Freshworks Inc. (FRSH) Earnings

Management highlights

### Market and Leadership Position - Gartner named Freshworks a Leader in the 2026 Magic Quadrant for IT Service Management platforms, which management states validates their product positioning for agile enterprise customers and supports larger deal flow. - Freshworks serves over 20,000 global customers, with total ARR (EX + CX) standing at ~$967 million at the end of Q2. ### AI Product and Monetization Progress - Over 7,000 paying customers use Freshworks AI SKUs, with Freddie AI Copilot attach rates exceeding 70% for new deals over $30,000. 22% of the installed EX customer base now pays for Copilot, and AI-enabled customers have higher net dollar retention than the company average. - Two new AI products were launched in Q2: Freddie AI Agent Studio (no-code domain-specific AI agent builder, currently in early access with hundreds of customers and over 1,000 total customers to date) and MCP Gateway (connects Freshservice intelligence to existing customer AI tools including Claude and Microsoft Copilot). - Measured productivity gains for customers: agents using Freddie AI handle 50% more tickets; average ticket deflection reaches 50% (up to 80% for mature deployments). - Pricing strategy: Copilot is sold as an add-on, while new AI products like Agent Studio will move to consumption-based session pricing when monetization launches in fall 2026. ### Strategic Priorities and Capital Management - The company achieved positive GAAP net income in Q2, two quarters ahead of its original target of reaching GAAP profitability by the end of 2026. Capital allocation prioritizes investment in high-return EX growth (sales capacity and AI R&D) first, followed by returning excess capital to shareholders via stock repurchases. - Year-to-date 2026, the company has repurchased over $200 million in stock, reducing fully diluted shares outstanding by 8.3% since its 2021 IPO. At end-Q2, the company held $665 million in cash and investments with no debt. - CX organizational restructuring was completed effective July 1, 2026, with all GTM, product, and engineering teams co-located in India to drive efficiency and focus. 90% of CX customers have migrated to the new Freshdesk Omni platform. - Multi-product platform expansion: Device 42 ITAM is now fully cloud-native and integrated into the Freshservice interface; FireHydrant will be fully integrated into the EX platform by the end of 2026. The partner program is evolving from transactional to long-term partner account ownership, with 40% of current business already partner-influenced.

Guidance

- Full year 2026 total revenue is guided to $963.5 million to $966.5 million, representing 15% year-over-year as-reported growth (14-15% constant currency), including a $2 million FX headwind relative to initial annual estimates. This represents an upward revision from prior guidance. - Q3 2026 total revenue is guided to $244.5 million to $245.5 million, representing ~14% year-over-year as-reported growth (14-15% constant currency), including a $0.5 million FX headwind. The company expects full year 2026 billings growth to align with total revenue growth. - EX ARR is expected to grow in the mid-20% range full year 2026, and exceed $600 million by the end of 2026. CX ARR is expected to grow in the low single digits full year 2026. - Full year 2026 non-GAAP operating income is guided to $222 million to $228 million, with non-GAAP EPS of $0.66 to $0.68. Adjusted free cash flow is expected to reach ~$265 million, for an adjusted free cash flow margin of 27.5%. The company reaffirmed it will meet or exceed its full year adjusted free cash flow per share target of $0.94, which represents 24% growth from fiscal 2025. - Management expects constant currency NDR and EX NDR to remain roughly stable in Q3 compared to Q2 levels.

Segment performance

1. Employee Experience (EX) Segment: Ended Q2 with $567 million in ARR, growing 23% year-over-year as reported and 24% on a constant currency basis. EX ARR represents approximately 59% of total company ARR. Within EX, Enterprise Service Management (ESM) crossed $50 million in ARR, growing 67% year-over-year, and accounts for one-fifth of all new EX seats. ITAM (powered by Device 42) is included in roughly one-third of large new EX deals, and posted its strongest new logo quarter in Q2 2026. FireHydrant (incident management) generated its first six-figure expansion deal this quarter, and was one of the top three largest deals of the quarter. Customers contributing more than $100,000 in ARR grew 25% year-over-year, and represent approximately 40% of total company ARR. Constant currency EX net dollar retention (NDR) exceeded 111% including legacy Device 42 customers. 2. Customer Experience (CX) Segment: Ended Q2 with $400 million in ARR, growing 3% year-over-year as reported and 4% on a constant currency basis. CX ARR makes up approximately 41% of total company ARR. Over 90% of Freshdesk customers have completed migration to the new Freshdesk Omni platform. CX AI agent sessions and conversations on Freshdesk Omni grew 60% quarter-over-quarter and more than fivefold year-over-year.

