Freshworks (FRSH) Q3 2025 Earnings Call Transcript

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DATE

Wednesday, Nov. 5, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer and President — Dennis Woodside

Chief Operating Officer and Chief Financial Officer — Tyler Sloat

Head of Investor Relations — Brian Lawn

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TAKEAWAYS

Revenue -- Total revenue of $215.1 million for Q3 2025, representing 15% year-over-year growth on both as-reported and constant currency bases

Non-GAAP Operating Margin -- 21%, five points above internal estimate.

Adjusted Free Cash Flow Margin -- 27%, reflecting an improvement of over five percentage points year-over-year.

Net Dollar Retention -- 105% as-reported and 104% constant currency, both in line with expectations.

Total Customers Contributing >$50,000 in ARR -- 3,612 customers contributed more than $50,000 in ARR, up 20% year-over-year as-reported, representing more than 50% of ARR.

Enterprise Service Management (ESM) ARR -- Freshservice for Business Teams exceeded $35 million in ARR, with annual recurring revenue for Freshservice for Business Teams doubling year-over-year.

Employee Experience (EX) ARR -- Over $480 million in annual recurring revenue, with 24% year-over-year as-reported growth and 23% constant currency growth.

Customer Experience (CX) ARR -- Over $390 million in annual recurring revenue (ARR), with 8% year-over-year as-reported growth and 7% year-over-year constant currency growth.

AI-Driven Products -- Over 50 applications in market; AI ARR doubled year-over-year; Freddie Copilot ARR grew 160% year-over-year.

Freddie Copilot Penetration -- Included in more than 60% of new deals over $30,000, a five-point increase from the previous quarter.

Device 42 -- Largest new deal to date closed; included in half of the top ten deals; on-premise Device 42 contributed a one-time $1 million revenue benefit.

Calculated Billings -- $224 million in calculated billings (non-GAAP), up 14% year-over-year as-reported and constant currency; Billings growth for Q4 2025 estimated at 17.5% as-reported and 14% constant currency.

Adjusted Free Cash Flow -- $57.2 million driven by strong collections; Full-year 2025 outlook for adjusted free cash flow raised to approximately $222 million.

Full-Year Revenue Guidance -- $833.1 million to $836.1 million for full year 2025, reflecting approximately 16% growth on both as-reported and constant currency bases.

Share Repurchase -- Completed $400 million buyback; repurchased approximately 27.9 million shares at an average price of $14.35 per share.

Cash and Equivalents -- $813 million at quarter end.

Fully Diluted Shares Outstanding -- 309 million fully diluted shares outstanding, down 7% year-over-year.

Freddie AI Agent Sessions -- Grew over 70%, reaching 650,000 sessions per month; deflected more than 50% of tickets for CX and EX clients.

Standalone Enterprise Service Management Product -- "Freshservice for Business Teams" launched as an independent product, no longer tied to IT entry point.

One-Time Q4 Investment -- Management disclosed a planned one-time increase in Q4 2025 spending, primarily for marketing to drive pipeline and demand generation targeting the EX segment.

Q4 Revenue Guidance -- $217 million to $220 million revenue guidance for Q4 2025, reflecting 12% to 13% year-over-year growth as-reported for Q4 2025 (non-GAAP) and 11% to 13% constant currency revenue growth expected for Q4 2025.

GAAP Profitability Target -- Management reaffirmed target for GAAP profitability by the end of 2026.

Reporting Changes -- Beginning with Q1 2026, total customer count will be discontinued as a reported metric to focus on larger customer cohorts.

Device 42 Cloud Release -- Anticipated launch in Q1 2026, expected to expand market access beyond on-premise-only opportunities.

SUMMARY

Freshworks Inc. (NASDAQ:FRSH) reported double-digit top-line growth of 15% year-over-year (non-GAAP) in Q3 2025, highlighted by a 15% revenue increase and significant improvements in non-GAAP operating and free cash flow margins. Management introduced a standalone ESM product, expanded AI monetization capabilities with price optimization, and cited a doubling of AI-related ARR year-over-year as evidence of execution on key strategic priorities. Device 42 penetration reached company records and is expected to further accelerate upon its cloud launch, while the company completed its inaugural $400 million buyback, materially reducing share count. Looking forward, Freshworks guided for continued growth.

CEO Dennis Woodside explained, "this is on top of the core ESM business that we have, the product that is attached to Freshservice, we think that alone, when we talked about this at Analyst Day, that alone has a path to $100 million. This is additive to that."

CFO Tyler Sloat said, "we are strategically reinvesting a portion of our earnings outperformance to further build on that momentum. As such, we anticipate a one-time increase in spending during Q4 2025 to expand our pipeline and drive customer acquisition."

Management highlighted plans to discontinue routine reporting of total customer count, due to a strategic focus on high-value customer cohorts.

Woodside described forthcoming Device 42 cloud capabilities as a major lever for reaching additional enterprise accounts that require cloud-based deployment.

Management stated, "you will see a meaningful price change with the launch of those products, which will allow us to monetize it quite well."

INDUSTRY GLOSSARY

ARR (Annual Recurring Revenue): Normalized annual value of all active subscription contracts, a primary growth metric for SaaS companies.

EX (Employee Experience): Suite of Freshworks products supporting HR, IT, and operational workflow automation to enhance internal productivity.

