FRSH - NASDAQ

Hello, everyone. Thank you for joining us, and welcome to the Freshworks fourth quarter and full year 2025 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. I will now hand the call over to Kate Skolnick, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Freshworks' fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President and Tyler Sloat, Freshworks' Chief Operating Officer and Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our fourth quarter and full year 2025 performance, and our financial outlook for our first quarter and full year 2026. 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 management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroeconomic environment in which we operate and market volatility. And certain other assumptions made by the company all of which are subject to change. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand, and to control costs and improve operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-Ks, and other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures for historical periods are included in our earnings release which is available on our Investor Relations website at ir.freshworks.com. I encourage you to visit our Investor Relations site to access our earnings release, supplemental earnings slides, periodic SEC reports, and a replay of today's call or to learn more about Freshworks. And with that, let me turn it over to Dennis. Thanks, Kate. I am thrilled to share that Q4 marks a historic inflection point for Freshworks.

For the first time in our company's history, we achieved profitability for the full year and generated record free cash flow. A testament to our disciplined execution, product innovation, and operational I'm also happy that we remain on track for sustained growth and profitability exiting 2026. First, I'll start by summarizing the year. Our business performed exceptionally well in 2025. Quarter after quarter, we achieved or exceeded our top and bottom line expectations throughout the year. In employee experience, we continued winning in the mid-market and enterprise. We successfully are evolving Freshservice into a world-class unified service platform. By natively integrating Device 42 and acquiring Fire Hydrant, we have brought ITSM, ITOM, ITAM, and ESM under one cohesive roof. This one platform advantage has enabled us to aggressively win bigger deals. We're winning the mid-market with a continued roster of displacements. Whether it's equipment shares, high growth debut on Nasdaq, or a global sustainability consultancy's global scale we are winning. Most notably, a global semiconductor company recently abandoned a decade-long ServiceNow environment for fresh service. Projecting a 30% cost savings and 20 to 30% faster resolution times powered by Freddie AI. Freddie AI is proving that AI at Freshworks is a tangible revenue engine. Customers like iPostalOne are using Freddie AI agent studio to resolve 54% of queries automatically. And seeing a 99% improvement in interaction speed When Vermeer Corporation cut their resolution times by 50%, using Freddie AI. They drove customer satisfaction up to 95% and sparked enterprise-wide adoption. We brought stabilization to the CX business, We did this by continuing to simplify our core Freshdesk product experience to make it easier to implement and maintain. We improved time to value, customer retention, and our customers are also staying longer. Because they are seeing tangible results with AI features in Freshdesk. Now let's recap Q4. Q4 was a significant capstone to our fiscal year. Freshworks delivered an outstanding quarter with results that surpassed expectations once again. We have outperformed our estimates across growth and profitability metrics for five consecutive quarters. And in Q4, we also achieved profitability. We grew Q4 revenue over 14% year over year on an as-reported basis. Nearly $3 million above the high end of our estimates. We ended the year at $907 million in annual recurring revenue, which represents 18% growth year over year on an as-reported basis. And over 14% growth on a constant currency basis. Non-GAAP operating margin expanded to 19% nearly five points above our estimate. Our free cash flow margin was 25%, and this was the sixth straight quarter. We achieved rule of 40. We saw an upmarket momentum surge with our enterprise cohorts outpacing overall growth. Proving our ability to consistently win and scale within the world's most complex organizations. we now have over 1,500 customers with greater than $100,000 in As of Q4, ARR. An increase of 28% year over year. And over 3,700 customers with greater than $50,000 in ARR an increase of 23% year over year. For our first strategic priority in employee experience, we crossed the half-billion-dollar milestone as of the 2025 reaching $510 million in ARR. That represents 26% year over year growth on an as-reported basis and 22% year over year on a constant currency base. Now we are witnessing a generational shift where midsize and larger enterprise organizations expect sophisticated software that can handle their complex needs and get fast time to value. Freshservice is uniquely positioned to fill this gap left by legacy providers like ServiceNow. We are capturing a growing share of organizations that demand robust AI native service management that can be deployed in weeks, not years. We believe this is a massive and growing opportunity for us. We saw great success in our device 42 offering as a solution for larger enterprises with complex IT asset management needs. Device 42 ended 2025. With over $40 million in ARR, as a result of quality new deals and expansion including cross-sell from our fresh service customer base. In Q4, we saw a 30% attach rate of device 42 to our top 50 new EX deals, including our three largest deals in the quarter. We have a wide range of customers, like Holiday Inn Club Vacation, Dell EMC, and SoftBank Group, who use our fresh service advanced ITAM platform to provide them with a detailed and unified view of their entire infrastructure. Supporting their most critical IT services. Our ESM product, known as fresh service for business teams, contributed greatly to our Q4 success. ESM continues to be one of our fastest-growing businesses and $40 million in ARR in Q4 nearly doubling ARR year over year. Today, one in four eligible fresh service customers also uses fresh service for business teams. For their non-IT needs. We believe both our ITAM and ESM businesses are well on track to achieve our target of over $100 million in ARR. We are bolstering the scope of our EX business with the acquisition of Fire Hydrant in 2026. Fire Hydrant, a leader in AI-powered IT incident management and response software, brings large customers like British Petroleum, Palo Alto Networks, and SNC Limited into the fresh service ecosystem. This acquisition opens an $8 billion addressable market in IT operations management or ITOM, and sets the groundwork for our expansion into AI ops. We will provide updates as we progress through the integration of FireHydro into Freshservice unified platform over the course of this year. With all these components, we provide a unified service operations platform for sophisticated global IT teams and beyond. Our ITSM is enterprise-grade for service management. Device 42 provides world-class asset management capabilities soon to be in the cloud. Freshservice for business teams enables any department in any company to deliver amazing service. And fire hydrant forms the basis for growth in ITOM. We are really excited to have all these pieces of the puzzle together now. Our second strategic priority, Freddie AI, continued to advance in 2025. With over 8,000 customers using Freddie AI. AI is not just a feature in our product. It's a standalone revenue line delivering measurable value to our customers. Which ended 2025 with over $25 million in ARR, and remains on a path to reach a $100 million in ARR by 2028. Freddie AI agent conversations were up over 80% at 3,500,000 in Q4 in CX. And Freddie AI agent deflected more than 50% of tickets for CX and EX customers. Since Freddie Insights became generally available to EX customers, in June 2025, 1,000 customers have already adopted and are active on the product. In customers with more than $30,000 in ARR, we continue to see 50% and Copilot customer growth more than doubled year over year. Another clear indication that AI is driving long-term value for our customers is the net dollar retention rate Which improved significantly from 112% last quarter For CoPilot customers in Q4. to 116% and remains significantly higher than our overall base for both EX and CX. For our last strategic priority, we drove continued execution in our customer experience business, and our AI-driven Freshdesk Omni platform roadmap. In Q4, we continued to see healthy demand in our flagship Freshdesk business. We ended the year with $395 million in ARR and 9% year over year growth on an as-reported basis, and 5% growth on a constant currency basis. We continue to improve retention quarter over quarter as a result of product simplification, adoption efforts, and innovation. We believe Freshdesk Command Center, the unified Freshdesk Omni workspace we launched in December, positions us well to sustain growth, quickly deliver new AI native capabilities across our entire customer base, and deliver increasing value for all customer service needs. We enter 2026 with clear goals that are built upon our three strategic pillars. First, expanding EX. Continue to increase our 20 plus percent ARR growth rate in EX fueled by continued focus and investment in our unified employee experience service platform. Second, monetizing AI at scale. Continued disciplined innovation in AI as a current revenue driver and stay on track to deliver $100 million in AI-driven ARR over the next three years. And third, improving retention in CX. Focus on our unified platform to drive retention and efficiency in our customer service business. Presswork's 2025 results bring me confidence in our march towards $1 billion in annual recurring revenue this year and $1.3 billion by 2028. The opportunity ahead of us is tremendous, and I wanna thank our customers, partners, and employees for an incredible 2025 and for the collaboration ahead in 2026. The best is yet to come. Now I'll hand it over to Tyler to walk through the financial results in detail. Thanks, Dennis, and thanks everyone for joining on the call and via webcast today. We closed 2025 with a strong fourth quarter. Exceeding expectations across both revenue and profitability. These results capped a year of significant financial progress

