Q4 2023 Freshworks Inc Earnings Call
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Operator: Good day, and thank you for standing by. Welcome to the Freshworks fourth quarter and full year 2023 conference call. At this time, all participants are in a listen-only mode.
Welcome to the fresh works fourth quarter and full year 2023 conference calls.
At this time all participants are in a listen only mode.
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Operator: To start a question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, June Huh, VP of Investor Relations. Please go ahead.
Your question. Please press star one again please.
Please be advised that today's conference is being recorded.
I would now like to turn the conference over to your speaker for today Joon Huh VP.
V P of Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to fresh works fourth quarter and full year 2023 earnings Conference call. Joining me today argue rich Martha breakdown freshwater chief Executive Officer, Dennis Woodside, freshwater president and Tyler Sloat Brushwork, Chief Financial Officer.
June Huh: Thank you, good afternoon, and welcome to Freshworks' fourth quarter and full year 2023 earnings conference call. Joining me today are Girish Mathurbutham, Freshworks' Chief Executive Officer, Dennis Woodside, Freshworks President, and Tyler Slope, Freshworks Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our fourth quarter and full year 2023 performance and our financial outlook for our first quarter and full year 2024. 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 also subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statement.
The primary purpose of todays call is to provide you with information regarding our fourth quarter and full year 2023 performance.
The outlook for our first quarter and full year 2024.
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 1095 B.
These forward looking statements are based on <unk> current expectations and estimates about 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 such risks include but are not limited to our ability to sustain our growth to innovate to reach our long term revenue goal to meet customer demand and to control costs and improve operating efficiency for a discussion of additional material risk.
June Huh: 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 a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our Form 10-Q for the quarter ended March 31st, 2023, 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 call, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures.
And other important factors that could affect our results. Please refer to today's earnings release, our Form 10-Q from the quarter ended March 31, 2023, and our other periodic filings with the SEC.
<unk> 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.
June Huh: 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.
<unk> is available on our Investor Relations website at IR Dot <unk> Dot com.
I encourage you to visit our Investor Relations site to access our earnings release supplemental earnings slide periodic SEC reports, a replay of today's call or to learn more about fresh works and with that let me turn it over to Girish.
Thank you Joan and welcome everyone to freshwater earnings call covering our fourth quarter and full year of 2023.
Girish Mathurbutham: Thank you, June, and welcome everyone to our Freshworks Earnings Call, covering our fourth quarter and full year of 2020. A year ago, we laid out our growth strategy to focus on product innovation. Winning in enterprise, learning and expanding to drive revenue, and Improving Our All, over the course of 2020. We launched the Freshworks Customer Service Suite and a range of AI capabilities like ready self-service, co-pilot, and insights, all in pursuit of our mission to power business with AI-enabled software that helps customers optimize their work and boost sales. We landed or expanded with big brands like Big Lots, S&P Global, Phila, Cineworld, Forbes, L.A. Dodgers, Nucor, Giant Eagle, and Johnson & Johnson.
A year ago, we laid out our growth strategy to focus on product innovation, winning in enterprise landing and expanding to drive revenue growth and improving operating efficiency.
Over the course of 2023.
We launched the freshwater customer service suite and a range of AI capabilities like critical service co pilot and insights.
All in pursuit of our mission to power businesses with AI enabled software that helps customers optimize their work and boost productivity.
We landed our expanded with big brands like Big locks S&P Global pillar <unk> was.
And the Dodgers Nucor giant peaks and Johnson with sausage.
We significantly improved our operating efficiency and inflicted our financial model. We went from using cash from operations in 2022, we're generating $78 million of free cash flow in 2022.
Girish Mathurbutham: We significantly improved our operating efficiency and inflected our financials. We went from using cash for operations in..., generating $78 million of free cash. Turning to the quarter, I would like to thank the entire Freshworks team for delivering a strong Q4 as we outperformed across our key business. Our revenue exceeded the high end of our financial forecast.., coming in at $160.1 million. Thank you, generating 28.6.
Turning to the quarter.
The <unk> team for delivering a strong Q4, as we outperformed across our key business metrics.
Our revenue exceeded the high end of our financial estimates coming in at $160 1 million.
For the quarter.
We outperformed on non-GAAP operating margin and delivered a record amount of free cash flow generating $28 6 million in Q4.
Girish Mathurbutham: For the full year 2023, we finished with revenue of $596.4 million and a free cash flow margin of $1.2 billion. During today's call, I want to highlight three of our key differentiators and how they helped finish out the year. The first is the power of our Neo platform, which underpins our product portfolio, giving us the ability to serve enterprises and Croswell into more departments. Second is our AI innovations, which are already helping customers achieve concrete product goals. And third is our talented product development team in India that drives our innovation velocity and brings products to customers. Our Neo platform is a critical component of our success and provides all the services that power our product analytics and training, offers extensibility and interoperability for our customers through marketplace apps, and offers a unified customer data model across.
For the full year 2023, we finished with revenue of $596 4 million.
And free cash flow margin of 13%.
During today's call I want to highlight three of our key differentiators and how they helped finish out the year with a strong Q4.
The first is the power of our neo platform, which underpins our product portfolio, giving us the ability to serve enterprise buyers and cross sell into more departments with multiple products.
Second is our AI innovations, which are already helping customers achieve concrete productivity improvements.
And third is our talented product development team in India that drive that innovation velocity and brings products to customers faster.
Our new platform is a critical component of our success and provide all the services that our product analytics and AI, all first extensibility and intraoperative repeat for our customers through marketplace apps and offers a unified customer data model across our products.
The development and launch of customer service suite illustrates the power of our platform.
Girish Mathurbutham: The development and launch of customer service illustrates the power of art. Customer Service Suite combines three distinct, Freshworks products. Generative AI Bots, Conversational Messaging, and Ticketing in one integrated platform to meet the many needs of... For example, ClickFunnels, a provider of sales, marketing, e-commerce, and analytics, replaced their previous support solution with our customer support. The long developer times required to make even the smallest change forced the Farrell Marketing Company to search for a more robust and agile... ClickFunnels chose CSS because of our Productions. Thank you.
Our service suite combines three distinct.
Chris Brooks product capabilities generally bought conversational messaging and ticketing in one integrated solution to meet the many needs of our customers.
For example, <unk> a provider of sales marketing e-commerce and analytics tool rips.
Replaced their previous support solution with our customer service suite.
The long delivery times required to make even the smallest change.
The funnel marketing company to search for a more robust and a good solution.
Click for Lance Joe CSS because of our integrated offering that is powered by AI capabilities, resulting in improved evolution. Please.
According to Forrester total economic impact report published in Q4.
Girish Mathurbutham: According to a Forrester Total Economic Impact Report published in Q4, a Freshworks CSS customer surveyed could achieve over a 200% return on investment. Our platform also helps us with the rapid adoption of new technologies into all of our products, for example. We've built generative AI capabilities across our products in just a few months. We started with Freddy Self-Service through BOTS and later introduced Freddy Co-Pilot, built for fresh chat first and then extended to fresh desktop. We are excited about the AI opportunity and potential monitoring as Co-Pilot became generally available recently. We plan to launch Freddy in February.
<unk> CSS customer survey could achieve over 200% return on investment over two years.
Our platform also helps us with rapid adoption of new technologies into all of our products.
For example, we built <unk> AI capabilities across our products and just a few months.
He started with critical service to box and later introduced ready co pilot built purpose checklist, and then extended to pressure test in for service.
We are excited about the AI opportunity and potential monetization.
Copilot became generally available recently and we plan to launch for the insights later this year.
The critical pilot capable producing the hands of our customers. We are encouraged by the early results.
Girish Mathurbutham: With Freddie's co-pilot capabilities in the hands of our customers, we are encouraged by the early release. Several power user customers realized approximately a 50% reduction in the resolution time for customer service agents with the help of Fredrick. As customers grow, many of them will use acquisitions as a part of their growth strategy. And when they do, they have a choice to either cobble together inherited disparate software or make it their own.
Several power user customers realized approximately 50% reduction in transfusion times further customer service agents with the help of critical pilot.
As customers grow many of them will use acquisitions as a part of our growth strategy and when they do they have a choice to either cobbled together inherited disparate software solutions are pick one unified solution that works for us at Crestwood.
Girish Mathurbutham: And that's what we're trying to do, or pick one unified solution that works for all, like Freshworks. For example, Fraser's group in the, a retail customer that has grown over four decades and completed several acquisitions. It now represents 70 store brands, including sportswear, games, homeware, fashion, and beauty.
For example places group in the UK a.
Our retail customer that has grown over four decades and completed several liquids.
It now represents 70 store brand, including sportswear games on vet fashion and beauty.
After the tour flash disk and 2022 to consolidate 16 customer support systems into one.
The company saved over $1 million in software licensing costs.
Then in recent months.
<unk> group added our AI powered bot and can now reflect more than a quarter of their customer interactions from human agents saving more time and money for the company.
Girish Mathurbutham: After they chose Freshdesk in 2022 to consolidate 16 customer support, the company saved over a million dollars in software licensing costs. Then, in recent months, Pressure Group added our AI-powered bot and can now deflect more than a quarter of their customer interactions from human interaction, saving more time and money.
For our partners, we are seeing them utilize AI co pilot for Delaware to significantly accelerate the App development cycle in Q4, one partner connectivity.
Went from <unk> four apps per month to building an average of seven per month, a productivity improvement of 75% with the help of copilot fidelity.
Yes.
With introduction of chat GPT for last year every company had the chance to re imagine its use of the latest AI technology.
Girish Mathurbutham: For our partners, we are seeing them utilize ReadyCopilot for developers to significantly accelerate app development. In Q4, one partner, Connectify, went from publishing four apps per month to building an average of seven per month, a productivity improvement of 75%, with the help of Co-Pilot for Development. With the introduction of Chad GPT-4 last year, every company had the chance to reimagine its use of the latest AI. One of our strategic advantages at this time was our access to high-quality talent. Our product and engineering teams were able to quickly innovate on our product. In 2023, this included integrating generative AI into a platform to leverage the latest large-length AI. This year, we plan to continue to advance our AI features across our products and platforms.
