Freshworks Stock

Hello, everyone. Thank you for joining us, and welcome to the Freshworks Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Kate Scolnick, VP of Investor Relations. Kate, please go ahead.

Thank you. Good afternoon, and welcome to Freshworks' Third Quarter 2026 Earnings Conference Call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President; and Tyler Sloat, Freshworks' Chief Operating Officer and Chief Financial Officer.

The primary purpose of today's call is to provide you with information regarding our third quarter 2026 performance and our financial outlook for our fourth quarter and full year 2026. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management's beliefs about our business and industry, including our financial expectations and estimates, uncertainty in the macroeconomic environment in which we operate and market volatility and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals to meet customer demand and to control costs and improve operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-K and other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law.

During the course of today's call, we will refer to certain non-GAAP financial measures. 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.

I will now turn the call over to Dennis. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Freshworks is the AI-powered unified service operations platform for the modern, agile enterprise. Our strategy showed up in Q3 results, meeting or exceeding on both top and bottom line metrics and delivering record free cash flow. We moved further upmarket, won multiproduct displacement and executed profitably.

Revenue was $245.4 million, up 14% year-over-year, at the high end of our estimates. Non-GAAP operating income was $73.2 million, a 30% margin, and non-GAAP EPS was $0.22, well above our estimates. GAAP net income was $18.3 million with GAAP EPS of $0.07, reflecting our second straight profitable quarter and ninth straight quarter at Rule of 40 or better.

Adjusted free cash flow was $73.9 million, a 30% margin. Adjusted free cash flow per share grew 40% over Q3 last year, and we are now expecting to exceed $0.94 of adjusted free cash flow per share for the year. This is ahead of our 20% free cash flow per share growth target. We're executing on our EX strategy to continuously expand and elevate our intelligent platform centered around rich operational data. In October, we acquired 2 companies, Torii and Robusta, adding critical AI capabilities that further strengthen our robust ITOM and ITAM offerings.

AI is taking on more of the work in IT. That means IT leaders need to see, govern and pay for the technology and access behind it. Torii gives them visibility into software and AI spend. Robusta adds intelligence to incident investigation and resolution. It's great to welcome these teams to Freshworks. When combined with our existing ITAM solution and ITOM solution, FireHydrant, we can tell an enterprise what it runs, what it costs, when something breaks and how to fix it. That moves us from visibility to intelligence, to action and to proactive operations. This aligns with the core belief our customers count on: trust they can see. That matters today more than ever because governed operational data is the foundation AI runs on.

Now to EX results, where our shift upmarket is clear. In Q3, EX ARR grew 22% in constant currency to $588 million or 59% of total ARR. Customers above $100,000 in ARR grew 26% and now make up about 41% of total ARR. ARPA for new EX customers grew 35%, and we closed yet another multiproduct 7-figure EX deal this year. When we ask customers why they choose Freshservice, we repeatedly hear these reasons: depth and scale on day 1 and ease and speed as an architecture. Customers are not buying a point solution. They are standardizing on 1 platform for service operations across IT, HR, finance and other teams on 1 data model. That gives us the power of an enterprise system of record with the agility of modern software. It sets us apart from both legacy incumbents and start-up challengers. This momentum is reflected in our performance as multiproduct adoption continues to accelerate. New EX deals with multiple products grew over 35% year-over-year. Corresponding ARR, more than 50%. 2/3 of our top 50 new EX deals included ITAM, an improvement from Q2. We are in our second quarter of ramping up our cloud-based ITAM product, now called Freshservice ITAM. Since the launch in Q2, we've added over 400 new customers. ESM new business rose over 35% and was in over 40% of large new lands.

FireHydrant is further deepening our platform presence across IT and engineering incident response. Our cross-sell strategy is yielding results, including a 6-figure expansion with a legacy FireHydrant customer this quarter. These products actively reinforce one another, creating a powerful land and expand flywheel. ITSM paired with ITAM drives faster ticket resolution through instant asset visibility, while adding ITOM shifts IT teams from reactive firefighting to proactive prevention. We introduced enterprise-grade ITAM product enhancements this quarter, including data center infrastructure management and real-time power utilization tracking. This converts fragmented physical and cloud infrastructure data into actionable service intelligence, unlocking immediate cost efficiencies for our customers. Most importantly, every capability, from ITAM and ESM to ITOM, Torii and Robusta, runs on a single data model that eliminates integration friction. When an enterprise wants to expand, they don't need a multi-month consulting project. They simply switch it on.

One of America's largest commercial vehicle dealership networks recently selected Freshworks, ending an incumbent relationship of nearly a decade. Freshservice was selected for its unified ITSM and ITAM platform. This is yet another example of a customer turning away from the operational drag and the complexity tax of legacy platforms in favor of Freshworks' intuitive, easy-to-deploy solution and Freddy Copilot AI capabilities across its IT and business teams.

Freshservice is built for configuration, not coding, with continuous updates rather than disruptive multiyear upgrades, that allows customers to see value in weeks, not years. Partners are a major driver of that speed to value. They were attached to 44% of EX bookings and 53% of new business and sourced 35% of new deals.

Our largest new business deal, a North American wholesale distributor, was sourced and led by CDW. Year-to-date, CDW has nearly doubled its business with us, and Softchoice has more than doubled theirs.

Global SIs are driving larger IT transformation programs. One example is a global professional information software and services provider who selected Freshservice for its technical asset discovery, robust security capabilities and flexible commercial model. Working alongside our deal partner, we are helping the customer discover and manage its global asset footprint, with Device42 displacing their incumbent legacy platform. Bigger customers, larger deals and incumbent displacements are the direct result of an architecture built for speed.

Now let's talk about how AI is the multiplier for speed to value for customers. Domain-specific AI is now a core requirement in vendor selection and a primary reason customers choose Freshworks. Freddy is built for specific jobs to be done, grounded in a decade of service context.

One of the largest HSA custodians in the U.S. recently chose Freshservice to overhaul high-volume service delivery with domain-specific AI. Freshservice with Freddy Copilot and Intelligent Self-Service was deployed across their IT and HR operations.

A global digital sports platform and leader in licensed sports merchandise had a CEO mandate to lower total cost of ownership and accelerate operational AI. They selected Freshservice with Freddy Copilot after an end-to-end AI demonstration proved its rapid time to value ahead of a January 2027 go-live date.

Tower Federal Credit Union in Maryland, with $5 billion in assets and more than 220,000 members, selected Freshservice for its intuitive platform. They deployed Freddy Copilot to automate routine service tasks alongside Device42 for comprehensive IT asset discovery, thereby streamlining enterprise workflows while ensuring continuous operational visibility.

Amwins, the largest wholesale distributor of specialty insurance products in the U.S., selected Freshservice for its rapid workflow configuration, predictable long-term costs and reliable platform governance. Freshservice and Freddy Copilot are being deployed across Amwins' global organization.

The outcomes for customers deploying Freddy Copilot speak for themselves. Teams using Freddy Copilot handle 50% more tickets. Freddy AI Agent deflects 50% of inquiries on average and up to 80% in mature deployments. And in Q3, active copilot agents doubled year-over-year. Customers choose us for the platform, the speed and the AI, and they expand at a higher rate. In fact, EX customers who purchase AI have a net dollar retention rate of greater than 115%. Underpinning our product road map is choice. Our new Model Context Protocol gateway embodies this. It seamlessly integrates Freshservice data into the AI tools teams already rely on while enabling Freddy AI Agents to operate securely across external systems through a governed gateway. For customers, that means AI and the tools their teams already use with their service data staying governed in one place. Innovations like Freddy AI Studio and Email AI Agent further empower customers to expand capabilities within their existing environments.

Turning to our CX performance. CX ARR was $404 million, up 4% as reported and on a constant currency basis. We are demonstrating durable growth in CX and have improved the profitability of this business significantly in the last 18 months.

The Omni platform transition and consolidation of our sales and support teams in India has made CX more focused and efficient and gives us a credible path to steady profitable growth. Freshdesk Omni is resonating with our mid-market customers. Win rates for Omni new business are 15% higher than our legacy platform, with larger ARR per customer. AI adoption is strengthening, with CX AI agent sessions up more than 3x and conversations up more than 4x year-over-year. For example, a fast-growing U.K. software and embedded payments group recently chose Freshdesk Omni with Freddy Copilot to modernize its customer support operations, provide unified omnichannel support and AI-driven resolution across its business.

To pull it together, we are an EX-first company, moving upmarket with larger customers and larger deals. Our unified platform, 1 data model across IT, HR and finance, is displacing entrenched incumbents, and AI adoption is driving high margin expansion.

Finally, in October, we crossed $1 billion in annual recurring revenue, the milestone we committed to by year-end. That doesn't happen without our customers and our employees, some of whom were here when Freshworks became the first Indian SaaS company to list on NASDAQ. It's one of many milestones to come.

I'll now turn it over to Tyler.

Thanks, Dennis, and thanks, everyone, for joining the call today. We had a strong third quarter, our eighth consecutive quarter exceeding revenue expectations and our second consecutive quarter of GAAP net income. We outperformed our estimates for non-GAAP operating margin and free cash flow, both of which are accelerating as we enter the end of the year. At the same time, we have been executing a significant amount of change internally, aligning with our highest growth opportunities and implementing operational efficiencies. At the beginning of Q3, we reorganized our go-to-market to focus all of our field and geography teams to be fully dedicated to our EX business, and we moved all of our CX go-to-market efforts to India.

For our call today, I'll cover the Q3 2026 financial results, provide context on key metrics and close with our updated outlook for Q4 and full year 2026. As a reminder, most of my discussion will focus on non-GAAP financial results, and I will provide comparisons on both an as-reported and constant currency basis.

Starting with the income statement. Total revenue reached $245.4 million in Q3, up 14% year-over-year as reported and 14% on a constant currency basis, at the high end of our estimates' range. Professional services revenue was approximately $2.7 million. EX continues to be our primary growth engine. EX ARR ended Q3 at $588 million, growing 22% year-over-year on an as reported and constant currency basis. We believe EX will continue to be a mid-20s grower as we scale the multiproduct platform, ramp cloud ITAM, introduce ITOM and continue to make AI a key differentiator. As Dennis mentioned, we are already seeing the benefits of our platform offering with the traction of Freshservice ITAM, our newly launched cloud ITAM offering. As a result, we're also seeing fewer purchases of our Device42 on-prem term license product and expect this to continue in line with our strategy. As this transition to the cloud ITAM offering happens, we do expect to see less upfront term license revenue going forward. The underlying shift upmarket is strong. Customers above $100,000 grew 26% in constant currency and now represents about 41% of ARR. As Dennis mentioned, the shift upmarket is showing up in our results as we closed our second 7-figure deal in Q3. And ARPA for new EX customers was up 35% year-over-year. We also closed the highest amount of greater than $100,000 new logo lands in EX than ever before. Looking ahead, we now expect EX ARR to exceed $625 million exiting 2026.

Turning to our CX business. CX ARR ended Q3 at $404 million, growing 4% year-over-year as reported and on a constant currency basis, tracking at or above our full year expectation. This reflects our deliberate plan to run CX for profitability and durable growth, and the Freshdesk Omni platform is demonstrating strong market fit for our mid-market ICP. We're also seeing increased usage of CX AI Agent Studio, with over $2.5 million in new ARR being added in Q3. This was across a broad base of customers. In fact, the number of customers purchasing session packs for the CX AI Agent Studio increased over 50% quarter-over-quarter. As a reminder, session packs are purchased as customers experience increased use of the AI Agent product. For Q4 and full year 2026, we continue to expect similar CX ARR growth rates.

Moving to margins. Q3 non-GAAP gross margins of 87% remained consistent with prior quarters. Non-GAAP operating income was $73.2 million, about $12 million above the high end of our estimates' range. Non-GAAP operating margin was 30%, over 6 points higher sequentially and 9 points higher than a year ago. This reflects continued top line leverage and the benefit of the restructuring actions we announced earlier this year. Our first use of that operating leverage remains investment in EX sales capacity and AI R&D, and we will continue to invest to support the growth opportunities ahead in EX. We again achieved GAAP net income this quarter. Q3 GAAP net income was $18.3 million, up from $3.2 million last quarter, with GAAP EPS of $0.07 and non-GAAP EPS of $0.22.

Turning to operating metrics. Excluding legacy Device42 customers, net dollar retention was 106% on a constant currency basis, above our estimate of approximately 105%. Within this, EX NDR excluding legacy Device42 customers was over 109%. Including Device42, net dollar retention was 104% as reported and 105% on a constant currency basis.

Looking ahead, we expect total NDR excluding legacy D42 customers to be approximately 105% on a constant currency basis in Q4.

Moving on to customer cohorts. Both of our large customer cohorts sustained strong growth sequentially. Customers contributing more than $100,000 in ARR grew 25% as reported and 26% on a constant currency basis, consistent with Q2. These customers represent approximately 41% of total ARR. Customers contributing more than $50,000 in ARR grew 18% year-over-year as reported and on a constant currency basis compared to 18% as reported and 19% on a constant currency basis in Q2 and now represents over 58% of total ARR. This reflects the sustained upmarket shift in our business and our focus on mid-market and agile enterprise customers with a multiproduct EX motion.

Now on to billings, balance sheet and cash. Calculated billings reached $249.5 million in Q3, growing 11% year-over-year as reported and 12% on a constant currency basis. Looking ahead, we continue to expect Q4 and full year billings growth to be in line with revenue growth.

Our focus on operational excellence continues to compound capital efficiency. Adjusted free cash flow was $73.9 million in Q3, above our estimates. Adjusted free cash flow margin was approximately 30%, up from 24% last quarter, and adjusted free cash flow per share was $0.28. As Dennis highlighted, we are now on track to exceed $0.94 of adjusted free cash flow per share this year, ahead of our 20% free cash flow per share growth target. Our capital allocation framework is to invest in high-return EX growth first and return excess capital to shareholders second. In Q3, we repurchased approximately 2.7 million shares for $27 million, buying opportunistically. Year-to-date, we have deployed approximately $232 million toward our stock repurchase program and reduced shares outstanding by over 7%. We ended Q3 with approximately 293 million fully diluted shares and approximately 262 million basic shares outstanding. We also continue to be opportunistic with tuck-in acquisitions that add talent, technology and TAM expansion for our EX platform. Towards this, as Dennis highlighted, we acquired both Torii and Robusta in October. Cash and investments ended Q3 at $697 million with no debt, giving us ample capacity to continue our repurchase program while prioritizing investment in future growth.

