’s really where our business is focused. So I’m optimistic for 2025. I can’t give you a completely clear single one way or the other, but we definitely were happy with the progress that we made in Q4.

Great. Thank you so much.

Thank you. [Operator Instructions] One moment for our next question. It comes from the line of Pinjalim Bora with JPMorgan. Please proceed.

Hello. This is Noah on for Pinjalim. Thanks for taking our question. Can you just maybe provide a little bit more color around what you’re embedding in the 2025 guidance as we look at both the CX business, as well as the Freshservice side of the business as well? Thank you.

Yeah. Hey, Noah. This is Tyler. We didn’t break out between the two different products. We’ve been talking about EX is still doing really well. We had a question earlier on what is the sustainability of kind of 20% growth there and we think that’s a huge market. And CX has kind of stabilized. We’re at that kind of 7% growth is what we said it was in Q4 and that’s one that we’ve been very open about what we’re doing there in terms of very focused efforts on an ICP. When we look at the guidance for the year, the revenue guidance clearly, this is the first guidance for the years. We do -- we have a lot more fidelity into Q1 than we do for the full year and we’ll clearly update it as we go throughout the year. I think the one thing that we did call out is that we are going to be annualizing the Device42 acquisition so that the compares from a revenue perspective do get tougher in the back half of the year than they are in the front. We also noted that there’s some nuances to the operating margin really around our merit cycle in Q2 and we would expect it to continue to drive efficiencies to the back half of the year and that’s why we expect that to go up. So we called out as much nuances as we know about right now. Clearly as we get to the end of this quarter and can reflect performance from this quarter for the year, we will update guidance for the rest of the year after this quarter.

One moment for our next question, please. And it comes from the line of Patrick Walravens with Citizens JMP. Please proceed.

Oh! Great. Thank you and let me add my congratulations. Dennis, I’m curious with sort of the recent advances that we’ve seen on the AI front with DeepSeek and then today, Mistral all of a sudden is ramping up to the top of the app store list. Have you guys had time to sort of wrap your arms around what that means in terms of what you could maybe do for your customers, which you didn’t think you could do before and also what the implications are for the cost that you guys incur when you deliver…

Yeah.

… AI across your base?

Definitely, Pat. Thank you. So look, competition is good for us among LLMs and competition has already driven pricing down and will continue to drive pricing down. We’ve built our tech stack so that we can and already do look at and test various LLMs as the space continues to innovate. So we rely today for conversational capability on Azure OpenAI and that’s because there are certain protections that are built in with respect to data, with respect to hallucinations, that Microsoft provides that we find a value and then we have our own protections on top of that. But we also have tested Anthropic. We have tested Google’s AI for, in particular, image. And we’re always looking at other models that are out there. We’re going to balance cost, performance, data security. All those things are important to our customers. And the competition is, overall, just something that’s going to help us deliver a better product at a lower cost over time. So, so far, all of that is good for us. All of the developments are good and we’re constantly evaluating all the models that are coming out.

All right. Super helpful. Thank you.

Thank you. Our next question is from the line of Scott Berg with Needham & Company. Please proceed.

Hi. This is Rob Morelli on for Scott Berg. Thanks for sending the question. Congrats on the quarter. Great to hear about some of the momentum with the SMB and CX. With this in mind, how do you think about your go-to-market investments for 2025? Is a large proportion still going towards ITSM or are there opportunities to invest in CX with this recent momentum? Thanks.

Yeah. So we balance our investments across CX and EX, depending on where we see the opportunity. We -- for the CX business, that today is about two-thirds SMB and so we continue to invest against marketing in particular to drive demand among the SMB community into CX. And the EX business tends to be more of a mid-market and lower-end of enterprise business. So those investments are going into field and the like. So, I think the way we look at the business, we’re going to allocate investment where we see momentum, where we see opportunity and continually adjust throughout the year depending on what kind of results we’re seeing. And over the course of the last year, we’ve been very mindful about both the payback and the economics of all those investments to make sure that it makes sense and you see that in terms of the sales and marketing as a percentage of revenue coming down and us continuing to drive efficiency in that sales and marketing line item.

Got it. Thanks.

Thank you. One moment for our next question. It comes from the line of Brent Thill with Jefferies. Please proceed.

Thanks. The 50% attach for Freddy Copilot is very impressive. Is there any way to quantify the ACV uplift, what you’re seeing on average?

