Freshworks Second Quarter 2026 Earnings Conference Call

doesn't directly flow to NDR, it likely reflects broader product demand that should also drive Freddie expansion into your existing base. Are you seeing that translate into upsell activity yet? And when should we expect it to show up in NDR?

Yeah, so you're right. The NDR has been pretty consistent from a constant currency basis and, you know, slightly improving in some cases. The Freddie attach rates for new deals, as you indicated, but absolutely it is one of our strong expansion motions. Now it is harder to get existing customers to adopt Copilot because they have existing ways they work, but we have kind of prescriptive sales plays around it, and we do expect that to continue to be one of our larger expansion motions going forward. I can't say when the impact to NDR is there, but as a percentage of expansion, it is actually increasing.

Your next question comes from the line of Taylor McGinnis with UBS. Your line is open, Taylor. Please go ahead.

Thanks so much for taking my questions. I'd love to ask on the EX business. So a slight decel in 2Q to 24% constant currency. So, Tyler, could you just maybe talk about as we look into the back half and the comfort in sustaining, you know, mid-20s growth, what some of the drivers are there? Are there any incremental growth opportunities that could potentially lead to an acceleration in that business? Maybe you could just help us, you know, unpack the confidence there.

Yeah. Hey, Taylor. So 25% in Q1, 24% constant currency. This is up from 22% at the end of the year. We had a really good quarter and EX continues to be the driver of growth. And so I just think that, you know, the 25 to 24, there's a little bit of noise there, But it's nothing outside of what we expected, and we're very confident still on mid-20s growth. As Dennis had mentioned, like, we're seeing larger and larger deals, and, you know, the pipeline is reflecting that. That's on the new business side. On the expansion side, we just talked about the attach rates on kind of ITAM and ESM, where about 20% of seats are, excuse me, ESM, and about a third of the lands include ITAM. But that means still two-thirds still have device 42 as the potential to sell. We just kind of went live last quarter with what we call advanced ITAM cloud, which is device 42 on the cloud, which really opens up the potential for our entire existing base that wasn't using asset management previously. Fire hydrant is a brand new product for us. We haven't talked about when the full integration is going to be done, but we have been selling it. And one of our biggest lands in Q2 was a fire hydrant standalone. And that's just going to open up opportunities to kind of cross sell ITSM, ESM, and others into that account. But also, you know, as that muscle build, it's just another way that we can go land with another EX product with kind of a different buying segment. So, yes, we're confident on the mid-20s growth, and EX continues to be a driver of that growth for the whole company.

And just to add something to that, look, the market itself, the market that we're focused on, that mid-market, lower-end enterprise, that's about 60% of the overall market, and it's still fairly fragmented. No single competitor has more than 20% share, so that's a big opportunity for us. We're seeing the momentum. Obviously, Gartner validates. We've got the product. We've got the customers saying good things about us. All that's good. And now we have this platform where there's multiple ways to win, right? So we can land with ITSM, expand into ITAM, into Ops, into ESM, into AI. All those things are really building momentum. So you're seeing a lot of that come together. And I think all that gives a lot of optimism to the team here about the second half.

And then my next question is, just if I look at the performance in the quarter, there was nice one-point acceleration on a constant currency basis for revenue. So maybe you could just unpack what drove to the upside there. And then secondly, as we look into the back half, the guide is really strong on a revenue basis. So any, you know, bigger, you know, drivers of that in the second half compared to what you guys saw in the first half?

Yeah, let me start and then Tyler will jump in. I would just echo what I said, which is we just see a lot of momentum on the EXI, given that the product strategy, the go-to-market strategy is all kind of coming together. We also have confidence in that we've cracked the code on pipeline. I mean, a year ago, we were a little bit more challenged, I would say, around pipeline. But we entered the year right out of the gate, first quarter, second quarter, did really well in generating new pipelines. So that pipeline is maturing and is kind of coming due, so to speak, in the second half of the year. So that gives us confidence. And this was the second quarter, actually, in a row that we accelerated revenue slightly. I think we went from 13 to 14, 14 to 15. So, yeah, so far, so good this year. And we're optimistic about that back half. And Tyler, maybe talk about the guy.

Yeah, I think it's just about everything that Dennis just said, Taylor. You know, we talked about it in the beginning of the year that, you know, kind of record pipe building. But it's really, again, a lot of the momentum we're seeing on the X side in that kind of what we call agile enterprise and the high mid-market. it. And we're quickly becoming the product of choice for those companies. And it's just starting to build on itself.

Your next question comes from the line of Patrick Scholls with Baird. Your line is open, Patrick. Please go ahead.

Hey, I appreciate all your time this afternoon. Maybe could you just touch on the linearity of demand throughout the quarter? How did the demand environments and pipeline build compare versus last quarter? Are you seeing any impact on sales cycles as customers maybe head back and reassess where their AI investments are going?