Now on to our forward-looking estimates. Our non-GAAP net income projections for 2026 assume a tax rate of 24%. For the fourth quarter of 2026, we expect: revenue of $253.5 million to $254.5 million, growing approximately 14% year-over-year as reported or 14% to 15% in constant currency; non-GAAP income from operations in the range of $68 million to $70 million; non-GAAP net income per share of approximately $0.21, assuming weighted-average shares outstanding of approximately 266 million shares.

For the full year 2026, we now expect: revenue of $965 million to $966 million, growing approximately 15% year-over-year or 14% to 15% in constant currency. This includes an approximately $2 million FX headwind relative to the rates assumed in our initial guidance at the beginning of the year. Non-GAAP income from operations in the range of $238 million to $240 million; non-GAAP income per share of approximately $0.71, assuming weighted-average shares outstanding of approximately 272.3 million shares; approximately $265 million of adjusted free cash flow; and adjusted free cash flow margin target of over 27% for the full year 2026. And we are on track to exceed our full year adjusted free cash flow per share target of $0.94.

As a reminder, cash used for stock repurchases is reflected in our financing activities and is excluded from our adjusted free cash flow calculations. Our forward-looking estimates are based on FX rates as of October 31, 2026, and do not take into account any impact from currency moves.

In closing, our strong third quarter performance across both top and bottom line metrics reinforces our confidence in our 2026 financial and operational road map. Looking to the remainder of the year, our updated outlook reflects raised revenue, operating margin and free cash flow per share expectations compared to our outlook at the beginning of the year, demonstrating strong momentum as we close out 2026.

Operator, let's now open it up to Q&A.

[Operator Instructions] Your first question comes from the line of Billy Fitzsimmons with Piper Sandler.

Dennis and Tyler, can you comment on the mix of demand you're seeing across your different customer cohorts by size? As you talked about in the prepared remarks, you've been pushing upmarket for some time. And if I look at the customer metrics, the 50,000-plus customer adds were pretty consistent with what you've been doing. And it maybe looks like, call it, the mid-market customers between $5,000 and $50,000 were potentially down sequentially. Is that what you expected going into the quarter? And is that just reflects kind of where your targeting opportunity is?

Yes. Thanks for the question, Billy. The emphasis for us has absolutely been on moving upmarket. That's where the demand is, that's where we're seeing what I like to call the agile enterprise looking for an alternative to the larger historical incumbents and looking for an AI-enabled platform that extends beyond ITSM into ITAM, into operations management, into ESM, and that's what we have. So our emphasis in our field team, in particular, has very much been moving upmarket. That's why we're getting these big lands. We had our second $1 million land this quarter of the year, which is fantastic. We have multiple $200,000 to $500,000 lands, which is fantastic. We're seeing big expansions on the order of $0.5 million, which is fantastic. So a lot of the emphasis is very much on that upmarket motion. And that's where we're seeing the growth. I think our accounts over $100,000 grew 26% in the quarter, which is really leading us more and more upmarket. Those accounts expand at higher rates, the NDRs are better. And so that's been an intentional focus for us to move upmarket. At the same time, in the CX business -- and the number you referred to is blended across CX and EX. In the CX business, we're focused very much on the more profitable portion of SMB, whereas in the distant past, we would fish for anybody, any fish we could catch. Now we're very much focused on those that are going to retain with us longer, expand with us more. And so that's a slightly larger customer within the SMB segment. It's also being much more discerning with our marketing so we're attracting those customers that are going to have long-term value for us and where they're going to see long-term value from our products. So I think all of that contributes to the larger account mix moving up and seeing growth actually higher than the overall corporate growth in those larger accounts. And so that's an intentional output of our strategy.

And then if I could sneak in a second one, just on the margin side, pretty sizable upside here in operating margins relative to the guide. Can you just talk about where you're seeing the most efficiencies internally and then frame for us kind of how you're balancing the mix of growth versus profitability?

Billy, yes, we did really well on the efficiency side. Now if you recall, at the end of Q2, we made some structural changes to the business. A lot of it was go-to-market led, which I also mentioned on the call that we moved all of our go-to-market efforts for CX down to India, which does two things. One, it makes CX highly profitable, which we said we're going to run that business for profit. Second, it gets our entire field motion solely focused on EX. And that is what the strategy is going forward. We were able, at the same time, to continue to drive efficiencies, which we've been doing for the last couple of years. We rolled that beat through and raised it. And we -- the margin structure for Q4, we are still going to lean in specifically to two things. One, EX field sales. And so we're building that out, and that's all taken into account in the guide we made for Q4 as well as kind of AI engineering development.

Your next question comes from the line of Scott Berg with Needham & Company.

Really nice quarter here. Dennis, for my one question, I wanted to talk about partners, partner contribution. The CDW example you gave, I thought was interesting and encouraging given what seems to be probably $1 million land there if I put all the pieces in your commentary together properly. What -- I guess the question, though, is how do you think about partner contribution as you get into next year? Obviously, their contribution is growing. But longer term, on the EX business, should it be 50% of the business, 75% of the business? Just kind of how are you thinking about all those pieces over the next couple of 3 years would be great.

Yes. So as we move upmarket, more and more of our deals are covered by a partner. And there's a couple of things going on. The first is that our platform story is really coming together nicely. So in the last quarter, 2/3 of our top 50 deals were both ITSM and ITAM. As we -- and this was the first quarter where we had ITAM fully integrated into the cloud. So all of the Device42 capabilities in the cloud. Any large account that we're going after, they are typically asking for both of those modules to start. As we integrate FireHydrant, we fully expect ITOM to be a part of that story as well. In fact, we're seeing that now. Now -- and then, of course, AI, where the AI capability continues to be built out across our platform. We announced Robusta, which is an AI ops company, very innovative company in Israel which is going to supplement what we're doing with FireHydrant to proactively identify issues before they actually are real issues, and the IT department can intervene over time, the AI can simply intervene. So all of that creates a much more rich, robust platform that allows us to go upmarket. And as you go upmarket, we're going to be getting into more and more sophisticated environments where a partner is absolutely critical. So I would expect -- when we look at like what are the top 50 customers, top 50 deals in the quarter, it's going to be 75% of those customers that are covered by a partner. And that's how we've been investing in our partner motion. We have a partner leader who's -- I want to say, 6 or 9 months in, who's really been investing in our relationships with the larger partners in our portfolio. We're focused on going deeper with fewer partners. I mentioned two of the partners that doubled their business with us over the last year, but there were actually at least five that I know of that doubled their business with us over the last year. And I think that, that's going to be just a more and more important part of our motion, both in sourcing deals, bringing us into new situations, but then helping us actually execute those implementations and then ensuring that the customers are set up properly, that they're happy, that they're successful. We also see an opportunity potentially in SMB for partners, which we're exploring where we're not doing a lot with partners in the lower end of the business, but we could. And so I think you'll see more partners in how we grow and how we expand. It's critical for us to do that as we continue to drive profitability of the business overall. Partners can help you do that as well. So I'm pretty excited about where we are, the progress that we've made, and particularly in that upmarket motion.

Your next question comes from the line of Patrick Walravens with Citizens.

Dennis, I mean, you guys sound really good. And -- but this -- the beat this quarter was the skinniest you've had in a while. So I'm just wondering if you could talk us through what the -- I don't know what the right word is, but what the offset was this quarter?

Well, I think -- well, thanks for the compliment. So I think that we -- if you look at the beat, first of all, on cash flow and operating margin, it was a pretty meaningful beat. On revenue, it was skinnier than -- yes. So I mean, that's quite meaningful for us, right? We're at 30% free cash flow margin in the quarter. We're guiding to 27% for the full year. That is super important for us in the long run because that allows us to reinvest in the business or potentially reinvest in buybacks. And we're seeing that the acquisitions that we've made over the course of the last couple of years are paying off. I mean, the one that's the most obvious and very clear is Device42 with ITAM, but I think we're going to be saying the same thing in a year for FireHydrant. And so I think that's super important. We're not just focused on top line. We're balancing top line with bottom line. That is important for everybody to understand. We did make some meaningful changes in the quarter. We moved all of our servicing and selling for our CX business to India. We used to have reps in the field that were responsible for selling both EX and CX. We said, look, the opportunity for EX is so large, and we need you focused 100% on EX. We need to go deep in the product. The product is much more sophisticated than it was 2 or 3 years ago. You need to become expert in this, if you're not already. So focus there. So you're going to -- when you make those kinds of changes, you're going to create some moving of books and so forth. But when we look at the next quarter, we look at Q4, our pipeline looks fantastic. We've got all this momentum upmarket. So I think that we're just going to continue to execute against this balanced approach to growth, both top line and bottom line, while being efficient with our share count. And that's why we are focusing on this 20% growth in free cash flow per share as a really important metric for us because we are balancing both.

Your next question comes from the line of David Hynes with Canaccord Genuity.

This is Luke on for DJ. So I know you're not guiding to next year yet, but it's obviously something people are speculating on now. Maybe just help us think through, what are the biggest puts and takes investors should be thinking about and considering when thinking about next year's growth and margin profile? And just the levers across the durability of EX growth, CX growth stability, just your AI monetization and then broader investment priorities behind the broader platform here?

Luke, this is Tyler. I'll take that one. Yes, for EX and for CX, right, CX has been very durable. We've put up 4% growth again. The early signs for our Omni product are really strong. ARPA is there, continuing to increase, and we view that there's potential upside there, but we've been very -- pretty conservative in that. And what we said in the script here, we kind of expect it to kind of stay around the same growth rates.

On the EX, we still believe this is a mid-20s grower, and there's a ton of upside here. And the things that we know about the product is that when it becomes a multiproduct sale, which we're landing with that the attributes of those customers just look a lot better. Yet we still have so far to go in terms of our existing installed base, offering them, number one, our new kind of cloud ITAM offering, which just came out this year, as well as ITOM, which is FireHydrant, which will be fully integrated at the beginning of the year of 2027.

So we're really optimistic. We're going to get through this quarter. Dennis and I both mentioned the kind of go-to-market changes, and we're going to execute this quarter, and we'll update all the numbers for next year at the end of this quarter. We should note, from an operating margin perspective, we've been able to drive a lot of efficiencies, and we're going to continue to do that. Q1 always has a little bit more pressure from an operating margin than Q4. And that pressure comes usually because of two things. One, our annual focal process, which is our raises internally, that all hits on January 1, which also, you have to do a bunch of things for balance sheet items that caused some onetime hits to your P&L. And then secondarily, Q1 has fewer days of revenue. And so we talk about that every single year, so there will be a little bit pressure on the operating margin for Q1, but we're going to actually digest that and continue to run the business very, very efficiently.

Just to add one thing for next year that as we're planning the business, the emphasis that we've had internally among our sales teams is very much about landing new business. And you hear it in our call, right? We emphasize lands all the time. And internally, that's what we've gotten quite good at. As the platform gets more mature, as we bring in ITOM and integrate it fully into the Freshservice platform so it's a seamless experience for customers, easy to upgrade to, we're slightly shifting the emphasis to expansion and really driving that expansion motion. And if we look at our base now, we've got 20,000 Freshservice customers. We've done some rough math to say, well, if we simply took the products that we had now and fully sold them in, such that we -- every customer is buying products at the right level. That's more -- that's hundreds of millions of additional ARR, close to double our base. That's just from upselling into our existing base. So we've gotten very good at land. Next year, what we're focusing on is, okay, now we have to take that motion, we have to become amazing at expansion, at exposing our customers to all the products and offerings that we have. 70% of our customers today are just on 1 of those EX products, primarily ITSM. And so there's a huge opportunity in the base just to expand, and you'll hear us talking more and more about that next year.

Your next question comes from the line of Robert Oliver with Baird.

Dennis, that was really helpful in response to that last question because that was going to be mine, which was around the kind of EX collective opportunity you're seeing to expand your largest accounts? And I guess maybe would add with the addition of FireHydrant and now having D42 in the cloud, I think you called out in the prepared remarks that D42 plus ITSM is already additive. But how does having that on a cloud version help accelerate that multiproduct expansion motion for your customers? And do you guys know where the bodies are buried within the customer base to be able to attack that? And then I had a quick follow-up for Tyler.

Yes. So thanks, Rob. So with advanced ITAM, the on-prem product was very well suited for a larger organization that had a mixed cloud on-prem model. But a lot of our customers are cloud-first, and they have very few on-prem assets, and they weren't going to bring an on-prem product into their estate. When we opened up advanced ITAM in the cloud to our customer base, we expected that we would get fewer than 100 customers in the first couple of quarters. We added 400 customers. And they're smaller, but there are easy expansions from Freshservice because it's literally a click of a button and upsell, and you experience the product, you experience the asset management product in Freshservice. The experience for the agent and the admin is completely seamless. So we have opened up a new market which our customers that tend to be a bit smaller, they tend to be cloud-first. And they're buying, and they can land with advanced ITAM. Now that's not the typical motion. Typically, they're landing with ITSM. But it's a great way to expand. It's a fairly lightweight sale to do that. And that's just an example of when we get these products integrated, there's a huge opportunity for us. The FireHydrant product, that's coming out in Q1, and we're very optimistic about that as well because a lot of our customers are using other solutions which tend to be more expensive. The integration is a bit clunky. We've got one of our competitors that's end-of-lifing their products. So there's a big opportunity for us there to take share and really drive that ITOM product into the market as well. So I think the expansion motion for us, there's multiple plays that we now have as we build out -- as we're building out the platform. And that's just going to continue over the course of 2027.

Great. Really helpful. And then, Tyler, just would love to hear from you, and it might be early because this might be more in the context of the out-year guide. But to get a sense for as that perpetual license shift to cloud happens, are you guys going to require that move for customers? There's going to be some math around it, I would assume? Obviously, the headwind from less perpetual upfront. But anything else we should know about contract durations, how long that will play out, potential uplift? Anything else you can share would be helpful.