One of our strategic advantages in this moment was our access to high quality talent in India.
Product and existing teams were able to quickly innovate on our product roadmap in.
In 2023. This included integrating <unk> into our platform to liberate the latest large language models.
This year, we plan to continue to advance our AI features across our products and platform.
In CNS we.
We expect to migrate more customers to our integrated customer service suite, which is designed to improve agent productivity.
And for service, we plan to enhance ASM item and vertical based offerings to fuel upmarket growth and expansion across departments.
And we plan to make significant upgrades to our sales and marketing product to drive more inbound demand and cross sell opportunities.
Dennis Woodside: CS, we expect to migrate more customers to our integrated customers, and many more. In Fresh Service, we plan to enhance ESM, ITOM, and a verticalized offering to fuel upmarket growth and expansion across departments. We plan to make significant upgrades to our sales and marketing products to drive more inbound demand and cross-market. Now, I will turn it over to Dennis to share what we are seeing in the market. How larger customers are driving our business, and how companies are expanding. Thank you, G, and congratulations to the team for our strong finish to 2023.
Let me now turn it over to Dennis to share what we're seeing in the marketplace.
Larger customers are driving our business growth and how companies are expanding the use of our products.
Thank you Gee and congratulations to the team for a strong finish to 2023.
<unk> talked about our enterprise grade platform AI capabilities, and the strategic advantage of our India teams.
Now, let me spend some time talking about how these played out for us in our go to market success.
Macroeconomic pressures and a greater emphasis on fast time to value, our leading enterprise companies to choose a smaller number of platform solutions to build their businesses.
We believe fresh works is well positioned to continue taking advantage of this trend.
Dennis Woodside: Gee talked about our enterprise-grade platform, AI capabilities, and the strategic advantage of our India team. Now, let me spend some time talking about how these played out for us in our go-to-market success. Macroeconomic pressures and a greater emphasis on fast time to value are leading enterprise companies to choose a smaller number of platform solutions to build their business. We believe Freshworks is well positioned to continue taking advantage of this trend. In 2023, we continued our progress in winning new markets. In Q4, we closed the year by adding 229 more customers, contributing more than $50,000 in ARR. This represents the highest number of quarterly ads for this customer cohort ever. We also closed a record number of new deals over $100,000 in both IT and CS segments, contributing to our strong quarter. These include a U.S.-based footwear and apparel company operating in over 120 countries and a leading wholesaler to millions of restaurants, hotels, and catering.
In 2023, we continued our progress in winning upmarket.
In Q4, we closed the year by adding 229 more customers contributing more than $50000 in IRR.
This represents the highest number of quarterly adds for this customer cohort ever.
We also closed a record number of new deals over $100000 in both.
NCS segments contributing to our strong quarter.
These include a U S based footwear and apparel company operating in over 120 countries and a leading wholesaler to millions of restaurants hotels and catering firms.
As Jay said, we win with large businesses because of the power of our neo platform underpinning our multi product offerings.
This enables us to rapidly rollout new technologies like AI.
All at a third the cost of larger competitors.
Customers across a variety of industries are quickly realizing the benefits.
In the CPG sector consumer products is a prime example of our enterprise customers leveraging improved automation workflows.
As one of India's leading food and beverage companies, they're the world's second largest key manufacturer and operate Starbucks in India.
Dennis Woodside: As she said, we win with large businesses because of the power of our Neo platform underpinning our multi-product offering. This enables us to rapidly roll out new technologies like AI, all at a third the cost of larger competitors. Customers across a variety of industries are quickly realizing the benefits. In the CPG sector, Tata Consumer Products is a prime example of our enterprise customers leveraging improved automation workflows. As one of India's leading food and beverage companies, they are the world's second largest tea manufacturer and operate Starbucks in India. Their legacy ITSM solution provided no control over admin configuration, making it difficult to create automation workflows.
Their legacy ITM solution provided no control over adenine configuration, making it difficult to create automation workflows.
At the same time the company faced an overwhelming volume of E mail and phone calls.
Since adopting fresh service email quarries have fallen by 21% and five months.
In addition to other consumer products is one of the highest users of Freddie co pilot.
For Industrials Clark <unk> company supplies more than 90000 customers worldwide with steel and metal products.
The company is also digitizing and largely automating its supply and service chain.
They needed to find a new self service tool, that's easy to use fast and a trustworthy daily assistant.
Press service beat the competition, helping them optimize budget and repurpose funds for other initiatives.
Shifting to expansion, we have several paths to grow our business with existing customers.
Dennis Woodside: At the same time, the company faced an overwhelming volume of email and phone calls. Since adopting the new service, email queries have fallen by 21% in five. In addition, Tata Consumer Products is one of the highest users of Freddy Copa. For industrials, Klockner & Co. supplies more than 90,000 customers worldwide with steel and metal products.
These include agent seat additions product cross sells additional upsells and enhanced pricing.
Our recent introductions of AI capabilities, including bought sessions and co pilot airlines offer additional opportunities across our 67100 customers.
Digging into our Q4 numbers were pleased that our net dollar retention increased one percentage point quarter over quarter to 107% on a constant currency basis.
Dennis Woodside: The company is also digitizing and largely automating its supply and service chain. They needed to find a new self-service tool that's easy to use, fast, and trustworthy daily assistance. Press Service beat the competition, helping them optimize their budget and repurpose funds for other IT initiatives.
We closed several large expansion deals in Q4 as growth expansion improved from the prior quarter and reversed declining trends from earlier in the year.
We also continued to improve our dollar based churn incrementally from the prior quarter.
Lastly, our multi product adoption increased to 26% of our customer base.
Dennis Woodside: Moving to expansion, we have several paths to grow our business with existing customers. These include agent seat additions, product cross-sells, additional upsells, and enhanced pricing. Our recent introductions of AI capabilities, including bot sessions and co-pilot add-ons, offer additional opportunities across our 67,100 customers. Digging into our Q4 numbers, we're pleased that our net dollar retention increased one percentage point, quarter over quarter, to 107% on a constant currency basis. We closed several large expansion deals in Q4, as growth expansion improved from the prior quarter and reversed declining trends from earlier in the year.
For example, we saw higher adoption for fresh service for business teams as accounts grew more than 50% quarter over quarter, ending the year with more than 1000 customers.
One of these customers is Brunel University in London, a college highly recognized for its research.
Serve up to 18000 students and more than 2500 staff across the academic year.
Already a fresh service customer they saw an opportunity to improve and provide a more consistent service experience.
<unk> beyond it.
These include health and safety campus service.
<unk> centre and student welfare bye.
By adding business agent licenses and Workspaces they reduced the average ticket resolution time from a previous backlog log of several weeks to around four hours and achieve over 85% positive customer feedback.
We're also seeing expansion from early fresh desk adopters to the newer fresh works customer service suite.
Dennis Woodside: We also continue to improve our dollar-based churns incrementally from the prior quarter. Lastly, our multi-product adoption increased to 26% of our customer base. For example, we saw higher adoption for Fresh Service for Business teams as accounts grew more than 50% quarter over quarter, ending the year with more than 1,000. One of these customers is Brunel University London, a college highly recognized for its research. They serve up to 18,000 students and more than 2,500 staff across the academic year. Already a new service customer, they saw an opportunity to improve and provide a more consistent service experience to departments beyond IT. These include Health and Safety, Campus Service, the Student Center, and Student Welfare.
For example, Canadian based Carlton one made the switch and has since achieved a two hour first response SLA.
They are resolving over 1000 tickets daily and landing a 60% first contact resolution rate through AI and bots.
And finally fresh works interoperable products gives us a natural expansion path across solutions.
For example, a detail and mid market travel management company in the U K first bought fresh desk.
This was to replace an on premise customer support solution that couldnt deliver unified analytics and limited collaboration across teams.
Later, they added fresh color and fresh chat to unify support channels and more recently in Q4, they rolled out fresh sales to generate more qualified leads.
In addition to our powerful platform and multiple expansion pads. What we believe makes fresh works unique is our go to market motions, which include both inbound product led growth and field sales are.
Our inbound business is primarily marketing led while our field business is sales led.
Dennis Woodside: By adding business agent licenses and workspaces, they reduced the average ticket resolution time from a previous backlog of several weeks to around four hours and achieved over 85% positive customer feedback. We're also seeing expansion from early Freshdesk adopters to the newer Freshworks customer service. For example, Canadian-based Carleton One made the switch and has since achieved a two-hour first response SLA.
As our company matures, we have hired two proven leaders across these distinct go to market motions that can help us scale.
In Q4, <unk> Yamamoto joined us in the new role of Chief customer and marketing officer to drive greater inbound activity, including responsibility for our customer support.
And commercial sales.
Under her leadership this team will drive our inbound product led growth motion.
Our field sales team will be led by Abe Smith, who I am excited to announce has joined as our chief of global field operations. This week.
Dennis Woodside: They are resolving over 1,000 tickets daily and landing a 60% first contact resolution rate through AI and bots. And finally, Freshworks' interoperable products give us a natural expansion path across solutions. For example, Agito, a mid-market travel management company in the UK, first bought Freshdesk.
He's a sales executive with nearly 25 years of global experience at Zoom, Oracle and Cisco and will lead our talented field team to scale the business.
With these changes in the organization.
<unk>, our CRO will be departing fresh works at the end of this month.
Patti stepped up to lead and stabilize our go to market teams during a transition period and delivered a strong Q4 to finish out the year.
Dennis Woodside: This was to replace an on-premise customer support solution that couldn't deliver unified analytics and limited collaboration across. Later, they added FreshCaller and FreshCat to unify support channels, and more recently, in Q4, they rolled out FreshSales to generate more qualified leads. In addition to our powerful platform and multiple expansion paths, what we believe makes Freshworks unique is our go-to-market strategy, which includes both inbound, product-led growth, and field sales. Our inbound business is primarily marketing-led, while our field business is sales-led.