and continued innovation that reinforces our confidence in our long-term strategy. As we build meaningful momentum into 2026, we are well-positioned to drive top-line growth, with a clear focus on winning in a very large EX market. Executing an efficient operating model, and delivering strong cash generation. For our call today, I'll cover the Q4 and full year 2025 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q1 and full year 2026. As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses restructuring charges, the release of our deferred tax asset valuation allowance, and other adjustments. We will also talk about our adjusted free cash flow. Which excludes the cash outlay related to restructuring costs. To provide greater transparency into our underlying business performance, we will also include constant currency comparisons throughout today's call. Starting with the income statement. Q4 total revenue increased to $222.7 million growing 14% year over year on an as-reported basis, and 13% on a constant currency basis. Professional services revenue ticked up modestly quarter over quarter to $2.5 million as a result of strong bookings, and earlier than expected project kickoffs and milestones achieved in the fourth quarter. Our EX business crossed the $500 million ARR mark in Q4, reaching approximately $510 million in ARR, representing 26% year over year growth on an as-reported basis and 22% on a constant currency basis. We finished the year strong across the EX portfolio with both ESM and advanced ITEM each exceeding $40 million in ARR. Our CX business is at $395 million in ARR, reflecting year over year growth of 9% on an as-reported basis and 5% on a constant currency basis. We continue to drive solid growth in CX as we focus on unifying our technology and customer base around our AI-led Freshdesk Omni platform. Moving to margins. We maintained a non-GAAP gross margin of 86.8% in Q4. Included in the Q4 cost of service is a $1.5 million credit from our AWS contract. Excluding this item, non-GAAP gross margin for Q4 was in line with prior quarters in 2025. Non-GAAP operating income for Q4 was $41.6 million representing a non-GAAP operating margin of nearly 19%. Which was ahead of our prior expectations. These strong results driven by top-line outperformance and continued gains in operational efficiency. GAAP net income for Q4 was $191.4 million In Q4, our GAAP net income was favorably impacted by two items. First, was a favorable impact of $41.1 million from a onetime reduction for fiscal year 2025 stock-based compensation related to our executive chairman's departure. Additionally, there's a favorable impact of a $151.7 million from a onetime income tax benefit for the release of a valuation allowance on our US deferred tax assets. This is a result of our improved profitability over the course of fiscal 2025. Leading us to conclude that our evaluation allowance on these deferred tax assets is no longer necessary. Achieving GAAP probability for the first time in our company history is significant milestone that demonstrates the healthy and profitable trajectory of our business. Looking ahead, we remain on track to hit sustainable GAAP profitability in 2020 reflecting our trajectory of consistent profitability we are adopting a long-term projected tax rate of 24%. We believe this rate provides an accurate representation of our long-term tax profile and should be utilized for all non-GAAP financial modeling. There is no cash impact associated with these onetime benefits, and they are excluded from our non-GAAP net income. Moving to operating metrics. Net dollar retention was a 108% on an as-reported basis, and a strong 104% on a constant currency basis. In line with prior expectations. This includes a headwind of around 70 basis points from device 42, similar to prior quarters. As we look ahead, the strengthening demand and momentum we see within our EX business gives us increased confidence in our expansion trends. As a result, we expect net dollar retention to improve to approximately 105% on a constant currency basis in Q1 2026. We ended Q4 with nearly 75,000 total customers. As noted last quarter, we continue to focus our efforts on moving upmarket and we'll discontinue reporting this metric on a quarterly basis as we believe larger customer measures better reflect the trajectory of how we manage our business. The number of customers contributing more than $5,000 in ARR as of the end of Q4 grew 10% year over year on an as-reported basis at eight on a constant currency basis, 24,762 customers. This customer cohort continues to represent over 90% of our ARR. The number of customers contributing more than $50,000 in ARR grew 23% year over year on an as-reported basis and 19% on a cost currency basis to 3,760 customers. This cohort now represents nearly 55% of our ARR. For our larger customer cohorts, the number of customers contributing more than a $100,000 in ARR grew meaningfully to over 1,500 customers. Representing 28% year over year growth on an as-reported basis and 22% on a constant currency basis. We also closed 2025 with 15 customers paying us over $1 million in ARR. Now let's turn to calculated billings, balance sheet, and cash items. representing strong year over year growth of 17% on an as-reported basis Calculated billings were $259.6 million in Q4, and 13% on a constant currency basis. Our calculated billings were impacted by slightly lower contract duration from device 42 and fewer pull in renewals than We've historically