Yes. No, we are not going to require the move because some customers, they want the on-prem product, and we will still sell it. But what we do anticipate is that as customers come up for renewal, there are going to be a number of them who want to migrate over, and we've already seen some of that. And to the extent that this actually impacts numbers, we'll share that. We did kind of built in. We had previously had about $2 million of term license revenue in Q4 that we've now assuming that's going to be more ratable. So that provided a little bit of headwind to our Q4 revenue guide. We built that into the guide. And it's all part of the strategy, right? It's actually what we want. But this is going to be a shift that's happening over the next couple of quarters, but we've built all of that -- those numbers in. But we are going to have both, Rob. And so we will still see some customers who renew on that on-prem product. And like we have in the past, we will call it out if it provides any anomalies.

Your next question comes from the line of Jackson Ader with KeyBanc Capital Markets.

The first one that I have is on just the messaging and just like the deprioritization on the CX side. I just feel like it's so tricky to find the right balance. And so I'm curious, like what are some of your largest CX customers? Like how are they actually reacting to either your messaging continue to prioritize or some of the actions that you've taken to deprioritize that side of the house?

Yes, I wouldn't describe it as deprioritization. I mean, we've said we're EX-first. CX is a critical part of our business, and those customers are super important for us. The biggest investment we've made that benefits small and large customers is this shift to the new Freshdesk Omni. In that new experience, an agent can handle conversation right alongside e-mail-based correspondents alongside voice in a way that they couldn't before. And a customer can move from an e-mail experience to a conversational experience to an AI experience seamlessly. And that's all very different from the approach that we had before where the product line was somewhat fragmented across conversational, traditional ticketing and so forth. So that change is very important for those larger customers. And it also allows us to concentrate our innovation on a single codebase, which allows us to move faster. The other area that our larger customers are benefiting by and you're starting to see in the numbers is AI. So our AI Agent Studio for CX had a very strong quarter. Tyler mentioned in his remarks, $2.5 million in revenue coming -- new ARR coming from that in the quarter alone. And we're starting to see the sessions associated with that product really ramp up quarter-over-quarter as the customer base gets more comfortable with true agentic actions for their consumers or for their customers. And as the capabilities of that platform are continuously expanding as we add more prebuilt configurations into the studio, into the marketplace and our customers can build their own custom experiences, which, of course, takes some time for them to do, to test, to get comfortable with, but you're starting to see that really happen. And those tend to be larger customers. So I think there's plenty of goodness in it for the larger customer base. We certainly don't say we're deemphasizing the product. We're continuing to develop our CX product. But I think it's also important to be clear that EX is the driver of our growth, and EX is where our -- or the majority of our investment has been going.

Yes. Okay. I got you. And then a quick follow-up. Can you -- there just have been a few tuck-ins, tuck-in acquisitions. Is there any size for the inorganic -- the total inorganic contribution, either in the third quarter or in the fourth quarter guide?

Yes. So Jackson, we have -- we closed both Torii and Robusta. We expect to get between $8 million to $10 million of ARR from the two of them by the time the quarter ends, and there's nuances and contracts that come over and things like that. And as part of that, about $1.5 million of revenue in the quarter is the current expectation.

Your next question comes from the line of Brian Peterson with Raymond James.

Maybe just following up with the last one related to M&A. As your free cash flow margins have gotten to 30%, would you anticipate being a little bit more active in the M&A market? And I'm curious what the valuation environment looks like for some of the targets that you guys might be looking at?

Yes. So we've been pretty active this year. We've done 3 transactions. We're looking for -- we're looking for areas that will accelerate our road map and enhance the overall platform value that we've -- that we're creating. We're also looking for talent and for, in particular, deep technical expertise in subject areas where our team might not have that expertise, AI, expertise is always really exciting for us. Robusta is an example of an AI-first company that's doing amazing things with an amazing technical team that we're really excited about. And so we have the ability to go out and to find those companies. I think the valuations are all over the map, right? You can be talking to a company with $20 million in ARR and they're expecting 30x ARR, and that's not what we're going to go after. But there's plenty of opportunities out there for teams that are doing interesting work and that want to be part of a bigger platform, that want to have access to a go-to-market operation that they just simply couldn't build themselves. I think for both Torii and Robusta, that was a big part of the appeal. They want to see the hands of -- their product in the hands of thousands of customers, not hundreds. And that's what we offer. So I think you'll see us continue to be prudent in the M&A market, but we've also built up the muscle where we're able to do these transactions smartly, able to integrate the teams, able to integrate the products, able to retain and develop the talent. So I think we're more confident going forward in our ability to do meaningful deals. And we've proven, because of the cash generative ability of the business, that we can fund these out of cash flow effectively.

Your next question comes from the line of Taylor McGinnis with UBS.

Just on the EX business specifically, it looked like it slowed a little bit to 22% constant currency, I think you mentioned. And then if I look at the outlook and if I take out the $8 million to $10 million of ARR from acquisitions, it looks like you're assuming the EX business is going to continue to grow in this low single-digit range on an organic basis. So could you just comment on if anything changed or if anything surprised you in the quarter? And what might be the drivers of that?

Yes. So I'll start, and Tyler can take it up. So I think the momentum that we see in EX continues to be very strong. And you're going to have quarter-to-quarter, blips up and down. I think what we saw in the quarter was this continued demand amongst that class of companies from 5,000 to 20,000 employees that are meaningful businesses with real enterprise needs. They need a secure solution. They need a solution that's very much embracing AI, and they're looking for a platform. And that's why you're seeing that substantial growth in the over $100,000 customer base. That's the customer that we really -- that's really resonating with us. I think if you look forward, we're really optimistic, first of all, because if we look at our new business and expansion pipeline, it's quite strong. Going into Q4, Q4 is historically the biggest quarter of the year for us. But like I was saying earlier, just the embedded expansion value in the customer base that we have now, now that we have a broader product set is really impressive and something that we have to go after that will allow us to accelerate growth from where we are now in a way that's frankly more predictable than new business, right? Our emphasis has so much been on new business, which is where it should be. We're in the market to take share, but we need to get that expansion motion going now that we've got a fuller product set, a fuller platform story. And I -- just one -- I think you said low single digits. What we're -- what we delivered last quarter was 22% constant currency, just to clarify.

Yes. And Taylor, the math is right in terms of the numbers we gave out for Q4, the $8 million to $10 million, and we -- but we said we plan to exceed $625 million ending the year. As Dennis just mentioned, Q4 is historically our largest quarter. We have the most pipe that we're working right now. We clearly are executing, and we feel like the changes we made in at the beginning of Q3, that they're now settled in. And the teams are executing, but we have to obviously go finish up the quarter.

There is no other changes on EX. We think the opportunity is massive. And we are structurally really focused going into next year also on the expansion motion into our existing base, which we think the majority of that will play out throughout 2027.

Your next question comes from the line of Alex Zukin with Wolfe Research LLC.

I guess, maybe, Dennis, for you, on sales cycles and the broader demand environment. Maybe can you comment like what are you seeing right now on the ground in the midst of [ token ] spend, incremental anxiety on cyber? Is that helping sales cycles because you're getting more involved in those projects or maybe making them a little longer as those activities kind of crowd things out? And then I have a quick follow-up for Tyler.

Okay. So let me -- first, thanks for the question. Let me start with the spend side. Absolutely, the pressure on budgets is helping us because we're moving upmarket, we're taking share from bigger incumbents that are typically a lot more expensive. And that's not just the licensing cost, that's the total cost of managing the solution, keeping the solution current, changing workflows as your business processes change. The other trend that's benefiting us is just a desire among CIOs to consolidate to fewer platforms. That also helps us as we broaden the platform story. I think there is a point about cycles that is important to understand. Our average deal in our pipeline, our average opportunity in our pipeline has doubled in the last year. The average deal size has doubled in the pipeline. And we're seeing more and more of these large new opportunities come in through -- in some cases, we had a number of large deals, I think 1 $0.5 million deal that came in through a webinar, right? So they're finding us, which is great. And things like Gartner Magic Quadrant helps, the IDC Top 3 in IDC help. All that's helping us get better awareness, better recognition among a larger set of customers. We also have a much better referral network than we had 2 years ago because we have all these big customers. And every quarter, we've got new customers coming on board that were tenured customers of our biggest competitor. And they are then talking to their peers and recommending us. All that helps. But that does mean these deals are bigger. They're more complex. There's more parties involved. And so our whole go-to-market has had to mature for that larger deal. And we do see, in some cases, the sales cycles are longer than what we've previously expected. So the challenge for us internally is how do we keep moving upmarket, how do we raise our game, get the right people in the door, train the people that we have to be able to match that larger buyer, that more complex buyer. And yes, I would say that our -- the cycles have elongated somewhat. I think we've adjusted to that, but that's part of the territory that we're going into as we move upmarket on the EX side.

Got it. Tyler, maybe for you, I guess, again, kind of the spirit of the question is you're talking about a confidence in growing EX mid-20s. But again, forward-looking metrics, whether it's billings, they were a little light or CRPO decel or even kind of EX ARR, if you exclude the $8 million to $10 million from acquisitions, you're exiting the year closer to 20% growth in EX. Whereas, I think before you were targeting 25%. So maybe, just what is giving you the confidence to say it's going to reaccelerate to that mid-20s, and given those forward-looking metrics?

Yes. I think -- so Alex, on the numbers on the -- for the Q4 and backing in based on the $8 million to $10 million and the greater than $625 million, I really think that's like a 22% kind of constant currency number there is what we're kind of -- what that should roll through at. The confidence is really the market there. The pipeline is absolutely there for us, and it's really about adjusting, as Dennis said, about making sure we have the right people to close those deals. And that's mainly on lands. And we feel like we haven't even turned on the expansion motion yet. Again, advanced ITAM, which is our cloud offering, just is becoming available to our existing installed base in Q3 and Q4. ITOM, which was the FireHydrant acquisition, will not be ready to be sold until kind of the end of this quarter to beginning of next quarter in terms of it being released on the new -- fully platformed onto our whole Freshservice platform. Those things are what give us confidence. And what we know is that as customers are buying them as they land, the attributes look really, really good and they're seeing the value. That, along with all of the AI initiatives that we're making right now. So yes, we're very bullish in terms of what we can do with our existing installed base. And the new business, everything that we're seeing there is really, really strong. Again, even with all the disruption we had, we still landed more greater than $100,000 deals in EX than we ever have before in Q3. And we're just going to keep plugging away at that.

And just to clarify, Tyler, I apologize. The $625 million, is that including the $8 million to $10 million of acquisitions or excluding?

Yes, it does include the $8 million to $10 million.

Your next question comes from the line of Tamjid Chowdhury with Guggenheim Securities.

I guess, the first one for Dennis. In August, you announced that Freshservice achieved FedRAMP In Process designation. Can you maybe talk about what your expectations are in terms of like time line to achieve full certification there? And how you view the opportunity in terms of scale and the competitive landscape there?

Yes. So FedRAMP is an important investment for us, and we're very excited about going through the process. The opportunity there is huge. We already have a number of government-affiliated laboratories around the country that are using Freshservice. What we -- and they, in turn, have pulled us into a major department of the government who has agreed to help us through the process. And the thesis is that there's -- in large government, there is a large opportunity that's similar to what we're seeing in the commercial market. Organizations that are not necessarily the U.S. Army, but organizations with tens of thousands of employees that are looking for something that's more nimble, better suited to their need. They're under the similar budget challenges that we're seeing in our segment of the market in that agile enterprise. But they historically haven't had much choice. There haven't been a lot of solutions that have been FedRAMP-certified. And they know they need something to automate how IT works, but there just hasn't been a choice. So we're going to give them a choice. In terms of timing, I think it's Q3 of next year, roughly.

Yes. Right now, the current timing is our expectation is that we would be done by the end of the summer. Obviously, we -- this is a big effort, and a lot of it is both in the way we deploy the product, but a bunch of product work that we're doing. But right now, it looks at the end of Q3, it's going to be ready. At the same time, we're doing both Rev5 and 20x. There's two things you got to do now because the FedRAMP rules have changed a little bit, so it makes it a little bit more complex. So we're working with some of our sponsors on that who are already customers. But at the same time, yes, it's a massive opportunity. And so we are starting to build out what that sales motion would also be, which we haven't necessarily had internally to be ready for when we get there.

And then, Tyler, as a follow-up, it looks like the EX net dollar retention excluding legacy Device42, I think it was like 109%. That is slightly lower than the 111% that you reported last quarter. Can you provide more color on what's driving that? And how did that pan out relative to your expectations?

Yes. It was roughly in line with expectations. Again, on the expansion side for EX, we have ESM primarily and then also agent addition and Copilot. The ITAM product, right, that's just coming available for existing customers, which we think is going to be a huge driver for continued expansion. Then a follow-up with ITOM, which is -- the most will most likely be ITSM land with ITAM, if they're buying new upsell to ITAM if they're existing, and then follow on with ITOM. So we looked at that. There's a little bit of noise in that number, but nothing that we thought was concerning.

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

So thanks, everybody, for joining the call today. Just to reiterate, Q3 delivered on our priorities: EX-first momentum; category leadership with agile enterprises; and in the mid-market, AI as an expanding tailwind, disciplined profitability and prudent capital management. We're very confident in our plan for a strong 2026 finish, and we look forward to speaking with you next quarter. Thank you.

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

Welcome to Freshworks Second Quarter 2026 Earnings Conference Call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President; and Tyler Sloat, Freshworks' Chief Operating Officer and Chief Financial Officer.

The primary purpose of today's call is to provide you with the information regarding our second quarter 2026 performance and our financial outlook for our third quarter and full year 2026. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroconomic environment in which we operate and market volatility, and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements.

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. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release our most recently filed Form 10-K and other periodic filings with the SEC.

Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. 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. I will now turn the call over to Dennis. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Freshworks is the AI-powered unified service operations platform for the modern agile enterprise. In Q2, we delivered another quarter of strong growth and profitability. Revenue was $237.4 million, up 16% year-over-year. Our non-GAAP operating margin was 24%. We have now achieved Rule of 40 for 8 straight quarters. We are growing our business with discipline quarter after quarter. In Q2, we also achieved a meaningful financial milestone. We reported positive GAAP net income ahead of our previously given expectations. GAAP profitability is no longer just a goal. It is here, and it is funding our investments in EX and AI.

And we expect to sustain our [indiscernible] profitability. At our investor event during [ refresh ] in May, we laid out 5 key messages about the durability of our business. Before I get into the quarter, I want to remind everybody of those messages. First, we are an EX first company. When Freshworks went public, 35% of our total ARR came from our employee experience business. By year-end 2026, we expect EX ARR will exceed 60%. Now the market opportunity in EX is significant. The total addressable market we are pursuing spans ITSM, ITAM, ITOM and ESM and is roughly $45 billion, growing 13% a year.

We are focused on businesses with up to 20,000 employees, which represent about 60% of that overall total addressable market. It's large, fragmented and no single player in this segment holds more than a 20% share. That leaves plenty of room for Freshworks to win. Second, we are a category leader with agile enterprises and in the mid-market.

Freshservice has over 20,000 customers globally with EX ARR up 5x from where we started at the beginning of 2021 just 5 years ago. Freshservice serves companies that carry the complexity of an enterprise but require the speed and agility of a modern platform. Recently, Gartner named Freshworks a leader in the 2026 Magic Quadrant for IT service management platforms. We feel our positioning as a leader by Gartner highlights a clear shift in the market. We're focused on giving agile enterprises the depth and scale they need alongside domain-specific AI so that they can move at the speed of their business while staying firmly intro. Third, AI is a tailwind, enabling growth in our business.

Over 7,000 customers are paying for an AI SKU. Our Copilot attach rate on larger deals exceeds 70%, our products allow customers to adapt to an agentic world quickly and achieve measurable IT efficiencies faster.

Fourth, we are profitable and scaling. We're demonstrating operating leverage and purposefully concentrating our investment to expand our EX business. And our fifth key message, we are committed to capital efficiency and prudent capital management. Tyler will cover this in more detail as we bring together how Q2 delivered on all 5 of these key objectives.

Now let's look at the results from the quarter, starting with EX. Our EX business demonstrated continued growth and large deal traction. EX ARR grew 24% on a constant currency basis, ending the quarter at $567 million, and representing approximately 59% of total ARR. Why are we able to consistently grow EX? Two reasons. First, large customers are actively choosing Freshworks to displace incumbents that no longer serve them. Take [ Seagate ], a global leader in hard drives with 30,000 employees. After 14 years with a legacy provider, they struggled to extract value from AI and we're unable to adapt workflows as the business evolves, and we're paying for dedicated specialists just to manage the complex system.

They evaluated the market, they chose Freshservice and we're live in 3 months. that speed to value is what Freshworks delivers. Another example is American Oncology Network, a nationwide cancer care network supporting over 140 clinic locations. They implemented Freshservice for IT, Freshservice for business teams and Freddy AI Copilot in under 30 days. Today, their EX platform has expanded to 7 business departments beyond [ IP ], and it takes just 1 administrator less than 2 hours per week to manage the entire environment. That upmarket momentum shows in our numbers. Customers contributing more than $100,000 in ARR, grew 25% year-over-year and now represent roughly 40% of total ARR.

We believe that's the clearest evidence our enterprise motion is working and it's accelerating, not slowing down. Second, we are expanding our right to win by broadening our EX platform. Fresh Service ITAM makes infrastructure visible and actionable giving IT teams the context they need for unified service operations. Our offering is powered by Device42, a company we acquired a little over 2 years ago. And today, we offer both on-prem and cloud native advanced ITAM products. About 1/3, a large new EX land now include ITAM. And in Q2, we had the strongest new logo quarter for this business yet. We are actively serving new Freshservice ITAM cloud customers on our platform, such as drive time and [ radio France ]. Our enterprise service management crossed $50 million in ARR this quarter growing 67% year-over-year.

ESM continues to be a major long-term growth vector for Freshworks as [ 1/5 ] of new EX seats are coming from outside IT. Our investment in fire hydrant showed results this quarter. [ Fire hydro ] generated its first 6-figure expansion deal since owning Freshworks and was 1 of our top 3 largest deals of the quarter. This customer is a global cybersecurity leader that chose to consolidate their alerting and incident management on to [indiscernible].

Stepping back, Freshworks [indiscernible] business is in the strongest position in the company's history. We are winning against [indiscernible] and legacy providers expanding our customer base with new platform offerings, growing deal sizes and strengthening our market leadership. Now let's talk about how we are innovating with AI. Freddy AI continues to be embedded throughout our platform, delivering real value for customers while building towards the long-term monetization opportunity. At [ refresh ], we launched 2 new AI products for fresh service. Freddy AI agent studio, a no-code environment for rapidly building domain-specific AI agents, and MCP Gateway, which connects fresh service intelligence, AI tools customers already use, including Claude and Microsoft CoPilot.

Despite being available for a short time, we have hundreds of customers using both products in our early access program today. The productivity gains our customers are experiencing with AI are substantial and real. Agents using Freddy AI copilot handle 50% more tickets. That means they are 50% more productive. That's huge for customers. Freddy AI agent deflection rates averaged 50% and reach as high as 80% for mature deployments. With Freddy customers are changing the economics of how they run service operations. And we are monetizing AI, copilot attach rate for new deals above $30,000 exceeded 70%. Eligible EX customers paying for CoPilot increased to 22% of our installed base in the quarter. and EX customers with AI continue to carry higher NDR well above total company NDR. [ ICOR ] demonstrates what Freddy AI can do at enterprise scale, a global BPO with more than 40,000 employees, [ iCore ] had a mandate to modernize and automate. They replaced a legacy on-premise system with Freshservice and Freddy AI, now they have an agentic AI solution that is fully automated 35% of their IT service delivery and cut monthly ticket volume by 39%.

Turning to the results and highlights of our CX business in Q2. We're 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. As of Q2, over 90% of Freshdesk customers have migrated to the new platform. Freshdesk [ Omni ] is delivering measurable value for our mid-market customers. They are reporting real efficiency gains, including up to 97% first contact resolution, 60% higher agent productivity and 95% CSAT.

These customers are benefiting from an AI-ready platform that provides the unified context needed to deliver better AI alums. In Q2, CX AI agent sessions and conversations on Freshdesk Omni were both up quarter-over-quarter and more than fivefold year-over-year. Take fleet claims, a U.K.-based motor fleet accent management company. They have reported that they have been able to use our e-mail AI to resolve about 10% of their tickets without any agent involvement and amplified the importance of being able to respond faster than ever, especially outside business hours.

Our CX organization is now fully aligned to drive efficiency and customer value. As of July 1, we've consolidated our CX organization in India. Our GTM product and engineering teams are all co-located in driving that business. Looking ahead, we're encouraged by our Q2 CX developments and have a positive outlook on our ongoing growth opportunities for this business.

Taken together, our EX momentum and a more disciplined CX business confirmed that Freshworks is delivering on our mission while investing in our future. As we announced last week, I'm pleased to welcome Ryan Manning to Freshworks as Chief Product and Technology Officer. Ryan will bring deep product and engineering leadership, having built and scaled category-leading platforms across service management and [ CRM ]. He joins us from BMC Helix, where he served as Chief Product Officer, with prior leadership roles at [indiscernible] and ServiceNow. Our platform is stronger and broader than ever.

AI monetization is taking shape, and our financial model is delivering solid results. We are the AI-powered unified service operations platform for the modern agile enterprise and Q2 delivered on that. I'll now turn it over to Tyler to discuss our financials.

Thanks, Dennis, and thanks, everyone, for joining on the call today. We had a strong second quarter, our seventh consecutive quarter exceeding revenue expectations, and we achieved positive GAAP net income ahead of plan. For our call today, I'll cover the Q2 2026 financial results provide context on key metrics and close with our updated outlook for Q3 and the full year 2026. As a reminder, most of my discussion will be focused on non-GAAP financial results.

I will provide comparisons on both an as reported and at constant currency basis where available. Starting with the income statement. Total revenue reached $237.4 million in Q2, up 16% year-over-year as reported and up 15% on a constant currency basis, above the high end of our estimates range. Professional services revenue was approximately $3 million, slightly higher than prior quarters.

EX continues to be our primary growth engine. EX ARR ended Q2 at $567 million, growing 23% year-over-year as related and 24% on a constant currency basis. As Dan covered, the growing breadth of our platform that covers ESM, ITAM and ITOM is enabling us to win business well beyond core ITSM, and is broadening the EX growth base.

Looking ahead, we continue to expect EX ARR to grow in the mid-20s and to exceed $600 million exiting 2026. Turning to our CX business. CX ARR ended Q2 at $400 million, growing 3% year-over-year as reported and 4% on a constant currency basis. This performance reflects the deliberate operating plan we have in place to run CX with a focus on profitability and for steady-state growth. The actions we took in May have facilitated better efficiency and focus in our CX business and the Freshdesk Omni platform is demonstrating strong market fit for our mid-market IDP.

We continue to expect CX ARR to grow in the low single digits for the full year 2026. Moving to margins. Non-GAAP gross margin at 86% remains consistent with prior quarters. Non-GAAP operating income for Q2 reached $55.9 million, well above estimates. This performance reflects continued top line leverage as well as the partial impact of restructuring savings. Most notably, we achieved positive GAAP net income this quarter.

Q2 GAAP net income was $3.2 million, with GAAP EPS of $0.01 and non-GAAP EPS of $0.17. We set a goal to reach GAAP profitability by the end of 2026, and we achieved this ahead of schedule. To be clear about how we're allocating the benefit of operating leverage in our model. As organic growth remains our top capital priority, our first use is continued investment in EX sales capacity and AI R&D.

We invested in both of these areas in the first half of the year, and we intend to continue to invest in the second half to support our accelerating growth opportunities in [ EX ].

Turning to operating metrics. Net dollar retention was 104% as reported and 105% on a constant currency basis in Q2. Excluding the legacy Device42 customers, Net dollar return was 106% constant currency, exceeding expectations. Within this, EX NDR, excluding legacy Device42 customers, was over 111% on a constant currency basis.

Looking ahead, we expect NDR and EX NDR on a constant currency basis to be roughly the same for Q3. Moving on to customer cohorts. Customers contributing more than $50,000 in ARR and grew 18% year-over-year as reported 19% on a constant currency basis. This cohort now represents over 55% of our total ARR. Customers contributing more than $100,000 in ARR, grew 25% year-over-year as reported and 26% on a constant currency basis. This cohort represents approximately 40% of total ARR.

The growth rate of this cohort and mix of total ARR reflects the sustained upmarket shift in our business and validates our strategy of concentrating our ICP in mid-market and agile enterprise customers. and driving an EX multiproduct motion across core ITSM, ITAM, ITOM and ESM improving win rates and deal sizes and new business across the EX portfolio and creating a flywheel for expansion opportunities gives us confidence in sustaining the mid-20s EX growth trajectory.

Now on to billings, balance sheet and cash. Calculated billings reached $245.8 million in Q2, growing 15% year-over-year as reported and 16% on a constant currency basis. For Q3, we estimate billings growth of approximately 13% as reported and 14% on a constant currency basis. Looking ahead, we expect billings growth to be in line with revenue growth for 2026. Adjusted free cash flow was $57.7 million in Q2, which was above our previously given estimates. Q2 adjusted free cash flow margin was approximately 24% and adjusted free cash flow per share was $0.21. We remain on track to meet or exceed our full year adjusted free cash flow per share target of $0.94.

Capital allocation, our framework is to invest in high-return [ EX ] growth first and return excess capital to shareholders second. Year-to-date, we have deployed over $200 million toward our stock repurchase program and reduced shares outstanding by 7%. In Q2, we repurchased approximately 18.3 million shares for $159 million, while utilizing an additional $10 million to offset dilution through our net cash settlement of equity, we ended Q2 with approximately 296 million fully diluted shares and approximately 263 million basic shares outstanding. At the time of our IPO in 2021, we had approximately 323 million fully diluted shares outstanding. We have reduced our fully diluted share count by 8.3% over the past 5 years. We ended the quarter with $665 million in cash and investments with no debt, providing ample financial capacity to continue our repurchase program while still prioritizing investments in future growth.

Now on to our forward-looking estimates. Our non-GAAP net income projections for 2026 assume a tax rate of 24%. For the third quarter of 2026, we expect revenue in the range of $244.5 million to $245.5 million growing approximately 14% year-over-year on an as-reported basis and approximately 14% to 15% on a constant currency basis.

Within this, we are including a $0.5 million headwind from FX, compared to our initial estimates at the beginning of the year. Non-GAAP income from operations in the range of $59 million to $61 million and non-GAAP net income per share of approximately $0.18 assuming weighted average shares outstanding of approximately 266 million shares. For the full year 2026, we expect revenue in the range of $963.5 million to $966.5 million, growing approximately 15% year-over-year or 14% to 15% on a constant currency basis.

Within this, we are including a $2 million FX headwind compared to our initial estimates at the beginning of the year. Non-GAAP income from operations in the range of $222 million to $228 million, and non-GAAP income per share to be in the range of $0.66 to $0.68, assuming a weighted average shares outstanding of approximately [ 263 million ] shares. We expect to generate approximately $265 million in adjusted free cash flow. This resulted in adjusted free cash flow margin target of 27.5% for the full year of 2026.

We remain on track to meet or exceed our full year adjusted free cash flow per share target of $0.94, up 24% from fiscal 2025. As a reminder, cash used for stock repurchases is reflected in our financing activities and is excluded from our invested free cash flow calculations. Our forward-looking estimates are based on FX rates as of August 1, 2026, and do not take into account any impact from currency moves.

Our full year 2026 revenue estimates include $2 million FX headwind. In closing, we delivered strong top line and bottom line performance in Q2, and we remain confident in our ability to achieve our 2026 financial and operational plans. EX remains our primary and largest growth opportunity. Our AI monetization strategy is on track and our CX business is now best positioned for steady-state growth. We are profitable and have the operating leverage to fund our EX platform growth and expansion to meet the demand momentum driving us into the second half of the year. Operator, let's open it up to Q&A.

