Freshworks Inc. (FRSH) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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%.
Key Financial Performance
Q4 Revenue $222.7 million, growing 14% year-over-year on an as-reported basis and 13% on a constant currency basis. Growth attributed to strong bookings and earlier-than-expected project kickoffs and milestones.
Annual Recurring Revenue (ARR) $907 million, representing 18% growth year-over-year on an as-reported basis and over 14% growth on a constant currency basis. Growth driven by upmarket momentum and enterprise cohort expansion.
Non-GAAP Operating Margin 19%, nearly 5 points above estimate. Improvement due to top-line outperformance and operational efficiency gains.
Free Cash Flow Margin 25%, marking the sixth straight quarter achieving Rule of 40. Improvement attributed to strong cash collections and disciplined execution.
EX Business ARR $510 million, representing 26% year-over-year growth on an as-reported basis and 22% on a constant currency basis. Growth driven by unified employee experience service platform and acquisitions like FireHydrant.
CX Business ARR $395 million, reflecting 9% year-over-year growth on an as-reported basis and 5% on a constant currency basis. Growth supported by product simplification and AI-led Freshdesk Omni platform.
Device42 ARR Over $40 million, with a 30% attach rate to top 50 new EX deals. Growth driven by quality new deals and cross-sell opportunities.
ESM Business ARR Over $40 million, nearly doubling year-over-year. Growth attributed to adoption of Freshservice for business teams for non-IT needs.
Freddy AI ARR Over $25 million, with Freddy AI agent conversations up over 80% to $3.5 million in Q4. Growth driven by AI adoption and measurable customer value.
Net Dollar Retention 108% on an as-reported basis and 104% on a constant currency basis. Improvement expected due to strengthening demand in EX business.
Calculated Billings $259.6 million in Q4, representing 17% year-over-year growth on an as-reported basis and 13% on a constant currency basis. Growth impacted by slightly lower contract duration and fewer pull-in renewals.
Free Cash Flow $56.2 million in Q4, outperforming expectations. Annual free cash flow reached over $223 million in 2025, marking significant improvement from negative free cash flow in 2022.
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Operating Highlights
Freddy AI: Freddy AI is a standalone revenue line with over 8,000 customers, delivering measurable value. It ended 2025 with over $25 million in ARR and is on track to reach $100 million in ARR by 2028. Freddy AI agent conversations increased by 80% to $3.5 million in Q4, and it deflected more than 50% of tickets for CX and EX customers. Freddy Insights, launched in June 2025, has 1,000 active customers. Freddy AI Copilot attach rates for customers with more than $30,000 in ARR exceeded 50%, with customer growth doubling year-over-year.
Freshservice: Freshservice evolved into a unified service platform integrating ITSM, ITOM, ITAM, and ESM. It achieved $510 million in ARR in 2025, growing 26% year-over-year. Device42, part of Freshservice, ended 2025 with over $40 million in ARR, and Freshservice for Business Teams exceeded $40 million in ARR, nearly doubling year-over-year. The acquisition of FireHydrant in January 2026 bolsters IT incident management capabilities and opens an $8 billion addressable market in ITOM.
Market Expansion: Freshworks is capturing a growing share of midsized and larger enterprise organizations demanding robust AI-native service management. The company is positioned to fill gaps left by legacy providers like ServiceNow. The acquisition of FireHydrant expands Freshworks' reach into the ITOM market, valued at $8 billion.
Profitability and Revenue Growth: Freshworks achieved profitability for the first time in 2025, with $907 million in ARR, growing 18% year-over-year. Non-GAAP operating margin expanded to 19%, and free cash flow margin reached 25%. The company has outperformed growth and profitability metrics for five consecutive quarters.
Customer Growth: The number of customers with greater than $100,000 in ARR increased by 28% year-over-year to over 1,500. Customers with greater than $50,000 in ARR grew by 23% year-over-year to over 3,700.
Strategic Priorities: Freshworks focuses on three strategic pillars: expanding EX (Employee Experience) with a unified service platform, monetizing AI at scale to achieve $100 million in AI-driven ARR by 2028, and improving retention in CX (Customer Experience) through a unified platform.