We have not broken out the dollars yet on the attach rate in terms of quantification and the attach rate really is to new business on the larger deals. It’s a double-digit attach rate for the SMB deals. As we go about -- as we go through this year, specifically probably in our Investor Day, which is going to be the beginning of the back half of the year, we can look to provide more kind of the monetization strategy for our Freddy products. As a reminder, we have the Copilot, which is an add-on price to our agents, which is at $29. But we also have our Freddy AI Agent, which is more of a consumption-based model. And that one gets monetized more as our customers use it. We also talked about how many of those customers are actually now paying customers, which is over 1,300 customers that are now paying for additional bot sessions. So, again, we haven’t broken out the actual dollars, I think still a little bit early, but the progress is really, really positive.

Yeah. Just one thing to add there. If you are selling CX today, you have a number of options to drive expansion or to drive a bigger sale. You can add Freddy AI Agent to solve L1 support problems. You can add Freddy AI Copilot, the per-seat license, to improve the productivity of the agents that you’re serving. You can -- if you’re selling IT, you can provision our ESM product, Freshservice for Business Teams, to address a broader set of employees within the company or you can bring Device42 in. So, there’s a lot of expansion options that we have at our fingertips now that, frankly, two years ago, we didn’t have that are helping us drive the business forward and helping us drive consistent growth.

Thank you.

Thank you. Our next question is from the line of Rob Oliver with Baird. Please proceed.

Great. Thank you. Dennis, I wanted to ask on Device42 as well, after your comment, and maybe a follow-up to Brent’s question earlier. But I know, are you seeing in the market sort of improvement in win rates now that you guys have the opportunity to come to the table with an ITAM solution? What has that done to the competitive opportunity for you guys in ITSM and how has it helped that? And then, can you just remind us of what other deadlines or milestones we have this year to look forward to for Device42? I know Tyler mentioned the anniversary of it, but I think there’s also some technological or financial milestones that…

Yeah.

… we should be aware of as well. Thank you.

Yeah. So, let me start with the milestones. The first one was met earlier in January. We launched a revamped integration between Freshservice and Device42 that allows for more seamless synchronization of data across those two platforms. So, I can be working in Freshservice and see data that’s being pulled from Device42, which you couldn’t do before. You needed to switch applications and so forth. So, that was the first milestone. The second milestone is a cloud version of Device42, which we’re slating for late this year, early next year and that’s on track as well. Those are the two technical milestones to keep in mind. In terms of the competitive dynamics, the reason that we went out and looked for an IT Asset Management solution was that we were losing deals in the mid-market and lower end of enterprise over functionality for IT Asset Management. A lot of companies, when they’re buying their ITSM, want to buy their asset manager along with it. And what we’ve seen is that we’re able to move into these larger and larger deployments. A good example is New Balance. And New Balance came to us when we had a partnership with Device42, but we hadn’t initially purchased the company. And then during the course of the kind of discussions with them, we did, and now they’re implementing Device42 as part of their global solution. And that’s the kind of customer that we want and that we’re consistently winning now. Another one was the hard drive manufacturer that I referenced, 13-year customer of ServiceNow. A big component of that sale is Device42. So we’re absolutely seeing it as essential for our growth and for us to make that upmarket motion. And again, remember, it’s only been one quarter when we’ve been fully selling together, but the fact that three of our largest 10 deals involved Device42 is a real positive. The fact that we entered this quarter with twice the pipeline we had last quarter and last quarter was pretty good, just for Device42 is -- that’s positive. And then just the, I would say, the buzz among the sales team about Device42 and the ability to bring that to market has been super positive as well.

That’s great color. Okay. Thanks a lot. Appreciate it.

Thank you. And our last question comes from Ryan MacWilliams with Barclays. Please proceed.

Hey, guys. Thanks for the question. Tyler, how should we think about the shape of net retention for this year as implied by the guide and how should we think about the Device42 revenue contribution for 2025? Thanks.

Yeah. So we talked about net dollar retention for kind of Q1 as 104% and we didn’t really talk, give guidance for the full year. But right now, we don’t see anything different for the full year. And so we think it’s going to be relatively consistent, clearly, as we get more fidelity on that number each quarter as expansion rates and turn rates, as we see that, we will update that. But right now, I would just model it out as we get up for Q1. In terms of Device42, we actually do not plan to break out the Device42 number. As we indicated in the script, right, three of the top 10 deals in Q4 included Device42 and half of the net new Device42 deals were actually sold by Freshworks teams, which means that they’re sold in bundle with Freshservice. And as such, that’s a really positive indicator that, the reason we did the deal is starting to come to fruition. It’s all starting to be included as one product, one united product, and it’s going to be very difficult to kind of disassociate revenue from one to the other as we go through that. So if there’s any huge anomalies, we’ll call them out. But in general, we don’t plan to distinguish.

Makes sense. Appreciate the color. Thank you.

Thanks, Ryan.

Thank you. And this concludes our Q&A session and program for today. Thank you all for participating and you may now disconnect.