[Operator Instructions] Your first question comes from the line of David Hynes with Canaccord Genuity.

Great. This is Luke on for DJ. So I'm curious, you guys have always won on the on the enterprise grade without the costs without the complexity of the bigger guys in the space. I'm curious, as you think about layering in you've layered in Device42. You have [ fire hydrant ] now, maybe you have some security ops down the road. Like how do you think about keeping the product in the implementation experience of [indiscernible] from getting to complex potentially weakening that differentiation over time.

Yes. Thanks for the question. It's Dennis. That's 1 of the key areas that our engineering and product teams really, really focus on is how to -- how do we maintain that usability, easy to use, fast time to value, intuitiveness of the product that where we are as we continue to expand the capability of the platform, the enterprise readiness of the platform and so forth. And we work really hard at making that work. We pride ourselves in the focus that we have on design and UX. We've made a lot of strides in unifying our overall design language across all of our products.

For Device42, for example, that product today is now fully available in the cloud. If you go into Freshservice and you're an admin, it appears as a tab as other product would the design language is the same as what Freshservice is all about. It's the way you navigate through the product is the same. Data is pulled seamlessly from the asset management capabilities and the CMDB into the fresh service module. And so the advent can see all that in 1 place. So that's really important. And that approach that we're going to take to fire hydrant as well later this year. So I think it's something that is critical for us. It's going to remain critical for us to continue to focus on that usability as we broaden the platform.

Yes. Yes, super helpful. And maybe just a follow-up. One thing that our team has been hearing more of with this new wave of AI native or at least potential new wave of AI native service management vendors they're positioning as an intelligent layer that maybe sits on top of whatever ITSM vendor a customer has already the figure is basically you can modernize the employee experience without ripping out something like, say, a service now, for example. I'm curious, are you starting to hear discussions around that? And how do you think about competing against that approach?

Yes. We're cognizant of the startups out there. We have not seen them competitively that much, if at all. And our what we're seeing customers want is a system of record that has the kind of control and security that they need that has AI integrated into it in a way that's usable, that's easy for them to get up and running, that's easier for them to configure. And that's consistent with what we've been building all along in the core fresh service products. So our AI agent studio, which we launched in May for EX, already has over [indiscernible] customers on it. You might remember, we launched that product into EA, and we have not priced it yet. The intention is to price that fall. That will be a session-based pricing model. But that is an example of customers getting value out of our product immediately and really looking to us to provide that experience layer.

So I understand, of course, we're very well aware of the startups coming into the space. But as of yet, we have not seen them make a lot of traction. I think it's going to be hard because to do AI well, you need to understand the operating environment. You need to understand the workflows that already exist, the controls that already exist in the operating environment. And that's what we've spent over a decade building.

Your next question comes from the line of Patrick Walravens with Citizens.

Congratulations to you guys on the results. Dennis, I saw that Gartner came out with their new Magic Quadrant I mean, just like a week ago, and it was nice to see Freshworks in the leaders cart. I think it's been a long time since they've had 1 of these for ITSM. Does that -- how much does that help? Does that help with lead generation -- and I saw Ian posted it? I'm just wondering what that actually ends up doing for you guys?

So look, we think it helps a lot now. In part, the reason we're in the Magic Quadrant is because Gartner has gone out and talked to a lot of customers and understands the value that we've been able to provide for those customers, the capabilities of the product and how that's evolved over time. But we're quite happy with that result.

Look, I think -- we've got a lot of ways of driving interest in the business. We've seen a lot more large accounts come in the door that are referred by analysts referred by other customers. We've got a large cohort now of bigger customers that are on our side and helping us recruit the next generation of customers. You see that in the numbers. You see that in the number of $100,000 accounts growing 26% year-over-year. 40% of our business is now coming from those customers spending over $100,000. We closed our first $1 million deal back in Q1. We continue to see a lot of momentum among much larger deals. And those are the kind of -- that's the kind of evidence, I think that shows that the work that we put into building this complete platform that can handle [ service ] operations from frontline employee questions to solving problems when they arise through fire hydrant and our advanced asset management.

So all those things are what IT departments want in particular in the segment that we're focused on. which is those agile enterprises up to 20,000 employees. They don't have the resources necessarily or want to be spending the time and money on managing a more complicated system.

They want something that's going to work for them that they're going to be able to modify, that's modern and that's what we provide. So I think the Gartner validates all of that, and we're very happy about that, very proud of that, but we have a lot of work ahead of us, too.

Your next question comes from the line of Tamjid Chowdhury with Guggenheim Securities.

I guess the first one, it seems like there's a strong momentum in EX from ITAM and ESM cross-sell. That's good to see. Can you talk about how much runway remains for those products within your existing EX customer base? And what penetration looks like today versus where you think it can go?

Yes. So we outlined at our investor event almost a year ago. We believe both of those businesses will be $100 million businesses in the course of the next 2 years. We've got every single quarter, proof points that we're gaining momentum there. [ BSM ] grew 67% in the quarter. Our ITAM products that were attached in over 1/3 of our larger deals Often, ITAM is a quick follow-on after an ITSM land. So it's a good upsell once you've got the customer in the door. And really with where we're going with our IT operations, that intersection between ITAM and ops is really important because to do -- to respond to incidents as well, you need to understand the asset base.

So we think that those are actually self-reinforcing. And as we get more momentum with fire hydrant, we integrate that product. We put more and more focus behind that as well. That's going to help even more that ITAM business. ITM actually accelerated this past quarter. I think we had our best quarter ever for asset management. we launched the new --the cloud-based version of Asset Management last quarter. And we already are tapping into a whole slew of customers that otherwise would not have bought an on-prem product.

So the hypothesis there was that there were lots of customers, some of which were smaller than the typical Device42 customer that would be interested in the product. That turned out to be true. We beat our internal goals by wide margin. So we think there's a long way to go. And if we look at the penetration of the existing base for ESM in particular, we're really, really early in driving that business overall. So we're going to continue to stay focused there. We're going to continue to invest in capability for teams out [ out of ] IT. A lot of our focus has been in HR capabilities, things like onboarding and offboarding workflows out of the box. We're facing more on teams like facilities, teams like finance. Those teams also have lots of internal employee service needs, and we can build capabilities out of the box that are agentic that expand and allow us to tap into another team. So those are huge areas for us. We're very excited about both.

And then 1 quick follow-up. Constant currency NDR has been stable sequentially at about [ 105 ]. While it seems like a Freddy AI copilot attach rate is strong. I think you mentioned over 71% of new enterprise deals. While we understand that it doesn't directly -- the attach rate doesn't directly flow to NDR. It likely reflects broader product demand that should also drive Freddy 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?

Yes. So you're right, the NDR has been pretty consistent from a constant currency basis. and slightly improving in some cases. The Freddy attach rates for [indiscernible] , as you indicated, but absolutely, it is 1 of our strong expansion motions. Now it is harder to get existing customers to adopt CoPilot because they have existing way to work.

But we have kind of prescriptive sales plays around it. And we do expect that to continue to be 1 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.

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 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 unpack the confidence there.

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 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 mentioned, like we're seeing larger and larger deals, and 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 ESM and about 1/3 of the lands include ITAM, but that means still 2/3 still have Device42 as the potential to sell. We just kind of went live last quarter with what we call advanced ITAM Cloud, which is Device42 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 1 of our biggest lands in Q2 was a fire hydro stand-alone. And that's just going to open up opportunities to kind of cross-sell ITSM, ESM and others into that account, but also as that muscle build is 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 X continues to be a driver of that growth for the whole company.

And just to add something to that. look, if the market itself, the market that we're focused on that mid-market, lower end of the enterprise, that's about 60% of the overall market, and it's still fairly fragmented. No single competitor have 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 land with ITSM, expand with -- into ITAM, into ops in the ESM and AI. All those things are really building momentum. So you're seeing a lot of that come together and I think all of that gives a lot of optimism to the team here about the second half.

Perfect. And then my next question is just to look at the performance in the quarter. There was a nice 1 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 bigger drivers of that in the second half compared to what you guys saw in the first half?

Yes. 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 EX side given that the product strategy, the go-to-market strategy are 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 and first -- right out of the gate first quarter, second quarter did really well in generating new pipeline. 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 [ content ]. And this was the second order actually in a row that we accelerated revenue slightly. I think we were -- went from 13% to 14%, 14% to 15%. So yes, so far so good this year, and we're optimistic about back half and Tyler maybe talk about the [indiscernible] .

Yes, I think just about everything that Dennis just said, Taylor. We talked about in the beginning of the year that kind of rep pipe building, but it's really Again, a lot of the momentum we're seeing on the EX side in that kind of what we call agile enterprise and the high mid-market. 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 Schulz with Baird. Patrick. Please go ahead.

Maybe could you just touch on the [ liminarity ] of demand throughout the quarter? How does the demand environment and pipeline build compare versus last quarter? Are you seeing any impact on sales cycles as customers maybe back and reassess for their AI investor 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 that's -- 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 -- more of the deals going in at the back half of the quarter, but nothing unusual. And I wouldn't say that the buying cycles are unusual, considering [ again ], we're moving upmarket. AI actually is more of a motivator for people to think about their [indiscernible] and most of our business is coming from another vendor. It could be a small player, but often it's a very large player.

So they are faced with a decision often as to, okay, what are we going to do about AI, we're going to migrate to the incumbent vendors 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 or a competitor, 14 years ago we didn't do this.

So they're going out to market now and they're seeing -- 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 [indiscernible] 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 pretty good for us.

Okay. Yes, yes. That's very helpful. And I appreciate the commentary you guys provided around ITAM this quarter. I wanted to dive a little bit deeper there and maybe better understand how important it is that an enterprise-grade ITAM solution as you move further out market. Did you expect that ITAM and Device42 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 Device42, maybe just give an update on the cloud transition and how much of that business is still on-prem license.

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

Yes. So I think the -- for the on-prem business is 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 ingrate 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-premise. That was the whole goal and point. and that's now available to the existing installed base and any new customer who doesn't want the on-prem. So we kind of offer both now.

So on the first part of the question, customers aren't buying just in ITSM. They're buying the full capability to power their IT apartment, especially upmarket. And asset management ESM ops, all that -- that's -- 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. And 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 [indiscernible] platform. And again, you see the numbers working.

Your next question comes from the line of Scott Berg with Needham & Company.

Nice quarter. Apologies I did jump on [ light ]. I hope this was an at least. But I attended the [ refresh ] event in May. And 1 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 really evolving into more of a long-term account ownership 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 or should we see some other benefit to come from that program?

So I would say it's both new business, retention and expansion, those things benefit when we have a partner. We know when we have partners to our retention rates are higher, for sure. We know when we have parts involved, the extension happens faster. And we know in the sales cycle, we have a partner involved, the close rates are higher. So all of 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 the EX side. Partners like Unisys, which we talked about in the past, CGI, which we've talked about in the past. So those are -- 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, Dan. And then from a follow-up perspective, the partners that we did speak with seem to be very positive. I don't know, you guys are doing product-wise and win rate wise, you certainly are making an impact up 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. 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?

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.

So -- and then they want that system to continue 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 influence in some way, shape or form. But we're investing there. We have a new -- 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 VanVliet with Cantor.

I guess, first, if we think about the magnitude of either expansion or just deal size growth when Freddy is attached, where do those sit today and now with a couple of 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 Freddy?

Yes, that's a great question. I think -- in terms of the 1 metric you can look -- we look at is [ ARPA ] growth. That's been 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 accounts paying for a SKU for AI 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-priced 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 essential 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 [indiscernible] game.

And that's why we've been investing so much in AI. And these bigger customers would never come us if they didn't both believe in what we delivered today and believe in where the road map is going. That's super important for them.

So yes, I think it's hard to say like, okay, how much is it be AI-driven. But we have a lot of confidence in the overall business. We have a lot of -- we put the number out there, $1.4 billion ARR in the next couple of years. That's up from where we thought we would be a year ago. We wouldn't have done that if we did 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 of it, 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.

Yes. So it sounds like 2 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 [indiscernible] 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 1 product and seamlessly migrate -- or sorry, seamlessly upgrade from an e-mail-based ticketing experience to 1 involving chat and conversational and voice and 1 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 life cycle has changed. We now have designers who can work in Sigma create a product and [indiscernible] , push it directly to code. He built the hooks between our production environment in [indiscernible] , -- so the code comes out and compliant with our internal coating requirements. The process for doing QA is highly automated with AI now. And so that's resulted in a meaningfully shorter cycle times, about 30% faster we're shipping on basically a 2-week cycle now, which we were not doing before for AI products in particular.

It's changed our support business as well. We've implemented our AI e-mail agent internally to handle the questions that we get from our own customers about billing, and we saw about 30% of those questions were completely handled through AI in the when we turned it on.

So I think it's transforming many businesses. It's certainly transforming us. It's helped us drive our overall profitability of the business. GAAP profitable this quarter. That's ahead of where we thought we would be. Cash flow looks good. And so all of that, I think, is good for us. And I make sure that my team is using AI and everything we do, whether it's preparing for this call or doing a presentation to the company, AI's 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 Zukin with Wolfe Research, LLC.

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 16% -- or sorry, 18%. So if I think about -- Tyler, 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 in that business for the second half?

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 nuances like 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 end of avenues to grow outside of new logo, which we talked about the pipes that were already growing that we come into Q1 had the strongest pipe kind of ever. but really the expansion products that we're bringing to fruition. Again, fire hydrant new on the ITOM side and Device42 advanced cloud version now being available. So we're very confident what we've seen in the first half of the year, and we expect to continue to see that through the back half of the year. We -- as a whole, we had already talked about what we're seen for the backside. We just rolled through our $4 million beat, and that already encompassed a $2 million FX headwind. So it would have been a $6 million for the back half of the year if we didn't see that FX. So again, we're super confident EX is still the driver of growth. CX is stable at 4% right now.

Yes. Just to emphasize, like this is a beat and raise quarter. I know we didn't emphasize that, but you count that FX headwind, and we rolled that beat in and we raised 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 16% of revenues 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 [indiscernible] unpack. Go ahead.

