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Freshworks (NASDAQ: FRSH)
This fall 2024 Earnings Name
Feb 11, 2025, 5:00 p.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Individuals
Ready Remarks:
Operator
Hi there, and welcome to Freshworks fourth quarter and full yr 2024earnings convention name At the moment, all members are in a listen-only mode. After the audio system’ presentation, there will probably be a question-and-answer session. Please be suggested that at this time’s convention is being recorded.
I’d 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 2024earnings convention name Becoming a member of me at this time are Dennis Woodside, Freshworks chief govt officer and president; and Tyler Sloat, Freshworks chief working officer and chief monetary officer. The first function of at this time’s name is to offer you info concerning 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 include forward-looking statements throughout the which means of the Non-public Securities Litigation Reform Act of 1995. These forward-looking statements are based mostly on Freshworks’ present expectations and estimates about its enterprise and business, 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 alter. These statements are topic to dangers, uncertainties, and assumptions that would trigger precise outcomes to vary materially from these projected within the forward-looking statements. Such dangers embrace, however should not restricted to, our potential to maintain our progress, to innovate, to succeed in our long-term income objectives, to satisfy buyer demand, and to regulate prices, and to enhance working effectivity.
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For a dialogue of extra materials dangers and different necessary components that would have an effect on our outcomes, please check with at this time’s earnings launch, our most just lately filed Kind 10-Okay, and different periodic filings with the SEC. Freshworks assumes no obligation to replace any forward-looking statements with the intention to replicate occasions or circumstances which will come up after the date of this name, besides as required by legislation. In the course of the course of at this time’s name, we are going to check with sure non-GAAP monetary measures. Reconciliations between GAAP and non-GAAP monetary measures for historic intervals 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 website to entry our earnings launch, supplemental earnings slides, periodic SEC stories, a replay of at this time’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 this time 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 offered estimates for progress and profitability, ending the yr on a excessive be aware. We ended the yr with over 72,200 clients who’ve chosen Freshworks CX and EX software program to rework their enterprise.
Again and again, overpriced legacy software program distributors with overcomplicated merchandise drive clients immediately into our arms. Prospects select Freshworks’ uncomplicated software program to ship highly effective productiveness features for IT, buyer assist, and different enterprise groups. In This fall, income grew 22% yr over yr to $194.6 million, beating our beforehand offered 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 clients in This fall, representing the biggest quarterly improve in 4 years. We welcomed and onboarded notable clients, together with Mesa Airways, retailers like New Steadiness and Rawlings Sporting Items, and software program firms like Sophos. We noticed wholesome growth exercise and maintained the same 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 clients, 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 clients 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 influence on our reported numbers, which Tyler will cowl in higher element later within the name.
We ended the quarter with 18,300 clients in EX. A number of developments inside our enterprise are driving progress, continued upmarket success, growth with ESM, attaching Device42 to new and current accounts, and constructing a management place in particular industries. First, increasingly more mid-market and enterprise clients are turning to Freshworks as they go away behind our largest IT opponents. We consider that is as a result of massive SaaS distributors are overcharging and underserving their clients, notably 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 staff. 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 arduous 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 group well being facilities, wanted to modernize its IT operations. By changing its legacy ITSM instrument with Freshservice, Denver Well being can defend the safety and privateness of affected person information whereas automating necessary duties in order that staff can present affected person care.
The second massive pattern driving our EX enterprise is our ongoing success in ESM with Freshservice for Enterprise Groups. ESM is a key lever for growth and in new offers, the connect price 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 clients 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 superb service experiences.
Alterra Mountain Firm, proprietor of the favored Ikon Ski Cross, operates 18 year-round resorts. They wished a single expertise answer to allow smoother collaboration between departments and places. After seeing success with Freshservice of their IT atmosphere, Alterra expanded its use of Freshservice throughout extra departments, together with HR, services, finance, gross sales, and advertising. Coherent, a worldwide producer of business and laser gear, transitioned 500 inside brokers and all ITSM workflows from a number of instruments together with ServiceNow, to Freshservice.