seen in Q4. Looking ahead, we expect billings to be in line or slightly better than revenue growth for 2026. For Q1, we are estimating calculated billings growth of approximately 13% year over year on an as-reported and constant currency basis. For the full year, we are estimating calculating billings growth of 14% year over year on an as-reported and constant currency basis. Turning to our cash items. We generated $56.2 million in free cash flow in Q4. Outperforming expectations due to strong cash collections and disciplined execution. This resulted in a free cash flow margin of 25%. Which represents a nearly four percentage point improvement year over year. For the year, adjusted free cash flow margin was 27%. Representing an over five percentage point improvement compared to the prior year. We are proud of the excellent progress we have made in our cash generation over the last three years, going from negative free cash flow in 2022 to over $223 million in 2025. Looking ahead, we expect to generate free cash flow of $55 million for 2026, and see linear quarter to quarter improvements thereafter. Reflecting our focus on consistent operating performance and disciplined expense management. For the full year 2026, we expect to generate approximately $250 million of free cash flow. We expect this will represent a free cash flow margin of 25-26% for Q1 and full year 2026 respectively. Fully diluted share count as of 12/31/2025 was approximately 308 million shares, a decrease of 6% year over year. The fully diluted calculation includes 283 million basic shares outstanding. Which also represents a decrease compared to the prior year. We continue to manage and offset share count dilution by net settling invested equity amounts. During Q4, we used approximately $11 million for that purpose. In 2026, we will continue to net settle vested equity amounts and expect Q1 cash usage of approximately $11 million and for the full year, cash usage of approximately $54 million at current stock price levels. This activity is reflected in our financing activities, and is excluded from our adjusted free cash flow calculation. We ended the quarter with cash, cash equivalents, marketable securities, and restricted cash of nearly $844 million. Now on to our forward-looking estimates. As a reminder, our non-GAAP net income projections assume a tax rate of 24%. For the 2026, we expect revenue to be in the range of $222 million to $225 million growing 13% to 15% year over year. Non-GAAP income from operations to be in a range of $33 million to $35 million and non-GAAP net income per share to be in the range of 10¢ to 12¢, assuming weighted average shares outstanding of approximately 287.4 million shares. For the full year 2026, we expect revenue to be in the range of $952 million to $960 million growing approximately 13.5% to 14.5% year over year. Non-GAAP income from operations to be in the range of $181 million to $189 million and non-GAAP net income per share to be in the range of 55 to fifty seven cents. Assuming weighted average shares outstanding of approximately 291.5 million shares. Our financial outlook is based on a few assumptions that we would like to call out for modeling purposes. First, we are increasing our fiscal year 26 revenue growth from what we outlined at our Investor Day last September. Reflecting the strength and growth opportunities we are seeing in the business. Particularly in EX. We expect revenue growth to accelerate in the second half as we further build on that momentum. Using the midpoint of the range for Q1 estimates, we expect revenue growth rates of approximately 14% in Q1, Q2 and Q3, And 14.5% in Q4. As a reminder, last year's Q3 revenue had a $1 million benefit from device 42 that we do not anticipate this year. In December, we announced our acquisition of five Hydrant and closed the deal on January 1. We believe the acquisition will meaningfully enhance our ITOM capabilities. Allowing our customers to quickly respond to incidents. We expect fire hydrant to have an immaterial impact on our Q1 and fiscal year 2026 revenue growth and approximately one point of headwind on our Q1 and fiscal year 2026 non-GAAP operating margin. We have taken these factors into account in our estimate. For our non-GAAP operating margin, we expect approximately 15% in Q1, using the midpoint of our guide. For the subsequent quarters, we expect operating margins to increase by approximately 100 basis points in Q2 and will exit the year at roughly 23.5% in Q4. This reflects a shift in the timing of our annual merit increase process as well as other administrative changes. As we have previously mentioned, we also continue to be on track to achieve GAAP profitability exiting the year. Finally, our forward-looking estimates are based on FX rates as of 02/06/2026 and do not take into account any impact from currency moves. To close, 2025 was a year of meaningful progress as we sharpened execution and strengthened our financial foundation to support our growth engine. As we look ahead to 2026, we see a compelling opportunity to build on progress by continuing to invest with discipline, expand our uncomplicated AI-powered EX and CX solutions, and scale the business in a durable and profitable way. With a clear strategy, a strong operating model, and a motivated global team, we are confident in our ability to drive sustained growth in our business. Thank you for your continued support and confidence in Freshworks. And with that, let us take your questions. Operator?