CX (Customer Experience): Freshworks' customer-facing product segment delivering support, service, and engagement platforms for end-clients.

ESM (Enterprise Service Management): Service desk and workflow products for business units beyond core IT, such as HR or finance, delivered via Freshservice offerings.

ITSM (IT Service Management): Solutions for managing and automating IT department services and processes, central to Freshservice products.

Device 42: Freshworks' IT asset and discovery management product, offering integration within Freshservice and supporting real-time enterprise asset visibility.

Freddie Copilot: AI-powered assistant integrated into Freshworks' platforms, providing automation, ticket classification, and productivity enhancements.

Calculated Billings: Total value of all invoices issued during the quarter, used as a leading indicator for future revenue recognition.

Full Conference Call Transcript

Brian Lawn: 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 third quarter 2025 performance, and our financial outlook for our fourth quarter and full year 2025. 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 our management's beliefs about our business and industry, including our financial expectations and estimates.

Uncertainties in the macroeconomic environment in which we operate, 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, 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. Non-GAAP operating margin expanded to 21%, five points above our estimate. Our free cash flow margin was 27%, and we added a fifth straight quarter of rule of 40 plus.

We ended the quarter with nearly 75,000 customers, including new logos such as global auto manufacturer Stellantis, multinational bank Societe Generale, the Pennsylvania Gaming Control Board, and Travis Perkins PLC, the UK's leading distributor of building materials. Our positive results also reflect significant expansion deals with existing customers like Wiley, The Access Group, and iRhythm Technologies. In Q3, we saw a more than 40% year-over-year increase in the number of new and expansion deals with greater than $50,000 in ARR. Our strategy has focused on three key growth drivers: investing in employee experience, delivering AI capabilities across our products, and accelerating adoption and driving continued expansion in customer experience.

At our Investor Day in September, we outlined our path to $1.3 billion in ARR in the next three years, and we continue to make progress towards our goal of ESM, AI, and ITAM, each generating over $100 million in ARR. Before we dive into the results, I want to speak to the transformative AI opportunity ahead for Freshworks. We have over 50 AI-driven applications in the hands of customers right now, and the direct monetization of these products demonstrates that we are driving incremental growth, and that customers are realizing tangible outcomes from our AI. The headline here is that businesses need the right foundation, workflow, data, and security that all work together, and that's what we provide.

Companies will continue to rely on us because we have the operational context, data connections, and governance needed to manage full-service functions like customer support and IT service at scale. Security, privacy, and compliance are already built into our architecture. That's what makes our AI enterprise-ready compared to general-purpose AI. Employee experience continues to lead in durable growth, achieving over $480 million in ARR. That represents 24% year-over-year growth on an as-reported basis and 23% year-over-year growth on a constant currency basis, an acceleration from Q2. Three primary growth drivers that contributed to these results include expansion into departments outside of IT, continued growth upmarket, and deepening our foothold in IT asset management with Device 42.

Enterprise service management continues to be an important expansion lever as customers increasingly use Freshservice in areas of their business outside of IT. Our ESM solution, Freshservice for business teams, has doubled its annual recurring revenue in the past year and exceeded $35 million in ARR in Q3. Customers like Databricks, RingCentral, and Qualphone are using our ESM offering to automate workflows and deliver more personalized employee experiences at scale.

Operator: As of Q3, one in every four eligible Freshservice customers are using Freshservice for Business teams.

Brian Lawn: To meet this surging customer demand, today, we announced that we are expanding enterprise service management access by making Freshservice for Business teams available as an independent product for non-IT functions. With a standalone product, we are no longer limited to using IT as our entry point, and we can now sell directly to HR, finance, facilities, and legal, even if an organization is already locked into another ITSM tool. Second, we continue to move upmarket with mid and enterprise customers. ARR from customers who spend more than $100,000 with us in Q3 grew 25% year-over-year.

The steady flow of new product innovations like employee journeys, business teams, our AI-powered onboarding and offboarding capability, and increased adoption contributed to the momentum of these larger customers. Freshworks is positioned as a clear alternative to legacy players, and we continue to displace incumbents. In Q3, we delivered our highest ITSM competitive win rates in two years as customers selected Freshservice for its ease of use, fast deployment, and lower total cost of ownership.

Operator: Freshworks has an established track record in ITSM mid-market, and enterprise organizations want speed and simplicity, and Freshworks delivers.

Brian Lawn: One example is Holt Cat, the largest US dealer of Caterpillar equipment, who saw significant improvement in efficiency and productivity as agents were able to handle nearly 10,000 tickets within six months and bring their average ticket resolution time to under five hours. The third growth lever in EX is our advanced IT asset management offering expansion with Device 42. In Q3, we closed our biggest Device 42 new deal to date with the largest US-based sporting goods retailer. Device 42's deep integration with Freshservice and its differentiated discovery engine made it the clear choice for enterprises that are seeking real-time visibility and control.

The momentum is evident as half of our top 10 largest deals in the quarter included a Device 42 component across key verticals. In addition to these three growth drivers, we're deepening our presence. For example, in Q3, we doubled our law firm customer count, reaching over 1,000. In sports, we want to congratulate the Los Angeles Dodgers, one of several Major League Baseball teams that rely on Freshservice, for winning back-to-back World Series. And also the McLaren Formula One team for winning back-to-back constructors championships. Finally, we continue to drive greater efficiency and focus on our go-to-market motion. On the leadership front, we welcome Enrique Artegun as Senior Vice President and General Manager of America Field Sales.