Coherent just lately expanded its use of Freshservice past IT to their HR division, supporting 25,000 staff. They’ve plans to broaden Freshservice to extra groups corresponding to services and procurement. In This fall, we made product enhancements to additional strengthen our providing for groups exterior 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 dwell 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 clients.
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 report gross sales in 2024. They utilized Freshservice Enterprise and Device42 to supply a worldwide on-line portal for all inside assist wants. The combination of Device42 for superior asset administration and its CMDB provides New Steadiness an correct view of its IT infrastructure throughout places.
AI-powered self-service capabilities accessible by way of the portal, Microsoft Groups and e mail will empower associates with an intuitive and fashionable assist 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 only a few of our NFL clients. In Main League Baseball, the San Francisco Giants, Cleveland Guardians, Minnesota Twins, and Houston Astros are clients. We even have quite a lot of European soccer golf equipment corresponding to Paris Saint-Germain and South Hampton as clients and a number of F1 groups like McLaren Racing. We consider 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 clients are realizing tangible enterprise worth. After launching Freddy Copilot in February, we ended the yr with greater than 2,200 clients, 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 inside targets.
In a world of hype and jargon, we’re efficiently taking clients 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 tip of the yr, over 1,300 clients have been utilizing Freddy AI Agent, together with 100 clients testing the most recent beta model.
As our AI brokers enhance, extra clients are utilizing them and seeing optimistic 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 crew makes use of Freddy AI Agent to hurry decision instances and deflect tickets.
This frees up time for the crew to concentrate on 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 approach 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 clients, producing over $360 million in ARR, rising at 7% yr over yr on a constant-currency foundation, just like the constant-currency progress price in Q3. With an initiative that we began mid-Q3, we’re seeing ongoing conversion of free-to-paid clients, 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 way of the overwhelming majority of conversions so anticipate to see a smaller profit in Q1.
Wonderful giant organizations are selecting Freshdesk, together with Airbus and AMC Networks. Satair, an entirely owned subsidiary of Airbus, adopted Freshdesk to successfully talk and resolve tickets from clients, suppliers, and staff. 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 assist admin options, in addition to our supervisor expertise, which delivers superior analytics to our clients.
We additionally launched integrations with PlayBox Workforce Administration, an necessary characteristic for purchasers like Sew Repair. It’s clear to us that these product enhancements contributed to strong retention charges which remained secure from Q3. We consider our CX merchandise have a number of robust growth paths: first, CX clients are main the cost in adopting our AI merchandise; second, we noticed progress in our whole agent depend throughout the enterprise as seats elevated quarter over quarter; third, CX clients are additionally shopping for EX and vice versa. For instance, Dune London, a rising footwear and accent retailer, wished a unified answer to assist buyer inquiries and handle inside IT processes.
Dune first had success with Freshdesk and Freddy AI, which deflected 40% of tickets. They just lately added Freshservice with Freddy AI Copilot to help their IT crew. iPostal1 is the biggest supplier of digital mailbox companies and has been utilizing Freshdesk for years as a scalable answer 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 inside 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 crew. Srini, who brings in depth expertise main AI and automation initiatives at RingCentral, Five9, and Cisco will form the following 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 crew. 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 perform, all targeted on delivering for our clients’ uncomplicated options. Trying forward, we’re driving new avenues of progress by way of strategic partnerships which are unlocking a extra various pool of consumers.
Right this moment, we now have greater than 500 energetic companions globally from giant value-added resellers, answer suppliers, system integrators, distributors and gross sales consultants. Our companions touched one-third of our ARR in 2024 and lots of extra clients by way 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 in search of a contemporary IT answer to ship for his or her giant and mid-market clients.
And after finishing a aggressive overview 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 extra margin enhancements within the enterprise.
I’m extremely excited in regards to the alternative forward and in 2025. We now have a aggressive benefit with our enterprise-grade software program that delivers outcomes quick. We now have an skilled and gifted management crew. We’re targeted on effectively scaling and are well-positioned to be a number one enterprise software program firm.