No, we're not seeing any impact on sales cycles or decisions or anything like that in terms of AI. Like I know you're referring to some things that happened, I guess, with some other vendors, but we're not seeing that at all. I would say the linearity is pretty similar to what we've been seeing in prior quarters where as we go up market, more of the dealers are coming in at the back half of the quarter, but nothing unusual. And I wouldn't say that the buying cycles are unusual, considering that, again, we're moving on market. AI actually is more of a motivator for people to think about their vendor. And, you know, most of our business is coming from another vendor. It could be, you know, a small player, but often it's a very large player. So they're faced with a decision often as to, okay, what are we going to do about AI? Are we going to migrate to the incumbent vendor's platform? Sometimes that requires an upgrade in plan. It certainly requires cost. So it often provokes a discussion as to, well, maybe we should go to market and see what else is out there. And, again, a lot of times you talk about that Seagate 14-year customer of a competitor. 14 years ago we didn't exist. So they're going out to market now, and they're seeing, you know, they're calling Gartner, they're calling their peers, and they're hearing about us, and we're getting in the mix. So I think that that's driving more of our business than anything else is that customers are saying we need to do something on AI. That's leading to a discussion. Do we stick with the incumbent? And that's leading to us to get a shot at winning. So all that's been all that's been pretty good for us.

OK, yeah, that's very helpful and appreciate the commentary you guys provide around ITAM this quarter. Wanted to dive a little bit deeper there and maybe better understand how important it is to have an enterprise grade ITAM solution as you move further upmarket. Do you expect that ITAM and Device 42 will become a leading driver of new logos, or is it still more of a cross-sell opportunity? And then just as we think about Device 42, maybe just give an update on the cloud transition and how much that business is still on-prem licensed.

You want to take the second part, Tyler? I'll take the first.

So I think for the on-prem business, and it's part of the reason we're still calling out some of that legacy churn, the migration of those customers, there is no actual purposeful migration. We're not forcing customers to migrate over to the cloud. In fact, there's a lot of customers who want an on-prem version, and we're going to continue to sell that for the foreseeable future. The new ITAM cloud version, which is advanced ITAM, is essentially at parity with the on-prem version. That was the whole goal and point. And that's now available to the existing install base and any new customer who doesn't want the on-prem. So we kind of can offer both now.

So on the first part of the question, customers aren't buying just an ITSM. They're buying the full capability to power their IT department, especially upmarket. And asset management, ESM, ops, all that, those are table stakes. You have to have that. And if you look at our larger deals, typically it's multiple components right out of the box. So I think it's less about is it something that you land with and helps you compete? It's absolutely essential for us to continue to move up market. Customers are coming off products that have those capabilities, and they expect that. And that's why we've invested in those areas to build a complete solution, a complete platform. And, again, you see it in the numbers.

Your next question comes from the line of Scott Berg with Needham & Company. Your line is open. Scott, please go ahead.

I have one next quarter. Thanks for taking my questions. Apologies I did jump on late. I hope this wasn't asked at least. But, you know, I attended the refresh event in May, and one of the things I thought was interesting is some of the commentary around partners and those individuals that are involved in your partner program and how it's maturing and really evolving into more of a long-term account ownership, you know, kind of strategy instead of just something that was more transactional in nature. I guess as that structure continues to evolve, do you see that driving, I guess, better retention, better expansion opportunities with your customers if those partners do maintain that ownership more, or should we see some other benefit come from that program?

So I would say it's both new business, retention, and expansion. All of those things benefit when we have a partner. We know when we have partners involved, our retention rates are higher for sure. We know when we have partners involved, the expansion happens faster. And we know in the sales cycle we have a partner involved, the close rates are higher. So all those things are really important for us. We've been purposeful about cultivating a select group of partners that can help us and have the expertise to actually manage our business, which is a little different than some of our competitors in terms of what's required on an ongoing basis, what's required for migration. And a lot of our focus has been fewer but higher leverage partners, especially on that EX side. You know, partners like Unisys, which we've talked about in the past, CGI, which we've talked about in the past. So that's where we're really focused in making sure that those partners that are really investing in the capabilities to serve our customers well are continuously kept up to speed on our products and that we're collaborating in those customer situations, both to help them grow their business and they can help us grow our business.

That's helpful, Dennis. And then from a follow-up perspective, the partners that we had a chance to speak with seem to be very positive. I know you guys are doing product-wise and win-rate-wise. You certainly are making an impact out there. I guess, how do you think about that partner impact on that business today, And where should that be if you look out maybe 12 or 24 months as you lean into this more? You know, is this more than 50% of your business, 75% of maybe some of your leads and interactions, or is it maybe having a more muted impact longer term?