I'll start with, and Dennis 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 our total P&L from a GAAP perspective and the biggest component of that -- the hurdle we had to get to, to get to GAAP profitability, which we hit this quarter, which is a couple of quarters earlier than we expected was going to be SBC.

Some of the bigger drops in SBC is that we've kind of -- we've gone through all of the brands 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' leadership, and we're going to continue to do that. We're constantly looking -- working with our total benefits folks, making sure that we are being, number 1, 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 like when 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...

Yes, I just -- look, I'd pay attention to it, 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 managed 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, 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 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's CEO, for closing remarks.

All right. I just want to thank everybody for joining the call today. And just to emphasize, Q2 overall for us, reinforced every 1 of the 5 priorities that we laid out of a refresh. I 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, everybody. Look forward to speaking to everybody next quarter. Bye.

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

Hello, everyone. Thank you for joining us, and welcome to the Freshworks First Quarter 2026 Earnings Conference Call. [Operator Instructions]

I will now hand the conference over to Kate Scolnick, VP of Investor Relations. Kate, please go ahead.

Thank you. Good afternoon, and welcome to Freshworks First Quarter 2026 Earnings Conference Call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President; and Tyler Sloat, Freshworks' Chief Operating Officer and Chief Financial Officer.

The primary purpose of today's call is to provide you with information regarding our first quarter 2026 performance and our financial outlook for our second quarter and full year 2026. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroeconomic environment in which we operate and market volatility and certain other assumptions made by the company, all of which are subject to change.

These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand and to control costs and improve operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-K and other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law.

During the course of today's call, we will refer to certain non-GAAP financial measures. 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. For presentation purposes today, Dennis' financial comments will be on an as-reported basis. Tyler will be providing financial comments on an as-reported and constant currency basis.

I will now turn the call over to Dennis. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Freshworks delivered a strong start to 2026, exceeding expectations across revenue, profitability and free cash flow.

Our Q1 revenue grew 16% year-over-year, above the high end of our estimates. Non-GAAP operating margin was 18%, nearly 3 points above our estimate and adjusted free cash flow margin was 24%. And once again, we achieved Rule of 40. In Q1, we signed the 2 largest deals in Freshworks history, including our first 7-figure EX ARR deal. Customers with more than $100,000 in ARR grew 29% year-over-year and customers with more than $50,000 in ARR grew 22% year-over-year. This demonstrates our continued success in serving mid-market and enterprise customers.

Freshworks is the AI-enabled unified service operations platform that is fast to deploy, intuitive to use and enables every employee to be more productive. We entered 2026 with clear goals: expanding our EX business, monetizing AI at scale and profitably growing our CX business. Now let's look at the results for each of these areas in Q1. As we grow Freshworks to a $1 billion ARR company and beyond, our EX business represents the primary and largest growth opportunity.

In Q1, EX ARR grew 27% year-over-year with both new and expansion business coming in ahead of our expectations. We are attracting a fast-growing base of mid-market companies and enterprises choosing Freshservice for enterprise-grade capabilities, fast time to value and lower complexity in implementation. Most notably, in Q1, a global leader in nutrition replaced our largest competitor with Freshservice in what represents the largest new customer deal in our company's history. They were seeking a solution that could handle enterprise-grade scale without sacrificing the intuitive experience necessary to manage their complex workflows.

Following that historic win, Piedmont Healthcare also selected Freshservice over our largest competitor, citing our significantly lower total cost of ownership, faster implementation and enterprise capabilities. Finally, Reed, the U.K.'s #1 specialist recruitment company, moved to Freshworks to achieve a faster and more collaborative enterprise IT experience. These wins underscore a clear trend. Organizations are increasingly choosing our platform for its ability to deliver sophisticated results without the traditional overhead.

Freshworks' ability to deliver enterprise-grade outcomes without the implementation drag and administrative burden of legacy systems is exactly why we are displacing vendors whose products have become too expensive and complex for mid-market and enterprise customers to maintain. We are also expanding our right to win by integrating and broadening our EX offerings.

In March, we launched a new Freshservice ITAM experience, bringing Device 42 capabilities natively into Freshservice and making it easier for customers to use in a single cloud experience. We also completed the acquisition of FireHydrant, which advances our vision for an AI-enabled service ops platform that unifies service, asset and operational data. We will complete the integration of FireHydrant over the course of 2026.

Moving on to our AI progress. Freddy AI continues to be embedded throughout our platform, enhancing customer outcomes today while building toward a long-term monetization opportunity. Freddy AI Copilot is one of our fastest-growing products with strong customer growth, new business attach rates and higher expansion among AI customers. In Q1, Freddy AI Copilot customer growth exceeded 80% year-over-year and the attach rate growth in new deals over $30,000 in ARR was above 65%. Specifically, in our EX business in Q1, our customer penetration for AI surpassed 20%, nearly doubling year-over-year. And roughly 1/3 of all new EX customers in Q1 had Copilot attached.

Amerisure, a commercial insurance provider and EX customer has been able to transform service delivery within a single platform using Freshservice's AI-driven workflows and Freddy Insights. With Freshservice for business teams, the use cases expanded beyond IT into legal, HR, underwriting and marketing, saving thousands of hours in 2025 alone and cutting employee onboarding resolution time by 97%. We look forward to detailing more about our future AI strategy and EX product innovations at our refresh event next week.

Turning to our customer experience business. We continue to deliver durable growth with CX ARR up 6% year-over-year in Q1. We are making progress in this business through go-to-market discipline, platform integration and increased market fit enabled by our AI capabilities. A leading provider of lender-placed insurance solutions consolidated a fragmented stack of JSM, Genesys and SharePoint into a single Freshworks platform. By unifying ticketing, automation and AI in one place, the team reduced manual effort, improved operational visibility and gained a clear path to scaling support.

Over 80% of our CX customer base has now migrated to the new Freshdesk Omni platform. This successful replatforming is more than just improving consistency for customers. It is the foundational work to enable the next wave of generative AI capabilities in our CX products and accelerate margin accretion. Since we began offering Freshdesk Omni at the end of last year, ARPA is 2.5x higher for new Freshdesk Omni customers compared to the prior platform. In lockstep with our focus on durable growth from our EX and CX businesses, we remain committed to driving structural operating efficiencies that support enterprise-grade scale and long-term profitability.

Q1 non-GAAP operating margin reached 18%, nearly 3 points above our estimate, reflecting the disciplined execution we expect to sustain throughout 2026. Today, we announced some workforce changes we are making to the company in Q2 to consolidate overlapping go-to-market efforts, streamline our product development process and apply AI and automation across our business. These actions enable us to focus energy on our momentum in EX and accelerate Freshworks' competitiveness. Tyler will provide the financial impact and updates to our outlook in his remarks.

Turning to capital allocation. Our operating model continues to deliver durable free cash flow. This operational strength allows us to take a balanced approach to capital allocation, reinvesting in high-return growth opportunities while also returning capital to shareholders. In February, our Board authorized a new $400 million share repurchase program, reflecting our confidence in the intrinsic value of our business. In Q1, we reduced shares outstanding by approximately 2%. We remain confident in our ability to compound adjusted free cash flow and drive long-term shareholder returns.

Overall, Freshworks achieved significant progress in Q1, accelerating our momentum with profitable growth fueled by our EX opportunities. By structurally shifting our operating model over the last 2 years, we have established a durable framework that balances top line performance with capital efficiency. Our long-term focus is on compounding adjusted free cash flow per share. Having more than doubled this metric over the last 2 years, we are now positioned to compound adjusted free cash flow per share by at least 20% annually over the next 3 years. We will share more details on the operational drivers and our long-term vision at the refresh event next week.

I'll now turn it over to Tyler to walk through our financials.

Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today. We kicked off 2026 with strong results, exceeding our expectations on revenue, non-GAAP operating income and free cash flow. Our Q1 performance reflects accelerating momentum and strong retention in EX, increasing success in the enterprise market and disciplined operational execution across the business.

For our call today, I'll cover the Q1 2026 financial results, provide background on the key metrics and close with our forward-looking commentary and expectations for Q2 and full year 2026. As a reminder, most of my discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, restructuring charges and other adjustments. I will also talk about our adjusted free cash flow, which excludes the cash outlay related to the costs associated with the Q2 restructuring announced earlier today.

To provide greater transparency into our underlying business performance, I will also include constant currency comparisons throughout today's call. Starting with the income statement. We had a strong first quarter. Total revenue reached $228.6 million, up 16% year-over-year as reported or 14% on a constant currency basis. Within this total, professional services revenue was approximately $2 million.

Professional services revenue grew in line with our internal expectations and is a key component of our overall customer success strategy, ensuring successful deployment and adoption of our platform. EX continues to be our primary growth engine, and EX ARR ended at over $540 million, growing 27% year-over-year on an as-reported basis and 25% on a constant currency basis. This performance was supported by strong expansion and new logo activity, including the 2 largest new business contracts in our history. These large wins validate our enterprise readiness and competitive positioning upmarket.

Looking ahead, we anticipate EX ARR to grow in the mid-20s and EX ARR to be over 60% of total ARR by year-end. Turning towards our CX business. We ended Q1 with over $395 million in ARR, up 6% year-over-year on an as-reported basis and 4% on a constant currency basis. The replatforming work we are doing to Freshdesk Omni to improve product consistency, support AI adoption and increase the competitiveness of our platform is on track and will enable efficiency gains for the CX business over time. We have a disciplined focus on our CX business as we complete our customer migration and tighten alignment with our ideal customer profile. Going forward, we are adopting a prudent outlook and anticipate CX ARR to grow in the low single digits in 2026.

Moving to margins. We demonstrated the durability of our business model by maintaining a non-GAAP gross margin of 86.3% in Q1, consistent with prior quarters. Our non-GAAP operating income for the first quarter of 2026 reached $41 million, translating to a non-GAAP operating margin of approximately 18%. This performance surpassed the high end of our initial expectations for the quarter. The key drivers behind this result were twofold: strong top line performance and continued efficiency gains realized across various lines of our operating expenses.

We are structurally continuing to shift our business towards GAAP profitability and strategic efficiency gains, driving a meaningful improvement in margins throughout the year. As Dennis noted, today, we announced some operational changes to our workforce that we are making to consolidate overlapping organizational efforts, streamline our product development process and increase the leverage of AI and automation across our business.

As a result of these actions, we are reducing our global headcount by approximately 11%. We anticipate taking onetime restructuring charges of approximately $8 million with the vast majority in Q2. In a moment, I will discuss our updated Q2 and full year estimates that incorporate the financial impact of these actions.

Moving to operating metrics. Net dollar retention was 106% on an as-reported basis and 105% on a constant currency basis, a 1 point acceleration from the prior quarter. Within this, we are demonstrating strong momentum in the expansion growth of our EX business. Q1 EX net dollar retention achieved 111% on an as-reported basis and 109% on a constant currency basis. Going forward, we expect to sustain net dollar retention of approximately 105% on a constant currency basis for Q2 2026. As a reminder, this excludes any impact from D42 legacy customers.

Moving on, I'd like to provide some additional color on results from our customer cohorts. Customers contributing more than $50,000 in ARR grew 22% year-over-year as reported and 20% on a constant currency basis. This cohort now represents over 55% of our total ARR. Customers contributing more than $100,000 in ARR grew 29% year-over-year as reported and 26% on a constant currency basis. This cohort represents approximately 39% of our total ARR.

Double-digit growth in our larger customer cohorts was driven by the strong performance within EX, which we believe validates our strategy to increase our focused investments on mid-market and enterprise EX customers. The accelerating growth we are achieving tells us we are structurally well positioned to capture a disproportionate share of the future EX market and sustained durable growth from our most strategic customers.

Now let's turn to calculated billings, balance sheet and cash items. Calculated billings came in at $235 million in Q1, up approximately 16% year-over-year as reported and 13.5% on a constant currency basis. For Q2, we estimate billings growth of approximately 14.5% on both an as-reported and constant currency basis. Looking ahead, we expect billings growth to be in line with revenue growth for 2026. Our cash position remains strong.

In Q1, we generated $55.8 million in free cash flow, representing a 24% margin and slightly better than our expectations. Adjusted free cash flow per share was $0.20, an 8% increase over the prior year. This metric underscores our operational efficiency and our disciplined approach to converting growth into tangible shareholder value.

Turning to our capital structure. We view share repurchases as part of a disciplined capital allocation framework and a reflection of our confidence in the long-term opportunity ahead. In Q1, we repurchased 5.7 million shares for $45.4 million, while utilizing an additional $7 million to offset dilution through the net settlement of vested equity. We ended Q1 with approximately 318 million fully diluted shares outstanding, down 2% year-over-year.

Included within this was approximately 279 million basic shares outstanding, which also declined year-over-year. We ended the quarter with $780 million in cash and investments, providing ample financial firepower to continue our repurchase program while investing in future growth. Now on to our forward-looking estimates. As a reminder, our non-GAAP net income projections for 2026 assume a tax rate of 24%. For the second quarter of 2026, we expect revenue to be in the range of $232 million to $235 million, growing approximately 13% to 15% year-over-year.

Non-GAAP income from operations to be in the range of $41 million to $43 million and non-GAAP net income per share to be approximately $0.13, assuming weighted average shares outstanding of approximately 280 million shares. For the full year 2026, we expect revenue to be in the range of $958 million to $964 million, growing approximately 14% to 15% year-over-year. non-GAAP income from operations to be in the range of $207 million to $215 million and non-GAAP net income per share to be in the range of $0.61 to $0.63, assuming weighted average shares outstanding of approximately 281 million shares.

Looking ahead, for the full year 2026, we expect to generate approximately $265 million of adjusted free cash flow. Within this, we expect to generate adjusted free cash flow of approximately $57 million in Q2. This results in adjusted free cash flow margin of 24% and 27.5% for Q2 and full year 2026, respectively. Our full year 2026 outlook for adjusted free cash flow per share is $0.94, up 24% compared to fiscal 2025. As a reminder, cash used for stock repurchases is reflected in our financing activities and is excluded from our adjusted free cash flow calculations. Finally, our forward-looking estimates are based on FX rates as of May 1, 2026, and do not take into account any impact from currency moves.

