Q4 2024 Earnings Summary
- Freshworks' Employee Experience (EX) business has reached over $400 million in ARR, growing at over 20% organically, focusing on the mid-market opportunity that represents about $10 trillion in economic activity in the U.S. alone, positioning the company for significant growth ahead.
- The strong adoption and attach rates of Freshworks' AI products, Freddy AI Agent and Freddy Copilot, particularly in the SMB segment, are expected to drive significant growth in the coming year as AI adoption accelerates.
- The strategic partnership with Unisys and Freshworks' growing focus on Managed Service Providers (MSPs) represent significant growth opportunities in the IT side of the business, with over 1,000 MSPs already using their product and upcoming enhancements to further support this customer segment.
- Continued pressure on main expansion driver, agent addition, which has been struggling for years. Despite stabilization in the back half of the year, there's still a year-over-year decline in the expansion rate for agent addition, potentially hindering growth.
- Slowdown in the addition of $50,000+ customers, indicating challenges in the mid-market and enterprise segments. The company acknowledges fewer but larger deals and attributes some effects to FX impact, but the slowdown may signal underlying issues in acquiring new high-value customers.
- Potential slowdown in growth rates due to tougher comparisons in the second half of 2025 as the company anniversaries the Device42 acquisition, impacting revenue growth. Additionally, despite high attach rates for AI products like Freddy Copilot, the company has not yet quantified the financial impact, suggesting that monetization is still early and revenue contribution remains uncertain. ,
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +21.5% (from $160.11M to $194.57M) | Total Revenue increased significantly driven by robust expansion from both existing and new customers, including additional contributions from acquisitions like Device42. This growth continues the momentum observed in previous periods where revenue expansion was a key driver. |
Gross Profit | +24% (from $133.10M to $165.11M) | Gross Profit improvement reflects an accelerated revenue growth combined with effective cost management, echoing similar trends in prior quarters where increased subscription services revenue and operational scaling were crucial. |
Operating Loss | Reduced from $40.04M to $23.79M (~41% reduction) | Operating Loss narrowed notably due to enhanced operating efficiency and controlled expenses relative to the revenue growth. This improvement builds on past initiatives that focused on cost discipline and better allocation of operating resources. |
Net Loss | Improved by 22% (from $28.08M to $21.90M) | Net Loss reduction is attributable to an overall better operating performance, which includes higher revenues and improved non-GAAP adjustments as previously seen in the company's strategic cost management efforts. |
North America Revenue | +25.6% (from $72.17M to $90.63M) | North America revenue surged as a result of strong organic growth driven by the expansion and upsell strategies to existing customers, as well as new customer acquisitions. The trend reflects earlier periods where geographic expansion and enhanced subscription revenue fueled growth. |
EMEA Revenue | +21.7% (from $61.65M to $75.01M) | EMEA revenue experienced robust growth driven by effective upselling, pricing improvements, and a favorable foreign currency impact, consistent with earlier gains in this region which were bolstered by healthy net dollar retention metrics. |
Operating Cash Flow | +34% (from $30.87M to $41.36M) | Operating Cash Flow improved markedly due to a combination of a smaller net loss, increased favorable non-cash adjustments, and better management of operating working capital. This enhancement builds on the prior period trends of operational efficiency and strategic cash management. |
Cash and Cash Equivalents | Increased (from $488.12M to $620.32M) | Cash and cash equivalents grew substantially, reflecting strong operating cash generation and disciplined liquidity management. The increase in cash reserves ties back to previous operational improvements and strategic balance sheet optimization. |
Marketable Securities | Declined (from $699.51M to $449.75M) | Marketable securities decreased predominantly due to a strategic reallocation of assets as funds were redirected towards acquisitions and building cash reserves, a shift that contrasts with earlier periods when higher securities balances supported liquidity until reallocation became necessary. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q1 2025 | no prior guidance | $190 million to $193 million, growing 15% to 17% YoY (16% to 18% constant currency) | no prior guidance |
Non-GAAP Income from Operations | Q1 2025 | no prior guidance | $32.5 million to $34.5 million | no prior guidance |
Non-GAAP Net Income per Share | Q1 2025 | no prior guidance | $0.12 to $0.14 | no prior guidance |
Revenue | FY 2025 | no prior guidance | $809 million to $821 million, growing 12% to 14% YoY (13% to 15% constant currency) | no prior guidance |
Non-GAAP Income from Operations | FY 2025 | no prior guidance | $131 million to $139 million | no prior guidance |