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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.
Sustaining Growth: Challenges in sustaining growth and reaching long-term revenue goals, particularly in a competitive market.
Innovation: The ability to innovate and maintain a competitive edge in the market is a potential risk.
Customer Demand: Meeting customer demand and expectations, especially in the context of evolving enterprise needs, poses a challenge.
Cost Control and Efficiency: Controlling costs and improving operating efficiency are critical to maintaining profitability.
Regulatory Risks: Potential regulatory hurdles that could impact operations or financial performance.
Integration of Acquisitions: The integration of FireHydrant into the Freshservice unified platform could present challenges and risks.
Retention in CX Business: Improving customer retention in the CX business remains a focus area and a potential risk.
Currency Fluctuations: Foreign exchange rate fluctuations could impact financial results.
Contract Duration and Renewals: Shorter contract durations and fewer pull-in renewals could affect calculated billings and revenue growth.
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Guidance & Outlook
Revenue Growth: For Q1 2026, revenue is expected to be in the range of $222 million to $225 million, representing 13% to 15% year-over-year growth. For the full year 2026, revenue is projected to be between $952 million and $960 million, growing approximately 13.5% to 14.5% year-over-year.
Non-GAAP Operating Margin: For Q1 2026, non-GAAP operating margin is expected to be approximately 15%. Margins are projected to increase by 200 basis points in Q2 and reach approximately 23.5% by Q4 2026.
Free Cash Flow: Free cash flow for Q1 2026 is expected to be $55 million, with linear improvements throughout the year. For the full year 2026, free cash flow is projected to be approximately $250 million, representing a margin of 26%.
Net Dollar Retention: Net dollar retention is expected to improve to approximately 105% on a constant currency basis in Q1 2026, driven by strengthening demand and momentum in the EX business.
EX Business Growth: The EX business is expected to continue its 20%+ ARR growth rate, fueled by investments in the unified employee experience service platform.
AI Revenue Growth: Freddy AI is projected to reach $100 million in ARR by 2028, with continued disciplined innovation and monetization at scale.
CX Business Retention: Focus remains on improving retention in the CX business through the unified Freshdesk Omni platform, aiming for sustained growth and efficiency.
FireHydrant Acquisition Impact: The acquisition of FireHydrant is expected to have an immaterial impact on Q1 and fiscal year 2026 revenue growth but will contribute to enhancing ITOM capabilities.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What factors are creating headwinds in the CX side of the business, and what is being done to address them?
A:The CX side faced headwinds due to the transition to a unified conversational and ticketing platform released in Q4. The company is upgrading customers to this platform, which will allow faster innovation and drive retention and expansion. The growth change in Q4 was also influenced by lapping a free-to-paid initiative from the previous year. The business is expected to grow in the mid-single-digit range while investments are focused on the EX side.
Q:Does the current revenue retention ratio feel appropriate to drive 14%-15% growth, or does NRR need to increase?
A:The current revenue retention ratio (104% on a currency-adjusted basis) is appropriate for now. The EX business, which has better net dollar retention, is growing faster than the CX business. The mix shift towards EX, along with new products like ESM, Device42, and FireHydrant, is expected to improve net dollar retention. The company anticipates NRR to increase to 105% in Q1, driven by EX results.
Q:How should the Device42 attach rate trend, and what is the typical incremental ACV uplift when included with Freshservice?
A:Device42 is integral to the company's ITAM strategy and upmarket motion. The attach rate is expected to grow as the company builds out ITOM and ESM capabilities. Device42's ARPU ranges from $20,000 to multiple hundreds of thousands, depending on the organization size. The company plans to launch a native cloud offering for Device42 in Q2, which will expand its market reach.
Q:What are the Freddy AI tailwinds for growth in 2025 and 2026, and how does the company monetize alternative solutions plugged into its platform?
A:Freddy AI has over 8,000 paying customers and $25 million in ARR, nearly doubling year-over-year. The company launched AI Agent Studio in late November, which is gaining traction. Pricing for AI interactions increased from $0.10 to $0.50, creating ARR upside. Copilot adoption is improving productivity by 30% and is included in large deals. The company does not see significant competition from alternative solutions and focuses on delivering competitive products.