You know, I think it will continue to grow as we continue to grow up market because you get into these larger companies where they do have – they're coming off of a deployment that's been around for a while. Often their partner understands that deployment quite well, if they have an existing partner, or they need somebody to help them move off and configure the new system in the way that they want it. That does take work, and that does take expertise. And then they want that system to continue to grow with them over time. So I think that does create a greater opportunity for partners. It's hard to say whether that's 50%, 60% down the road. I think right now about 40% of our business is partner-influenced in some way, shape, or form. But we're investing there. We have a relatively newer head of our partner team who's done a great job of building that, starting to kind of build out that, I would say, next level of partner program, and we're going to continue to invest there.

Your next question comes from the line of Matt Vendleet with Cantor. Your line is open, Matt. Please go ahead.

Good afternoon. Thanks for taking the questions. I guess first, if we think about the magnitude of either expansion or just deal size growth when Freddie is attached, where those sit today and now with a couple more products and more along the way, what should we expect over the next couple of years in terms of deal size growth just from adding those extra capabilities through Freddie?

Yeah, that's a great question. I think in terms of the – one metric you can look – you know, we look at is ARPA, ARPA growth. That's been, you know, double-digit for some time now. We look at the attach rate on new deals. Internally, we look at attach rate overall. We have over 7,000 accounts paying for a SKU for AI today. Today, as AI infuses itself across the platform, the pricing model is going to continue to evolve. So today, there are elements of our AI capabilities that are embedded into our higher price plans, like Insights is available for our enterprise plans. There are elements that are add-ons. So CoPilot today is an add-on. And then there are elements that are consumption-based. AI Agent is a consumption-based product. There are elements that we've introduced that we haven't yet monetized. So for EX, we introduced AI Agent Studio in May, and we've chosen not to monetize it because we want to get a lot of customers on it using it. We want to keep building the capabilities, and at some point in the fall, we will monetize it on a usage basis. And so I think the models are going to continue to evolve. What's most important for us is it helping us win. That's what we really look at. And in every competitive situation, whether it's an upsell, just retaining the customers that you have, or expanding, AI is central to the RFP. It's not the only thing that you need in order to win. You need a lot more than that. But you absolutely need to have the AI game, and that's why we've been investing so much in AI. And these bigger customers would never come to us if they didn't both believe in what we delivered today and believe in where the roadmap is going. That's super important for them. So, yeah, I think it's hard to say, like, okay, how much is going to be AI-driven? We have a lot of confidence in the overall business. We have a lot of, you know, we put the number out there, 1.4 billion ARR in the next couple That's up from where we thought we would be a year ago. We wouldn't have done that if we didn't think we had confidence. We see it in the pipeline numbers. We see it in these large customers who are super happy with us. So all of that gives us confidence that the plan is working, and AI is an important part but there's a lot more than just AI.

Very helpful. And then I guess as you look at maybe the CX business, you talked about a lot more efficiencies there and consolidating some of the organization around India. Curious how much internal usage of AI is driving that efficiency and how much more can be unlocked as that becomes maybe a little bit more of a on cruise control of running that business and having a little bit more customer-led growth?

Yeah, so it sounds like two questions, really. It's kind of our internal use, but also the CX business. CX business, the big change we made this quarter, at the end of last quarter, is we consolidated the teams that are driving CX into India. Most of that business is SMB. Most of that business was inbound, so most of the team was already there. But now there's a single go-to-market team that is driving that business, and that's going to create a lot more focus around retention, in particular around ensuring that we're focused on the right customers. In the past, any customer was a good enough customer, and that resulted in us acquiring a lot of smaller customers that churned. We're not doing that anymore. So the new business acquisition motion is focused very much on, call it the higher end of SMB and mid-market. And we would expect over time that will help our retention rates. We've made a big investment in the CX product in moving to our new Freshdesk Omni. We have multiple products in the past. Now a customer can get onto one product and seamlessly upgrade from an email-based ticketing experience to one involving chat and conversational and voice and one involving AI. That's important for upsell and for retention as well. So we're optimistic about the fact that we've got 90% of our customers now on that new platform. We've got the go-to-market motion much more focused that we're going to be able to get some goodness out of that CX business. And then from an internal standpoint, AI has been suffused across every part of our business. Our entire product development lifecycle has changed. We now have designers who can work in Figma, create a product in Figma, push it directly to code. We've built the hooks between our production environment and Figma. So the code comes out and it's compliant with our internal coding requirements. The process for doing QA is highly automated with AI now. And, and, and so that's resulted in a meaningfully shorter cycle times, about 30% faster. We're shipping on a, on basically a two week cycle now, which we were not doing before for, for AI products in particular. It's changed our support business as well. We've implemented our AI email agent internally to handle questions that we get from our own customers about billing. And we saw about 30% of those questions were completely handled through AI when we turned it on. So, you know, I think it's transforming many businesses. It's certainly transforming us. It's helped us drive our overall profitability of the business. You know, Gap Profitable this quarter, that's ahead of where we thought we would be. cash flow looks good. And so all that I think is good for us. And I make sure that my team is using AI in everything we do, whether it's preparing for this call or doing a presentation to the company, AI is front and center. So I think it's just a part of how we're doing business now. It's maybe a little less dramatic than it was a year ago because it now is how people are used to working.