Non-GAAP Net Income per Share | FY 2025 | no prior guidance | $0.52 to $0.54 | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI Adoption, Monetization, & Productivity Improvements | In Q1–Q3 2024, AI products like Freddy Copilot and Self Service were consistently highlighted for enhancing productivity, reducing resolution times, and driving monetization with growing attach rates and ARR contributions | Q4 2024 continued to emphasize strong early adoption—with over 2,200 customers on Freddy Copilot, notable customer use cases, and growing monetization momentum—while pointing to accelerated adoption expectations for 2025 | Consistent emphasis with positive momentum. The narrative has grown increasingly optimistic, with a clear focus on AI as the key growth lever for the future. |
Employee Experience (EX) Business Growth | Q2 and Q3 highlighted robust growth in EX with ARR figures (e.g., over $340M in Q2 and nearly $390M in Q3) and strong growth rates; Q1 had no specific mention | Q4 2024 showcased EX surpassing $400M ARR and strong year-over-year growth, with an increased focus on the mid-market and enterprise segments | Increased focus and positive sentiment. EX has emerged as a higher-priority area with impressive growth numbers that enhance its future impact. |
Customer Experience (CX) Performance & Churn Management | Across Q1–Q3, CX performance was regularly discussed with steady ARR growth around $350–360M, mid-teens churn, and NDR generally in the 105%–107% range, with AI adoption starting to play a role | Q4 2024 continued to report solid CX ARR growth (over $360M), stable mid-teens churn, and consistent NDR figures, now supported by increased AI adoption in customer solutions | Steady and consistent. CX remains a focal point with stable performance and retention metrics, bolstered by the growing role of AI in enhancing customer outcomes. |
SMB Segment Performance and Macroeconomic Challenges | Q1–Q3 discussions noted persistent macroeconomic pressures impacting SMB expansion, with slower chair additions and delayed decision-making, though some positive momentum in free-to-paid conversions was emerging | In Q4 2024, though macroeconomic headwinds (like high interest rates) still affect SMBs, there are signs of stabilization and improved demand, notably via increasing net customer adds and conversion improvements | Mixed but slightly improving. While macro challenges remain, the SMB segment shows early signs of recovery, suggesting a cautiously optimistic outlook. |
Enterprise and Mid-market Customer Acquisition | Q1–Q3 consistently featured success stories and strategic wins in the mid-market and enterprise segments, including significant deal wins, competitive replacements, and rising enterprise ARR contributions | Q4 2024 maintained this positive trend with high-profile customer acquisitions (e.g., companies switching from legacy providers) and strong expansion activity in mid-market and enterprise segments | Consistently positive. The company's strategy to move upmarket is gaining momentum, with robust acquisition wins that reinforce its competitive positioning. |
Agent Additions and Expansion Drivers | In Q1–Q3, agent addition was noted as the key expansion driver though growth had slowed due to macroeconomic pressures; new AI tools and cross-sell strategies were being introduced as additional drivers | Q4 2024 reports continuing pressure on agent additions while emphasizing expansion through AI integration and cross-selling initiatives, even as declines in addition rates persist year-over-year | Mixed sentiment. Persistent headwinds in agent additions remain, but mitigation through AI and cross-sell opportunities shows a strategic pivot toward sustainable expansion. |
Strategic Partnerships & Acquisitions (Device42, Unisys, MSP Focus) | Q1–Q3 featured active discussions on Device42’s acquisition and integration, growing MSP engagement, and even mentions of shifting services to partner channels, although Unisys was less consistently mentioned | Q4 2024 highlighted a robust focus on strategic partnerships—with clear emphasis on Device42 integration (evidenced by top deal inclusions), a new strategic agreement with Unisys, and targeted investments in MSP functionality | Increasing emphasis with broader scope. The deepening integration of Device42 and new partnerships like with Unisys signal an enhanced strategic focus on expanding capabilities and market reach. |
Revenue Growth Guidance and Retention Metrics | In Q1–Q3, revenue guidance showed steady year-over-year growth (ranging approximately 16–19% quarterly and 17–20% annually) with NDR typically around 105–107% and churn in the mid-teens, reflecting stable performance amid expansion challenges | Q4 2024 guidance maintained similar growth expectations (with quarterly revenue around $190M and full-year targets in the low 2020s range) while NDR and churn metrics remained stable, though expansion pressure persists | Consistent but cautious. Revenue growth remains robust with healthy retention metrics, though incremental caution is evident due to ongoing expansion challenges. |
Operational Adjustments (Workforce Reductions) | Q1 and Q2 did not mention workforce adjustments; Q3 briefly noted broad-based reductions to refocus efforts on strategic priorities such as EX and AI | Q4 2024 disclosed a one-time restructuring expense of $9.7M, with an explicit plan to reinvest in growth and ensure the right organizational fit, indicating a tactical adjustment to changing market conditions | Emerging and more pronounced. Workforce reductions have become a defined part of the strategy in Q4, suggesting a focus on cost discipline and resource optimization to support future growth. |
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Device42 Integration and Growth Impact
Q: How is the Device42 acquisition impacting growth and what are the integration plans?
