Freshworks Inc. (FRSH) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights solid financial metrics, including 14% YoY revenue growth and a 27% free cash flow margin, indicating operational discipline. The Q&A reveals positive sentiment towards AI and EX product growth, with strategic investments for future expansion. Despite no buyback expansion, the focus on M&A and reinvestment is seen positively. While management was vague on some specifics, the overall tone and strategic direction suggest a positive market reaction, especially given the company's market cap.
Key Financial Performance
Q3 Revenue $215.1 million, a 15% year-over-year increase. This growth was driven by strong performance across growth and profitability metrics, including a $1 million onetime contribution from the on-premise Device42 business.
Non-GAAP Operating Margin 21%, which is 5 points above the estimate. This reflects effective cost management and top-line momentum.
Free Cash Flow Margin 27%, an over 5 percentage point improvement year-over-year. This was driven by operational discipline and strong collections.
Employee Experience (EX) ARR Over $480 million, representing 24% year-over-year growth on an as-reported basis and 23% on a constant currency basis. Growth was driven by expansion outside IT, upmarket growth, and IT asset management with Device42.
Enterprise Service Management (ESM) ARR Exceeded $35 million, doubling its annual recurring revenue in the past year. Growth was driven by adoption in non-IT functions and automation of workflows.
Customer Experience (CX) ARR Over $390 million, representing 8% year-over-year growth on an as-reported basis and 7% on a constant currency basis. Growth was driven by deeper product adoption and customer sentiment favoring Freshdesk's ease of use.
Freddy AI ARR Doubled year-over-year. Freddy Copilot's ARR grew 160% year-over-year and was included in over 60% of new customer deals over $30,000.
Net Dollar Retention 105% on an as-reported basis and 104% on a constant currency basis. Device42 represented a small drag of 60 basis points.
Calculated Billings $224 million, representing 14% year-over-year growth on both an as-reported and constant currency basis. Growth was supported by partner-led implementations in over half of ARR deals greater than $50,000.
Adjusted Free Cash Flow $57.2 million, resulting in a 27% margin. This reflects operational discipline and strong collections.
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Operating Highlights
AI-driven applications: Freshworks has over 50 AI-driven applications in use, directly monetizing these products and driving incremental growth. Freddy AI's ARR has doubled year-over-year, and its AI Copilot's ARR grew 160% year-over-year.
Freddy AI Agent: Usage expanded more than sixfold in the past 7 months, with 650,000 sessions per month since launch. Freddy AI Agent deflected more than 50% of tickets for CX and EX customers.
Freshservice for Business Teams: Annual recurring revenue doubled in the past year, exceeding $35 million in Q3. Expanded access as an independent product for non-IT functions.
Expansion into departments outside IT: Employee Experience achieved over $480 million in ARR, growing 24% year-over-year. Freshservice for Business Teams is now available as a stand-alone product for HR, finance, facilities, and legal.
Upmarket growth: ARR from customers spending more than $100,000 grew 25% year-over-year. Freshworks is displacing legacy players with its ease of use and lower total cost of ownership.
Vertical expansion: Doubled law firm customer count to over 1,000 and expanded in sports, with notable customers like the Los Angeles Dodgers and McLaren Formula 1 team.
Operational efficiency: HOLT CAT improved efficiency by handling nearly 10,000 tickets in 6 months, reducing average ticket resolution time to under 5 hours.
Partner ecosystem: Partners led implementations for over half of ARR deals greater than $50,000, showcasing a robust partner network.
AI as a growth driver: Freddy AI is positioned as a $100 million stand-alone revenue stream over the next 3 years, with AI deeply embedded in customer workflows.
Customer Experience (CX) refocus: Freshdesk, Freshchat, and Freddy AI products consolidated into a unified workspace to improve customer support efficiency.
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Risk or Challenges
Macroeconomic Environment: Uncertainties in the macroeconomic environment and market volatility could adversely impact the company's financial performance and strategic objectives.
Growth Sustainability: Challenges in sustaining growth and reaching long-term revenue goals, particularly in a competitive market.
Innovation and Customer Demand: Risks associated with the ability to innovate and meet customer demand, which are critical for maintaining market position.