Enrique's experience leading high-performing sales organizations will help sharpen our execution, accelerate growth, and strengthen our GTM discipline across North and South America. Now let's talk about our AI tailwind. Opportunity across EX and CX, Freddie AI continues to be a growth driver and expansion and is delivering exceptional results for thousands of customers who are seeing tangible business value and returns quickly after adoption. As we stated before, we believe this can be a $100 million standalone revenue stream over the next three years. AI is becoming a core productivity engine for every team, not just for IT. And here's why Freshworks is winning.

Our products are where real work happens in customer support, IT, HR, and operations, helping businesses automate tasks, resolve issues faster, and deliver better experiences with less effort. It's writing replies, our AI is deeply embedded in how our customers work every day, classifying tickets, generating insights, and increasingly taking action on behalf of employees and customers. The results speak for themselves. AI ARR has doubled year-over-year. Customers are now using Freddie AI to resolve millions of problems every week. And our new AI agents are performing real work across industries, from handling returns in e-commerce to managing employee requests in HR.

As a testament to our AI momentum, we have seen AI agent usage expand more than sixfold in the past seven months, while our existing AI Copilot solutions continue to double in usage year-over-year. Freddie Copilot ARR grew 160% year-over-year and was included in over 60% of our new customer deals over $30,000, a five-point increase from the prior quarter. We also saw double-digit attach rates again for new SMB customers in Q3. The number of customers using Copilot grew significantly too, by over 130% year-over-year. Travis Perkins PLC upgraded from legacy complexity to service efficiency with Freshservice and Freddie AI Copilot.

Travis Perkins is now able to provide best-in-class IT service management to 17,000 employees across 1,400 locations while improving operational execution, optimizing costs, and increasing productivity for HR and IT teams. These 112% in Q3 for both CX and EX, higher than our overall base, and a tangible sign that AI is driving deeper engagement and long-term value. We believe this tailwind will continue to strengthen our growth trajectory. The number of Freddie AI agent sessions grew over 70% in Q3, and we have seen 650,000 sessions per month since launch. Freddie AI agent deflected more than 50% of tickets for CX and EX customers.

Those who had early access to AgenTic workflows that we launched in June are seeing their average deflection rate jump to 65%, with a handful of customers seeing 80% of service issues resolved by AI agents. We're seeing positive feedback from customers who have had early access in Q3 to several products we announced at our June refresh event. For example, Gail's Bakery, a midsized UK cafe chain with over 170 locations, used Freddie AI agent studio for Freshdesk to build AI agents. These Freddie AI agents now handle 1,000 inquiries per month to deflect more than one-third of total volume.

Employees are freed from repetitive work and can dedicate more time to more complex customer cases like allergies, ingredients, or complaints that require personal care. Next week, we'll share new product announcements across our entire portfolio at Refresh North America, on November 13 in San Francisco, and at our virtual summit on November 18. This includes new vertical Agenic AI agents that bring our growth strategy to life, demonstrating how we're executing through AI innovation that expands our addressable market and deepens customer value. Our third imperative, customer experience, grew to over $390 million in ARR, representing 8% growth year-over-year on an as-reported basis and 7% on a constant currency basis.

Q3 growth was driven by deeper product adoption and customer sentiment that Freshdesk is easier to implement and use than the legacy alternatives. To build momentum, we refocused our CX products and will be announcing a new unified experience at Refresh next week. A single workspace that consolidates Freshdesk, Freshchat, and all of our Freddie AI products for customer support teams. This hub centralizes all conversations, context, and tools to help agents resolve inquiries and get work done more efficiently. This will be a force multiplier for frontline support teams, helping them improve the speed and quality of customer service.

Freddie AI continues to be an expansion driver for CX, with measurable impact for customers using Freddie AI agent in Freshdesk. For example, Bergsight, a leading German outdoor retailer, uses Freddie AI agent to automatically retrieve real-time order data and provide status updates, return labels, and invoices with customers in seconds. This has significantly reduced ticket volume and improved response times, driving higher satisfaction and greater trust in the Bergsight brand. The potential of AgenTeq workflows is tremendous. Traditionally, building AI agents like this took months designing customer support workflows, training data, and endless testing. Our prebuilt AI agents help our customers deploy on day one to handle tasks like expediting orders, processing returns, or checking delivery status.

That means faster setup, faster results, and a better customer experience from the start. While SMB and commercial segments continue to turn to Freshdesk, we are also seeing larger implementations with mid-sized and enterprise organizations. Like the University of Pennsylvania, who consolidated its finance support into a single hub with Freshworks. In just six months, the university processed more than 30,000 service tickets, streamlining workflows and improving stakeholder satisfaction. We believe customers of all sizes continue to choose Freshworks CX solutions for its AI-driven efficiency and uncomplicated customer support experience. Around the world, businesses are choosing software that delivers real outcomes, speed, simplicity, and measurable ROI. And that's exactly where we stand out.