We will now begin the question and answer session. Please limit yourself to one question. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from David Hynes with Canaccord Genuity. Please go ahead.

Congrats on the quarter. Nice to see the durable IPEX growth. I am gonna actually ask about the CX side of the business. I think there was some optimism that AI could drive a little bit faster growth there that it didn't play out in Q4. Can you just talk about some of the factors maybe creating some headwinds in that side of the business and kinda what you're doing to rectify those?

Yeah. Well, first of all, thanks for the question. As you know, our investment really is focused on that EX side of the business and then, of course, AI. The big move that we've made recently on the CX side has been to unify our conversation and ticketing capabilities in a new platform, which we released in Q4, and we're in the process now of upgrading all of our customers onto that. That'll give us a single code base to innovate off of, which we know will allow us to move faster on that side of the business. And drive both retention and expansion. I wouldn't say there was any meaningful trend in Q4. Remember, we lapped an initiative that we had last year called free to paid. So that accounted for some of the growth change. But, you know, we're managing that business to kinda grow where it is now, which is in that mid-single-digit range. While we invest over in that EX side, which is where we're seeing the growth, where we're seeing the move upmarket work quite well for us. So I wouldn't think that I don't think that Q4 was anything outside of our expectations. And if you look at our plan for next year, it's pretty consistent with where we think for this year, where we think we're gonna grow that business this year.

Yep. Okay. Makes sense. And then, Tyler, maybe a follow-up for you. If we think about kinda intermediate-term targets that you have out there, you know, call it 14, 15% growth, Today, you're getting about a third of that from that revenue retention. Right? I think it's 104 on a currency-adjusted basis. Does that feel like the right ratio to drive durable 14, 15% growth, like a third from expansion and two-thirds from net new? Or do we need to see NRR inflect higher to drive that growth durability?

So where we're at right now, DJ, I think, you know, that is the rate that it's at. But as we've talked about, you know, our EX business is growing a lot faster than our CX business as well. EX has a better net dollar retention, kinda makeup to it. Along with the fact that we've been adding different mechanisms to grow within the EX portfolio, specifically ESM products, our device 42 products. And then, you know, now with our recent acquisition of Fire Hydrant, later than in this year, you know, hopefully, a new SKU on the ITOM side. That's all, you know, on top of the Freddie copilot ads that we have. As the mix shift continues to change, you know, we're gonna expect to see that gonna see some benefit from net dollar retention. We did say you know, for the first quarter, really, that we're gonna see some upside on net dollar retention in Q1 moving up to $1.05. Is what we said. And that's the first time we've seen that in a while then. You know, that confidence is driven, really largely on the results that we're seeing on the EX side.