Thanks to our clients, companions, staff, and shareholders on your ongoing assist. 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 by way of webcast at this time. For our name at this time, 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 probably be targeted on non-GAAP monetary outcomes, which exclude the influence of stock-based compensation bills, restructuring expenses, and different changes. We will 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 offered top-line and bottom-line estimates in This fall. We made vital enhancements to our general 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 replicate the profitable execution of our strategic initiatives as we stay assured in our potential to drive worthwhile progress for our enterprise. Let me first begin with FX as this had a significant influence 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 influence was minimal however this resulted in a three-percentage level unfavorable influence to our ARR progress or $17.5 million discount to our ARR. As such, I will embrace fixed forex comparisons for most of the metrics to supply a greater view of our underlying enterprise developments.
Beginning with the earnings assertion. Complete 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 web new ARR for Device42 originated from the Freshworks discipline crew as we realized cross-sell synergies from the acquisition. Our EX enterprise stays our main driver of general 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 effectively, rising at 6% yr over yr on an as-reported foundation and seven% yr over yr on a constant-currency foundation.
Shifting 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 assist our clients. This represents an enchancment of roughly 200 foundation factors in comparison with the prior yr. Our non-GAAP working earnings 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. Shifting to working metrics. Our two key enterprise metrics are web greenback retention and clients contributing greater than $5,000 in ARR.
Because of the FX influence, 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 stress on growth, 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 clients contributing greater than $5,000 in ARR, as of the tip 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 clients.
This buyer cohort continues to characterize 90% of our ARR. For our bigger buyer cohort contributing greater than $50,000 in ARR, as of the tip 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 clients. This cohort represents 50% of our ARR. For whole clients, we added over 2,600 web clients within the quarter and ended with over 72,200 clients.
Roughly 2,000 of the shoppers 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, steadiness 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 influence 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 steadiness sheet. Looking forward to Q1 2025, our preliminary estimate for calculated billings progress is 13% and 14% on a constant-currency foundation.
For the total 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 need to name out a number of components for the Q1 billings progress price comparability quarter over quarter. This consists of 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. Shifting to our money gadgets.
We generated $41.7 million in adjusted free money circulate for This fall, outperforming our estimates, due to 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 total yr 2024, we practically doubled our adjusted free money circulate to $153.3 million in comparison with the prior yr.
For the total 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 permitted by our board in November 2024, we repurchased $15.5 million of our shares in This fall at a median worth of $15.77 per share. As a common follow, 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 depend dilution by net-settling vested fairness quantities by utilizing roughly $11 million in the course of the quarter and $60 million for the total yr 2024. Since our IPO, we now 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 total 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 depend for This fall. We had roughly 328 million shares excellent on a totally 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 depend 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 forex utilizing FX charges from Q1 of final yr, this displays progress of 16% to 18% yr over yr; non-GAAP earnings from operations to be within the vary of $32.5 million to $34.5 million; and non-GAAP web earnings 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 total 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 forex utilizing FX charges from Q1 of final yr, this displays progress of 13% to fifteen% yr over yr. Since our Q3earnings callin November, FX charges have additionally modified meaningfully, impacting our monetary estimates.
Making use of forex charges from November, our full yr 2025 income estimate can be $5.6 million increased or one share level increased in progress. Non-GAAP earnings from operations to be within the vary of $131 million to $139 million, and non-GAAP web earnings 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 forex strikes should not 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 reveal 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 method 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 price. How are you fascinated by the expansion potential right here as you begin to anniversary Device42? Do you assume you possibly can maintain 20%-plus? What is the alternative right here in EX? Double-click there, when you may.
Thanks.
Dennis Woodside — President and Chief Govt Officer
Thanks, Brent. So, it is Dennis. We predict the chance is big and that our EX enterprise is squarely targeted on the mid-market and decrease finish of enterprise. Our ICP is an organization with wherever from 250 to twenty,000 staff.
And that a part of the market, if you consider the IT division, you’ve gotten refined calls for. Usually, these companies are world. They want ITAM, they want ITOps. They want what we now have.