Our enterprise-grade products deliver faster time to value and lower total cost of ownership, aligning perfectly with what today's buyers demand. With solid momentum behind us, we're leaning into the global opportunity ahead to expand our pipeline, acquire new customers, and fuel durable growth. Thank you to our customers, partners, employees, and shareholders for your ongoing support. Now let me turn it over to Tyler to go through the operational and financial details. Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today. We are very pleased that we continued our streak of outperforming across both growth

Tyler Sloat: and profitability during the third quarter. We once again exceeded our revenue, non-GAAP operating income, and adjusted free cash flow expectations. This strong overperformance reflects the continued demand for our AI-powered and uncomplicated EX and CX solutions. Our consistent execution and financial discipline position us well to capture the significant long-term opportunities ahead. For our call today, I'll cover the Q3 2025 financial results, provide background on the key metrics, and close with our forward-looking commentary and updated for Q4 and full year 2025. 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, and other adjustments.

We will also talk about our adjusted free cash flow, which excludes the cash outlay related to restructuring 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. Q3 total revenue increased to $215.1 million, growing 15% year-over-year on both an as-reported and constant currency basis. Revenue outperformance includes a one-time $1 million contribution coming from our on-premise Device 42 business. Professional services revenue modestly declined quarter over quarter to just over $2 million, consistent with our ongoing shift in leveraging our partner network as we scale our business. In 2025, we saw partner involvement expand significantly across our largest deals.

Partners helped to lead implementations for over half of our ARR deals greater than $50,000. A notable increase from last year underscoring the success of our robust and growing partner ecosystem. Our EX business accelerated in Q3, growing to over $480 million in ARR, representing growth of 24% year-over-year on an as-reported basis and 23% year-over-year on a constant currency basis. Our faster growth was driven by strength across our entire EX portfolio. As we saw positive momentum in not only ITSM, but also meaningful progress in ESM, advanced ITAM, and AI. Each of which we believe can eventually be $100 million ARR businesses.

Our CX business increased to over $390 million in ARR, reflecting growth of 8% on an as-reported basis and 7% year-over-year on a constant currency basis. We continue to see healthy and predictable demand for our Freshdesk products. Moving to margins. We maintained a non-GAAP gross margin of 86% in Q3 as we continue to scale our business efficiently. Our non-GAAP operating income for Q3 came in at $45.2 million, representing a non-GAAP operating margin of 21% and ahead of our prior expectations, reflecting our continued top-line momentum and effective cost management. Moving to operating metrics. Our net dollar retention came in at 105% on an as-reported basis and 104% on a constant currency basis.

Both in line with our expectations. Just like last quarter, Device 42 represented a small drag of 60 basis points to net dollar retention. We expect Device 42 retention to improve gradually as we continue to scale the business with our ITSM offering. Looking ahead, we estimate net dollar retention of approximately 105% on an as-reported basis and 104% on a constant currency basis for Q4. As of the end of Q3, the number of customers contributing more than $5,000 in ARR grew 9% year-over-year on both an as-reported and constant currency basis to 24,377 customers. This customer cohort continues to represent over 90% of our ARR.

For a larger customer cohort, as of the end of Q3, the number of customers contributing more than $50,000 in ARR grew 20% year-over-year on an as-reported basis and 19% on a constant currency basis to 3,612 customers. This cohort represents over 50% of our ARR. We have continued to move upmarket successfully. For total customers, we added over 260 net new customers in the quarter and have nearly 75,000 customers as of September. Given the continued success of our upmarket strategy and our focus on mid-market and enterprise, we believe total customer count is no longer a meaningful indicator of our performance.

Starting with the release of Q1 results next year, we would discontinue reporting this metric on a quarterly basis and shift our focus to larger customer measures that better reflect how we manage the business and its trajectory. Now let's turn to calculated billings, balance sheet, and cash items. Our calculated billings grew to $224 million in Q3, representing growth of 14% year-over-year on both an as-reported and constant currency basis. Matching our prior expectation on an as-reported basis, and coming in ahead of our constant currency forecast of 13%. Looking ahead to Q4 2025, our initial estimate for calculated billings growth is 17.5% year-over-year on an as-reported basis and 14% on a constant currency basis.

For the full year 2025, we expect calculated billings growth to be approximately 16% year-over-year on an as-reported basis and 14% on a constant currency basis. Both of which are in line with our expectations from last quarter. Moving to our cash items. We generated $57.2 million in adjusted free cash flow in Q3, driven by continued operational discipline and strong collections. This resulted in an adjusted free cash flow margin of 27%, which represents an over five percent point improvement year-over-year. For the full year 2025, we now expect to generate approximately $222 million of adjusted free cash flow with approximately $55 million in Q4.

As a reminder, we successfully completed our 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, we repurchased approximately 27.9 million shares at an average price of $14.35. We continue to manage and offset share count dilution by net settling vested equity amounts. During Q3, we used approximately $15 million for that purpose. This activity is reflected in our financing activities and is excluded from our adjusted free cash flow calculation. Looking ahead, we will continue to net settle vested equity amounts and expect Q4 cash usage of approximately $12 million at current stock price levels.

For the full year, we expect to use approximately $58 million to net settle vested equity amounts. We ended the quarter with cash, cash equivalents, and marketable securities of approximately $813 million. Turning to our share count as of 09/30/2025. We had approximately 309 million fully diluted shares, which represents a decrease of 7% year-over-year. The fully diluted calculation includes 282 million basic shares outstanding, which represents a decrease compared to both the prior year and quarter. It also includes 24.5 million shares related to unvested RSUs and PRCUs, and over 2 million shares related to outstanding options. We remain committed to thoughtfully managing our share count dilution over time. Now on to our forward-looking estimate.