Yep. Makes perfect sense and good to hear. Thank you, guys.

Thanks, CJ.

Your next question is from Elizabeth Porter with Morgan Stanley. Please go ahead.

Hi. You got Oscar Savedra on for Elizabeth? Thank you for taking my questions, and congrats on the strong performance on the EX side of the house. Really nice to see it crossing the $507 million. I wanted to touch on device 42. You highlighted, you know, the 30% attach rate across your top 50 new EX deals. As we think about 2026 and the updated guide you gave for '27, how should we think about that attach rate trending? Should we think about it going higher? And then what's the typical incremental ACV uplift? When you included those versus fresh service alone? Thank you. Yeah. I'll take the first I'll take the first part of the question. I think

you know, device 42 is a piece of the bigger puzzle. We've built a platform that can power all the needs of a mid-market IT department from ITSM to I IPAM, now we're building out I Tom and then ESM. So, you know, Tyler, mentioned this. That those are the growth levers that we see enabling us to sustain these this mid 20 growth rate, three x for a long time to come. We said at our Analyst Day back in September, ITAM is a business that is on track to drive a $100 million in ARR for us, over the next couple of years. We crossed $40 million this past quarter. It's the Device 42 product is integral to our continued motion upmarket. Because larger organizations need that asset management capability really to power their IT department. So it's not just a, you know, an attached on a net new sale. It's important for retention. It's important for expansion. And it's really been so far a huge success for us in terms of enabling us to kinda continue to move upmarket. Tyler can comment on some of the specifics, in terms of, notes. And, Oscar, I just wanna add also, you know, we still have not launched the

native cloud offering of device 42 that which is, you know, which we've been working on since kinda we we we, you know, brought on the company. And that's still on track to launch at the '2 here. And that's gonna be an initial phase of cloud. We because what we've been selling so far is still the on-prem. The ARPAs of device two, we haven't disclosed, but you could tell from our Q3 disclosure about the $1 million that we had in Q3 of last year that we don't expect to repeat necessary. That was a stand-alone Device 42 deal. It wasn't a $1 million deal because of the term license we recognized more upfront, but it was very significant as you can imagine. And so the ARPA is can go anywhere from, you know, you know, the $20,000 level all the way up to the multiple of thousands for device Voyager depending on the size of the organization that we're serving. But what you're seeing is that this is just another piece of a broader platform that we feel that is a holistic offering across you know, all of EX and adding ITOM to it too is, something that our customers been asking for that we're really excited about.

You very much, guys.

Your next question is from Alex

Dennis, maybe first one for you. Just as you think about Freddie AI tailwinds to growth that you saw in calendar 'twenty five and you look at those for calendar 'twenty six, maybe just help us understand kind of what those could be. And also, to the extent that folks plug in, you know, alternative solutions, agentic solutions into your platform maybe just remind us how do you monetize or how can you monetize that as well? Then I've got a quick follow-up for Tyler.

Yeah. So AI for us as we kinda shared in the remarks earlier, we crossed the 8,000, customer mark for customers that are paying for AI. In terms of revenue, we crossed $25 million in ARR. As well, and that nearly doubled year over year. So we've got good momentum We've got, I would say a good start. We still got 75,000 customers so we have a long way to go in terms of driving full penetration. We launched our AI agent studio in, in late November. So that is in the market now. We've got, hundreds of customers using that product create their own agents. On the customer support side. And we'll bring that into EX, later in the first half of this year. So we in some ways, we're really getting started on the AgenTex side because the our pricing prior to that was all focused on the old, structured bots. We increased our pricing to 50¢ an interaction from 10¢ an interaction. We're just starting to see that flow through in terms of, ARR And we as as that product scales, we think that that's gonna create significant upside, in our overall AI business. Copilot continues to grow. We continue to see productivity improvements of 30% plus among customers that use Copilot. So that, I think, is gonna continue to drive, increased penetration of capabilities there improve. So all of these are either upsells to existing customers or included in in deals, especially in large deals where over half of our customers are taking AI from the start. And it's really core to our sales motion now. It's what customers expect And as far as the know, customers that might be experimenting with over the top solutions, we don't see it that much. We tend to be the first port of call for that midsize enterprise company. That's looking to understand how AI can benefit their business both on the IT and the CX side. Of course, we've gotta put out a competitive product, but we've got a the right to win with every one of those customers.

Understood. And then maybe Tyler, on the guidance, obviously, nice to see outperformance there versus consensus. In terms of both the billings guide for next year as well as the revenue guide. Maybe just remind us and compare and contrast the level of conservatism, that you're putting in there, versus a year ago. Kind of how we should think about that, particularly as we get through the year And then any color on billings seasonality gave us kind of the revenue seasonality. But some billing seasonality would be helpful too.