And the largest competitor, clearly, ServiceNow, that product may be very complicated and requires plenty of work to stand up and operating, plenty of work to get worth from. We hear this on a regular basis. So, these firms in that section, they’re in search of one thing that is enterprise-grade with out the enterprise complexity, and that is quick time to worth and general decrease whole value. So, the rationale 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 consumers which are switching or in the event that they have been coming off of a legacy supplier like Ivanti or Cherwell, they’re selecting us over a ServiceNow. So, we expect that market is big. Simply within the U.S. alone, the mid-market, as we outline it, account for about $10 trillion in financial exercise.
So, we expect we are able to construct a really massive enterprise there. By way of 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 form of getting all of the post-merger stuff out of the best way. However now we enter Q1 with a pipeline that is roughly double what we entered This fall with.
And there is plenty of curiosity from firms as a result of firms must get a greater deal with on their belongings. They’re in search of a instrument to assist them on the safety aspect as effectively. We predict that is going to be an accelerant. And we expect AI is totally an accelerant to that IT enterprise as effectively.
So, plenty 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 fascinated by 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 think about extra M&A to enhance and assist speed up the product street map whereas nonetheless sustaining prudent and environment friendly progress mannequin right here in margins? Stroll us by way of the thought course of across the money, use of among the investments going ahead now that you have 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, rather well on an effectivity perspective. This previous yr, simply free money circulate, in addition to working margin, we will actually proceed to have that theme when it comes to effectivity.
However we have additionally been actually clear, we are going to have a look at alternatives, inorganic alternatives as they arrive up. Device42 is the primary deal we have finished 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 making an attempt to optimize what we are able to get for that. On the identical time, we will train, proceed to execute on our share repurchase, and proceed to do the web gross sales, which we use portion of money this yr.
And we additionally stated once we went by way of form of our restructuring in This fall that we have been planning to reinvest plenty of that into the enterprise, actually targeted on ensuring that we now have the suitable folks in the suitable locations and investing for progress in plenty of areas. So, I believe we are able to do each. I believe we are able to form of make prudent investments and actually form of make investments the place we really feel like we will get the perfect 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 form of the slowdown within the metric there? I imply, it makes me really feel like perhaps the ITSM enterprise did not have the perfect web new quarter. However I understand additionally that metric would not seize upsell, cross-sell of consumers which will already be forward of that threshold. So, simply assist me form of interpret that information level relative to the bookings that you just noticed on the IT aspect of the enterprise.
Dennis Woodside — President and Chief Govt Officer
Yeah, so thanks for the query. Initially, bear in mind, we had a disproportionate FX influence in This fall. We’re extra FX uncovered than plenty 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 have been lapping in This fall in opposition to a reasonably robust prior-year This fall, and that had an impact as effectively. 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 numerous offers over 100K, and people are each growth and renewals.
So, all these issues have an effect on simply absolutely the variety of clients with over 50K in income. So, when you have a look at the ARPU for that cohort, that is truly up and that is additionally one thing that we have a look at carefully. So, I believe that this time by way of, that metric undoubtedly was affected by another components. However we’re fairly comfy with our upmarket momentum.
You simply have a look at the secure of consumers that we’re gathering, which are refined world gamers, like a New Steadiness, and we proceed to see alternatives to press upmarket.
David Hynes — Analyst
Yeah. Yeah, that is sensible. That is a useful rationalization. Perhaps as a follow-up, you talked about the Unisys partnership and perhaps the chance to evolve that to an MSP alternative over time.
Perhaps you possibly can simply broadly contact on form of the MSP alternative, how significant that could possibly be on the IT aspect of the enterprise? And are you there from a product perspective at this time to assist 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 are proper in our candy spot, proper in that mid-market, decrease finish of enterprise house. And people firms have been coming to them in search of an alternate. And Unisys spent a yr evaluating each product available in the market 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 could be 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’ll 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 now have a set of releases which are popping out in Could 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’ve not actually, up till just lately, been constructing performance that is particular for MSP.
So, we expect the chance there may be fairly giant, and I am fairly enthusiastic about it.
David Hynes — Analyst
Glorious. 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 aspect, the outlook nonetheless appears somewhat bit pressured from growth. And simply given it has been a number of years that we have had that growth stress, I wished to get a way for at what level are clients form of operating lean sufficient that they might begin to reexpand? And likewise, what is the alternative for the innovation cycle that we’re seeing with AI and AI additionally shifting extra towards monetization grow to be a lever to drive that growth aspect to begin to get well?