After joining us in 2020 through an acquisition Patty made countless contributions first as our chief customer officer and later at CRO.
Thank him and wish him all the best in his future endeavors.
Now over to Tyler to go through the Q4 and full year financials and talk about how we're driving efficiency.
Thanks, Dennis and thanks, again to everyone for joining us.
As it reflect on Q4 and 2023 I was really pleased with our ability to adapt to a changing macroeconomic environment to deliver durable revenue growth, while also improving our operating efficiency throughout the year.
Dennis Woodside: As our company matures, we have hired two proven leaders across these distinct go-to-market activities that can help us scale. In Q4, Mika Yamamoto joined us in the new role of chief customer and marketing officer to drive greater inbound activity, including responsibility for our customer support, SMB, and commercial sales. Under her leadership, this team will drive our inbound product-led growth mode. Our field sales team will be led by Abe Smith, who I'm excited to announce has joined as our Chief of Global Field Operations this week. He's a sales executive with nearly 25 years of global experience at Zoom, Oracle, and Cisco, and will lead our talented field team to scale the business. With these changes in the organization, Pradeep Rathanam, our CRO, will be departing Freshworks at the end of this year.
Specifically, we continued our product innovation cycles, injecting generative AI capabilities into our offerings.
We retooled our go to market approach to more efficiently serve our diverse customer base.
We brought on new leaders and team members to help drive additional growth.
At the same time, we significantly improved our full year non-GAAP operating and free cash flow margins by 12 percentage points, and 16 percentage points, respectively compared to the prior year.
For our call today I will cover the Q4 and full year 2023 financial results provide background on the key metrics and close with our forward looking commentary on expectations for Q1, and the full year 2024.
I'll include constant currency comparisons for certain metrics to provide a better view of our business trends.
As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock based compensation expenses and other adjustments.
Dennis Woodside: Patty stepped up to lead and stabilize our go-to-market teams during a transition period and delivered a strong Q4 to finish. After joining us in 2020 through an acquisition, she made countless contributions first as our chief customer officer and later as CRO. We thank him and wish him all the best in his future endeavors. Now, over to Tyler, to go through the Q4 and full year financials and talk about how we're driving. Thanks, Dennis, and thanks again to everyone for joining us.
Starting with the income statement.
Q4 revenue grew 20% year over year to $161 million adjusting for constant currency revenue growth was 19% as we saw the positive impacts from currency rates for the euro and pound against the U S dollar over the past year.
Similar to prior quarters I TSM continued to drive the majority of our growth in Q4.
In addition, we were encouraged to see an improvement in our <unk> expansion activity quarter over quarter.
Looking at our margins non-GAAP gross margin remained flat compared to Q3 at 84% as we efficiently scaling the business.
Tyler Slope: As I reflect on Q4 and 2023, I was really pleased with our ability to adapt to a changing macroeconomic environment to deliver durable revenue growth while also improving our operating efficiency throughout the year. Specifically, we continued our product innovation cycles, incorporating generative AI capabilities into our offer. We retooled our go-to-market approach to more efficiently serve our diverse customer base. We also brought on new leaders and team members to help drive additional growth. At the same time, we significantly improved our full-year non-GAAP operating and free cash flow margins by 12 percentage points and 16 percentage points, respectively, compared to the prior year.
Similarly for the full year 2023, we achieved strong non-GAAP gross margins of 84%, which represents a 150 basis point improvement from the prior year.
Turning to our operating metrics, we have two key business metrics net dollar retention in customers contributing more than $5000 in the IRR.
Net dollar retention was 108% in the quarter, which includes a one percentage point benefit from FX and came in ahead of our previous estimates of 105%.
In Q4, we saw improvements in both gross expansion and churn rates quarter over quarter.
The higher expansion rate was mainly driven by strong execution from our field teams closing a number of large deals with existing customers.
This was despite the overall macro demand continuing to feel pressure in Q4.
Looking forward, we are planning for Q1 net dollar retention of 106%.
Moving to our other key business metrics of number of customers contributing more than $5000 in IRR.
This metric grew 14% year over year on an as reported and constant currency basis to 2200 61 customers in the quarter and now represents 89% of our era.
Tyler Slope: For our call today, I'll cover the Q4 and full year 2023 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q1 and full year 2024. I'll include constant currency comparisons for certain metrics to provide a better view of our business trends. As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses and other adjustments. Starting with the income statement.
For our larger customer cohort contributing more than $50000 in the IRR. We saw strong growth in this cohort of 31% year over year to 2497 customers and it now represents 48% of our IRR.
Adjusting for constant currency this cohort grew at 30%.
As Jim Dennis mentioned earlier, we're excited about our ongoing success in winning upmarket deals.
For total customers, we added over 500 net customers and ended the quarter with over 67100 customers.
The lower net adds in the quarter was primarily impacted by higher logo churn from smaller customers and the customer service segment.
But we continue to see improvement in ARPA as we focus on attracting higher yielding more profitable customers.
Tyler Slope: Q4 revenue grew 20% year-over-year to $160.1 million. Adjusting for constant currency, revenue growth was 19%, as we saw the positive impacts from currency rates for the euro and pound against the US dollar over the past year. Similar to prior quarters, IDSM continued to drive the majority of our growth in Q4. In addition, we were encouraged to see an improvement in our CS expansion activity quarter over quarter. Looking at our margins, non-GAAP gross margin remained flat compared to Q3 at 84%, as we are efficiently scaling the business. Similarly, for the full year 2023, we achieved strong non-gap gross margins of 84%, which represents a 150 basis point improvement from the prior year. Turning to our operations, we have two key business metrics, net dollar retention and customers contributing more than $5,000 in ARR. Net dollar retention was 108% in the quarter, which includes a 1% point benefit from FX.
Moving to calculated billings balance sheet and cash items.
Calculated billings grew 22% year over year to $184 million and 20% on a constant currency basis.
Factors, including timing duration of contracts created a slight benefit of 2% to these growth numbers.
Looking ahead to Q1 2024, our preliminary estimate for calculated billings growth of 16%.
For the full year 2024, we expect calculated billings growth to be similar to our expected annual revenue growth rate of 18% to 19%.
During the quarter, we generated $28 6 million and free cash flow and for the full year, we generated $78 million in free cash flow.
This annual figure was nearly $70 million above our initial estimates we provided at the start of the year as we realized efficiencies throughout the year.
This improvement was driven by lower than expected head count costs improvements on our infrastructure spend and consolidation of vendor spend resulting in both ongoing efficiencies as well as some onetime benefits.
For the full year 2024, we expect to generate approximately $110 million of free cash flow with approximately $26 million of that in Q1.
We ended Q4, maintaining a similar balance to Q3 for cash cash equivalents and marketable securities with $109 billion.
We continued to net settle invested equity amounts using $16 million during the quarter and $68 million for the full year 2023.
This activity is reflected in our financing activities and is excluded from free cash flow.
Tyler Slope: We came in ahead of our previous estimates of 105,000. In Q4, we saw improvements in both gross expansion and churn rates quarter over quarter. The higher expansion rate was mainly driven by strong execution from our field teams, closing a number of large deals with existing customers. This was despite overall macro demand continuing to feel pressure in Q4.
Since our IPO in 2021, we have used approximately $239 million and net settlement invested equity.
As we look forward to Q1, we plan to continue net settling invested equity amounts, resulting in Q1 cash usage of approximately $21 million using current stock price levels.
For the full year, we expect to use approximately $80 million to net settle vested equity amounts.
Turning to our share count for Q4, we had approximately 326 million shares outstanding on a fully diluted basis as of December 31 2023.
Tyler Slope: Looking forward, we are planning for a Q1 net dollar retention of $160,000. Moving on to our other key business metric, the number of customers contributing more than $5,000 in ARR. This metric grew 14% year-over-year on an as-reported and constant currency basis to 20,261 customers in the quarter, and now represents 89% of our air offer. For our larger customer cohort contributing more than $50,000 in ARR, we saw strong growth in this cohort of 31% year over year to 2,497 customers. And it now represents 48% of our revenue. Adjusting for constant currency, this cohort grew at 30%.
Representing share growth of less than 1% from the prior year.
The fully diluted calculation consists of approximately 297 million shares outstanding.
$7 million related to Unvested, Rsc's, mpr's use and 2 million shares related to outstanding options.
Let me now provide our forward looking estimates.
For the first quarter of 2024, we expect revenue.
Revenue to be in the range of $162 5 million to $164 5 million growing 18% to 19% year over year.
non-GAAP income from operations to be in the range of $12 5 million to $14 5 million.
And non-GAAP net income per share to be in the range of seven to eight.
Assuming weighted average shares outstanding of approximately 305 million shares.
For the full year 2024, we expect revenue to be in the range of $703 5 million to $711 5 million growing 18% to 19% year over year.
Tyler Slope: As Jean-Denis mentioned earlier, we're excited about our ongoing success in winning upmarket deals. For total customers, we added over 500 net customers and ended the quarter with over 67,100 customers. The lower net ads in the quarter were primarily impacted by higher logo churn from smaller customers in the customer service segment.
non-GAAP income from operations to be in the range of 52 million to $60 million.
And non-GAAP net income per share to be in the range of 29 to 31.
Assuming weighted average shares outstanding of approximately $306 1 million shares.
We want to provide our best view of the business as we see it today and as part of that I want to call out a couple of assumptions in our financial model.
First our.
Tyler Slope: But we continue to see improvement in ARPA as we focus on attracting higher yielding, more profitable customers. Moving to Calculated Billings, Balance Sheet, and Cash Item, calculated billings grew 22% year-over-year to $180.4 million.
Our forward looking estimates are based on FX rates as of February 2024, so any future currency moves are not factored in.
Second.
We have seasonality in our business with expenses typically stepping up in Q2 as our annual merit increases come into effect.
Tyler Slope: Factors including timing the duration of contracts created a slight benefit of 2% to these growth. Looking ahead to Q1 2024, our preliminary estimate for calculated buildings growth is 16%. For the full year 2024, we expect calculated billings growth to be similar to our expected annual revenue growth rate of 18 to 19. During the quarter, we generated $28.6 million in free cash.
