Conference Transcript - FRSH 2026-08-12

Brian L., Analyst — Stevens

Greetings to everyone who's dialed in today for the Freshworks webinar. With me, we have one of our longtime presenters here at the conference, Tyler Sloat. He's the CFO, runs the finance department at Freshworks. And great to see you again, Tyler. And thank you so much for being here.

Tyler Sloat, CFO

Yeah, Brian, thanks for having me. We've known each other for a long time, so I've really enjoyed doing this with you. So thanks again for inviting us.

Brian L., Analyst — Stevens

Great. Well, let's dive into the story here first. Why don't we start out with the right to win for Freshworks in the market? So when you win a competitive deal, you know, what's the single most decisive reason for the customer to choose Freshworks? And maybe if I could add a second question on that, you know, has that changed at all over the last 12 months as the company has built out more of the EX portfolio?

Tyler Sloat, CFO

Yeah, what I can say, Ryan, is every deal is competitive, right? It's not like we are going into a lot of greenfield space and have the opportunity to go close a customer without any competition. This is an EX must-have product. If you're a company of any scale, you really need to have this. So what is your right to win for us? It really comes down to really dry and providing our customers with, you know, the enterprise grade capabilities that they need without, you know, kind of enterprise complexity. And what do I mean by that? It's like, OK, the easy use of the product has to be there, which is kind of in our DNA. And I think started with us servicing SMBs from the very beginning, specifically on the desk side. But really, as we add feature functionality, making, you know, the products continue to stay true to that DNA of ease of deployment, time to value. That coupled with the fact that, yes, what has changed over the last couple of years is that we really moved from just, you know, a pure ITSM product that's focused on core ticketing for IT, really to now kind of, you know, we've got multiple pillars across our product portfolio that are all kind of on the same platform, staying true to that ease of use, starting with ESM, which is enterprise service management selling to functions outside of IT, then moving to ITAM, which is IT asset management, which is a device 42 acquisition that we made. And now ITOM, which is IT operations management, which is the fire hydrant acquisition that we made with AI across the entire portfolio. Now, our AI capabilities, that is now something that if you want to compete, which I said every single deal is competitive, you have to have that. It's kind of a table stakes at this point. You need to be able to deliver AI capabilities that are going to deliver efficiencies for your customer in the way that they operate. And the testament there is that as the companies are buying, the attach rates specifically for Freddie Copilot on significant deals, which we just say are over 30K, are very high and they're growing. And it just means that as companies are evaluating, they're evaluating that as part of your product. And you have to be able to demonstrate that you can deliver those high capabilities, which we are. And so hopefully that answers the question. Every deal is competitive. Our right to win really comes with, hey, being able to deliver an enterprise-grade product without that enterprise-grade complexity. That also means that we can save our customers money compared to our competitors.

Brian L., Analyst — Stevens

Terrific. Great lead-in to the next question. You know, as you said, a lot of the right to win for your business in that upper mid-market is having enterprise capability without enterprise complexity. So just thinking about the durability of that? So if AI makes competitors easier to configure, administer it, or implement, you know, does that wedge narrow? So if you think about it over a medium term or three-year perspective, you know, what do you see as the durable differentiator? Is it the product? Is it the platform? Is it the unification price point? Is it the data gravity that you have over the years?

Tyler Sloat, CFO

Yeah, I don't think it narrows. I think that if you look at what we're offering to our customers, that the moat that we have is really that system of record and all of those workflows that are built in in an ITIL compliant manner. And if a company is going to come in and say, as I can say, pure AI native and through an agent, those things are still needed. And so you still have to have a system that's doing that internally. And we are that system. And so I don't say the moat is narrowing. I do think then it's like, okay, how can we actually make our software even that more attractive to a customer because of what it can provide on top of that moat? And that's where our investments in our AI agent studio for EX, in co-pilot capabilities and AI insights, those are the things that, you know, that are really providing, you know, all of that new capability on top of what we view as a pretty entrenched moat around that system of record and workflow that we've built over the last 10 years.