For the 2025, we expect revenue to be in the range of $217 million to $220 million, growing 12% to 13% year-over-year. Adjusting for constant currency using FX rates from Q4 of last year, this reflects growth of 11% to 13% year-over-year. Non-GAAP income from operations to be in the range of $30.6 million to $32.6 million. And non-GAAP net income per share to be in the range of 10¢ to 12¢, assuming weighted average shares outstanding of approximately 284.5 million shares. For the full year 2025, we expect revenue to be in the range of $833.1 million to $836.1 million, growing approximately 16% year-over-year on both an as-reported and constant currency basis.

Non-GAAP income from operations to be in the range of $167 million to $169 million and non-GAAP net income per share to be in the range of 62¢ to 64¢, assuming weighted average shares outstanding of approximately 293.9 million shares. Our financial outlook is based on a few assumptions we would like to call out. First, our forward-looking estimates are based on FX rates as of 10/31/2025 and do not take into account any impact from currency moves. As a reminder, we had a $1 million revenue benefit in Q3 related to a large Device 42 deal that we would not expect to repeat in Q4.

Secondly, given our strong operating and go-to-market execution this year, we are strategically reinvesting a portion of our earnings outperformance to further build on that momentum. As such, we anticipate a one-time increase in spending during Q4 to expand our pipeline and drive customer acquisition. With a modest corresponding impact on operating, these planned investments are reflected in our financial outlook and position us well for continued growth. Looking beyond Q4, we are reaffirming the long-term model we outlined at our Investor Day in September. Based on our current forecast, we continue to expect full-year 2026 revenue growth of 13% to 14%, and we remain on track to achieve GAAP profitability by end of year.

Brian Lawn: As a reminder,

Tyler Sloat: the fourth quarter has historically been our largest bookings quarter and a good indicator for so we will follow our typical cadence of providing a more detailed outlook for 2026 on our next earnings call. With that said, let me provide some additional color on our operating margin linearity for the full fiscal year 2026. We anticipate that our Q1 2026 operating margin will be slightly better than Q4 2025 and represent the low point for next year. This is driven by the strategic decision to move the timing of our annual merit increase process from April to January as well as the reset of US payroll taxes and the start of new benefit plans.

Following this Q1 low point, we project a subsequent linear ramp-up throughout the remainder of fiscal year 2026, culminating in an operating margin exiting Q4 2026 at over 23%. Our results underscore the exceptional execution and financial discipline our global team has demonstrated throughout the year. As we get ready to close out 2025, we remain focused on continuing that momentum and thoughtfully reinvesting in our growth to capture the multitude of significant opportunities ahead. We appreciate your continued confidence in Freshworks as we execute on our strategy to deliver long-term profitable growth. And with that, let us take your questions. Operator?

Operator: Certainly. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourselves to one question and a follow-up. One moment for our first question. Our first question will be coming from Scott Berg of Needham and Company. Your line is open. Hi, everyone. Really

Tyler Sloat: nice results here in the quarter. Dennis, I wanted to talk about the announcement today. Michelle and ESM is a standalone solution. Certainly not news to us, but we're paying attention at the Analyst Day. But just wanna hear, you know, kind of, I guess, how you're thinking about that solution. Is this gonna be sold with a, I guess, separate Salesforce now? As you're selling it standalone? It's gonna be, you know, sold with the same, you know, sales folks that you're using and, you know, any changes to, don't know, your pricing or, I guess, you know, whatever the marketing message looks like around that in a standalone environment.

Dennis Woodside: Yeah. Thanks, Scott. So first of all, we launched Freshservice for Business teams in 2022. We had a lot of demand outside of core IT departments for a service desk solution. And that, as you know, has been a huge driver for us. We crossed $35 million in ARR. That business has doubled year-over-year. About a quarter of our customers now for our Freshservice customers now are using Freshservice for business teams in some way, shape, or form. So it's a really strong value proposition.

And what we've seen is some prospects where they might be locked into a contract for their core ITSM with a, you know, larger incumbent, they don't necessarily wanna increase their vendor dependency on that incumbent. They wanna preserve optionality to potentially move to us at a later date. But they need a solution now for the teams outside of IT, and that's why we launched this. In those cases, we can sell to them now. We can preserve that optionality, get to know them a little bit. So when that contract does come up for renewal for core ITSM, we're there, and they've had a positive experience with us. There's no new Salesforce around this.

We already have, you know, a pretty well-worn try-to-buy way of getting a lot of customers started. So all of our typical outbound and inbound marketing methodologies apply here. It's gonna be the same Salesforce we have, so we think we'll get a lot of scale out of that. And, you know, this is on top of the core ESM business that we have, the product that is attached to Freshservice, we think that alone, when we talked about this at Analyst Day, that alone has a path to $100 million. This is additive to that. So we're launching it today.

We'll have more next quarter in terms of early traction, but we're pretty positive about where this is gonna go just given the success of the products that we've had in the market already.