Cost Control and Efficiency: Potential difficulties in controlling costs and improving operating efficiency, which could impact profitability.
Regulatory Compliance: The need to ensure security, privacy, and compliance in AI-driven solutions, which could pose risks if not adequately managed.
Customer Retention: Net dollar retention rate of 105% indicates some challenges in retaining and expanding existing customer accounts.
Device42 Integration: Device42's retention rate is a small drag on overall net dollar retention, indicating challenges in scaling this business segment.
Currency Fluctuations: Revenue and growth projections are sensitive to foreign exchange rate fluctuations, which could impact financial outcomes.
Strategic Investments: Planned reinvestments in Q4 to expand pipeline and customer acquisition could have a modest impact on operating margins.
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Guidance & Outlook
Revenue Expectations: For Q4 2025, revenue is expected to be in the range of $217 million to $220 million, representing 12% to 13% year-over-year growth. For the full year 2025, revenue is projected to be between $833.1 million and $836.1 million, growing approximately 16% year-over-year.
Operating Margin Projections: Non-GAAP operating income for Q4 2025 is expected to be between $30.6 million and $32.6 million. For the full year 2025, non-GAAP operating income is projected to be between $167 million and $169 million.
Net Income Per Share: For Q4 2025, non-GAAP net income per share is expected to range from $0.10 to $0.12. For the full year 2025, it is projected to be between $0.62 and $0.64.
Long-Term Revenue Growth: For the full year 2026, revenue growth is expected to be 13% to 14%, with GAAP profitability anticipated by the end of the year.
AI Revenue Growth: AI is projected to become a $100 million stand-alone revenue stream over the next three years, driven by Freddy AI and related solutions.
Employee Experience (EX) Growth: EX business is expected to continue its growth trajectory, with ITSM, ESM, advanced ITAM, and AI each potentially becoming $100 million ARR businesses.
Customer Experience (CX) Growth: CX business is projected to grow further, supported by AI-driven efficiency and new product innovations like a unified workspace for customer support teams.
Strategic Investments: A onetime increase in spending during Q4 2025 is planned to expand the pipeline and drive customer acquisition, with a modest impact on operating margins.
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Shareholder Return Plan
Share Repurchase Program: Freshworks successfully completed its inaugural $400 million share repurchase program after buying back an additional 12 million shares in Q3 at an average price of $13.28 per share. In total, the company repurchased approximately 27.9 million shares at an average price of $14.35. Freshworks continues to manage and offset share count dilution by net settling vested equity amounts. During Q3, approximately $15 million was used for this purpose, and for the full year, the company expects to use approximately $58 million to net settle vested equity amounts.
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Key Q&A
Q:How is Freshworks planning to sell ESM as a stand-alone solution?
A:Freshworks launched Freshservice for Business Teams in 2022, targeting demand outside core IT departments. The solution has reached $35 million in ARR, doubling year-over-year. It will be sold by the existing sales force using current outbound and inbound marketing methodologies. Freshworks sees this as an additive opportunity to their core ESM business, which has a path to $100 million.
Q:Why did Freshworks not expand its buyback program in the quarter?
A:Freshworks completed its inaugural $400 million buyback program in Q2, with a weighted average price of just over $14. The company is committed to working with the Board on capital allocation strategies, including potential future buybacks, while also considering M&A opportunities and reinvesting in the business.
Q:How is Freshworks balancing monetization versus adoption for the Freddy AI suite?
A:Freshworks has different monetization models for Freddy AI products: Freddy AI agent (consumption-based, per session), Freddy Copilot (per seat license adder), and Freddy Insights (available in the enterprise plan). They plan to increase pricing for AI agents to align with industry standards, especially with the launch of vertical-specific agents for fintech, travel, logistics, and e-commerce. The session-based pricing model will remain for now.
Q:Why does Freshworks consider itself an AI winner?
A:Freshworks is a system of record for IT and customer support, offering integrated AI workflows with security and governance. They leverage best-of-breed models like Anthropic and Gemini. Freshworks believes its AI solutions are well-positioned for complex environments, unlike standalone AI providers.
Q:Has Freshworks seen any impact from the government shutdown?
A:No, Freshworks has not seen any impact from the government shutdown. Their government business is primarily with state and local entities, municipalities, and universities, which have shown no changes or pressures.