Overall, Freshworks delivered a strong start to 2026, establishing a solid foundation for the year ahead. We remain confident in our ability to consistently exceed our strategic goals as we drive durable growth and expanding profitability. To that end, our internal metric that best aligns with our strategic priorities and long-term shareholder value creation is growth in adjusted free cash flow per share.

Over the last 2 years, we have more than doubled our adjusted free cash flow per share results. More importantly, we have laid the foundation to compound adjusted free cash flow per share by at least 20% annually over the next 3 years. We look forward to sharing more details on this metric, the operational drivers behind it and our long-term vision at our upcoming financial analyst session at our refresh event next week.

Thank you. Operator, we are ready for Q&A.

[Operator Instructions] Your first question comes from Scott Berg at Needham & Company.

Lucas on for Scott Berg. On the employee experience side of things, what kind of drove the variance to the high end of your implied year-over-year constant currency revenue growth here in the first quarter? Historically, that's kind of tended to skew towards the higher end. So just trying to understand any changes in the quarter here.

It's Dennis here. So first of all, I think we just continue to see real momentum on that EX business and the move upmarket is working. And you see that in a couple of different ways. If you look at our growth of accounts that are spending more than $100,000 with us, that's up 29% year-over-year. We had our biggest deal ever, biggest land ever, a large nutrition company that was a 10-year customer of one of our competitors that is moving over to us for all the reasons that we've talked about in the past, enterprise-grade scale, much faster time to value, easier to manage the platform, AI capabilities.

We had actually our second largest land ever with a large health care provider, very similar story. So the upmarket motion just continues to drive the overall EX business. We have built over the last couple of years, a platform that extends from service management to operations management now with FireHydrant to asset management. We brought the device 42 capabilities into the cloud. We launched that last quarter and then into ESM.

And that's what customers are looking for, in particular, in the mid-market, that customer that's from 5,000 to 20,000 employees. We call these mid-market or agile enterprises that are looking for a provider that really can keep up with them. And that market is big, and we're continuing to work there. Tyler?

Yes. And Lucas, thank you for the question. In general, EX is doing really, really well. It organically is accelerating growth, and that's something we're really proud of. We've been talking about it for a couple of years now, and we're seeing great product market fit, and you're seeing it now evidenced in some of the larger customers choosing us over our biggest competitor.

Got it. That's helpful. And then just a quick follow-up. We know you guys were kind of reviewing pricing changes earlier in the year. Do you guys have any kind of updated view on the impact kind of on pricing changes that kind of the impact on your full year guidance?

We had pricing changes, but I would say they're not material to our guidance, right? We're going through a normal process with our customers as they renew, which is more of a CPI type of increase that any other software company would do. This is something we put in place 1.5 years ago. But in general, there's not an impact to our guidance because of pricing changes. The impact is really because the new business is going really well on the EX side.

Your next question comes from the line of Elizabeth Porter at Morgan Stanley.

It's Oscar Saavedra on for Elizabeth. Maybe I want to stick with the Freshservice. Nice to see those -- the wins that you called out against your largest competitor. As we think about that and that opportunity, how would you characterize the pipeline building? And sort of I'd imagine a bit longer sales cycles, but anything you can share on how that's looking?

Yes. So the pipeline going into this quarter looks fantastic. The pipeline going into the last quarter looks pretty strong as well. We're seeing, like I said, just continued momentum in the larger end of the deal cycle. We still have a lot of kind of midsized deals that come in every quarter, but we're pretty happy with how the pipeline is shaping up this quarter. Everything looks good. Anything to add, Tyler?

No. I think it's just a continuation from what we saw coming into the year. We talked about that we've been building out this field motion over the last year and last year was about kind of putting the leaders in and those leaders started filling out the roles underneath them. And these are sales reps and also CSMs and AMs who can actually engage with larger customers. We're building that muscle and part of that is a pipeline muscle as well. And yes, we're seeing really, really strong pipeline in the field for EX in particular.

Got it. Got it. And maybe a follow-up around seat expansion, a big debate around whether -- there's lower headcount among customers, but your NRR ticked up quarter-over-quarter on constant currency. So I was wondering if you can share some details on whether that was more of an upsell driver or you also saw strong seat expansion?

So we saw strong new business wins. We saw strong seat expansion as well. And remember, our product portfolio is broadening. We have additional seats that are accessible to us outside of the core IT department through ESM. ESM has been a big growth driver for us over the last year. We've talked about that in the past. We have asset growth. So through Advanced ITAM, that monetizes on an asset base. So you pay for every piece of software, piece of hardware that's cataloged by the system.

And remember, we're in a position of taking share. We are not in a position of defending a large market share that we've accumulated over a long period of time. We very much are taking share from the bigger players. So that creates an opportunity for us to gain seats regardless of what the overall market is doing. We have not seen seat erosion.

Seat growth for us continues to be a meaningful driver of our business. And our business model is evolving. We have consumption-based offerings like Freddy AI Agent. We have asset-based offerings like Advanced ITAM. We have resolution-based or other offerings that are based on more transactional value. So we think the model will continue to evolve over the course of the remainder of the year. And we're excited about some new products that we've got coming out next week that also will enhance the monetization story, particularly around AI.

Your next question comes from the line of Patrick Walravens at Citizens.

This is Austin Cole on for Pat. Dennis, I was wondering if you could just maybe kind of double-click into that, what allowed you to win that largest deal and then to the extent that in this upmarket motion that there's interest in the AI solutions, I mean, Copilot would be helpful.

Sure. So customers in that mid-market and kind of lower end of enterprise space are looking for an enterprise-grade platform that extends from service management through to operations management, asset management and ESM. They're looking for a solution that's going to be very fast in terms of time to value. They're looking for a solution that has proven itself as -- in the ability to transition other large similar customers from some of these more legacy platforms onto our platform and then get them up and running fast and make them successful.

They're looking for that AI functionality today as well as the road map. And they appreciate the ability to have choice in the platform as to how they want to consume AI over time. So some want to lead with provisioning their agents with Copilot, others want to go directly into agentic AI.

One of the things that we're going to do next week, our event next week is Refresh for EX specifically. We're going to be announcing a number of product enhancements that are leaning into this enterprise motion, leaning into the ability to offer our customers more choice. We're going to be rolling out AI Agent Studio for EX, which allows our customers to build their own agentic capabilities directly in our platform. That will come with 20 preconfigured workflows for things like onboarding and offboarding, provisioning software, changing passwords and so forth.

And we're also announcing alongside that our MCP Gateway, which will allow customers that want to bring their own AI or build agents in clog, build agents in ChatGPT to do so. and take advantage of the data and information that's in our platform through MCP calls, which we will monetize over time. So we have a lot going on that is going to continue that drumbeat upmarket.

Like I said, we've launched our cloud-based version of IT Asset Management, Advanced ITAM a month ago. That's available for all of our customers now. We have a lot of customers that are cloud first. They don't want an on-prem product. Device42 historically was on-prem. So that opens up another avenue of growth. And then FireHydrant, we have a new integration with Freshservice. You can see your data for instance, incident response all through Freshservice. That's another vector of growth that we're opening up this quarter.

So that EX motion continues to be strong. That's driving the business, 27% year-over-year growth this past quarter. We see that continuing to be a bigger part of our business, continuing to be the majority of the business overall and really drive the growth. We've oriented the company around that in terms of investment on the go-to-market side, investment on the engineering and product side. And that's what we're leaning into. That's what we're going to drive growth for the full business.

Your next question comes from the line of DJ Hynes at Canaccord.

Dennis, so I hear largest deals ever. I hear pipeline is fantastic, signs of organic acceleration. Why the decision to restructure now? And I guess, where will those optimizations mostly be focused?

Yes. Look, I think overall, we're building an agile company that can deliver strong free cash per share growth while fueling that EX business that's growing at 27% year-over-year. A couple of reasons that we did it now. I think the first was we recently consolidated our go-to-market strategy. We had, I wouldn't say equal, but a more equal focus on inbound versus outbound. And we're increasingly focusing on that EX business, which is primarily an outbound motion and focusing on CX -- acquiring CX customers with better unit economics. So that's led us to rebalance our teams more towards EX and to rebalance our spend more towards EX.

And then really to run that CX business to drive profitability, drive cash that we're reinvesting back in EX. I think the second is we've, over the last year, 1.5 years, invested a lot in changing the way we build product to embed AI into the development process, which has resulted in much shorter cycle times. About over half of our code is originated in AI today. And like many other software companies, that is definitely changing how we build products, how fast we can build product and the amount of people that we need to build products. So that would really be the second.

And then throughout the whole business, we've been investing in automation and AI to streamline the way we do business, to move faster. All of those things contributed to the decision to actually do the restructuring. And it sets us up well for the rest of the year. It allows us to continue to invest in growth initiatives around that EX business and then continue to run the CX business for profitability and to be super efficient.

Yes. Yes. Okay. And then, Tyler, a follow-up for you. What does dollar-based net retention look like if we were to just look at the EX business? I don't need like a point estimate, but just broad strokes, like where are we with dollar-based net retention on EX?

Yes. No, I think we said it for net dollar retention for EX is still over 110%, coming in right around 111% and 109% at constant currency. It's really, really solid. And that includes a little bit of headwind that we're still facing from the Device42 legacy churn. Those are multiyear contracts. So we've been talking about that since we bought Device42. So we're really pleased about that. And we've been saying that on a weighted average basis, as EX continues to grow faster, this is going to help us out.

And we saw a slight acceleration to overall NDR this quarter as a result, right? So EX NDR is good, and we're now just introducing more and more products that are going to be upsell capabilities against our core Freshservice.

The next question comes from the line of Alex Zukin at Wolfe Research.

Maybe just first on the financials, Tyler, it looks like kind of you did accelerate revenue accelerate billings growth constant currency in the quarter. You're guiding for accelerating constant currency billings growth next quarter. Anything onetime in nature that you would kind of call out this quarter? And then maybe why -- was there anything that made it such that you were kind of in line with your constant currency revenue guide rather than ahead of it or at the high end?

Yes. There really wasn't any onetime. In the past quarters, we've called out if we had any significant Device42 deals that would have had accelerated revenue on the front end. In fact, we've been talking about we've had some churn on Device42, which actually is somewhat of a headwind against revenue growth because as those deals renew, we get kind of upfront sums on that old term license stuff.

So no onetime events there on the -- on a positive. It was just really good execution and go-forward execution as well, right? We rolled through the beat for the year. We're really quite positive on what happened in the quarter specific to EX. We're being really prudent about our estimates for CX going forward. We are internally optimistic, but externally, we want to be prudent about that. But in general, we think we had a really good quarter.

Perfect. And then just maybe as a follow-up for you, kind of a lot of noise in the market these days about some vendors going more upmarket, some vendors going more down market. Just what are you seeing kind of generally in kind of your swim lanes from competitors, both higher and lower? And then maybe any consensus view on just the AI anxiety, if that's having an impact on sales cycles. It doesn't seem to be for you guys given the larger deals that you're closing, but any kind of color there would be helpful.

Yes, I'll start with the second part. We don't see any AI anxiety slowing deals or impacting deals. In fact, as we said in the prepared comments, most of our larger deals now are coming in with an AI component. And AI is core to the pitch, the discussion on road map, all of that matters for the customers that are coming over. But at the same time, customers are coming over not just for AI. They're coming for the full platform. that I've been talking about. They need the same -- the full capability across different departments within IT and outside of IT to make the switch. I think on the competitive side, it's -- we haven't seen any major changes in competitive dynamics.

On the EX side, the primary competitors are on the kind of large side, ServiceNow and Atlassian. And then there's a long fragmented tail between Avanti Sharewell, BMC and a bunch of others. On the CX side, it tends to be more fragmented, Zendesk and then a bunch of smaller players. And I haven't seen that -- I wouldn't say that, that's changed dramatically. We're really confident about our ability to win against those larger competitors on the EX side.

We have many deals that we closed this past quarter. I highlighted a couple, the largest deal ever for us, second largest deal ever, both multiyear customers of our largest competitor, but there's many, many other deals every single quarter that come in against them, where if you are a company that's in that, let's say, 5,000 to 20,000 employee range, we've got the right product for you, and that's becoming more and more apparent to the market. I think on the CX side, competitive dynamics are kind of similar to the way that they have been.

AI certainly is more prevalent in those conversations. We're purposely focusing our CX team on the customers within the sort of SMB, commercial and kind of mid-market space, where we have a strong unit economics, there's strong expansion dynamics. We're no longer chasing micro deals, smaller deals in the lower end of that market, which in the past, we had. That's why you're seeing more efficiency be the focus there.

And I think with the replatforming, there's some real positive signs. We have over 2.5x ARPA for new customers that are signing up for new Freshdesk Omni. That is a really positive sign. If we can kind of keep that trend going, if we can realize the price increases that do come from migrating customers from other products onto that single Freshdesk Omni product, that will flow through to the CX line over time. We are being conservative in how we view the rest of the year. Our guide implies low single-digit growth for that CX business because we want to see how it plays out over the course of the next quarter or so.

So I think overall, we're set up for a good year. We raised our non-GAAP operating profit by something like $26 million, and we see the ability to really drive a profitable business with that mid- to high teens growth overall over the course of multiple quarters.

Your next question comes from the line of Brian Peterson at Raymond James.

I'll keep it to one. So Dennis, maybe just wanted to understand or get an update on your channel efforts. How big are those bookings or pipeline generation today? And as you kind of build out the broader EX suite, does that change the tenor of what those conversations are like with some of your channel partners and how you could expand that base over time?

Yes. Thanks for the question. I would say most of our channel partners are regional service providers that historically may have specialized in JSM or Ivanti, BMC, but they're more of the regional players. And they're very important. They're driving meaningful business for us. We do have a couple of GSIs that we've been working with Unisys is one. And -- but I would say that that's quite nascent. We brought in a new channel leader who is very much focused on moving that business up and focusing on the GSI.