Risks & headwinds

There was no explicit discussion of material business risks, operational failures, or unforeseen headwinds during the call. Foreign exchange rate fluctuations are noted as a minor headwind to full year 2026 revenue, already incorporated into the published guidance range.

Analyst Q&A

• Q: As Freshworks expands its EX platform with new products like Device 42 and FireHydrant, how does the company avoid losing its core differentiation of ease of use and low complexity? How is Freshworks competing with new AI-native vendors that position themselves as an overlay layer on top of existing ITSM systems? /

  A: Management says preserving product simplicity and unified UX is a top priority for product and engineering teams. Acquired products like Device 42 have been fully redesigned to match Freshservice's native design language, integrated as a native tab within the platform with seamless data sharing, and this same integration approach will be applied to FireHydrant. Management notes they have not seen meaningful competitive traction from AI-native overlay startups, as customers prefer a unified system of record with embedded AI that integrates with existing workflows and controls, capabilities Freshworks has built over more than a decade. New AI products like Agent Studio already have over 1,000 early customers, demonstrating customer demand for Freshworks' integrated approach.

• Q: Gartner positioned Freshworks as a Leader in the 2026 ITSM Magic Quadrant. How does this positioning impact the business, particularly lead generation and large deal flow? /

  A: Management states the Magic Quadrant leadership is a major validation of Freshworks' product and market positioning for large agile enterprise customers. It drives increased inbound interest from large accounts, via analyst referrals and word-of-mouth from existing happy customers. This momentum is already visible in results: the number of customers with over $100,000 ARR grew 26% year-over-year, large deal size is increasing, and the company closed its first $1 million ARR deal in Q1 2026. The leadership positioning confirms Freshworks is the product of choice for agile enterprises that want a modern, low-complexity alternative to legacy vendors.

• Q: What is the penetration growth runway for cross-selling ITAM and ESM to existing EX customers, and how much is ITAM driving new logo acquisition versus upsell? /

  A: Management expects both ITAM and ESM to each reach $100 million in ARR within two years. Currently, ITAM is attached to one-third of large new EX deals, most often as a follow-on upsell after initial ITSM adoption, and ESM penetration of the existing EX customer base is still very early. The recent launch of cloud-native Advanced ITAM opened up the product to a much larger set of customers than the legacy on-prem Device 42 offering, and Q2 2026 was the strongest quarter ever for ITAM new business, beating internal targets by a wide margin. For upmarket new customers, full platform capabilities including ITAM and ESM are now table stakes to win deals, making these products critical for new customer acquisition as Freshworks moves further upmarket.

• Q: EX ARR growth decelerated slightly to 24% constant currency in Q2 from 25% in Q1. What gives management confidence that mid-20s EX growth can be sustained in the second half of 2026, and are there upside opportunities to accelerate? /

  A: Management calls the quarter-over-quarter deceleration minor noise within the expected range, and notes the underlying growth trend has actually accelerated from 22% at the end of 2025 to mid-20s in 2026. Multiple drivers support sustained growth: large new deal size is increasing, the sales pipeline is the strongest it has ever been, and there is significant remaining cross-sell runway, with two-thirds of existing EX customers yet to purchase ITAM. New products like FireHydrant create additional opportunities to win new accounts and cross-sell other EX products. The target agile enterprise mid-market represents ~60% of the total ITSM market, which remains highly fragmented with no competitor holding more than 20% share, creating large untapped opportunity for Freshworks.