As a result, we anticipate non-GAAP operating income to be approximately $6 million in Q2 $15 million in Q3, and the remainder coming in Q4 to add up to the full year amount.
Let me close by saying I'm pleased with all that we accomplished in 2023, we continued our rapid pace of innovation and enhance our go to market efforts, all while making meaningful improvements to our operational efficiency.
As we look to 2024, we're focused on our growth initiatives and we're excited for the many opportunities ahead.
And with that let's take your questions operator.
Thank you.
If you would like to ask a question. Please press star one on your telephone. Please wait for your name to be now for you Christine What's your question one moment, while we compile the Q&A roster.
Tyler Slope: And for the full year, we generated $78 million in free cash. This annual figure was nearly $70 million above our initial estimates we provided at the start of the year, as we realized efficiencies throughout. This improvement was driven by lower-than-expected headcount costs, improvements in our infrastructure spending, and Consolidation of Vendor Spend, resulting in both ongoing efficiencies as well as some one-time benefits. For the full year 2024, we expect to generate approximately $110 million of free cash, with approximately $26 million of that in Q1. We ended Q4 maintaining a similar balance to Q3 for cash, cash equivalents, and marketable securities at $1.19 billion. We continue to net settle vested equity amounts using $16 million during the quarter and $68 million for the full year 2020. This activity is reflected in our financing activities and is excluded from pre-cash.
The first question that we have today is coming from Scott Berg of Needham Your line is open.
Hi, everyone really nice quarter on the sales side and thanks for taking my questions here.
Again a couple.
Gee I wanted to started with.
With what Youre seeing in some of the AI front with some of the functionality that you have in beta and I think one of the concerns amongst investors and are priced software is the more prevalent these technologies become more of a chance to EBIT seats in the seat base.
Model like what fresh works and you had commented that one of your beta customers and a 50% improvement in resolution timeframe. How do you think about the use or the impact of AI in terms of what your business looks like going forward is it just going to be a module that adds maybe some art to uplift for customers.
Tyler Slope: Since our IPO in 2021, we have used approximately $239 million in net settlement of vested equity. As we look forward to Q1, we plan to continue net settlement of vested equity amounts, resulting in Q1 cash usage of approximately $21 million using current stock price levels. For the full year, we expect to use approximately $80 million to net settle vested equity amounts. Turning to our share account for Q, we had approximately 326 million shares outstanding on a fully diluted basis as of December 31st, 2023, representing share growth of less than 1% from the prior year. The fully diluted calculation consists of approximately 297 million shares outstanding.
Is there some seed opportunity maybe on the positive or less positive side that might be impacted as well.
Yes, thanks for the question Scott.
So let me start off by saying.
Right from the very early days, even before AI one.
One of the goals for.
Like fresh looks and in particular on fund most technology vendors and customer service unemployed services. How can we help businesses drive more automation think about IV, but I think automation and the call center and things like that so so from 2018, we have been helping.
Customers in the fresh desk, Chris chat business to drive more automation and that's always a business Tyler so what we have with <unk> and <unk> self service and box is the opportunity to bring natural language conversational automation of customer service and some of the largest.
Tyler Slope: $27 million related to unvested RRCs and PRs, and 2 million shares related to outstanding. Let me now provide our forward-looking estimates. For the first quarter of 2024, we expect revenue to be in the range of $162.5 million to $164.5 million, growing 18% to 19% year-over-year, non-GAAP income from operations to be in the range of $12.5 million to $14.5 million, and non-net income per share to be in the range of seven cents to eight. Assuming weighted average shares outstanding of approximately 305 million shares, for the full year 2024, we expect revenue to be in the range of $703.5 million to $711.5 million, growing 18% to 19%, non-GAAP income from operations to be in the range of $52 million to $60 million, and non-GAAP net income per share to be in the range of $0.29 to $0.31. Assuming a weighted average shares outstanding of approximately 306.1 million shares. We want to provide our best view of the business as we see it today, and as part of that, I want to call out a couple of assumptions in our financial model. First,
We do see companies are using our.
Pretty AI today far.
Customer service automation, so we actually believe in this end.
It will actually help us help fresh looks be a beneficiary in driving better automation and.
But along with a seamless transfer to allow agent win.
The automate the actual customer liquidity goes beyond the simple automated Bill's question. So so I think overall.
You have to look at it as.
How do we use how do businesses use automation as the first line of defense and then seamlessly hand over to a human.
Then handle the conflict surplus we think we have the best Omnichannel customer service product in the industry today, and we would be a big beneficiary of that.
Got it helpful. And then from a follow up Dennis you mentioned you have a new field sales leaders starting.
You've obviously helped to enact a number of changes to the organization since your team, but with this individual are there a lot of moving parts that are going to be occurring here in terms of what your go to market strategy looks like in 'twenty. Four is this might be more of an opportunity to make some subtle adjustments. Thank you.
Well I would say this is more of an opportunity to make subtle adjustments.
We announced in Q4 that we made a change to separate our inbound business from our field business that is to create more focus on both that SMB, primarily inbound business from field field, we've done quite well over the last year, we have some opportunity in that SMB <unk>.
Tyler Slope: Our forward-looking estimates are based on FX rates as of February 2, 2024, so any future currency moves are not factored in. We have seasonality in our business with expenses typically stepping up in Q2 as our annual merit increases come into effect. As a result, we anticipate non-GAAP operating income to be approximately $6 million in Q2, $15 million in Q3, and the remainder coming in Q4 to add up to the full-year amount. Let me close by saying I'm pleased with all that we accomplished in 2020. We continued our rapid pace of innovation and enhanced our go-to-market efforts, all while making meaningful improvements to our operational efficiency. As we look to 2024, we are focused on our growth initiatives, and we're excited for the many opportunities. And with that, let us take your questions. Operator.
<unk> business and that's why we brought me Ken I think today's announcement with Abe is really really the next step and creating focus on those two businesses as distinct it's very different going out negotiating big deals with large industrial customers and on the other hand managing a.
A funnel that's generating thousands of leads every single week. So we want to bring focus to both of those businesses and that's why we made the change.
Very helpful. Thank you and congrats again on the nice quarter.
Thank you.
Thank you one moment for the next question.
Okay.
And our next question is coming from Penn gentlemen, Barra of JP Morgan Your line is open.
Oh, great. Thank you.
You.
For the question.
Good to hear about the improvement in the CX expansion side I wanted to ask you. If you can go a little bit deeper are you seeing seat starts to grow.
Operator: Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. Please wait for your name to be announced before you proceed with your question.
And kind of accelerate there or is it is that expansion characteristics largely driven by the customer service suite or maybe the pricing changes around box.
Scott Berg: One moment while we compile the Q&A roster. The first question that we have today is coming from Scott Berg of Needham. Your line is open.
Hey, John This is Tyler.
We actually in the quarter, we had strong expansion, we caught out CX.
Girish Mathurbutham: Hi everyone, really nice quarter on the sales side. Thanks for taking my questions here. I got a couple. Gee, I wanted to start with what you're seeing on some of the AI front with some of the functionality that you have in beta. I think one of the concerns amongst investors in enterprise software is the more prevalent these technologies become, the more they have a chance to eat into seats in a seat-based model, like what Freshworks is. And you commented that for one of your beta customers, they had a 50% improvement in resolution timeframe. How do you think about the use or the impact of AI in terms of what your business looks like going forward? Is it just going to be a module that adds maybe some RPO uplift for customers? Or is there some seat opportunity, maybe on the positive or the less positive side, that might be impacted as well?
It's a mix of all of the above but we did have seat expansion specifically on that mid market enterprise, which is driving a lot of it some of it was pull forward early renewals from Q1 with expansion, which I always see as a good sign that they are coming a customer coming up on renewal and theyre going to actually increase their army new early with us and so.
That was encouraging.
<unk> has seen pressure on Asia for a couple of years, we've been calling that out and so we thought it was really good quarter of execution on that side.
Yes.
Okay understood Tyler one another one for you the guidance.
Can you maybe unpack some of the assumptions guidance what are you thinking from a net retention perspective for the whole year.
On the logo perspective are you.
Thinking about macro to be kind of the same.
What should we think about from a pricing.
Leverage point of view and that guidance any anything you can add.
Yeah, So I'll take that in a couple of different pieces on guidance you mentioned that net dollar retention, we've been calling 105.
Girish Mathurbutham: Yeah, thanks for the question, Scott. So, let me start off by saying that right from the very early days, even before AI, one of the goals for Freshworks, and in particular for most technology vendors in customer service or employee services, was, how can we help businesses drive more automation?
We really I think is going to hit 105 in Q4, and we had called out earlier in the year.
And kind of coming into Q2 Q3, one of the reasons that we didn't get down to <unk>, because we're doing really really well on churn.
Girish Mathurbutham: Think about IVR driving automation in the call center and things like that, right? So, from 2018, we have been helping customers in the Fresh Desk and Fresh Chat business to drive more automation, and that's always a business driver. So what we have with GenAI and Freddy's Self-Service and Bots is the opportunity to bring natural language conversational automation of customer service, and some of the largest B2C companies are using our Pretty AI today for Customer Service Automation. So we actually believe in this, and it will actually help us help Freshworks be a beneficiary in driving better automation and along with a seamless transfer to a live agent when the actual customer query goes beyond a simple, automat So I think overall, you have to look at it as how do businesses use automation as the first line of defense and then seamlessly hand over to a human and then handle all the complex workflows. We think we have the best omni-channel customer service product in the industry today, and we will be a big beneficiary. I got found it helpful.
And hitting our number for Q4, it was really a combination of churn still getting better as well as expansion kicking in a little bit and now we're saying hey, we're going to be at 106 in Q1, and we do think that's going to be the number but.
We thought we'd stabilize at 105 and now we think we can stabilize at 106 and it really is just a reflection of the health of the customer base.
On the other areas of guidance on revenue we are its our best estimate based on what we see today and that kind of 18% to 19% growth.