Brian L., Analyst — Stevens

Sounds good. So, you know, let's talk a little bit about the X platform. You know, there's been a lot of development organically and inorganically, you know, to that platform over the last couple of years. You know, where do you think you go from here? You know, what agencies feels most natural for you? Do you go deeper into IT operations? Cybersecurity is a hot, you know, category right now. What feels like the most natural next step for the platform?

Tyler Sloat, CFO

Yeah, Brian, thanks. If you look at what we've done over the last, say, two and a half years, it's really, okay, EX was really starting to take hold and get attention for larger customers, but purely on kind of the kind of corporate IT ticketing side of the house. As we started to engage with those customers, started to understand, okay, what would be needed for us to come in and do an end-to-end displacement of all of your other kind of IT solutions that you might have internally? And there's a couple of things that came up. Number one is like, okay, if you're going to deliver us a product, like you have to make it look and feel as if it's one product, but everything has to work seamlessly together. Otherwise, what's the difference between having a whole bunch of disparate systems and that one product? Second is like, okay, here are the capabilities that we need. So we kind of started with the ESM. And ESM is Enterprise Service Manager. We saw a ton of our customers using our ITSM product for functions outside of IT. When we went and talked to them, I was like, okay, what's going to require you to really make proliferate this out? And we talked to the customers who weren't. And the customers who weren't was like, it was all about kind of security and compliance around those different functions. Think about HR, which is the biggest one that we sell to today. So we spent about a year re-architecting the product, moving the entire database layer down so that we could come up with workspaces that had that compliance. So that if you're an HR professional sitting inside of an ESM instance, you have the confidence that somebody in the IT instance isn't going to be able to just go over and look at all that data in there. And so that was a requirement. So we built that. The second thing that we looked at is like, hey, one of the areas that we had light capabilities but not enterprise grade was asset management. And that was one of the things that CIOs were telling us that we have to have this. And when something goes down, we have to be able to map the landscape of all of the assets that we're responsible for to be able to pinpoint where something is broken so that we can go fix it seamlessly and in an automated fashion. For that, that's what we went out and looked at, you know, everything that was available in the open market as standalone companies and device 42 is by far the leader. We partnered with them first. We did an integration and we partnered with them and resold their product for a year, made sure that, you know, we knew that this was going to be something that that would would match the need of our customer base then we brought device 42 on uh the freshworks um kind of family uh and we spent the last year and a half completely rewriting the cmdb in our fresh service product uh to be able to take advantage of all the capabilities that device 42 had but do it in a cloud framework they were an on-prem uh term licensed product and now that is now released you're going to see us do the same exact thing now with ITOM. And that's the next area that we said, okay, now you have asset management, but all these incidents are happening, you know, on the periphery, the incidents, we get notification of the incident and then you have incident management. The asset management capabilities allow us to go solve it once you have the incident, but we have all these other systems that are, you know, tying into the logging solutions. And as you mentioned, Brian, this gets us a little bit closer to security. ITOM is a different buyer typically than IT. And it happens, you know, It's kind of your tech ops team that oftentimes is in the product organization or your CTO organization, but they're the ones responding to anything that happens. FireHydrant, again, modern-day solution with enterprise-grade capabilities. They didn't have any go-to-market capabilities, so we feel it's going to be a great partnership. That's one that we, you know, one of our top three deals in Q2 was a FireHydrant land where they're not even a fresh service customer. And it was a very large organization that chose FireHydrant after going through a lot of competitive analysis against all of our biggest competitors there. We're super excited about that. So to your question, we're going to continue to look at the breadth of our portfolio and see what other adjacencies could be out there. There's a lot of things that we think are interesting. At the same time, once we bring something on board, we have to stay true to our DNA, and that's the depth. make sure we truly are delivering those enterprise capabilities, but doing it in a seamless way for our customers to enjoy it all and easily manage that fresh service portfolio product to stay true to that kind of lack of enterprise complexity. We need to make it simple for them to use. And so that you're going to see us do both and continue to do both.

