Alex Zukin: Perfect. And then maybe just a follow-up for 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 enterprise or vice versa, 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 are working the best early on and that you see potentially kind of getting escape velocity later in the year?
Girish Mathrubootham: Yes. So, I would answer it in two parts. When you look at Freddy Self-service, that is seeing — like we are seeing success with larger B2C companies because B2C companies have like fewer use cases that are scaling across millions of customers, so it’s ripe for automation. But if you look at our Copilot, that is seeing traction — because it’s helping agents get more productive, that we are seeing like excitement and adoption across thousands of customers, across customer sizes or segments, SMB this mid-market. So, again, where will we get escape velocity? I’m 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 through both.
Alex Zukin: Perfect. Thank you guys.
Girish Mathrubootham: Thank you.
Operator: Thank you. Our next question will be coming from Ryan MacWilliams of Barclays. Your line is open.
Ryan MacWilliams: Hey thanks for taking the question. I guess I want to note your focus on upmarket customers. So it makes sense that much smaller customers below 5,000 are turning in the customer service segment. But any reason why those customers are leaving now? Are they just looking for cheaper alternatives or is it some change in the competitive landscape?
Dennis Woodside: 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 shrink, and in SMB, you see quite a bit of that. I think we also have had customers who come in and try the product line, it doesn’t fit for whatever reason, what they’re looking for, maybe they’re too small. So, I wouldn’t say there’s any one competitor that we find those customers migrating to, if that’s your question.
Ryan MacWilliams: 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 with it like call it troughs? 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 like what we’re waiting for here?
Tyler Sloat: Hey Ryan, so I think 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 is a low point now where I think we’ll hit it and then possibly stabilize from there. In getting it back up to 110%, I think it’s a combination of a couple of things. We’re still going to make progress on churn that — we had said, hey, we went public, we’re kind of low 20s — 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 like 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 sixth one was kind of, hey, if macro comes back. And 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 the customer base 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.
Ryan MacWilliams: That’s great. Appreciate the color. Thanks guys.
Operator: Thank you. And our next question will come from Pat Walravens of JMP Securities. Your line is open.
Austin Cole: Hi, this is Austin Cole on for Pat. 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. And looking at the flip side of that on the topline, with all the kind of unlocks that you guys are discussing and the better than expected expansion, improving churn. Why might it not be at this point, prudent to say that this business could grow 20% next year? thank you.
Tyler Sloat: Well, our guide is to 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. And 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 overnight — kind of like the AI monetization that we talk about that we said, in Q4 is like 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, but they’re just going to take some time to play out. And thus, we can’t build them in yet.
Austin Cole: All right. Thanks a lot.
Operator: Thank you. Our next question will be coming from Brent Thill of Jefferies. Your line is open.
Brent Thill: Tyler, I want to 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 run rate $600 million. 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’s it, you just gave us a big margin bump in — but just trying to think I was trying to–
Tyler Sloat: Totally get it, Brent. If you look at last year, we do — we did get some one-time 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 higher, but really only $10 million higher when you look at kind of 2023 to 2022. And we had said, hey, don’t expect that same type of efficiencies driving into next year. 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 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 very focused on getting to the Rule of 40 by 2025, which we called out and specifically free cash flow margin and 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 or 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. 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.
Brent Thill: Okay. Thank you.
Operator: Thank you. And our next question will be coming from Taylor McGinnis of UBS. Your line is open.
Taylor McGinnis: Yes, hi. Thanks for taking my question. So, if I look at the high end of the FY 2024 revenue guide, it’s only a point below the 4Q exit rev growth rate. So, it implies some stability in topline 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, what your assumptions are for ITSM versus TS growth that’s supporting that outlook? Thanks.
Tyler Sloat: Hey Taylor, this is Tyler. We — 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 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 in terms of the growth rate stabilization, 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 net dollar retention that we thought it was going to be 105%. We’re actually calling 106% is kind of the bottom now. And we think we have a pretty good view of the business as it is in front of us. We — 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 we’re pretty positive.
Taylor McGinnis: Great. Thanks so much.
Operator: Thank you. And the final question for today will be coming from David Hynes of Canaccord Genuity. Your line is open.
