What Management Said
Read the full Q2 2026 transcript ↗The primary purpose of today's call is to provide you with information regarding our second quarter 2026 performance and our financial outlook for our third quarter and full year 2026. Such risks include, but are not limited to, our ability to sustain growth, to innovate, to reach our long-term revenue goals, to meet customer demand, and to control costs and improve operating efficiency. 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. I encourage you to visit our investor relations site to access our earnings release, supplemental earnings slides, periodic SEC reports, and a replay of today's call to learn more about Freshworks.
It's large, fragmented, and no single player in this segment holds more than a 20% share. Our fifth key message, we are committed to capital efficiency and prudent capital management. EX ARR grew 24% on a constant currency basis, ending the quarter at $567 million and representing approximately 59% of total ARR. Customers contributing more than $100,000 in ARR grew 25% year-over-year and now represent roughly 40% of total ARR.
Our offering is powered by Device42, a company we acquired a little over two years ago, and today we offer both on-prem and cloud-native Advanced ITAM products. ESM continues to be a major long-term growth vector for Freshworks as one-fifth of new EX seats are coming from outside IT. We are seeing steady ARR growth and significant progress on our platform migration. CX ARR grew 4% on a constant currency basis, ending the quarter at $400 million.
What went well
- Freshworks delivered a beat-and-raise quarter with revenue of $237.4 million, up 16% year over year, a 24% non-GAAP operating margin, and its eighth consecutive quarter achieving the Rule of 40.
- The company reported its first positive GAAP net income ($3.2 million; GAAP EPS $0.01, non-GAAP EPS $0.17) ahead of its year-end 2026 goal, and expects to sustain GAAP profitability while funding EX and AI investment.
- The Employee Experience (EX) business - now ~59% of total ARR - grew 24% in constant currency to $567 million ARR, with ESM crossing $50 million ARR (+67%), a record ITAM (Device42) quarter, and Gartner naming Freshworks a 2026 Magic Quadrant leader for ITSM.
- AI monetization progressed: over 7,000 customers pay for an AI SKU, Copilot attach exceeded 70% on new deals above $30,000 (22% of eligible EX customers now pay for Copilot), and new products (Freddy AI Agent Studio, MCP Gateway supporting Claude and Microsoft Copilot) gained hundreds of early-access customers.
- Up-market momentum accelerated: customers contributing over $100,000 in ARR grew 25% and now represent ~40% of total ARR, evidencing wins against legacy incumbents (Seagate, iQor, American Oncology Network).
- Adjusted free cash flow was $57.7 million (24% margin) and the company returned over $200 million to shareholders year to date (reducing shares ~7%), ending with $665 million of cash and no debt, while raising full-year guidance despite a $2 million FX headwind.
What went wrong
- The Customer Experience (CX) business grew only 4% in constant currency ($400 million ARR) as management deliberately runs it for profitability and steady-state growth, and expects only low-single-digit growth for the full year.
- Net dollar retention remained modest at 104% as reported (105% constant currency), as getting existing customers to adopt Copilot is harder than attaching it to new deals, so AI has not yet materially lifted NDR.
- GAAP profitability, while a milestone, is still thin at $3.2 million of net income ($0.01 GAAP EPS), and a $2 million full-year FX headwind trimmed reported revenue.
- EX constant-currency growth ticked down to 24% from 25% in Q1 (management characterized it as quarter-to-quarter noise within a mid-20s% trajectory).
Guidance Changes
| Metric | Period | Current guidance |
|---|---|---|
| Revenue | Q3 2026 | $244.5M-$245.5M (~14% YoY); includes a $0.5M FX headwind |
| Non-GAAP income from operations / EPS | Q3 2026 | $59M-$61M operating income; ~$0.18 non-GAAP EPS (~266M shares) |
| Revenue | FY2026 | $963.5M-$966.5M (~15% YoY); includes a $2M FX headwind (a ~$6M underlying raise) |
| Non-GAAP income from operations / EPS | FY2026 | $222M-$228M operating income; $0.66-$0.68 non-GAAP EPS (~273M shares) |
| Adjusted free cash flow | FY2026 | ~$265M (27.5% margin); FCF per share $0.94 (up 24% vs 2025) |
| EX / CX ARR growth | FY2026 | EX mid-20s% (exiting >$600M ARR); CX low single digits |
Performance Breakdown
| Metric | YoY | Note |
|---|---|---|
| Total revenue | +16% to $237.4M | Above the high end of estimates, driven by EX; +15% on a constant-currency basis, a slight sequential acceleration. |
| EX ARR | +24% cc to $567M | Large-deal traction displacing incumbents plus platform breadth (ESM, ITAM, ITOM); ~59% of total ARR. |
| CX ARR | +4% cc to $400M | Deliberate profitability-focused operating plan; over 90% of Freshdesk customers migrated to Freshdesk Omni. |
| Non-GAAP operating income | $55.9M (24% margin) | Top-line leverage plus partial restructuring savings; non-GAAP gross margin 86%. |
| GAAP net income | $3.2M (first positive) | Operating leverage and lower stock-based comp (16% of revenue vs 19% in Q1) as IPO grants rolled off; GAAP EPS $0.01. |
| >$100K ARR customers | +25% (~40% of ARR) | Sustained up-market shift toward mid-market and agile enterprises with multi-product EX motions. |
| Adjusted free cash flow | $57.7M (24% margin) | $0.21 per share; on track to meet or exceed the $0.94 full-year FCF-per-share target. |
Earnings Call Themes & Trends
| Topic | Previous mention | Current period | Trend |
|---|---|---|---|