Dennis Woodside — President and Chief Govt Officer
Perhaps 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 admittedly 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, greatest 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 clients and promoting in AI, each Freddy AI Agent and Freddy Copilot to these clients as effectively.
So, we expect that there is a massive alternative there to drive progress from that section going ahead. And likewise, we do really feel we’re nonetheless actually early within the AI adoption cycle. However this yr is the yr when we will 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 forex so it is truly somewhat bit higher than what we thought. We have been speaking about how we have been doing rather well on churn and churn for — throughout all merchandise is now within the form of strong mid-teens. That being stated, we had additionally talked about, hey, we have been seeing stress on our largest growth movement, which remains to be agent addition.
We now have stress on that for years. Now we did see the decline within the growth price for form of agent addition begin to form of cease in form of the again half of the yr, however we nonetheless have a decline from a year-over-year examine. So, that is form of why we’re nonetheless calling 104% for Q1. That is form of what we see proper now if growth and churn is available in, what we see — the best way we see it.
So, clearly, Dennis simply talked about on the Freddy merchandise, these are doing rather well. From a monetization perspective, we nonetheless must do some work on getting them to our current put in base, however on connect price for brand new enterprise are actually, actually wholesome. Device42, we expect, has plenty of capability to enter our current Freshservice base. After which our ESM providing for enterprise brokers for our Freshservice clients, these are the form of add-on merchandise that we’re actually targeted on going into ’25 which are 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 aspect. It appears like the advance in web provides was plenty of execution on the free-to-paid conversion. So, I hoped to get simply an replace on the broader SMB demand atmosphere.
Is the advance that we began to listen to about final quarter one thing that is persevering with? And form of what’s your outlook into 2025?
Dennis Woodside — President and Chief Govt Officer
Yeah. I’d say, Elizabeth, that the demand is secure 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 aspect of it, they’re beginning to understand that AI will help. And AI will help them be extra environment friendly, more practical, particularly the SMBs which are somewhat bit bigger within the 100- to 200-employee vary the place they’ve an IT division and so they have a buyer assist crew. And that is actually the place our enterprise is concentrated. So, I am optimistic for 2025.
I am unable to provide you with like a totally clear sign in some way, however we undoubtedly have been proud of 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 just 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 perhaps present somewhat bit extra shade round what you are embedding within the 2025 steerage as we have a look at each the CX enterprise, in addition to the Freshservice aspect of the enterprise as effectively? Thanks.
Tyler Sloat — Chief Monetary Officer
Yeah. Noah, that is Tyler. We did not escape between the 2 totally different merchandise. We have been speaking about EX remains to be doing rather well.
We had a query earlier on what’s the sustainability of form of 20% progress there, and we expect that is an enormous market. And CX has form of stabilized. We’re at that form 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 targeted efforts on an ICP.
After we have a look at the steerage for the yr, the income steerage, clearly, that is the primary steerage for the yr. We now have much more constancy into Q1 than we do for the total 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’d 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 find out about proper now. Clearly, as we get to the tip of this quarter, and may replicate efficiency from this quarter. For the yr, we are going to replace steerage 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 this time, Mistral, hastily, is ramping as much as the highest of the App Retailer listing. Have you ever guys had time to kind of wrap your arms round what meaning when it comes to what you possibly can perhaps do on your clients, which you did not assume you possibly can do earlier than? And likewise, what the implications are for the price that you just guys incur once you ship AI throughout the shopper base?
Dennis Woodside — President and Chief Govt Officer
Undoubtedly, Pat. Thanks. So, look, competitors is nice 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 are able to and already do have a look at and take a look at varied LLMs because the house continues to innovate.
So, we rely at this time for conversational functionality on Azure OpenAI. And that is as a result of there are specific protections which are inbuilt with respect to information with respect to hallucinations that Microsoft gives that we discover a worth, after which we now have our personal protections on high of that. However we even have examined Anthropic. We now have examined Google’s AI for, particularly, photographs.