Q:What is the one-time investment Freshworks is making in Q4?
A:Freshworks is making a one-time investment in Q4 focused on marketing and demand generation for their EX products. This decision is based on strong demand and efficiency gains, aiming to build pipeline for EX in the field.
Q:What are Freshworks' next milestones for growth in the $100,000+ deal segment?
A:Freshworks aims to continue focusing on customers with 5,000 to 20,000 employees, driving EX business growth in the low to mid-20% range. They plan to release Device42 on cloud in Q1, enabling them to target cloud-only customers and upsell existing ones. They are also investing in demand generation for EX and AI.
Q:How does AI adoption differ between SMBs and enterprises in Freshworks' customer base?
A:AI adoption is relatively even across SMBs, mid-market, and enterprises. Copilot is the leading product due to its maturity and human-in-the-loop approach. AI agent adoption is increasing, with plans to monetize at higher rates. Over 5,000 customers are paying for AI, and this number is expected to grow.
Q:What is driving growth in Freshworks' EX products?
A:Growth in EX products is driven by strong performance in ITSM core, ESM, Device42, and Copilot. EX products have high net dollar retention and low churn rates. Freshworks expects Device42's cloud release in Q1 to further accelerate growth.
Q:What differentiates Freshworks in the ITSM market?
A:Freshworks offers an enterprise-grade ITSM solution with security, extensibility, and AI integration. They target the lower end of enterprise and upper mid-market, providing modern, flexible solutions. Their go-to-market strategy and product capabilities have matured, enabling them to win larger deals.
Q:How is Freshworks' net revenue retention (NRR) trending?
A:Freshworks' NRR has stabilized at 104-105% on a constant currency basis. EX products, which have strong NRR and low churn, are becoming a larger part of the business, providing a tailwind for future NRR growth.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the revised pricing for Freddy AI agents, stating only that it would align with industry standards. They also did not disclose the exact impact of the one-time Q4 investment on future financials or the specific outcomes expected from the demand generation efforts.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Agent
AI agent
ARR basis
Agentic workflow
Employee Experience
Experience ARR
Freddy Copilot
Freshservice Teams
North
Pennsylvania
Refresh
agent inquiry
alternative
basis currency
context
cost ownership
day
driver
engine
enterprise organization
expansion deal
finance
function
hub
location
product adoption
result AI
result expansion
retailer
service expansion
speed simplicity
status
support team
ticket
tool
upmarket
volume
week
work customer
FRSH Transcript
Freshworks Inc. (FRSH) Q1 2026 Earnings Call Transcript
Positive5-6
The earnings call indicates strong financial performance with a 24% free cash flow margin and an 8% increase in adjusted free cash flow per share. The EX business shows momentum, highlighted by significant deal wins and a strong pipeline. The company's focus on AI and restructuring for efficiency supports growth. Despite some legacy churn, NDR remains robust. Analysts' questions reveal confidence in the company's strategy and execution. Given the market cap of $3.79 billion, the positive sentiment is expected to result in a 2% to 8% stock price increase over the next two weeks.
Freshworks Inc. (FRSH) Presents at Morgan Stanley Technology, Media & Telecom Conference 2026 Transcript
Neutral3-4
Freshworks Inc. (FRSH) Q4 2025 Earnings Call Transcript
Positive2-11
The earnings call reflects strong financial performance, with 12-14% revenue growth and optimistic guidance for 2026, including GAAP profitability. Freddy AI's growth and strategic investments indicate positive business momentum. However, the lack of specific guidance on certain elements and conservative expectations slightly dampen the sentiment. Overall, the market is likely to react positively, with a potential stock price increase of 2% to 8%.
Freshworks Inc. (FRSH) Q3 2025 Earnings Call Transcript
Positive11-6
The earnings call highlights solid financial metrics, including 14% YoY revenue growth and a 27% free cash flow margin, indicating operational discipline. The Q&A reveals positive sentiment towards AI and EX product growth, with strategic investments for future expansion. Despite no buyback expansion, the focus on M&A and reinvestment is seen positively. While management was vague on some specifics, the overall tone and strategic direction suggest a positive market reaction, especially given the company's market cap.
FRSH Report
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