And then billings for the year, we expect to actually track that we.
We did call out that Q1, just the way that renewals are kind of falling and also I. Just mentioned that we had some early renewals into Q4 that pulled some billings from Q1 into Q4 that that number is going to be a little bit calculate billings, we expect to be a little bit lower in Q1, but it really is just around timing and for the year, we actually expect it to track revenue for the full.
At 18 to 19.
Understood. Thank you so much.
Thank you one moment for the next question.
And our next question will be coming from the quarter.
Stanley Your line is open.
Thank you so much so first I just wanted to ask on the AI monetization impact you have some of the usage base revenue from box coming in and the co pilot seat add ons I believe Freddie and thank you mentioned is coming later this year. So what kind of attach our penetration rates are you assuming or is this more of an upside driver to guidance. Thanks.
Dennis Woodside: And then, from a follow-up, Dennis, you mentioned you have a new field sales that are starting. You've obviously helped enact a number of changes to the organization since you came. But with this individual, are there a lot of moving parts that are going to be occurring here in terms of what your go-to-market strategy looks like in 24? Is this going to be more of an opportunity to make some subtle adjustments?
So thanks for the question. So first of all I think in terms of adoption. So far with thousands of customers that have adopted into the opted into the beta programs for Freddie self serve for insights and four co pilot and not only have they opted in but the usage rates amongst those.
Customers is quite high so we track things like active usage and so forth.
Dennis Woodside: Well, I would say this is more of an opportunity to make subtle adjustments. We announced in Q4 that we made a change to separate our inbound business from our field business. That's to create more focus on both that SMB, primarily inbound business, from the field. We've done quite well over the last year. We have some opportunity in that SMB inbound business, and that's why we brought Meek in. I think today's announcement with Abe is really the next step in creating focus on those two businesses as distinct. It's very different going out, negotiating big deals with large industrial customers, and on the other hand, managing a funnel that's generating thousands of leads every single week. So we want to bring focus to both of those businesses, and that's why we made the change. Very helpful, thank you, and congrats again on the next quarter.
We recently put those programs into <unk>. So you can purchase.
Insights or sorry, you can purchase copilot and self serve today on our website. If you are a new customer and then we're moving all the beta customers into pay programs over the next month or so.
So we will start to see the monetization flow through but for now we're very much focused on adoption. We're very much focused on the value that those products are providing to our customers. That's a good leading indicator for us.
In terms of how we're thinking about it for the full year.
We haven't baked in meaningful upside to the year from AI, because we wanted to see how things play out before putting anything into our number.
Okay, Great and then just as a follow up I wanted to hit on margin you had some really impressive expansion over the last year.
Operator: Thank you. Thank you. One moment for the next question. And our next question is coming from Pinjalim Bora of JP Morgan. Your line is open. Oh, great.
Going ahead guidance implies more minimal expansion despite itself that solid top line growth. So first just how should we think about the leverage and any incremental areas of investment in fiscal 'twenty four and then second should we just be thinking more about some backend loaded linearity to hit your fiscal 'twenty six targets. Thanks.
Pinjalim Bora: Thank you for the question. Good to hear about the improvement on the CX expansion side. I want to ask you if you can go a little bit deeper.
Yeah. So thanks Elizabeth this Tyler.
We did make some huge improvements last year. Some of those improvements were kind of one time and I think we've been pretty consistent.
Pinjalim Bora: Are you seeing seats start to grow and kind of accelerate there? Or is that expansion characteristic largely driven by the customer service suite or maybe the pricing changes around that? Hey Pinjalim,
We expect the same kind of stair step improvement.
Coming into fiscal 'twenty four here.
Tyler Slope: This is Tyler. You know, we actually had a strong expansion in the quarter. We called out CX, you know, it's a mix of all of the above, but we did have seed expansion specifically on that, that mid-market enterprise, which is driving a lot of it. Some of it was pulling forward early renewals from Q1 with expansion, which I always see is a good sign that, you know, they're coming, a customer is coming up and renewing, and they're going to actually increase their A And so that was encouraging. It's, you know, CX has seen pressure on agents for a couple of years.
We are still very very focused on efficiency, but we also think that there are some areas to invest.
The R&D side, it really is going to continue to invest in innovation and we think that's a.
A big advantage that we have and on the sales and marketing side, we are going to continue to lean in where we see opportunity specifically in field.
And hiring there where we see appropriate so we have built in some areas of investment, but while also focusing on driving margin.
We're driving more dollars to the bottom line and driving more cash.
Great. Thank you.
Yes.
Yes.
Thank you one moment for the next question.
And our next question will be coming from Brent Breslin of Piper Sandler Your line is open.
Hi, guys. This is Hannah Rudolph on for Brent today, Thanks for taking my question.
It's really encouraging to see that record 50, K net adds this past quarter I guess, what do you attribute that to I imagine a lot of that is <unk>, but some of that was probably driven by that new see ethylene as well. So I'm wondering if you could just talk about the dynamics you witnessed the Mac cohort.
Tyler Slope: We've been calling that out, and so we thought it was a really good quarter of execution on that. I understand, Tyler. Another one for you.
Pinjalim Bora: The guidance. Can you maybe unpack some of the guidance? What are you thinking from a net retention perspective for the whole year on the logo basis? Are you thinking about macro to be kind of the same? What should we think about from a pricing leverage point of view in that guidance? Anything you can add or, Yeah, so I'll take that in a couple of different pieces.
Yes, you're correct a lot of it's driven by TSM, but we're seeing some promising results for CSS.
One of the one of the companies that I talked about in the prepared remarks, Carl and one that's the new CSS customer their loyalty company up in Canada.
<unk> one of the larger steel companies in Europe, that's a new Ics.
Tyler Slope: On guidance, you mentioned net dollar retention. You know, we have been calling 105, and we really did think it was going to hit 105 in Q4, and we had called that earlier in the year. And, you know, kind of coming into Q2, Q3, one of the reasons that we didn't get down to 105 was because we were doing really, really well on churn. In hitting our number for Q4, it was really a combination of churn still getting better as well as expansion kicking in a little bit. And now we're saying, hey, we're going to be at 106 in Q1.
<unk> customer.
Tata also another customer talked about earlier, that's another <unk> customer I think it's not just something that we've done in the last quarter, but the investment that we've made in the product over the last couple of years, where we build out our enterprise grade TSM suite added on icon Tam and then more recently <unk> with our.
Our service for business teams that really has driven growth of that product.
And then with CSS our customers have.
A best in class fully integrated product that covers both conversational and traditional ticketing.
Enhanced by AI, and that's something that really is unique in the marketplace, where if I'm an agent and a single pane of glass I can ingest and see comments from my customer coming in through Whatsapp coming in through SMS or email or phone.
Tyler Slope: And, you know, we do think that's going to be the number. But previously, we thought we'd stabilize at 105, and now we think we're going to stabilize at 106. And it really is just a reflection of the health of the customer base. On the other areas of guidance on revenue, we are, you know, it's our best estimate based on what we see today and that kind of 18%, 19% growth. And that billing for the year, we expect to actually track that. We did call out Q1, just the way that renewals are kind of falling. And also, I just mentioned that we had some early renewals into Q4 that pulled some billings from Q1 into Q4, so that number is going to be a little bit, calculated billings, we expect to be a little bit lower in Q1. But it really is just around timing.
And respond and that is has had a lot of positive acceptance in the market so far.
Great Super helpful. And then Dennis why do you feel still needs to be done to continue to execute on this mark and upmarket motion that you're on right now and is it just execution or is there more that you still need to do.
We're going to be making a meaningful investment in partners and partnerships, we announced a couple of weeks ago, and our partnership with AWS, where.
They are bringing us into new deals were working with them on deals one of our largest deals with a large apparel maker. This year was assisted by AWS.
Our customers are able to retire AWS commitments in terms of credits that they've committed to spend over multiple years by buying our software. So that makes the buying process much easier for them and for us at speeds that time to sale.
Elizabeth Porter: And for the year, we actually expect it to track revenue for the full year at 18%. Understand? Thank you. One moment for the next question. And our next question will be coming from Elizabeth Porter of Morgan Stanley. Your line is open.
So that's an example of a large partner that we think can help us accelerate growth over time.
I think just also getting.
We're getting better and better at execution, we had our best.
Elizabeth Porter: Great, thank you so much. First, I just wanted to ask about the AI monetization impacts. You have some of the usage-based revenue from bots coming in and the co-pilot seat add-ons. And I believe Freddie Insights, you mentioned, is coming later this year. So what kind of attach or penetration rates are you assuming?
Ever in North America, not surprisingly about six months ago, we brought in will honest us who's leading our North America sales efforts. So we're seeing the benefit of some of the big hires that we've made in the last year as well and we think that will continue with <unk> coming in <unk> is a tried and true field general and I think he is going to up our game.
Even more.
Dennis Woodside: Or is this more of an upside driver to guidance? Thanks, www.globalonenessproject.org. So, thanks for the question. So, first of all, I think in terms of adoption so far, we have thousands of customers that have opted into the beta programs for Freddie Self-Serve, for Insights, and for Copilot. And not only have they opted in, but the usage rates amongst those customers are quite high. So, we track things like active usage and so forth. We recently put those programs into GA, so you can purchase Copilot and Self-Serve today on our website if you're a new customer.
As we go to market.
Great to hear thank you so much.
Thank you one moment for the next question.
And our next question is going to be coming from Brian.
Peterson.
Of Raymond James Your line is open.
Hey, guys. Thanks for taking my question.
To follow up on this.
We also mentioned that overall people CF.
It's been under pressure for a little bit.
Do you think we're through that and a broader suite.
And.
Just curious your thoughts there.
Hey, Brian. This is Tyler you are broken it break it up a little bit, but I think youre asking about kind of degradation or just expansion pressure.
And as whether it's over or not now.
We actually we saw really good expansion in Q4 and we.
Dennis Woodside: And then we're moving all the beta customers into paid programs over the next month or so. So we'll start to see the monetization flow in. But for now, we're very much focused on adoption.