Brian L., Analyst — Stevens

Tyler, I wanted to tap into a little bit about the operating leverage from the business. The last couple of years, you've been reporting record operating margin after record operating margin. You did it again in Q2. You know, I assume that AI is helping the business, you know, with the operating efficiency. So I want to dive into that, you know, specifically with AI. What areas of the business are you realizing the most internal operating efficiencies from AI? And what you're seeing, does that give you greater confidence in being able to continue to drive margin growth for the business?

Tyler Sloat, CFO

Yeah, Brian, I think you're right. We've done a great job, I think, on bottom line, but then also managing kind of efficiencies internally and where we are deploying our capital internally to make sure we have the best return for it. And as a result, we've done a couple of reductions on headcount where I think historically Freshworks have kind of solved problems by throwing bodies at it. And we feel like we're at a point where we don't need to do that anymore and that we can become much more efficient, you know, with systems and processes and tools. And in some cases, that means, OK, maybe we're going to have more expensive headcount, but we're going to have less. I mean, our headcount is down over 20 percent since its peak a couple of years ago. Yet ARR, you know, is continuing to grow and it's up like 30 percent. Well, so we're doing more with a lot less. How are we doing that is your question. Well, internally, you know, a lot of the kind of probably most prolific use of AI internally is within the engineering organization. That they have completely shifted their capability to go code and use tools to really make them much more efficient so that we can innovate a lot faster with a lot more accuracy and do it with fewer people. And so, you know, that's been fantastic to kind of watch and see. At the same time, we have initiatives across every single company. And I kind of break it into three categories where you have, we consume a lot of software ourselves. And just like our customers do to us, if that software we consume is coming with a promise of AI capabilities, let's go use it because we're essentially already paying for it. Second is bringing in new tools that are AI kind of native that as we're picking new new tools to replace software or to add new capabilities, ensuring that we're going with an AI-first company that is going to actually help us become much more efficient. And then the third is a pure AI tool within itself. These would be things like Gemini, which we'd use a lot, but also Claude and even OpenAI, and making that available for our employees internally, but then at the same time holding them accountable to get true returns for it, right? Not use these as kind of like little toys, but really have very prescriptive view of projects and returns and things like that, that you can actually do. And what we're seeing is that, you know, you have certain groups are completely transforming the way they work and the, you know, kind of the efficiencies that they demand of themselves. Lastly, we use our own products too. And so the stuff that we've been able to do within Fresh Service and Fresh Desk internally, and even the deployments of Fresh Desk and Fresh Service across workspaces, and for things outside of customer support on the desk side, but turning on like email AI agent internally on the desk side has had dramatic improvements in some of our teams, which has been great as well.

Brian L., Analyst — Stevens

Perfect. I want to ask you about the topic of token maxing. It was highly topical in 2Q, kind of across the software industry. So maybe asking you the question about how you're dealing with it internally, how you're dealing it with customers. So internally, how are you handling token maxing so you don't blow through the IT budget faster than plan? And then for your customers that are maybe heavy users of your AI products, how are you handling the cost for that, the inferencing costs? Are you able to pass it on? Are you just absorbing it or are you capping it?

Tyler Sloat, CFO

Yeah. So I'd already mentioned. So first of all, yes, I think token costs are going to be a pretty significant thing for IT departments to go manage. And I think it's going to fall on the IT departments to go manage it. That and FP&A kind of. Internally, I already just mentioned, hey, we've been pretty prescriptive around looking at projects and returns. So if we are going to go license out a technology that is, you know, token based, we are going to do it pretty kind of carefully in terms of, okay, we're going to allow our employees to go use it, but we're going to actually monitor the costs, but then also kind of demand the returns. And we've been doing that internally. So we have, you know, teams dedicated to kind of managing that internally. And some of the stuff that is happening is pretty amazing in terms of, you know, the deliverables that they're making and the speed to those deliverables. So that part's great. From our customer perspective, our AI usage internally from our customers has increased pretty significantly this year, which is great. That's what we want. We view we've designed pricing to be able to, you know, you said pass it on. We're not really passing it on because you have a co-pilot, which is an add-on price. But AI Agent Studio, where the majority of, say, volume could come from, those are session packs. And session packs are supposed to kind of emulate what would a resolution be. And right now it's 49 cents per resolution. And so as the usage of kind of the AI agent, both on CX and EX, continue, and then now stuff like email AI agent, which is also under session pack usage, We're going to start to see the purchase of those session packs increase, but at the same time, we're delivering a ton of value to our customers, and as their costs kind of go up, it's an easy cost to absorb. I think you're going to see all these companies kind of continue to look at, companies like us continue to look at pricing and packaging to ensure that, number one, we're providing the most value to our customers. It truly delivers a return that they can see. But second, that we can keep to our margin structure. To date, you've seen our margin structure, right? We're still mid-80s on the gross margin side. I think we've done a really good job at that. And it's just something that we're continually going to go look at as our customers adopt our AI capabilities more and more. In some of those capabilities, we don't necessarily have to be doing it with the latest and greatest LLM from tier model. A lot of those things will be able to be solved with things that are a lot more efficient. And I think that's the other thing you're going to see happening across companies is that the models are starting to look at parity, but also that the stuff that was released six, nine months ago is still incredible to solve a lot of use cases. And I think that's just going to continue, I think.