Tyler Sloat: Excellent. Then from a follow-up perspective,

Scott Berg: maybe this is for Tyler, it's around your buyback program. It expired in the quarter. You've certainly been buying back some shares at higher levels. I didn't see that repeated here, which kind of almost expected, I guess, the quarter or at least expansion of those efforts. Should we take that as maybe an indication or a shift in your capital allocation strategy? Or maybe there's something more on just on a timing basis there. Any details there would be great. Thank you.

Tyler Sloat: Yeah. Hey. Hey. Thanks, Scott. Yeah. We so we finished we finished the inaugural buyback in Q3. So we just finished it a month and a half ago. That was authorized a year ago for $400 million, and we completed that. And, you know, we were happy to get that done. I think the weighted average price is just over $14. We are, you know, committed to working with the board on a continued capital allocation. We've always said, we've been open to M&A. If that if that comes forward, we're obviously gonna invest in the business where that's needed, but we're producing, you know, a lot of cash flow now.

We'll continue to talk about the board about other uses of capital, including other buybacks. We are still doing our net settles, and we provide the data there. And so we're still spending money every single quarter on that settlement, and that's been outside of the buyback. So that'll be a continual discussion that we will have with the board.

Scott Berg: Awesome. Nice quarter again. Thank you.

Operator: And our next question will be coming from Alex Zukin of Wolfe Research. Your line is open.

Tyler Sloat: Hi. How are you? This is Mark Kieser calling for Alex Zukin at Wolfe. Congrats on great results. Can you just give us a little bit more color on how you're balancing the monetization versus adoption play with the Freddie AI suite of tools? Any way we should think about how that might change with new agent capabilities?

Dennis Woodside: Yep.

Brian Lawn: So just to recap, our strategy is we have a Freddie AI agent, which is a consumption-based model for CX, where our customers pay us on a per session basis. We have Freddie Copilot, which is a per seat license adder. And then we have our Freddie insights, which is only available in the enterprise plan. So different products have different monetization levers and paths. For AI agents, we've historically priced those based on sessions with our AgenTik AI agent coming out in a matter of weeks. We have revisited pricing. We're not revealing that now. But we are going to be more in line with industry pricing, which is considerably higher than where our pricing historically has been.

We think that the market will support that based on what we've seen in early access with some customers seeing up to 80% deflection rates based on their use of AI agents. What's coming in a couple of weeks are agents that are focused on very specific verticals like fintech, like travel, logistics, e-commerce. That take action on behalf of the end customer, and we know that those interactions are quite valuable. We're not quite to the point to move to full resolution-based pricing, and frankly, neither are our customers. So the session-based pricing makes a lot of sense for where we are now.

We're always open to evolving that as our customers ask us to and as customer demand warrants. But you will see a meaningful price change with the launch of those products, which will allow us to monetize it quite well.

Mark Kieser: Great. And our next question

Operator: will be coming from Patrick Walravens of Citizens Bank. Your line is open.

Patrick Walravens: Great. Thank you and congratulations on the third quarter in a row this year.

Brian Lawn: The big question I still get, Dennis,

Patrick Walravens: believe it or not, is for investors who are just looking at Freshworks, they still wanna know is it an AI winner or an AI

Tyler Sloat: loser.

Patrick Walravens: And I see lots of evidence that it should be in the winner's camp, including your $100 million target. And

Brian Lawn: you just talked about actually is really interesting about the specific verticals for agents. But just to make it easier for people, if you're gonna boil it down to two or three key points, that you would make on that topic,

Patrick Walravens: why Freshworks is an AI winner. What are they? What would you lay out?

Brian Lawn: So first of all, look, we are the system of record for our customers in IT and in customer support. We have the native workflows that they're running their business off of. And that is super important for all of what we're, you know, focused on. The products that we ship have, you know, ready-made skills, guardrails, governance, things that our customers all need in order to run their support and IT departments, and that's what they demand. So, you know, there's a meme that, oh, everybody's gonna go directly to OpenAI or to Anthropic to build their solutions. That's just not gonna happen. In such complex environments as, you know, Seagate's IT department or some of these others.

The customers need the AI to be integrated into their workflow. They need the security. And we can tap into the best of breed models as the LLMs evolve. By tapping into, you know, Anthropic for coding or Gemini for image and so forth. So, you know, we think that we're actually really well positioned as the market evolves and as customers continue to adopt AI. To succeed there.

Mark Kieser: Awesome. Thank you. One moment for our next question.

Operator: Our next question will be coming from Elizabeth Porter of Morgan Stanley. Elizabeth, your line is open.

Elizabeth Porter: Hi. This is Oscar on for Elizabeth. Thank you for taking my question.

Tyler Sloat: Congrats on a great quarter. I wanted to ask in terms of, you know, government exposure for Freshworks, tends to be more state and local. I just wanted to check if you have seen any impact from the government shutdown. You know, either in the form of longer sales cycles or smaller deals. And either directly or indirectly, if it has pressured any small businesses within CX. Thank you very much. Yeah. It's Dennis. So we've seen no impact whatsoever.

Brian Lawn: We do not have large federal government exposure. Our government business comes from state and local entities, municipalities, universities, none of which we've seen at least any kind of change. We actually landed quite a few governments and universities this last quarter, and we've seen quite a bit of expansion there. So, you know, we really just have not seen any impact at all from the shutdown or any of the federal issues.

Oscar: Thank you very much. One moment for our next question.

Operator: Our next question will be coming from Brent Thill of Jefferies. Your line is open, Brent.