We've been talking about kind of agent addition.
Kind of lower amounts over the last call it year and a half.
That has not recovered from what it was several years ago, and we don't expect it to actually recover right away. There was good signs in Q4, but we're not planning on that just coming back.
Tyler Slope: We're very much focused on the value that those products are providing to our customers, so that's a good leading indicator for us. In terms of how we're thinking about it for the full year, we haven't baked in meaningful upside to the year from AI because we wanted to see how things play out before putting anything into our numbers. Great. And then, just as a follow-up, I wanted to hit on Margin.
Because at the same time also SMB did see some pressure and continue to see pressure and Thats one of the reasons for that.
The lower net adds is a very long tail of SMB, specifically CX, we saw some logo churn there.
In general what we've been talking about is focus on figuring out how to expand with our customer base outside of seat addition of seat addition, and agent edition comes back.
Tyler Slope: You had some really impressive expansion over the last year. Looking ahead, guidance implies more minimal expansion despite still some of that solid top-line growth. So first, how should we think about the leverage in any incremental areas of investment in fiscal 24? And then second, should we just be thinking more about some back-end linearity to hit your fiscal 26 targets? Thanks. Yeah, so thanks, Elizabeth. This is Tyler.
To the levels. It was a couple of years ago it'd be fantastic, but we're very focused on introducing new products, introducing new feature functionality moving customers up. The addition stack.
Stack and things like that as well as you know.
Getting them to use more across other divisions and so that's what our focus is right now it's not all the way back, but we did have a good expansion quarter.
Here.
A follow up.
Just from our field sales teams.
And how you're thinking about the pace.
Ohio.
Brent John Thill: You know, we did make some huge improvements last year. Some of those improvements were kind of one-time things, and I think we've been pretty consistent. We don't expect the same kind of stair-step improvement coming into fiscal 24 here. We are still very, very focused on efficiency, but we also think that there are some areas to invest in. You know, on the R&D side, we are really going to continue to invest in innovation, and we think that's a big advantage that we have, and on the sales and marketing side, we are going to continue to lean in where we see opportunities specifically in the field and in hiring there where we see appropriate. So we have built in some areas of investment, but while also focusing on driving margin or driving, you know, more dollars to the bottom line and Great, thank you.
Any comments that you could say if I'm correct.
Thanks, guys.
I think youre asking about the pace of hiring and field is what I heard.
We have been hiring in the field and specifically in areas that we think there is opportunity and we think theres areas definitely lean and we're going to continue to do that.
Our regional leaders.
Our in place and have been for a while to AIDS coming in and.
He has taken that over and he is going to work through.
The plan is to continue to hire and build out quota capacity, because we think there's big opportunity there.
Thanks Scott.
Thank you one moment for the next question.
And our next question is coming from Alex Zukin of Wolfe Research. Your line is open.
Hey, guys. Thanks for taking the question and congrats on a solid quarter, maybe just the first one.
Dennis or Tyler.
Can you just talk about the macro exiting Q4.
During the year has it hasnt changed has it gotten better has a different by geography in terms of what Youre seeing.
To what extent do you feel like this was the you guys executing meaningfully better versus the macro changing to the positive.
Dennis Woodside: Thank you. One moment for the next question, and our next question will be coming from Brent Breslin of Piper Sandler. Your line is open. Hi guys, this is Hannah Rudolph on for Brent today.
And then I've got a quick follow up.
Sure. So I think the trends we saw in Q4 were consistent with trends we saw earlier in the year and that is that in enterprise and mid market. We continued to see really solid traction you see it in the 50 K add number.
Dennis Woodside: Thanks for taking my questions. It's really encouraging to see that record 50k net ads this past quarter. I guess what do you attribute that to?
And part of that is because vendors are consolidating spend theyre looking for platforms that can do much more for them, they're looking to bring AI into their operations. Our workflows there help desks and we can do that and they are excited about the AI roadmap and what we already have out there in beta and now NGA. So all those things help there I think on SMB.
Dennis Woodside: I imagine a lot of it is ITSM, but some of it was probably driven by that new CS suite as well. So, wondering if you could just talk about the dynamics you witnessed in that cohort. Yeah, you're correct.
Dennis Woodside: A lot of it's driven by ITSM, but we're seeing some promising results for CSS. One of the companies that I talked about in the prepared remarks, Carleton One, that's a new CSS customer, their loyalty company up in Canada. Klockner, one of the larger steel companies in Europe, that's a new ITSM customer.
SMB overall is a bit more challenged.
I think that what we're what we're hearing from our customers as the market is under a little bit more pressure, if you're a smaller business.
Now there are also things, we can do better and that's again going back to.
Driving product led growth to the next level.
Aligning marketing more tightly with our SMB efforts all of those things, we think will pay off for us.
Dennis Woodside: Tata, also another customer we talked about earlier, that's another ITSM customer. I think it's not just something that we did in the last quarter, but the investment that we've made in the product over the last couple of years, where we filled out an enterprise-grade ITSM suite, added on ITOM, ITAM, and then more recently, ESM with a fresh service for business teams. That really has driven growth for that product. And then, with CSS, our customers have a best-in-class, fully integrated product that covers both conversational and traditional ticketing enhanced by AI. And that's something that really is unique in the marketplace, where if I'm an agent on a single pane of glass, I can ingest and see comments from my customers coming in through WhatsApp, coming in through SMS, or email, or phone, and respond. And that has had a lot of positive acceptance in the market so far. Great, super helpful. And then Dennis, what do you feel still needs to be done to continue to execute on this upmarket movement that you're on right now? And is it just execution?
So we think SMB is potentially a source of upside for us going forward, but what we saw in Q4 was consistent with prior quarters, where that was the part of the business that was that was not growing quite as quickly as what we saw on the larger customer cohort.
Perfect and then maybe just a follow up for GE.
<unk> got me AI question, a couple a couple of times, but maybe just.
What are you seeing in terms of early adoption.
Earnings from either are you seeing more in SMB versus mid market enterprise or vice versa faster versus slower.
And what monetization motions, because you have a number of different ones.
You are doing in the field, which one of those are working the best early on and that you see potentially kind of getting escape velocity and later in the year.
Yes.
So I would answer it in two parts. So when you look at pretty self service.
<unk> is seeing.
We're seeing success with the larger <unk> companies because BGC companies have.
Fewer used cases that.
Scaling across millions of customers. So it's ripe for automation.
But if you look at our co pilot that is seeing traction because it is helping agents get more productivity that we're seeing.
Dennis Woodside: Or is there more that you still need to do? You know, we're going to be making a meaningful investment in partners and partnerships. We announced a couple weeks ago a partnership with AWS where they're bringing us into new deals, and we're working with them on deals. One of our largest deals with a large apparel maker this year was assisted by AWS. We, uh, our customers are able to retire AWS commitments in terms of credits that they've committed to spend over multiple years by buying our software. So that makes the buying process much easier for them.
Excitement and adoption across thousands of customers.
Across customers faces some segments SMB mid market so.
Again that will begin to escape velocity.
And hopefully we'll get it.
And but what we'll wait to see it's still early days and so we will.
Continue to put our heads down and execute and deliver more value for our customers and escape velocity.
Dennis Woodside: And for us, it speeds the time to sale. Uh, so that's an example of a large partner that we think can help us accelerate growth over time. I think also just getting better and better at execution. We had our best quarter ever in North America.
Yeah.
Perfect. Thank you guys.
Thank you.
Thank you one moment for the next question.
Okay.
Our next question will be coming from Brian Wang of Barclays. Your line is open.
Hey, Thanks for taking my question I guess I want to note your focus on upmarket customers. So it makes sense that much.
Much smaller customers below five K are turning in the customer service segment, but any reason why those customers are leaving now or are they just looking for cheaper alternatives or is it some change in the competitive landscape.
Dennis Woodside: Not surprisingly, about six months ago, we brought in Will Anastos, who's leading our North America sales effort. And we're seeing the benefit of some of the big hires that we've made in the last year as well. And we think that will continue with Abe coming in. You know, Abe is a tried and true, uh, field general. And I think he's going to up our game even more, um, as we go to market. Great to hear. Thank you so much.
Yes, I wouldn't say that they're necessarily looking for cheaper alternatives I think we have a natural there's natural churn as businesses.
Frankly fail or.
The shrink in SMB, you see quite a bit of that.
We also have had.
Customers, who come in and try the product line it doesn't fit for whatever reason, what theyre looking forward, maybe they're too small.
Dennis Woodside: Thank you. One moment for the next question, and our next question is going to be coming from Brian. Peterson, of Raymond James, your line is open.
So I wouldn't say, there's any one competitor that we find those customers migrating to <unk>.
If that's your question.
Brian Peterson: Hi guys, thanks for asking the question. So, I wanted to follow up on the feed dynamic. Things have improved. You've also mentioned that the overall CWCS has been under pressure for a little bit.
Excellent and then just for Tyler please assume that retention would come in better than expected.
What are some of the things you would need to see before like call. It troughs and do you think for fresh to get back to 110% NRI, we would need to see a step up in macro how quick what we're waiting for here.
Brian Peterson: Do you think we're through that in a broader switch and going forward? Curious to get your thoughts. Hey, Brian, this is Tyler.
Hey, Brian So I think in terms of a trough.
Right now we called 106 for Q1 were previously calling 105, we do think 106 is kind of from what we can see today. The low point now where I think we'll hit it and then possibly stabilize from there and getting it back up to 110 I think it is a combination of a couple of things were still going to make progress on churn that we had said hey, when went public were kind of low 20.
Tyler Slope: You're breaking up a little bit, but I think you're asking about kind of seat degradation or just expansion pressure and whether it's over or not. Now, we actually, you know, we saw really good expansion in Q4, and we, you're right, we've been talking about kind of agent addition, having, you know, kind of lower amounts over the last, you know, call it a year and a half. That has not recovered from what it was several years ago, and we don't, you know, expect it to actually recover right away. There was good science in Q4, but we're not planning on that just coming back, because, at the same time, also, S&B did see some pressure and continues to see pressure, and that's one of the reasons for the lower net ads is that at the very long tail of S&B, specifically CX, we In general, what we've been talking about is focusing on figuring out how to expand our customer base outside of Seed Edition. If Seed Edition and Agent Edition come back to the levels they were a couple of years ago, that'd be fantastic.