Yeah. I mean, for the conservatism, Alex, as you know, you know, first guide of the year is the, you know, the tough for the whole year because you have the least amount of visibility. Now, clearly, you know, just a quarter and a half ago at Investor Day, we had guided to 13 to 14% growth for all of 2026. And, essentially, we're saying that's now 14%. We wouldn't put that out there if we weren't confident in that. We are really excited about our EX opportunity. It's a strategy that we've been very clear about for a year and a half now. That we're executing against, and it's working. And we're clearly the leader in that segment of the market that we're attacking right now. We're gonna continue to go attack that and make that our priority. So, clearly, we wouldn't put out the number right now if we didn't feel good that we can go execute against it. And, hopefully, as we go throughout the year, we'll be able to update you know, as we perform. Perfect. Thank you, guys. Your next question is from Scott Berg with Needham and Company.

Please go ahead.

Hi, everyone. Thanks for taking my questions here. Tyler, I just wanted to follow-up on the guidance question there. You're clearly getting some good momentum Freddie in particular from the AI perspective is we think about the impact on guidance this year? I know it's still a small amount, $25 million. In ARR exiting the year, but should we expect a material contribution to that next year from what seeing in pipelines? Or is still a little measured there?

Yeah. So, Scott, I think our biggest opportunity on Freddie is still on our existing install base. If you actually look at the numbers we've put out on attach rates on new business, specifically for larger deals, we're, you know, we're still over 50%. That means that as companies are choosing us as a new customer, part of the reason they're choosing us is because what they see on our Freddie capabilities. The and that is, you know, real time. And as a reminder, the dollars we put out on our AI revenue is purely a loan the SKUs that we sell. And so it doesn't include things like AI agent on EX right now because that's included. On some of our plans. We're not trying to do an allocation there. The products are working. We have 8,000 customers now. The growth rates there are good, and we still feel we're very confident that, you know, these can each be a $100 million product, AI agent and Copilot. In the next three years. And we, you know, we think that's gonna continue to be a lever of growth That being said, the other areas that we have, including ESM where we really only had that as a stand-alone product for one quarter, we're very excited about that as well. On our capability to go expand with existing customers, but also land there. And we just have to, you know, keep proving that out. And think that that could actually be, you know, a really good tailwind into the year.

Got it. Helpful there. And then, Dennis, your market sales motion is clearly going well. As you move know, your ITSM kind of products and solutions up there with with with device 42, etcetera. I mean, my by my math here, customers above 50 k, think you grew that net new comp by over 30% or roughly 30% year over year. Guess as you look at 25 versus 24 and know you had device 42 for the entire year. But outside of that, know, is there anything else to really call out that's kinda driving some of the extra strength up upmarket?

Yeah. Well, a number of things. First of all, that midsize enterprise is looking for choice, and they're looking for a platform that satisfies all of the different needs that you have in running a mid-sized enterprise IT department from ITSM to ITOM to ITAM to ESM. And that's what we built over the last couple years. If you think about a lot of the decisions that were made two or three years ago, to stay with BMC or Vontee or ServiceNow, you know, we were not in the market the way we are now. And those customers are coming up for renewal. They're looking around. They're seeing you know, they're seeing the recognition that we have from Forrester and Gartner. They're seeing all the customer references that we now have from, you know, large, meaningful companies that have made the switch. They're talking to the CIOs of those companies that have made the switch. We've got a really positive referral cycle going. And they're seeing the value. And so we that market, by our estimates, the mid-market of in the TAM we're competing in is as large as the true the true enterprise. Think of the g two k. It's a lot more companies it's a massive TAM. And in many ways, you know, we're just getting started in terms of getting the, that referral network going, the messaging going, all that. And that's just creating this momentum That market for us is enormous. And I know there's, you know, a lot of talk and about the impact of AI and how is AI gonna affect fee-based pricing. For us, it's a share game. So we're taking seeds every with every win that we make. We've always been in a competitive market. We've always had to take share from bigger players, and that's what we continue to be able to do. If you look at the growth rate for ESM at 22%, we think we're the fastest growing player in that mid, you know, midsize market. And, and so, you know, some of these some of these fears that seats are gonna erode, because of AI We've got multiple ways of monetizing the relationship we have with the customer. But more importantly, we're not the incumbent that has a lot to lose. We're the attacker who's taking share. And that is gonna continue to be true. For some time. So we think that the market that we're playing in that EX site, you add AI to that, you add these capabilities that we've been building out. It's just a huge opportunity for us, and that's why you see us talking about the investment that we're making there, You know, we're running CXLEAN to enable us to invest in that EX opportunity and really leaning into it. And that's what you're just gonna see every quarter this year.

Thanks, Scott.

A reminder to all analysts to please limit yourself to one question. Our next question is from Rob Oliver with Baird. Please go ahead.

Great. Thanks. Good afternoon. Dennis, for you, and this is, I guess, a follow-up to Scott's question. So you know, on that Freshservice Plus device device 42 side, clearly, you guys have shown some meaningful large wins stand alone on d 42 and sort of proven it out. And simultaneously, you guys are seeing a ton of momentum upmarket on the fresh service side. You talk a little bit about the sort of the combined go to market there? Where you are today? Where you need to be in terms of your ability to have have all hands on and kinda rowing oars at the same pace in order to compete for these deals? And is is that something that's already done and and ready to go today as we enter '26? Thank you.