And we’re at all times taking a look at different fashions which are on the market. We will steadiness value, efficiency, information safety, all of these issues are necessary to our clients. And the competitors is general 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, the entire developments are good, and we’re continually evaluating all of the fashions which are 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 among 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 steadiness our investments throughout CX and EX relying on the place we see the chance. For the CX enterprise, that at this time is about two-thirds SMB, and so we proceed to speculate in opposition to advertising, particularly, to drive demand among the many SMB group 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 discipline and the like. So, I believe the best way we have a look at the enterprise, we will allocate funding the place we see momentum, the place we see alternative, and frequently modify 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 sensible. 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 may be very spectacular. Is there any option to quantify the ACV uplift, what you are seeing on these on common?
Tyler Sloat — Chief Monetary Officer
We now have not damaged out the {dollars} but on the connected price when it comes to quantification. And the connect price actually is to new enterprise on the bigger offers, the double-digit connect price for the SMB offers. As we undergo this yr, particularly in all probability in our Investor Day, which goes to be firstly of the again half of the yr, we are able to look to supply extra form of the monetization technique for our Freddy merchandise. As a reminder, we now 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 clients use it. We additionally talked about what number of of these clients are literally now paying clients, which is over 1,300 clients that are actually paying for extra bot classes. So, once more, we’ve not damaged out the precise {dollars}. I believe it is nonetheless somewhat bit early, however the progress is admittedly, actually optimistic.
Dennis Woodside — President and Chief Govt Officer
Yeah. Only one factor so as to add there. In case you are promoting CX at this time, you’ve gotten quite a lot of choices to drive growth or to drive an even bigger sale. You possibly can add Freddy AI Agent to resolve L1 assist issues.
You possibly can add Freddy AI Copilot, the per-seat license, to enhance the productiveness of the brokers that you just’re serving. You possibly can — when you’re promoting IT, you possibly can provision our ESM product, Freshservice for Enterprise Groups, to deal with a broader set of staff throughout the firm, or you possibly can deliver Device42 in. So, there’s plenty of growth choices that we now have at our fingertips now that frankly, two years in the past, we did not have which are 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 effectively after your remark and perhaps a follow-up to Brent’s query earlier. However are you seeing available in the market kind of enchancment in win charges now that you just guys have the chance to come back to the desk with an ITAM answer? What has that finished 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 we now 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 should always pay attention to as effectively.
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 permits for extra seamless synchronization of information throughout these two platforms.
So, I might be working in Freshservice and see information that is being pulled from Device42, which you could not do earlier than. You wanted to change 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 effectively.
These are the 2 technical milestones to bear in mind. By way of the aggressive dynamics, the rationale that we went out and seemed for an IT asset administration answer was that we have been dropping offers within the mid-market and decrease finish of enterprise over performance for IT asset administration. Lots of firms, after they’re shopping for their ITSM, need 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.
A very good 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 in the course of the course of the form of discussions with them, we did and now they’re implementing Device42 as a part of their world answer. And that is the form of buyer that we would like and that we’re persistently successful now.
One other one was the arduous drive producer that I referenced, 13-year buyer of ServiceNow. A giant part 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 — bear 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 optimistic.
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 optimistic. After which simply the — I’d say the excitement among the many gross sales crew about Device42 and the power to deliver that to market has been tremendous optimistic as effectively.
Robert Oliver — Analyst
That is nice shade. OK. Thanks lots. Respect 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 form of Q1 is 104%, and we did not actually discuss — give steerage for the total yr. However proper now, we do not see something totally different for the total yr. And so we expect it is going to be comparatively constant.
Clearly, as we get extra constancy on that quantity every quarter, as growth charges and churn charges, as we see that we are going to replace that. However proper now, I’d simply mannequin it out as we get them out for Q1. By way of 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 web new Device42 offers have been truly bought by Freshworks groups, which implies that they’re bought in bundle with Freshservice.
And as such, that is a very optimistic indicator that the rationale 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 is going to be very tough to form 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 basically, 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 this time. [Operator signoff]
Length: 0 minutes
Name members:
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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