<unk>.
Total kind of gross churn and now we're mid teens and I think we can continue to make subtle progress there, but it's going to be kind of a.
And maybe 100 basis points 200 basis points over a longer period of time.
So it really is going to be up to the expansion motion and we've got a lot of initiatives. There that are in play we kind of.
Called out what some of those are.
In our Investor day, we actually called out six things that we're working on the six one was kind of hey, if macro comes back and that that would be a no brainer I think we would just.
Get to ride that wave organically, we're not counting on that.
And we don't expect that to happen overnight and so we are very very focused on other ways to grow with our customer base outside of that and we do think that eventually we can bring it back up to one one times based on that but it's going to take a little bit of time.
That's great appreciate the color.
Thank you one moment for the next question.
And our next question will come from Pat.
While Raven.
JMP Securities Your line is open.
Tyler Slope: But we are very focused on introducing new products, introducing new functionality, moving customers up the edition stack and things like that, as well as getting them to use them more across other divisions. And so that's what our focus is right now. It's not all the way back, but we did have a good expansion quarter.
Hi, This is Austin call on for Pat I. Appreciate you guys, taking the question.
So I just wanted to kind of piggyback on the answer given to the.
Incremental kind of.
Operating efficiency guidance implied.
Looking at the flip side of that on the top line.
All of them kind of unlocks that you guys are discussing and the.
Better than expected expansion and improving churn why might it not be at this point prudent to say that this business can grow 20% next year. Thank you.
Brian Peterson: If you need to follow up on this, just on a few bill themes, any opinion on how you're thinking about the pace of incremental hiring in 2024 and any comments that you can make on permits? Thank you. I think you're asking about the pace of hiring in the field. I heard that you said we have been hiring in the field, and specifically in areas that we think there's opportunity, and we think there's areas to definitely lean into. We're going to continue to do that. You know, our regional leaders are in place and have been for a while, so Abe's coming in and, you know, he's taking that over, and he's going to, you know, work through it. And, you know, part of the plan is to continue to hire and build up quota capacity because we think there's a big opportunity in textiles.
Well our guide is a little bit below that we do build up that guide based on what we see right now and what we've said is we have a lot of initiatives in play in those specifically six things that we called out.
In our Investor day that we said Hey, these are going to be upside to what is close to a 20% growth rate.
But they have to play out right and these aren't things that are going to happen over I kind of like to AI monetization that we talk about that we said Q4 as I hopefully we can come out in the middle of the year and give an update on what the early signs of monetization. There are I. Just we're very very excited about the initiatives and what the longer term results could be from those.
Operator: Thank you. One moment for the next question. And our next question is coming from Alex Zuckin of Wolf Research. Your line is open.
They're just going to take some time to play out.
Thus, we can't build them in yet.
Yeah.
Alright, Thanks, a lot.
Alex Zuckin: Hey guys, thanks for taking the question and congrats on a solid quarter. Maybe just the first one, Dennis or Tyler, maybe just talk about the macro exiting Q4 or like entering the year. Has it changed? Has it gotten better? Is it different by geography in terms of what you're seeing?
Thank you one moment for the next question.
Our next question will be coming from Brent Thill.
Of Jefferies. Your line is open.
Tyler everyone appreciates the margin you guys gave us last year, but.
A 50 point 50 basis point increase this year I think many are scratching their head so just to push back a little bit at your run rate at $600 million.
Dennis Woodside: And to what extent do you feel like this was you guys executing meaningfully better versus the macro changing to the positive? And then I got a quick follow-up, "Sure." So I think the trends we saw in Q4 were consistent with trends we saw earlier in the year, and that is that in enterprise and mid-market, we continue to see really solid traction. You can see it in the 50K ad number. And part of that is because vendors are consolidating their presence. They're looking for platforms that can do much more for them. They're looking to bring AI into their operations, their workflows, their help desks, and we can do that. And they're excited about the AI roadmap and what we already have out there in beta and now in GA. So all those things help there.
I think everyone's questioning where all these investments are going is this 80% of the field, 20% of the product, 50% field, 50% product.
How would you characterize that because the natural margin trajectory should be.
In my view.
A lot better.
And again.
Respect what you gave us last year. So maybe it's just that that you just gave us a big big margin bump in.
But just trying to think I am just trying to.
No I totally get it Brian is if you look at last year, we do we did get some onetime benefits right and so if you look at R&D stayed flat for the whole year year over year compare and then sales and marketing slightly.
Slightly higher, but really only $10 million higher.
When you look at kind of 'twenty three to 'twenty, two and we had said hey don't expect that same type of efficiencies driving into next year, especially.
Dennis Woodside: I think on S&B, you know; S&B overall is a bit more challenging. I think that what we're hearing from our customers is that the market is under a little bit more pressure if you're a smaller business. There are also things we can do better, and that's, again, going back to driving product-led growth to the next level, aligning marketing more tightly with our S&B efforts, all those things we think will pay off for us. So we think S&B is potentially a source of upside for us going forward, but what we saw in Q4 was consistent with prior quarters where that was the part of the business that was not growing quite as quickly as what we saw in the larger customer cohort.
Especially as we kind of last year going into sales and marketing, we really reshuffled a lot of stuff at the beginning of the year and let things settle and now we feel like they are subtle and it's going to be time to lean in a little bit and make some investments. We don't want the impression that we're moving away from thinking about efficiency. We are we are very focused on getting to the rule of 40 by 2025, which we called out.
Specifically free cash flow margin of growth. If you look at what we're guiding to we're just under 16% on free cash flow margin for the year and about 18, 19% on revenue and so I feel like that's a pretty good path with trajectory to get us to what we said, we're going to be doing and we're not going to lose sight of that and we're going to obviously be as efficient as possible while we're growing.
Dennis Woodside: Perfect. And then maybe just to follow up on G, you've gotten the AI question a couple of times, but maybe just, what are you seeing in terms of early adoption or learnings from either, are you seeing more in SMB versus in mid-market enterprises or vice versa, you know, faster versus slower? And what monetization motions, because you have a number of different ones that you're doing in the field, which one of those is working the best early on and that you see potentially kind of getting escape velocity later in the year? Yeah. So, I would answer it in two parts. When you look at pretty self-service, that is, like, we are seeing success with larger B2C companies because B2C companies have, like, fewer use cases that are scaling across millions of customers.
But we do think that if we have the opportunity to grow a little bit faster.
We're going to take that opportunity and we have to invest first to be able to do that.
Okay. Thank you.
Thank you one more Michael the next question.
And our next question will be coming from Tyler again of UBS. Your line is open.
Yeah, Hi, Thanks for taking my question. So if I look at the high end up FY 'twenty four revenue guide, it's only a point below the <unk> exit growth rate implied.
Implied some stability in topline growth. So can you talk about what gives you comfort that this outlook still in bed a level of conservatism or any change in the guidance framework.
Girish Mathurbutham: So it's ripe for automation. But if you look at our co-pilot, that is seeing traction because it's helping agents get more productive. And we are seeing excitement and adoption across thousands of customers across customer sizes or segments, SMBs to this mid-market. So again, where will we get Escape Velocity?
I think even despite the pull forward youre expecting billings growth to remain more stable too. So maybe you can just comment on what youre seeing in the macro what your assumptions are for Ikea versus CF growth, that's supporting that outlook. Thanks.
Hey, Taylor as the Tyler.
Girish Mathurbutham: I am hopeful we'll get it in both, but we'll wait to see. It's still early days. And so we will continue to put our heads down and execute and deliver more value for our customers and get Escape Velocity. Perfect. Thank you, guys. Thank you.
On the guidance I think we've tried to get to a cadence that you guys will recognize we are we are guiding to what we see and it's not like we're trying to be overly conservative or we are trying to call. It as we see it and then we will obviously update that every single quarter.
For the year, we do think.
Alex Zuckin: One moment for the next question, and our next question will be coming from Ryan McWilliams of Barclays. Your line is open.
In terms of the growth rate stabilization, we do think we're at a point right now we're okay.
Ryan McWilliams: Hey, thanks for taking the question. And I guess I want to note your focus on upmarket customers. So it makes sense that, you know, much smaller customers below 5k are turning into the customer service segment. But any reason why those customers are leaving now? Are they just looking for cheaper alternatives?
Expansion and things like that we don't expect those rates to get worse, we just talked about net dollar retention that we thought it was going to be one of five we're actually calling 106 is kind of the bottom now and we think we have pretty good view of the business as it is in front of us.
Again, I'm going to point to some of the initiatives, we're working on and how we're going to grow faster, we just need to let these things play out and we will actually build those in.
Dennis Woodside: Or is it some change in the competitive landscape? Yeah, but I wouldn't say that they're necessarily looking for cheaper alternatives. I think, you know, we have a natural churn as businesses, frankly, fail or shrink. And in S&B, you see quite a bit of that. I think we also have had, you know, customers who come in and try the product, find it doesn't fit for whatever reason, what they're looking for, maybe it's too small.
As we start to see returns on them, it's just too early to be able to do that.
But in general we feel really good about the business and we're coming off a really good quarter and we're <unk>.
Pretty positive.
Great. Thanks, so much.
Thank you and the final question for today.
We will be coming from.
David Hynes of Canaccord Genuity your line is open.
Hey, guys. Thanks for taking the question I'm going to pile on with another question I don't know if its for Dennis or G, but looked at the.
Dennis Woodside: And so I wouldn't say there's any one competitor that we find those customers migrating to, if that's your question. Excellent. And then just for Tyler, pleased to see net retention come in better than expected. What are some of the things you would need to see to like call a trough?
The value prop.
Our customer examples are given us the early adoption seems very apparent for the folks that arent moving forward yes.