Brent Thill: Great. Thank you. Tyler, apologize if you covered this, but this

Tyler Sloat: one-time

Brent Thill: investment you're talking about in Q4, can you articulate a little more detail what that is?

Tyler Sloat: Yeah. This is really hey, Brent. This is

Tyler Sloat: reflecting on the fact that, you know, we've now strung together four really, really good quarters and really see a very strong demand environment for our EX. Products in the field specifically. And so because we've also done really, really well on our efficiencies this year where we beat our operating kind of margin goals and consistently every quarter said, hey. Part of it's timing. We're gonna reinvest. But just keep in we actually, at the beginning of this quarter, did release spend. Specific to building pipe for EX in the field because market opportunity is there. And, you know, we're still beating our goals, but we actually decided to release that spend for the year.

It's more one-time just for Q4. Not repeated. That's why we also kind of give the linearity for operating margins for next year as well.

Brent Thill: And I'm sorry. Where does that go into reps? Marketing? What like, what's the

Tyler Sloat: Oh, yeah. It's majority of it is marketing.

Tyler Sloat: And it's really pipe and demand gen efforts.

Brent Thill: Okay. I got some good ideas. Let's talk later about the campaign. It has to do with the Dodgers. The Freddie Fresh. And just for Dennis, when you talk about that 25% growth above $100k, it seems like the referenceability is building really well. Like, what are the kind of the next milestones? It's been going well. It seems like

Tyler Sloat: heading in the right direction. But what are the next

Brent Thill: kind of hurdles that you'd like to see cross where you're like, okay. We're clearly on a continued, you know, trajectory, and you're in not that you aren't. It's just like, what's the next stop, if you will?

Dennis Woodside: Yeah. Look. I think we've got a really good sweet spot in customers ranging from five to 20,000 employees. That's where there's a ton of business out there that's looking for a solution that is enterprise-grade, that is, you know, faster time to value that's got AI built in. And we're gonna continue focusing there. I think in terms of, you know, where we're headed, we talked in the analyst day about continuing to drive our EX business in the low to mid-twenties in terms of growth. You saw a slight tick-up growth on a constant currency basis this quarter. We're gonna keep pressing these larger and larger deals every single quarter.

You know, for us, the attach rate for Device 42, that's an important metric that we look at. How many of our larger deals are including Device 42? We have a big milestone coming up in Q1 where we expect to release Device 42 on cloud. Once we do that, we'll be able to tap into another segment of the market that doesn't wanna go on-prem with any solution. They want everything to be in cloud. It'll also make it easier for us to up our existing customers into Device 42 as a product. That's gonna be another accelerant to growth. So we've got a lot of positive, I would say, momentum and positive accelerants to that business.

And, you know, Tyler was just talking about the demand gen investment we're making in Q4. That's all going into the EX business and into AI. But that really is a huge driver for us as well. So I think EX has a lot of kind of positive momentum behind it, and we're just gonna keep leaning into it every single quarter.

Brent Thill: Great. Thank you.

Operator: Star 11 on your telephone and wait for your name to be announced. Our next question will be coming from Brian Peterson of Raymond James. Brian, your line is open.

Brian Peterson: Hi. Thank you. This is Jonathan McCary on for Brian. So I wanted to ask on some of the AI deployments in your customer base. Can you talk about the appetite for that and how that may differ between the SMB and then the more mid-market enterprise customers? Curious specifically if you're seeing that it's a more important piece of the conversation in certain parts of the customer base or SMBs versus enterprises are moving from pilots to kind of forward deployments quickly. I'd be curious how that differs across the different customer sizes.

Dennis Woodside: Yeah.

Brian Lawn: So as we look at our AI paid footprint, it's actually pretty even across SMB, mid-market, and enterprise. We've seen traction across all three and, you know, different companies are in different stages of understanding AI and adopting. In terms of products, the product that clearly is leading for us has been Copilot. That's the product that for us is both most mature functionally and if you think from a customer standpoint, that's the first port of call where you still have a human in the loop. They still have some control. So they feel more comfortable going there first.

But what we've seen in the last couple of months is really an uptick in AI agent, and we think with the launch of our capabilities in CX in particular, that's really gonna take off, and we're gonna lean into it heavily. That plus the fact that we're gonna monetize at a much higher rate than we have before. We've been

Dennis Woodside: I would say,

Brian Lawn: quite underpriced. Relative to the market when it comes to our AI agent capabilities. That we think is gonna create a big opportunity for us going into next year. So, you know, I think overall, the customers, there's not one vertical. There's not, you know, it's not an SMB or mid-market enterprise issue. It's relatively even across CX and EX in terms of the monetization opportunities today. And we just think, you know, every one of our customers over time is gonna need the AI that we offer. We're, you know, we're a little over 5,000 customers that are paying for AI now. That's just gonna continue to grow. It's a core part of how we're selling now.

Jonathan McCary: Very helpful. Thank you, Dennis. And maybe one for Tyler here. It's good to see the continued strength in EX, the slight acceleration there. Just hoping, can you unpack the growth out a little bit in terms of what's trending and how NRR is trending there versus net new? And kind of where you think that should head longer term as you look to continue the low twenties? Growth profile. Thanks, guys.