Brian L., Analyst — Stevens

Greg, let's switch to monetization for your AI. So you talked about the AI agent is moving to $0.49 per session. Your MCP is going to be going to usage pricing in October. So, you know, is there a way of framing, you know, how big that could ramp into the install base or where it is today that under this promo? And then the second question with that is, you know, last year, oh, I'm sorry, this year at the Financial Analyst Day, you put out a $1.3 billion revenue target. Does this AI pricing, is that included in that target or could this be a potential upside driver to it?

Tyler Sloat, CFO

So it's included. So we've anticipated that we would have all of our products have AI capabilities and that the AI usage is going to continue to increase. I think you will see, as I just mentioned, pricing and packaging changes, right? So we're constantly looking at, you know, what is the market absorbing, but also what would be the best for our customers? So we do these customer advisory boards and we're doing them twice a year now. We really go in and we are asking our customers, hey, what do you guys want to see in pricing and packaging as we deliver you AI capabilities, knowing that, hey, we need to make a margin. But, you know, our whole job is to deliver you a product that allows you to be much more efficient. And so through collaboration, I think we're going to arrive at the right pricing. I think you've seen that we don't want to take kind of like a jerky approach to it. Like we've had a lot of our competitors announce multiple forms of pricing and packaging and changing. I think it's really confusing for customers. And so we've been pretty, I think, prudent. Hey, we have our session packs at $0.49 and we have a co-pilot that has an add-on. And outside of those two things, like we haven't changed anything yet. an MCP we haven't announced because it's in early release. We need to watch customers and how they're using it. We have a couple of, you know, about 100 customers using MCP right now. And some are using it heavily and really working with them on seeing what they're doing, how they're using the product. What does it mean for us cost-wise? And then as we engage with them, like what pricing would make sense? And that's kind of the way we're approaching this. When we look forward, brian i don't think there's going to be a difference between our core products and our ai products and things like that like when we get to that 1.3 and then beyond a billion dollars uh i think it was 1.4 on the arr side 1.3 on the revenue side like you're going to see a lot of products that have ai embedded in them and it's also one of the reasons that we're like i don't know if it makes sense to report on ai every single quarter and we're not doing that anymore We made that clear because we don't want to do allocations and we don't want to kind of play games with the investor base, which I think some other companies do. Like the numbers that we reported historically have been very SKU based. Like if it's an AI SKU, standalone SKU, and we sell it, that's what we're saying. But when a product has like AI insights embedded in it, we're not trying to carve out what is the value of insights because I don't think that's a good practice. And so going forward, we're going to be super clear on products that are what we're selling and how we're selling them. And if we start to embed things and include them, which could happen, then we'll probably be giving much more around usage metrics and things like that. And then the total ARR would be inclusive of any AI capabilities.

Brian L., Analyst — Stevens

That's a good lead into my next question, just asking about the structure, because you know, these sessions packs, they're getting recognized as consumed and not ratably.

Tyler Sloat, CFO

They are ratable. I should be clear.

Brian L., Analyst — Stevens

They are ratable.