Is it a matter of organizational readiness are there price sensitivities in the market I guess I'm, particularly curious on the latter just given.
Some of the more advanced AI features are yet to come to market.
Ryan McWilliams: And do you think for Fresh to get back to 110% NRR, we would need to just see a step up in macro? That's what we're waiting for here. Hey, Ryan.
How sensitive are buyers to price at this point any color there would be helpful.
Tyler Slope: So I think, you know, in terms of a trough, right now, we called 106 for Q1. We were previously calling 105. We do think 106 is kind of, from what we can see today, the low point where I think, you know, we'll hit it and then, you know, possibly stabilize from there. In getting it back up to 110, I think it's a combination of a couple of things.
Yes. So this is dennis so so far.
As I said earlier, there is thousands of customers have opted into the beta so I think to one degree or another all of our customers have some level of interest now some of those customers are going to be a little more cautious if if they have become reliant on.
A human driven interaction or let's say they have a very high value customer on the other end and they prefer to have a human involved then theyre going to be less likely to adopt very self serve but they may adopt our copilot products. So I think it's just a matter of time before all of these opt into some trial assort and then it's a question of whether or not.
Tyler Slope: We're still going to make progress on churn. We said, hey, when we were public, we were kind of in the low 20s, total, you know, kind of gross churn, and that now we're mid-teens. And I think we can continue to make subtle progress there, but it's going to be kind of like, you know, maybe 100 basis points, 200 basis points over a longer period of time So it really is going to be up to the expansion motion. And, you know, we've got a lot of initiatives there that are in play. We kind of called out what some of those are. At our investor day, we actually called out six things that we're working on. The sixth one was kind of, hey, if macro comes back, that would be a no-brainer.
They see value in the product and if they do that's when we get into a nice discussion about what what what is the.
What are the investments that they're going to be making.
Are they going to provision all their agents or some of their agents and how does that work. So that's a huge opportunity for us this year and we are seeing with some of the resolution rates the improvement in call quality and customer interaction.
A customer resolution, we're seeing a lot of value to come from these AI products and and.
And customers are recognizing that value. So we're going to have to see how it all plays out.
Tyler Slope: I think we would just, you know, get to ride that wave organically. But we're not counting on that. And, you know, we don't expect that to happen overnight. And so we are very, very focused on other ways to grow with the customer outside of that. And we do think that eventually we can bring it back up to 110 based on that, but it's going to take a little bit of time. That's great; I appreciate the color.
I'm pretty optimistic that this is a huge opportunity for us and thats going to going to really materialize over the course of the year.
Okay. That's helpful color and then maybe a follow up for you. It's I think it's been asked a couple different ways, but you have this $1 billion target out there for 2000.
It implies some future acceleration in growth.
Do we need to see the macro improves to hit that or do you think you can get there with the go to market enhancements to our enterprise AI new products all the stuff that you're doing today can you get there in the current environment.
Ryan McWilliams: Thanks guys. Thank you. One moment for the next question. And our next question will come from Pat. Walravens of JMP Security, your line is open. Hi, this is Austin Cole on behalf of Pat.
Yeah, our plan is to be able to get there in the current environment, that's not based on macro coming back.
Alright, guys. Thank you.
Patrick D. Walravens: Appreciate you guys taking the time to answer the question. So I just wanted to kind of piggyback on the answer given to the implied incremental kind of Operating Efficiency Guidance implied, and looking at the flip side of that on the top line, you know, with all the kind of unlocks that you guys are discussing and the, you know, better than expected expansion, improving churn, you know, why might it not be at this point prudent to say that this business could grow 20% next year? Well, our guide is a little bit below that, you know; we do build up that guide based on what we see right now. And what we've said is we have a lot of initiatives in play, and those, you know, specifically six things that we called out in our investor day that we said, hey, these are going to be upside to, you know, what is close to a 20% growth rate. But they have to play out, right?
Okay. Thanks, everybody.
This concludes today's conference call everyone may disconnect.
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Tyler Slope: And these aren't things that are going to happen overnight, kind of like the AI monetization that we talked about that, you know, we said, you know, Q4 is like, hopefully, we can come out in the middle of the year and give an update on, you know, what the early signs of monetization there are. I just, we're very, very excited about the initiatives and what the longer-term results could be from those, but they're just going to take some time to play out. And that's why we can't build them in.
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Patrick D. Walravens: All right, thanks a lot. Thank you. One moment for the next question. Our next question will be coming from Brent Thill of Jeffrey's. Your line is open. Tyler, everyone appreciates the margin you guys gave us last year, but a 50 basis point increase this year, I think many are scratching their heads, so just to push back a little bit, at your own rate, $600 million. I think everyone is questioning where all these investments are going, 80% of the field, 20% of the product, 50% field, 50% product. How would you characterize that?
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Brent John Thill: The Natural Margin Trajectory, and my, a lot better. And again, back to what you gave us last year, so maybe it's just that that's what you just gave us, Big Margin Bomb, and others. Thanks. Thanks. So totally get it, Brent. If you look at last year, we did get some one-time benefits, right? And so if you look at, you know, R&D stayed flat for the whole year, year over year comparisons, and then sales and marketing.
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Tyler Slope: Slightly higher, but really only $10 million higher when you look at, you know, kind of 23 to 22. And we had said, hey, don't expect that same type of efficiencies driving into next year, especially as we kind of, you know, last year going into sales and marketing; we really reshuffled a lot of stuff at the beginning of the year and let things settle. And now we feel like they're subtle, and it's going to be time to lean in a little bit and make some investments. But we don't want the impression that we're moving away from thinking about efficiency.
Okay.
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Tyler Slope: We are very focused on getting to the rule of 40 by 2025, which we called out, and specifically free capital margin and growth. If you look at what we're guiding to, we're just under 16% on free capital margin for the year, and about 18%, 19% on revenue. And so I feel like that's a pretty good path of trajectory to get us to what we said we'd be doing. And we're not going to lose sight of that.
Sure.
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Brent John Thill: And we're going to obviously be as efficient as possible while we're growing. But we do think that if we have the opportunity to grow a little bit faster, we're going to take that opportunity, and we have to invest first to be able to do that. OK. Thank you.
Okay.
Okay.
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Tyler McGinnis: One moment for the next question, and our next question will be coming from Tyler McGinnis of UBS. Your line is open. Yeah, hi.
Tyler Slope: Thanks for taking my question. So, if I look at the high end of the FY24 revenue guide, it's only a point below the 4Q exit REV growth rate. So, it implies some stability in top-line growth. So, can you talk about what gives you comfort that this outlook still embeds a level of conservatism or any change in the guidance framework? I think even despite the pull forward, you're expecting billings growth to remain more stable too. So, maybe you can just comment on what you're seeing in the macro or what your assumptions are for ITSM versus CS growth that's supporting that outlook. Thanks. Hey Taylor, it's Tyler.
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Tyler Slope: We, you know, on the guidance, I think we've tried to get to a cadence that you guys will recognize. We are guiding to what we see, and it's not like we're trying to be overly conservative.
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Tyler Slope: We are trying to call it as we see it. And then we will obviously update that every single quarter. For the year, we do think, you know, in terms of the growth rate of civilization, we do think we're at a point right now where, okay, expansion, things like that. We don't expect those rates to get worse. We just talked about that dollar retention that, you know, we thought it was going to be 105. But we're actually calling it 106.
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Tyler Slope: It's kind of the bottom, and we think we have a pretty good view of the business as it is in front of us. We, you know, again, I'm going to point to some of the initiatives we're working on and how we're going to grow faster. We just need to let these things play out, and we'll actually build those in as we start to see returns on them. It's just too early to be able to do that. But in general, we feel really good about the business, and we're coming off a really good quarter, and, you know, we're pretty positive. Great, thanks so much.
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Tyler Slope: Thank you. And the final question for today will be coming from David Hynes of Canaccord Renewal. Your line is open.
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David E. Hynes: Hey guys, thanks for taking the question. I'm going to pile on with another AI question. I don't know if it's for Dennis or G, but the value prop, for example, as you've given us, early adoption seems very apparent. For the folks that aren't moving forward yet... Is it a matter of organizational readiness? Are there price sensitivities in the market?
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Dennis Woodside: I guess I'm particularly curious about the latter just given that some of the more advanced AI features are yet to come to market. You know, how sensitive are buyers to price at this point? Any caller there would be helpful.
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Dennis Woodside: Yeah, so this is Dennis. As I said earlier, there are thousands of customers who have opted into the beta. So I think, to one degree or another, all of our customers have some level of interest. Now, some of those customers are going to be a little more cautious if they have become reliant on a human-driven interaction, or let's say they have a very high-value customer on the other end and they prefer to have a human involved, then they're going to be less likely to adopt Freddie Seltzer, but they may adopt our co-pilot product. So I think it's just a matter of time before all And then it's a question of whether or not they see value in the product.
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Dennis Woodside: And if they do, that's when we get into a nice discussion about, well, what is the investment that they're going to be making in AI? Are they going to provision all their agents or some of their agents? And how does that work?
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Dennis Woodside: So that's a huge opportunity for us this year, and we're seeing with some of the resolution rates, the improvement in call quality, and customer interaction, and customer resolution. We're seeing a lot of value come from these AI products, and customers are recognizing that value. So we're going to have to see how it all plays out, but I'm pretty optimistic that this is a huge opportunity for us that's going to really materialize over the course of the year. Yeah, OK. And then, Tyler, maybe a follow-up for you. I think it's been asked a couple different ways, but you have this billion-dollar target out there for 26.
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Tyler Slope: It implies some future acceleration in growth. Do we need to see the macro improve to hit that, or do you think you can get there with the go-to-market enhancements, the enterprise push, AI, new products, all the stuff that you're doing today? Can you get there in the current environment?
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David E. Hynes: Yeah, our plan is to be able to get there in the current environment that that's not based on macro coming, All right, guys. Thank you. Thank you. Thank you, everybody. This concludes today's conference call. Everyone may disconnect. **Phone Ringing** ** horseback males song ** ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??
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