Yeah. So I so I I think we're all feeling pretty confident in the sales and motion. We if we, you know, internally look at our win rates, it's consistent improvement quarter over quarter in our win rates against our largest competitors. Really good predictability in the business compared to where we were eighteen months ago. And you see that in our numbers. You see that in our ability to consistently beat our the top end of our of our estimates. And and that you know? So I think the sales motion we got nailed down. I think we're we're really focused is is pitching all the product pieces together in a way that, that makes sense for our customers. So the first step there is bringing device 42 fully to cloud, and that's happening later this quarter. That's gonna open up a slightly different market for us because if you're a cloud first company, you don't want an on prem you know, solution, and that's what device 42 has been up till now. So that will, you know, that will open up another set of customers for us. Fire hydrant's the next piece of that. Now we've got a a out the integration plan, but we have a lot of customers that work with us that are looking for a more modern solution for IT operations management, instance instance response, and ultimately, much more proactive incident detection. We our primary customer is over in the IT department, but a lot of these customers are over in the technology organization, and that's that's an interesting adjacency for us where customers are using Freshservice to in some cases, become alerted to instances that as they're happening, In other cases, they're using device 42 to understand the kind of the relationship of assets to one another and and get ahead of problems before they happen, there. So iTom is a is a natural compliment. A lot of our our customers are looking an integrated solution. That's what we're gonna deliver. In this back half of this year, and that's an another natural next step. And then, ESM. Know, our ESM capabilities are getting better all the time. We we said, a one in it used to be one in five. Now it's one in four of our eligible customers are are using ESM. That's great, but that means we have, you know, a lot more customers to go after. In departments like finance and and, legal and, HR. So building out the capabilities there, bringing AgenTic AI into those workflows, those are huge opportunities for us. And, and now we can offer our ESM product to companies that might not have fresh service that might be you know, stuck for a little bit longer on a legacy solution for their IT department because contractual reasons, but wanna wanna lessen vendor dependency on that incumbent want something that's that's more flexible for them that meets their needs better, and ESM is a great entry point into into those types of customers that where we can prove ourselves earn earn earn the the trust of the customer. And then when that ITSM contract's up for renewal, we can win so we've got a lot of levers on that, side of the business. And there's a there's a lot more that we're excited about going into to build you know, continue to build out that platform to serve larger and larger customers.

Great. Appreciate all the detail. Thank you, guys.

Your next question is from Patrick Walravens. With Citizens. Please go ahead.

Great. Thanks for taking the question. This is Austin Cole on for Pat. Dennis, you mentioned the just the work to do to to help penetrate the customer base with Freddie AI, and it sounds like there's a lot of momentum there. But what are what do you kinda see as the two or three big big bucket items in terms of increasing that that penetration? Yeah. I so

the focus now is is very much on building out the agentic capabilities of our AI agent studio. We focused initially that that set of launches on CX just because there's there's much more you know, queries to be, handled through AI on a customer support use case than a employee use case, but the employee use case is super important too. And we'll be coming out with with, prepackaged workflows and automations later, in the first half of the year. That's focused there. But that's an that's a a really good business for us because it just scales with usage. And we we've already seen customers that have adopted on the CX side once once they get going, the use is usage spirals up for them. They get the benefit of deflecting a a ton of inbound. They answer questions faster. CSAT often goes up. And, they're perfectly happy, you know, paying the the the session based pricing that we have, have set in the market. So I think that that on the, the the AI side, AgenTic, l one, AgenTik in particular, is is is, I think, a growth lever that we're gonna really see if it takes off this year. Copilot is a little steadier. Right? That's a very clear value proposition We've got lots of, of, customer examples that are working for us And so that also is scaling up about half of our customers in the among the 8,000 are Copilot customers. We got a long way to go. And and then we're investing in AI across the product portfolio to be much more proactive. In delivering service. Insights is an example of that where a manager can come in. They can see their their service desk, understand exactly what's going on. The AI suggests areas to look into anomalies, those sorts of things. The agent can, troubleshoot in a natural or the manager can in a natural language way, to understand any kind of issues or problems in the data. They don't have to hunt and peck through a bunch of Power BI dashboards. So that proactive service delivery is is really where we see AI taking us. And there's a lot of places we can go from there.

Great. Thank you.

Your next question is from Brian Peterson with Raymond James. Please go ahead.

Hi. Thank you. This is Jonathan McCary on for Brian here. So kind of dovetailing off that last question. So I wanted to ask about, you know, sort of are are you guys seeing a halo effect in the business where know, you're having a customer that's coming live on the CX or the EX side and I realize there's some difference there on the ideal customer profile, but they're seeing a lot of value from the Freddie products on one side of the business, and that actually brings them back to the table and unlocks cross sell opportunity on the other side?