Tyler Sloat, CFO

Yeah, they are ratable. So there's like, you have time-based and you have usage-based and you kind of go, hey, what is the predominant component to it? So a session pack is, just to be clear, if a customer signs an annual agreement and they buy one session pack, that session pack is actually recognized over 12 months in that annual agreement. But as the customer uses it, if they run out, they have to buy another one. And then that next one would be routable over that next 12 months kind of thing. Or not the next, whatever the period that is remaining is, right? And even the gap accounting on all this stuff will get a little bit kind of tricky based on what the predominant is at usage or session. So we're constantly working with our auditors and stuff to make sure that we're still doing stuff on subscription terms. Again, some of this could change too based on different products that you release and how it's accounted for.

Brian L., Analyst — Stevens

Perfect on that. Why don't you just ask you a question on the uses of cash for the business? Because your balance sheet is very strong. You have $664 million in net cash, effectively no debt. A lot more than most of the other software companies that I'm following. So the question is, do you think the business is overcapitalized at this point? And then, you know, how do you think about prioritizing the use of cash?

Tyler Sloat, CFO

I don't think we're overcapitalized, but we are using our capital, right? We are buying back stock. We continue to do net settles on RSUs, which is another form of buyback. We've been open that we will look at opportunities to buy companies. We've, you know, so far, we bought Firehydrant, we bought Device 42, and we use cash for that. And we're going to continue to look at opportunities. I think they're going to look and feel more like device 42 and fire hygiene, meaning like not huge significant deals, but more strategic things on how do we expand our portfolio or go deeper in our portfolio. And so those are going to be all of our use of capital. We constantly, like every board meeting, we talk to the board and we talk about other uses of capital, meaning including continued buybacks and things like that. We are at a point now, we're going to produce $265 million of free cash flow this year. And we said at our refresh event, it's like, you know, you could see a point in the future that we're going to make some commitment to use free cash flow every single year to do buybacks. And I could see us doing that as well, right? Because we are, you know, we have proven that we can build both a growth business, but also a very profitable growth business. And to me, that's pretty exciting. So no, I don't think we're overcapitalized. We've, you know, proven that we will use our capital to reduce dilution and our share count. And we're going to continue to do that. I think one thing we're super proud of is kind of that focus on free cash flow per share and the commitment that we're going to grow that by 20% a year. So you either have to continue to grow the top line significantly to produce more free cash flow while running a very profitable business, or you can also reduce your share account. And I think we're trying to do both.

Brian L., Analyst — Stevens

Perfect. Last question. Tyler, I see you have your refresh event.

Tyler Sloat, CFO

I changed it. I want it to look like you, Brian, as we started.

Brian L., Analyst — Stevens

Good. No, I'm glad you did. But I thought maybe you can take an opportunity to share that event with the audience, because I know that's always a big customer event.

Tyler Sloat, CFO

Yeah. So this is going to be our virtual summit in October of our refresh event, where it is going to be highlighting all of the new feature functionality that we're delivering out there to that customer. We're doing kind of two of these a year, one more in person, one virtually. This will be the virtual one. We kind of surround it with what are the big technology things that we're putting out there. Obviously, a lot of it is centered around AI and the capabilities that we're delivering. And then it's also just a great opportunity for us to engage with our customer base, but also have our customers engage with each other. We typically have been doing our cabs, our customer advisory boards, right around the same time as our refresh events. And we are trying to get more and more of our customers involved, not just to be advocates for us, which they're already doing, but to create the network across themselves. and that they, when we feel that the more our customers engage with each other, the more they are going to collaborate and, you know, and feedback is going to be great for us and helps us determine what we're going to go deliver for them next. And so, yeah, we're super excited about this. I think Caddy and her team, our CMO has done an incredible job of really honing in and making these pretty valuable events. And so the event we had in May in New York was awesome. That was in person. This is the virtual one, which will be in October.

Brian L., Analyst — Stevens

Well, we have it on our calendar and we will be there. Tyler, I want to thank you very much for your time today and presenting Freshworks. It's a great story.

Tyler Sloat, CFO

Yeah, Brian, thanks again for having us, man. We appreciate it.