Q:What level of conservatism is built into the 2026 guidance, and what is the billings seasonality outlook?
A:The 2026 guidance includes some conservatism, especially in the first guide of the year due to limited visibility. The company raised its growth guidance to 14% for 2026, driven by EX performance and pipeline strength. Billings seasonality details were not explicitly provided, but the company expressed confidence in its ability to execute against the guidance.
Q:What is the impact of Freddy AI on the 2026 guidance, and should we expect a material contribution?
A:Freddy AI's biggest opportunity lies in the existing installed base, with over 50% attach rates on new deals. The company expects Freddy AI and Copilot to each become $100 million products within three years. While Freddy AI contributes to growth, other areas like ESM are also expected to provide tailwinds.
Q:What is driving the upmarket sales motion, and what factors contribute to its success?
A:The upmarket sales motion is driven by the company's comprehensive platform for mid-sized enterprise IT departments, including ITSM, ITOM, ITAM, and ESM. Customers are attracted by the platform's capabilities, recognition from analysts, and positive referrals. The company is gaining share from legacy players like BMC and ServiceNow, with ESM growing at 22%.
Q:What is the combined go-to-market strategy for Freshservice and Device42, and is it ready for 2026?
A:The sales and marketing motion for Freshservice and Device42 is well-established, with consistent improvement in win rates. The focus is on integrating product pieces, such as launching Device42's native cloud offering in Q2 and building out ITOM capabilities with FireHydrant. ESM capabilities are also being enhanced to target departments like finance, legal, and HR.
Q:What are the key focus areas for increasing Freddy AI penetration?
A:The focus is on building out agentic capabilities in AI Agent Studio, initially targeting CX and later expanding to EX. The company is also investing in proactive service delivery features like Insights. Education and addressing customer concerns about data usage are critical to driving adoption.
Q:Is there a halo effect from Freddy AI adoption across CX and EX, and how does it impact cross-sell opportunities?
A:Freddy AI adoption enhances expansion and retention, with NDR for AI customers at 116%. The company focuses on educating customers about AI's value, leading to higher attach rates and cross-sell opportunities across CX and EX.
Q:What gives confidence in the 2026 guidance, and is there potential for CX tailwinds from the platform change?
A:Confidence in the 2026 guidance comes from EX performance, pipeline strength, and momentum in $100,000 deals. The company is conservative about CX growth until the platform transition is complete but continues to close new customers and drive AI adoption.
Q:What is the health of the mid-market segment, and how does it contribute to growth?
A:The mid-market segment (5,000-person companies, $1-$3 billion in revenue) is the company's growth driver, with strong pipeline and customer adoption. The company is gaining share from legacy platforms, and mid-market customers expand and retain at higher rates.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on billings seasonality and the exact level of conservatism in the 2026 guidance. Additionally, while they mentioned the potential of Freddy AI and other products, they did not provide precise metrics or timelines for achieving the projected $100 million ARR for AI Agent and Copilot.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Omni
AI engine
AI feature
AI incident
AI scale
AIOps update
ARR Today
ARR increase
ARR path
ARR quality
ARR rate
ARR scope
Advanced ITAM
Agent Studio
Alto Networks
British Petroleum
CX Agent
CX core
CX platform
ESM business
FireHydrant
Freshservice team
Full Conference
ITAM ESM
ITOM
ServiceNow
customer base
customer service
employee experience
mid market
need
priority
rate Copilot
resolution time
service platform
track
value customer
world class
FRSH Transcript
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.
Freshworks Inc. (FRSH) Q2 2025 Earnings Call Transcript
Positive7-29
The earnings call summary and Q&A indicate positive financial performance with strong customer growth, AI adoption, and increased revenue guidance. The company is expanding partnerships and has raised its full-year revenue expectations. Despite some uncertainties in product-specific revenue impacts and pricing models, the overall sentiment is positive due to strong growth metrics and optimistic guidance. Given the market cap, this is likely to result in a stock price increase in the 2% to 8% range over the next two weeks.
Freshworks at Public Technology Conference: AI and Growth Strategy
Neutral5-28
FRSH Report
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