Tyler Sloat: Yeah. I mean, we're growing across all segments of the business. Right? We talked about how ITSM core is strong, but ESM that we gave out the number of over, you know, $35 million now. Device 42, we've talked about as well. And then, you know, the Copilot components within there.

Dennis Woodside: If you look

Tyler Sloat: if you look at how that's gonna trend, you asked about NRR. Our EX products have always had strong NRR. Device-wise, it's a little bit of a drag because of the stuff we inherited when we made that acquisition. But we also said, hey. We expect that to actually start coming up. And we've also said that EX has kind of always had enterprise-grade net dollar retention numbers. Oh, I'm sorry. Churn numbers, which is, you know, single high single digits, and that continues. And it's just a very, very strong product.

Operator: And our next question will be coming from Rob Oliver of Baird. Your line is open, Rob.

Rob Oliver: Great. Hi. Good afternoon. Thanks for taking my question. Dennis, I wanted to go back to the ITSM win rates that you called out. You know, I think the best in two years, and that's also coming, I think, as you've really pivoted the business up towards that mid-market or upper end of mid-market. And just wanted to get a sense from you for kind of what the biggest key differentiators have been there in terms of repositioning for that opportunity?

And then as you look at kind of your pipeline today, how you feel about, you know, the pipeline as it sets up relative to the competition and kind of what's winning when you go head to head with some, you know, potentially bigger players at the low end of their stack? And then I had a quick follow-up question.

Dennis Woodside: Yeah. Sure. So look, what we've built over the last couple of years is a complete enterprise-grade solution. For that helps an IT department drive their operations, power their operations, and deliver great employee service. And that's what we're selling. That's what's working in the marketplace. So, you know, enterprise-grade product that has the kind of security and extensibility that you'd expect and that can work in a large account, the kind of extensibility outside of core ITSM. That's why Device 42 is super important for us. Typically, buyers are looking for their ITSM and their asset management solution all in one. That's what we provide now.

The functionality outside of IT, that's also something that everybody looks for when they're making these decisions. And, you know, two years ago, two and a half years ago, the product wasn't there. So a lot of this momentum has happened relatively recently. A lot of customers are looking for choice in that market. There hasn't been a lot of choice. The, you know, the largest provider is very focused on the biggest customers in the market or the biggest companies in the market. And that leaves a lot of room for us to compete in that kind of lower end of enterprise, upper end of mid-market.

You know, think of New Balance with five or 6,000 employees or Seagate with 20,000 employees or, you know, we had a customer this time through Flowserve with about 20,000 employees. These are sophisticated customers. They've got sophisticated IT departments. But they're looking for something that's more modern, more flexible, enterprise-grade AI built in, and that's what we have. So I think we're just gonna continue to invest in our capabilities and functionality there. We've got our customer advisory board next week. We've got 40 customers coming in and we're gonna hear from them on what, you know, share our road map, talk about what can we do to move faster to solve more of their needs.

We got a lot of ideas last year at our cab that we put into practice. And launched an innovation that has delivered and that has helped us continue to move upmarket. Then at the same time, the whole go-to-market side of things has matured as well. That's why we're confident investing more in Q4 in demand gen because we have a much better sense for how investment in demand gen connects to actual return. And we feel if we do that now, we'll just get a head start on Q1 because we've got a really good pipeline going into the last quarter.

In terms of the pipeline, you know, I would say that when we look at, you know, when I look at pipeline, let's say, eighteen months ago, a $100,000 deal was and, you know, we made a big deal about it. Now we have tons of $100,000 deals. That's not that's not an unusual deal anymore. You know, the bigger deals are half a million dollar land. And the other thing is that we would be invited into those half-million-dollar RFPs two years ago. And we would often lose, and we'd win the $100,000 deal or the $30 deal, we'd lose the $500,000.50 dollars.

You know, this last quarter, I don't I, you know, I can't recall a deal over $200,000 we were involved in that stock. Now, you know, it may have happened, but nothing that I was involved in was a loss. So I think we're just getting better at competing and winning for those larger deals. And the capability is there. The functionality is there. All that's a winning combination for us.

Rob Oliver: Great. That's really helpful. Thanks, Dennis. And then

Tyler Sloat: Tyler, I apologize if you touched on this at all, but is that net revenue retention numbers kind of really stabilized in that kind of 104 to 105 range on a constant currency basis? Last three quarters, you guys are getting some on-market momentum. I realize

Rob Oliver: trailing indicator, but how you think about that kind of leveling off? Potentially starting to improve and what kind of visibility you have into that?

Tyler Sloat: Yeah. We're pleased with the progress we've made there both, you know, on the expansion products we've introduced, and we think ESM is, you know, gonna be a new land. But then have a much bigger expansion opportunity once we start landing that with that if we can bring in Freshservice. But, obviously, with Device 42 and others, I and on what we've been doing on churn. We've been talking about churn for a year now, how we've been just again, a little bit better incrementally, and that's not something that moves really quickly. You know, we got it to essentially the same amount. For Q4, which is stable.

And, obviously, at the end of the year, based on what we've learned this quarter in terms of expansion, the pipe will guide for next year. But, yes, I feel like it's heading in the right direction. Then, you know, we've been talking about this. As the mix shift of our business continues to move more towards EX. That is, you know, the majority of our business now. The attributes of that business are much better. And, you know, we will get a tailwind from that at some point.

Operator: This concludes today's conference call. You may disconnect.

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