Your next question comes from the line of Alex Zucin with Wolf Research, LLC. Your line is open, Alex. Please go ahead.

Hey, guys. Thanks for taking the questions. Most of mine have been asked, but I want to double down on Taylor's question because I actually think it's really important. If you look at the net new ARR growth for the EX business in the first half, it looks like it's about 14%. I think the guide for the second half implies 18. So if I think about, you mentioned some noise on why net new ARR for that business was down year over year, but I just want to better understand that a little bit. And like, what are you seeing in the pipeline to give you the confidence to guide for acceleration of net new ARR on that business for the second half?

So we, so Alex, thanks for the question. So back to what I said to Taylor, right? Like she was asking about, Hey, 25 versus 24. And I said, Hey, there's, we're really confident on mid-20s growth for EX.

And we just talked about that at our refresh in April.

There's a little bit of nuance in terms of quarter to quarter, but the EX business is doing really, really well. And we wouldn't keep repeating that if we didn't think we had that strength. I think there's a whole bunch of avenues to grow outside of new logo, which we talked about the pipe that we're already growing that we, you know, coming to Q1, we said the strongest pipe kind of ever uh but really you know the expansion products that we're bringing to fruition again fire hydrant is brand new on the item side and device 42 advanced uh cloud version uh now being available so we're very confident uh you know what we've seen in the first half of the year and we expect to continue to see that to the back half of the year we you know as a whole we had already talked about um what we're you know seeing for for the back side we just rolled through our four million dollar beat and uh that you know already encompassed a two million dollar fx headwind uh

so it would have been a six million dollar beat uh for the back half of the year if we didn't see that fx um so again we're super confident cx is still the driver of growth cx is stable uh at four percent right now yeah just to emphasize like this is a beat and raise quarter i know we didn't emphasize that but you you count that that uh that fx headwind and we we rolled that beat in then we raise by an additional $2 million.

Got it helpful. And then the other thing that we noticed is, and again, I think you talked about this, but stock-based comp, you know, 16% of revenue is down from 19 in Q1. What's driving that strong decline? And how do we think about the outlook for the rest of the year and really beyond? And any changes that you're making there would be good to unpack.

Yeah, go ahead. I'll start with, and Dan's can add to it. So I think this is not something new for us, right? We've been talking for a couple of years now about how we were going to be looking at, you know, our total P&L from a gap perspective and the biggest component of that, the hurdle we had to get to to get to gap profitability, which we hit this quarter, which is a couple quarters earlier than what we expected, was going to be SBC. Some of the bigger drops in SBC is that we've kind of, you know, we've gone through all of the IPO grants now. And like we've taken off that tail. And so really what we're flowing through on the SBC is like our ongoing kind of new grants and focal. And that's the place that we've had added a lot of the discipline under Dennis's leadership. And we're going to continue to do that. We're constantly working with our total benefits folks, making sure that we are being number one, really competitive so we can bring on the best. But number two, using equity really prudently as we go forward. At the same time, we're just looking at total equity, and we want everybody focused on free cash flow per share. And that's kind of the North Star metric that we talked about. And in the call, we talked about how we've reduced that considerably in terms of fully diluted shares since we've gone public. But Dennis, if you want to.

Yeah, look, I pay attention to it. I think it's important. I think it's important internally that we reward performance with equity. But at the same time, in the past, We've been, I would say, a little bit broad in how we thought about it, and we've put in place basically performance management process to make sure that we're using that – we're thinking of that equity as a really scarce resource, and we're making sure that the people have the biggest impact, you know, see the biggest grants. And that, by definition, is going to create a more – I would say a more prudent approach to how we're managing things. And, you know, Tyler shared where we think we'll be in the next couple of years, and we take that very seriously, and that's what we're going to do. So I think it's a continuation of a trend that we've put in place for a while now.

We have reached the end of the Q&A session. I will now turn the call back to Dennis Woodside, CEO, for closing remarks.

All right. I just want to thank everybody for joining the call today and just emphasize Q2 overall for us reinforced every one of the five priorities that we laid out of the refresh. We demonstrated that EX first momentum, that category leadership for the mid-market and the agile enterprise. I think we showed that AI is an expanding tailwind to our growth and that we've been disciplined around profitability and how we're managing capital. So thanks to everybody. Look forward to speaking to everybody next quarter. Bye.

This concludes today's call. Thank you for attending. You may now disconnect.