| EX-first strategy | 35% of ARR at IPO | EX now ~59% of ARR (expected >60% by year-end), targeting a ~$45B TAM (ITSM/ITAM/ITOM/ESM) in the under-20,000-employee segment where no vendor holds more than 20% share, sustaining mid-20s% growth. | — |
| Platform breadth and cross-sell | Core ITSM (Freshservice) | ESM (+67%, >$50M ARR, one-fifth of new seats from outside IT), ITAM (Device42 Advanced ITAM Cloud launched, best quarter ever, in ~1/3 of large lands), and FireHydrant (first six-figure expansion) broaden the EX flywheel, each targeted to become $100M businesses. | — |
| AI monetization | AI embedded across the platform | Multi-model pricing (embedded, add-on Copilot, consumption-based AI Agent), 7,000+ AI-SKU customers, 70%+ Copilot attach on larger new deals, 50-80% agent deflection, and Freddy AI Agent Studio to be monetized on usage in the fall; AI is central to competitive RFPs and drives higher NDR. | — |
| CX repositioning | Broad SMB acquisition | CX consolidated into a single India-based go-to-market team focused on higher-end SMB/mid-market retention, with 90%+ of Freshdesk customers migrated to Freshdesk Omni, positioning CX for steady-state profitable growth. | — |
| Capital efficiency and SBC discipline | Higher stock-based comp | SBC fell to 16% of revenue (from 19% in Q1) as IPO grants rolled off and equity is managed as a scarce resource; over $200M of buybacks year to date, with free-cash-flow-per-share the 'North Star' metric and a $1.4B ARR ambition over the next couple of years. | — |
| AI as an internal productivity driver | Manual development/support | AI is embedded across the business (Figma-to-code, automated QA cutting cycle times ~30% to ~two-week releases; an internal AI email agent resolving ~30% of billing questions), contributing to the profitability inflection. | — |
Q&A Summary
Luke (Canaccord, for David) asked how Freshworks keeps the product simple as it layers in Device42, FireHydrant and future security ops, and how it competes with AI-native 'intelligence layer' startups sitting atop incumbents.
Woodside said design/UX unification keeps time-to-value fast (Device42 now a native cloud tab in Freshservice), and that customers want a secure system of record with integrated, easy-to-configure AI - Freddy AI Agent Studio already has 1,000+ customers - so the startups have gained little traction since doing AI well requires understanding existing workflows and controls.
Patrick Walravens (Citizens) asked how much the Gartner ITSM Magic Quadrant leader placement helps.
Woodside said it helps a lot with lead generation and analyst/customer referrals of larger accounts, reinforcing the up-market momentum visible in 100K+ customers growing 26% and the first million-dollar deal closed in Q1.
Tamjid Chowdhury (Guggenheim) asked how much runway remains for ITAM and ESM cross-sell and whether Copilot attach is translating into NDR.
Woodside said both ITAM and ESM are targeted to be $100M businesses within two years and remain early in base penetration (ITAM cloud opening the whole base, ESM expanding into HR/facilities/finance); Sloat said Copilot is a growing expansion motion but harder to adopt in the existing base, so its NDR impact will build over time.
Taylor McGinnis (UBS) and Alex Zukin (Wolfe) probed the EX deceleration to 24% cc and confidence in second-half net-new-ARR acceleration.
Sloat called the 25%-to-24% move noise within a confident mid-20s% trajectory, citing record pipeline built in H1, larger deals, and multiple expansion levers (ITAM cloud opening two-thirds of lands, FireHydrant standalone lands enabling cross-sell), and noted the raise would have been ~$6M absent the $2M FX headwind.
Patrick Schultz (Baird) asked about demand linearity, AI-related sales-cycle hesitation, and whether enterprise-grade ITAM drives new logos or cross-sell.
Woodside said no AI-related sales-cycle impact (AI is actually a motivator to reevaluate incumbents), linearity is normal with up-market deals weighted to quarter-end, and that up-market customers buy the full platform (ITSM+ITAM+ESM+Ops) out of the box, making ITAM essential to moving up-market.
Scott Berg (Needham) asked about the maturing partner program and its impact on retention/expansion.
Woodside said partner involvement raises retention, expansion speed and close rates; Freshworks is cultivating fewer, higher-leverage partners (Unisys, CGI) especially for EX, with ~40% of business partner-influenced today and expected to grow as it moves up-market.
Matt VanVliet (Cantor) asked about deal-size uplift from Freddy attach and how internal AI is driving CX efficiency.
Woodside cited double-digit ARPA growth and an evolving AI pricing model (embedded, add-on, consumption, some not yet monetized), with AI central to winning; on CX, the India consolidation plus Freshdesk Omni migration and internal AI (Figma-to-code, automated QA, AI support agent) drive efficiency and profitability.
Alex Zukin (Wolfe) asked what drove the drop in stock-based comp to 16% of revenue from 19% and the outlook.
Sloat said reaching GAAP profitability (a couple quarters early) hinged on SBC, and the decline reflects IPO grants fully rolling off plus disciplined ongoing grants; Woodside added performance-management processes now treat equity as a scarce resource focused on highest-impact employees, with free-cash-flow-per-share the guiding metric.
More on Freshworks Inc.
Reported 2026-08-04 · figures from the Freshworks Inc. Q2 2026 earnings call.
See how Top Bucket AI works for your firm
Request DemoTop Bucket AI Research
Stay ahead of private markets
Research and market intelligence for private-markets professionals.
✓
You're subscribed.
Thanks for signing up.