We're definitely seeing the impact of AI in terms of driving greater expansion and retention. So our NDR for customers that are taking our AI paid SKUs was a 116% last quarter, and I think that's from, like, one twelve the prior quarter. So you think about that. If we can eventually, all of our customers are gonna use AI. We know that. If we can drive continue to drive that penetration, and continue to see those kinds of results, that's fantastic for our business. It tells us that our customers are seeing value, both on EX and CX from the AI capabilities that we're bringing to market. And they're expanding at a much faster rate than those without AI. So it's a critical imperative for us to get as many customers as possible on. In terms of, like, what are the things that we have to do to get there? A lot of it's about education. Right? We have a broad spectrum of customers. Right now, I'd say AI adoption isn't confined to any specific industry or any specific size of customer. It's pretty broad. But there's still a lot of customers out there that are hesitant or need to be educated on how the data is being used and all that stuff. And that's what our go-to-market teams do every single day. And that's why you're seeing, you know, the 50% attach rate on new deals. That's why Tyler is constantly pushing the teams to drive penetration to the existing base. Because we know once customers get onto our AI, they see the value. They see the business case. It's very clear. And that just enhances their relationship with us and leads to a lot of positive upside.

Your next question is from Taylor McGinnis with UBS. Your line is now open. Please go ahead.

Thanks so much for taking my question. Tyler, just on the guide, if I look at the 4Q numbers, it looks like 13% constant currency growth across revenue and billings. And then the high end of the guide going into 2026 implies an acceleration. Could you just unpack for us what gives you comfort in that outlook? When you think about each of the individual pieces? And as a second part to that, when we look at the CX business and knowing that you guys are making this platform, you know, change, is there the potential to see any tailwind from that as we get through '26? Thanks.

Yeah. Hey. Thanks, Taylor, for the question. So you're right. We are guiding to some slight acceleration, right, into, even into the back half of the year. On the revenue side. And it really is just coming off of the confidence that we have driven by EX performance and you know, and we just had another great quarter, and we strung four great quarters together. And we know that the attributes of that customer base are really, really strong. And now we're, you know, starting to push a whole bunch of other products into that customer base and some that we never had before. So the confidence is really driven by the execution and the continued momentum. Things like pipeline, right, where we're seeing, you know, more $100,000 deals than we've ever seen in pipe. Currently. And this all gives us a lot of confidence. To be honest, on the CX side, we've been very, very clear now for a number of quarters. Like, our main focus is to bring all of our customers on to our new platform, our new Freshdesk Omni platform. And we're being relatively conservative in our expectations on growth from the CX side of the house until we get through all Now that being said, we're still closing new customers every single quarter, a lot of them. The AI adoption is continuing, and, you know, we're getting really good feedback. From a from, you know, what we've built in, we're being relatively conservative in what we expect in terms of CX growth. A lot of the confidence or all the confidence is coming from EX and our expectations there.

Great. Thanks for the color.

Our last question will be from Billy Fitzsimmons with Piper Sandler. Please go ahead.

Hey, guys. Thanks for squeezing me in. Fear from the metrics, healthy momentum, upmarket in I wanna focus on on maybe mid-market specifically, and I won't focus on mass market because, obviously, it's probably hard to disaggregate that given the shift in strategic strategic priority. But in terms of mid-market, I bring this up because in a couple prints this cycle, there's some narratives around kinda the health of of oh, sub-enterprise type customers in in some other companies in the software space call that weakening macro or or potential higher custom cost of customer acquisition. Just curious if you can kind of comment on of the metrics you are seeing in in real time for the, call it, like, sub-enterprise type customers. Exiting 2025 and kind of what you're baking in in in in 2026 in terms of the guide? Thanks, guys.

Yeah. So we'll just define you know, the way we define mid-market, call it a 5,000 person company. That's kind of the sweet spot. Maybe a billion billion 1 to 3 billion in revenue. That's what we're growing our business off of. That's what the sweet spot for us. That's where our growth is coming from right now. So we're not seeing anything negative at all. In fact, as Tyler alluded to, we entered this quarter with the best pipeline we've ever had. From that segment of the business, that whole market. Field motion is primarily focused on And that's where we have a really strong position in EX in particular where increasingly those customers are turning to us as the solution that makes sense. So, you know, we think that that's a large segment over time that is gonna continue to grow with us. If anything, if those customers are squeezed for cost or efficiency or anything like that, they're gonna turn to us. More than they would to a legacy platform, you know, like a BMC or onto your ServiceNow. Which are much more expensive, not just from a licensing cost, but they're expensive to run. They're expensive to keep up and running and keep current with their business processes. Their AI takes longer to implement. You know, all that is much easier on our platform. That's why the growth is coming from there. You can see it in our over 50 k customer count or and the percentage of our revenue that's coming from over 50 k customers. The, Tyler alluded to number of customers over a million. I mean, all that is coming from that mid-market. Which is where we're orienting the company. That's what we're focusing on That's where our growth is gonna continue to come from. And those customers expanded higher rates, They retained at higher rates. Everything's good there. We're in the middle of that journey to move the entire company to focus on that part of the market. It's super important for us.

That's all clear. Appreciate it.