Freshworks, Inc. Class A ((FRSH)) has held its Q2 earnings call. Read on for the main highlights of the call.
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Freshworks, Inc. Class A Reports Strong Q2 Performance Amid Cautious Q3 Outlook
The earnings call for Freshworks, Inc. Class A revealed a strong performance in the second quarter, characterized by robust revenue growth and significant advancements in AI adoption and the partner ecosystem. Despite these positive developments, the company faces challenges in net dollar retention and a moderation in Employee Experience (EX) growth, leading to a cautious outlook for the third quarter.
Strong Financial Performance
Freshworks reported an impressive financial performance in Q2, with revenue growing 18% year-over-year to $204.7 million. The company also saw an expansion in its non-GAAP operating margin to 22% and an adjusted free cash flow margin of 27%, underscoring its operational efficiency and financial health.
Growth in Employee Experience (EX)
The Employee Experience segment achieved over $450 million in Annual Recurring Revenue (ARR), marking a 24% year-over-year growth. Notable clients contributing to this growth include Skill Dynamics and KAYAK, highlighting the segment’s expanding influence in the market.
AI Adoption and Revenue
AI adoption has been a significant driver of Freshworks’ revenue, with over 5,000 customers now paying for AI copilot and agent products. The ARR from these AI-driven SKUs crossed $20 million in Q2, more than doubling from the previous year, showcasing the company’s successful integration of AI into its offerings.
Customer Expansion and Product Innovation
Freshworks introduced Freshservice Journeys to streamline employee transitions, alongside significant product updates in AI capabilities and customer experience (CX) solutions. These innovations are expected to enhance customer satisfaction and drive further growth.
Positive Partner Ecosystem Development
The partner ecosystem has played a crucial role in Freshworks’ success, influencing over one-third of ARR in Q2. The company onboarded over 130 new partners this year, strengthening its market position and expanding its reach.
Net Dollar Retention Challenges
Despite the positive financial metrics, Freshworks faces challenges in net dollar retention, which was reported at 106% but only 104% on a constant currency basis. This pressure is primarily due to churn in Device42’s partner business, indicating areas for improvement.
Moderation in EX Growth
The growth in the Employee Experience segment has moderated due to the anniversary of the Device42 acquisition, impacting growth comparatives. This moderation poses a challenge for maintaining the segment’s previous growth momentum.
Q3 Guidance Showing Slower Growth
Freshworks’ guidance for Q3 indicates a slowdown, with expected revenue growth of 11% to 12% year-over-year. This is a deceleration compared to the current quarter, reflecting a more cautious outlook amid existing challenges.
Forward-Looking Guidance
For the third quarter and full year 2025, Freshworks provided robust guidance, emphasizing strong growth and profitability metrics. The company projects Q3 revenue between $207 million and $210 million, with a non-GAAP operating income between $31.2 million and $33.2 million. For the full year, revenue is anticipated to be between $822.9 million and $828.9 million, reflecting a growth rate of 14% to 15%. These projections highlight Freshworks’ confidence in its operational efficiency and strategic focus on AI capabilities and partner ecosystem expansion.
In summary, Freshworks, Inc. Class A delivered a strong Q2 performance with significant revenue growth and advancements in AI and partner ecosystems. However, challenges in net dollar retention and moderated EX growth present hurdles. The company’s guidance for Q3 reflects a cautious outlook, yet it remains optimistic about its long-term growth prospects through strategic initiatives and operational efficiency.