A: The Device42 acquisition is proving essential for our growth and upmarket motion. We've only been fully selling together for one quarter, but three of our largest ten deals involved Device42. In January, we launched a revamped integration between Freshservice and Device42, allowing seamless data synchronization. We're also on track to release a cloud version of Device42 late this year or early next year. The acquisition is helping us win larger deals, such as with New Balance and a 13-year customer of ServiceNow , and we entered this quarter with twice the pipeline we had last quarter for Device42. -
Net Retention Rate Outlook and Expansion
Q: What's the outlook for net retention rate and how will expansion opportunities evolve?
A: We came in at 105% net dollar retention on constant currency, slightly better than expected. We're seeing pressure on our largest expansion motion, agent addition, but the decline in expansion rate is starting to stabilize. For Q1, we're guiding 104% net dollar retention. We're focusing on monetizing our Freddy AI products and Device42 to supplement agent addition. The AI adoption cycle is accelerating, and we see big opportunities to drive growth through AI offerings like Freddy AI Agent and Freddy Copilot. -
Operating Margin and M&A Strategy
Q: How are you balancing operating margin goals with investment and potential M&A?
A: We achieved over 20% operating margin this quarter, even with the acquisition. Our guidance implies 16% operating margin next year, which some consider conservative. We're committed to efficiency while making prudent investments to drive growth. With over $1 billion in cash, we're open to inorganic opportunities; Device42 is the first substantial deal in six years, and we'll continue to look at similar opportunities. We're also executing on share repurchases and reinvesting in the business post-restructuring. -
AI Advancements Impact on Products and Costs
Q: How are recent AI advancements affecting your products and cost structure?
A: Competition among large language models (LLMs) is beneficial, driving pricing down and helping us deliver better products at lower costs. We've built our tech stack to test various LLMs, relying currently on Azure OpenAI for conversational capabilities due to its data protections and handling of hallucinations. We're also evaluating models like Anthropic and Google's AI for images. Balancing cost, performance, and data security is crucial, and we're constantly assessing new models to enhance our offerings. -
SMB Demand Environment and Outlook
Q: What's the current SMB demand environment and outlook for 2025?
A: Demand is stable to improving; we've seen around 7% year-over-year ARR growth in CX for two consecutive quarters on a constant currency basis. SMBs are still constrained by high interest rates, but they are realizing that AI can help improve efficiency, especially larger SMBs with 100-200 employees. We're optimistic for 2025 and pleased with the progress made in Q4. -
Competitive Position in ITSM with Device42
Q: Are you seeing improved win rates in ITSM with Device42, and how does it affect competition?
A: Yes, having an IT asset management solution like Device42 is essential; previously, we were losing deals in the mid-market due to lacking ITAM functionality. Now, we're winning larger deployments, such as with New Balance, and competing effectively against ServiceNow. Device42 helps us move into larger deals and has been included in three of our top ten deals. -
Monetization of Freddy AI Products
Q: Can you quantify the ACV uplift from Freddy AI products like Copilot?
A: We haven't broken out the dollar figures yet, but progress is positive. Freddy Copilot is added at $29 per agent, and Freddy AI Agent is a consumption-based model monetized as customers use it. We have over 1,300 customers paying for additional bot sessions. Attach rates are healthy, especially in larger deals and new business. -
Go-to-Market Investments Between CX and EX
Q: How are you allocating go-to-market investments between CX and EX in 2025?
A: We balance investments across CX and EX based on opportunity. For CX, which is about two-thirds SMB, we're investing in marketing to drive demand among SMBs. EX investments focus on the mid-market and lower enterprise, targeting field activities. We're mindful of payback and economics, driving efficiency as seen in reduced sales and marketing expenses as a percentage of revenue. -
MSP Opportunity and Unisys Partnership
Q: How significant is the MSP opportunity, and are you ready to support MSP customers?
A: The MSP opportunity is quite large, and we're excited about our partnership with Unisys, a GSI that chose us after evaluating all market options. Unisys is building an MSP around our Freshservice product. We've been investing in MSP functionality, with new releases enhancing features like multi-account management coming in May. Over 1,000 MSPs already use our product, even before building specific MSP functionality. -
$50,000-plus Customer Adds and Metric Interpretation
Q: How should we interpret the slowdown in $50,000-plus customer adds?
A: The slowdown is due to factors like disproportionate FX impact in Q4 and lapping a strong prior year Q4. We're landing more larger deals but fewer of them; in Q4, we had the most deals over $200,000 and many over $100,000. These deals affect the number of customers over $50,000 in revenue, but the average revenue per account for that cohort is up. We're comfortable with our upmarket momentum, winning sophisticated global customers like New Balance.