There is interest for sure because there's a realization that the customers in that sort of lower side of the enterprise market are looking for choice, and we have a great product. So I think we're going to continue to invest in the channel there. But I would say the dynamics right now are pretty favorable in the more regional side of things. The GSI side is really nascent.

Your next question comes from the line of Billy Fitzsimmons at Piper Sandler.

Dennis, I don't want to get ahead of ourselves here, but you kind of mentioned in the prepared remarks the potential of monetization of you talked about kind of opening up the platform to third-party agents. And there's a couple of other enterprise software companies who have talked about like the potential monetization of third-party AI agents. Just how -- again, I don't want to get ahead of ourselves, but how should we think about that potential within the platform? And then good to see some of these kind of large EX displacements. How should we think about like the repeatability of these kind of over time?

Yes. So I would say on the EX displacements, we just we've been doing this for a while where we've been winning these bigger deals and highlighting them to you every quarter. We'll continue to do that. I think the metrics where it shows up, look at that customer count of over $100,000 customers, and that's up 29% year-over-year. You can calculate the ARPA for the business as a whole. That's been growing really nicely. So we think it is completely repeatable. We're repeating it every single quarter.

Our pipeline is bigger this quarter than last quarter, meaningfully larger than it was a year ago. So that's what's driving our business now, this upmarket motion in these larger accounts.

On MCP or on opening up the platform, next week at our Refresh EX event, we'll reveal our -- basically our MCP gateway, which is a way for customers who might want to do create an analytics platform that is broader than EX. They might want to combine data from multiple systems and put it in a data lake and apply AI on top of that.

So they're going to be needing to pull and put information in our system. That's what we're sharing, which is an MCP gateway, we'll monetize it over time. But it's a way for us to participate in AI that our customers are driving outside of our AI. And it allows our customers to have some choice in how they want to build their business and take advantage of AI. In some cases, they'll use our Copilot or they'll use our AI agent.

In other cases, they'll want to build their own agents that interact with the data and the systems that we've built within Freshservice and both extract data and drive actions within Freshservice. So we're building a system that's open to that and that over time can monetize both of those, and we'll have a lot more details next week at the launch.

There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.

Yes. So good morning. Thank you, everybody, for joining us on day 3 of the Morgan Stanley TMT Conference. My name is Oscar Saavedra. I sit in the Software Equity Research team here at Morgan Stanley, and I am here on behalf of Elizabeth Porter. I am pleased to have with us today returning guests, President and CEO of Freshworks, Dennis Woodside, thank you for being here.

Yes. Thanks for having me.

Before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please direct them to your Morgan Stanley research -- I mean, sales representative. And with that, let's get started.

All right.

Yes. Thank you for being here, Dennis, again. Maybe a good way to start would be to sort of level set the conversation, especially for folks who may be newer to the Freshworks story, just can you give us a quick overview of the key problem that Freshworks is solving for customers today? And as you move more into mid-market and enterprise, what's sort of driving more of those companies to pick you as -- for their IT service management?

Yes. So I've been CEO now for about 22 months. And in that time, we've really undergone a pretty meaningful transformation. Our business now is predominantly an EX business serving an IT department of a mid-market company, mid-market, lower end of enterprise. Think about a 5,000-person company like New Balance or larger companies like Nucor Steel, Steel Dynamics, Bridgestone Tire, these are companies that have very complex IT needs. They need a system that bridges ITSM and IT operations management and asset management. And then they also need help desk capability outside of IT, workflow capability outside of IT, but they don't have the same resources as a Fortune 50 company.

They need to be more nimble. They have typically smaller IT teams. They typically are more budget constrained. They need a product that's offering them much faster time to value than the incumbents than a ServiceNow or an Atlassian or Ivanti Cherwell, and it needs to be AI-enabled. So that's where we've really taken the business. Our EX business today crossed over $0.5 billion last year in ARR. It's growing at about 26% year-over-year. So that's the growth engine of the business. What we've layered on top of that and now really is integrated into the product is AI.

Of our 75,000 customers, 8,000 are using AI. We've got good penetration, about 10% of our customers. It's a long way to go to continue to drive that. But we have AI products for first-line support for the agent to enable the agent to be more productive and for managers. And that's really been a big growth engine for us as well, crossed $25 million in ARR last quarter, nearly doubled year-over-year.

And then the third part of the story is really where we came from, which is customer support and our CX business. The primary product there is Freshdesk. That's a little over a $400 million ARR business. Growth last quarter was about 8%. We're going -- undergoing a pretty meaningful transition from a set of 4 separate products within that family to a single product called Freshdesk Omni, which allows you to have conversational interactions with your customers, much easier to upgrade, much easier to add AI.

That upgrade is ongoing right now. We'll have about 40,000 of our 55,000-ish customers migrated to that new platform by the end of April. So that's a thumbnail sketch of the business. I think the growth really is in that mid-market customer. That market is huge. It's relatively underserved by the larger incumbents, and that's really what we're going for. We're going to build a big business there.

Got it. Got it. That's a very helpful sort of overview. Maybe building on that, talked pretty openly for a while now, that focus on employee experience. It's showing, like you said, $510 million in ARR, growing 22% year-over-year in constant currency. It's approximately 56% of the business, growing much faster than the rest. Maybe looking back, what was the original insight that sort of made you say, hey, like this is where we should focus on. And then as you lean into that, from what you've learned, like is EX structurally a more advantageous market? Or is it more of a function that you found sort of a wedge and have been uniquely able to execute against that opportunity?

Yes. So EX is structurally a much more advantageous market for a couple of reasons. First, from a competitive standpoint, you have ServiceNow serving the largest enterprises, and they do a very good job there. You have then a fragmented set of legacy players like Ivanti Cherwell, BMC that come from an on-prem world. They haven't necessarily innovated at the same rate as we have. And then you have Atlassian, which has a good presence in much more developer-centric companies.

But then you have a lot of other companies, customers -- prospective customers out there that just aren't well served by the models that exist. And our product for that mid-market customer is the best product in the market. It offers the fastest time to value. It's the lowest overall total cost. It's the most complete solution on a single code base across what an IT department needs. They need service management to answer questions from their employees, increasingly AI-driven. They need that asset management. They need to understand all the software and hardware in their estate, the relationships that all of those assets have with one another.

They use that to root cause problems when systems go down. They need operations management, which is the ability to respond to outages and instances and resolve them quickly. And increasingly, that's predictive and AI enabled. And then they want to be able to extend that outside of the IT department to finance and legal and HR and so forth. So that's what we've built. And for that mid-market customer, like a New Balance, that solution really makes sense for them.

It's nimble, it's fast, it's easy to get up and running. You don't need like consultants or specialists to actually keep it up and running as your workflow changes. It becomes the system of record for IT with all of the interactions between both assets, software and people all embedded in our system. And so as AI comes in, that information, that data, all those workflows become super important to training AI to resolve questions without the agent altogether. So that's where we're heading, and that's really what's been powerful about that part of the business. That's the future of our business.

Got it. Got it. Maybe staying with what's driving customer decisions. I want to zoom out and maybe talk about the AI debate, right? There's obviously been a lot of investor concerns around AI disrupting the SaaS landscape. One argument you hear is if enterprises can just spin up internal applications quickly with AI, maybe they won't need to buy as much software from vendors like you. When you hear that, what do you think people are missing? And specifically to Freshworks, what is it about your product that you view as difficult to replicate? And maybe lastly, how does that shape your thinking and how you best deliver value in a world...

Yes. So I think there's 3 arguments that are very prevalent. One is that seats are going to go away; two is that the LLMs are going to take all the business; and three is the start-ups are going to take the business. We have to be super paranoid about all 3, but we think we have got actually a very good answer to all 3. I think on the first with seats, as our -- we're seeing as our AI becomes more and more effective, it is taking the questions that otherwise would be answered by humans and it's answering them by itself, both just a simple Q&A and agentic.

That is monetized in a very different way for us. It's monetized on a consumption basis. And that model scales quite nicely. So we're pretty comfortable with how that model is going to evolve over time to enable our customers to get more value out of the software that they have. Now to the start-up point, the reason that, that works so well in our system is because our AI has access to all of the underlying data, all of the underlying workflow. It's trained on all that underlying data, customer-specific as well as the entire corpus of customers that we have.

So a start-up can come and they can potentially suck information out of a system of record to train their model for that specific customer, but they're not going to have access to 75,000 customers and the corpus of information that we have. And a ticket, which is the information a start-up might have through an API call is a small portion of the total amount of data that is resident in our system. A lot of the data that's in our system is not surfaced through a simple API call or in a ticket. That's the data that actually makes us able to answer questions better, take action better than a start-up that's trying to build on top.

So seats, it's all about pricing and packaging. Start-ups are competition, but we have a basis for competing because we've got such a large repository of data that we can train our AI on. And then the LLMs, we just -- I think that's the one where we just don't see it. You see some customers building very specialized applications through an LLM, but you don't see them trying to replicate the functionality of a full-fledged IT suite that's powering the entire IT department. There's all kinds of things you would need to do around security, and we have over 1,000 integrations for the EX products. That's very hard to do. It's taken us over a decade to build all that.

And furthermore, customers don't want to do that. If you think about our classic customer, one of them is called Vermeer Corporation. They're based in Iowa. Typical customer for us, 5,000 people, company has been around 100 years. They make wood chippers, they make agricultural-heavy machinery. Their business is not building their own ITSM. That's the last thing they want to do. If they have any spare capacity, they're certainly not going to go wide code that. So I don't see that, that is necessarily what is going to change our world, especially with that mid-market customer that has a lot of other things that they can do with their very spare IT resources.

Of course, we watch it. We partner and we have -- we built our AI so we can switch to any LLM that we want. We have -- for different use cases, we call on different models. We call, in some cases, on our own models, on small models where the economics justify it. In other cases, we'll call on Azure OpenAI. In other cases, we'll call on other models as well. So we have access to the state-of-the-art from a model standpoint. It's really about creating the kind of environment for our customers where they can actually get work done, and that's what they want.

Got it. Got it. Maybe putting a finer point on the headcount risk part of the equation. When you talk to customers, what are they telling you? How are they actually thinking about that -- the balance between their AI investments and also leveraging the increased productivity with their hiring plans?

Yes. So let me just give you some data on the headcount side. So we've had Copilot in market for about 18 months. And so we have thousands of customers that have bought Copilot, that's the product that allows -- that improves the productivity of agents by answering questions basically for them, giving -- suggesting answers to them and allows them to summarize conversations very easily, a bunch of functionality for the agent, make them more productive.

Our NDR for customers that have adopted Copilot for at least a year is 116%, right? The NDR for the company is 105%. NDR for EX is 110%. So customers that have used Copilot, that have adopted Copilot, they're actually expanding at a faster rate. Now whether that's seat expansion or AI expansion, we have asset pricing for Device42, it doesn't really matter. But the point is they're actually expanding their business with us, right? So we can talk about seat count. I look at that as a really positive sign because we still are pretty low in the penetration of our AI. The earliest adopters of AI, they have found real value out of it, and they've grown their relationship with us over time. So I think that's kind of where I would start from in terms of the argument on seats. The -- what was the other part of your question?

Just sort of how the customers are rationalizing those -- their hiring plans?

Yes. So I think we see a couple of different modes, I'd say, 3. There are a class of customers that are growing quite quickly that have decided, we're just not going to hire more customer support reps in particular. There are class of customers that are saying, hey, for cost reasons, I've got to reduce staff. And then there is class of customers that are saying, I'm going to take what used to be a cost center and turn it into a revenue center. It just depends on the customer. And either way, we can serve those needs and we can make money because we're monetizing AI in multiple different ways.

Like I said, the consumption model for the L1 agent, for Copilot, it's an adder on the seat license. And then when you get into other products like asset management, it's an asset-based fee. So multiple different ways of monetizing. And I also -- we're constantly looking at this. I don't think that if you come back in 2 years, the monetization is going to look the same at all. I think we're going to be looking at seat models. We're going to be looking at token pricing. A lot of things will change in the next couple of years. But we're pretty confident in our relationship with our customers and the value that we're providing to the customers that we're going to figure out a model that works for them and for us.

Got it. Okay. Maybe zooming out one step further, let's say, AI doesn't replace the need for Freshworks. I guess investor worries still on the value capture, right, and that AI will still chip away the pricing power over time. And so when you think about the next, call it, 3 to 5 years, like how do you see AI affecting the margins of what has historically been a high-margin business? And how do you...

Yes. Well, I don't think AI is going to chip away at the value. What AI is doing is allowing our customers potentially to substitute software for people, and that's a huge value exchange. And for our customers, it's -- the cost of an IT rep or the opportunity cost of an IT rep doing a low-value activity is huge. So if we can take those low-value activities away from those very high-value IT agents so that the IT agent who's trained in the systems of the company can do higher-value work, they can work on projects that are more closer to revenue, all that stuff, that's hugely valuable to the customer, and we'll be able to capture value from that.

So I don't -- I just don't -- I don't agree that AI is necessarily going to erode pricing power. It actually gives us an opportunity to create more value for our customers ultimately, and that's -- and they're going to be willing to pay for that.

Got it. Okay.

Again, look at the NDR, right? Copilot and NDR is actually much higher than the company overall. That shows that our customers are getting value.

Got it. Yes. No, makes total sense. Maybe bringing it back to the business and EX and what you're seeing competitively. It's been growing really nicely, mid-20%. You talked about improving win rates recently and including the replacement of decades-long incumbents. When you take a step back, what is driving -- beyond the sweet spot of the 5,000 to 20,000 employees, maybe the higher enterprise, what is driving them to reevaluate their ITSM approach?

Yes. So first, in that mid-market, so let's define the mid-market, roughly 500 to 20,000 employees. That's about the same size. It's a lot more companies, but that's about the same size as the true enterprise segment, like 21,000, 20,000 and up. So that's -- just to give you a sense of scale, that's a huge opportunity just right there. The reason -- if you are a Seagate or a Nucor or a New Balance and you needed to make a decision, let's say, 5 years ago on what's your core IT platform, platform that's powering IT, you could go cloud first, which was ServiceNow or you could be on-prem, right? There wasn't -- a lot of the legacy players didn't have cloud versions of their software yet or they were in the process of building them.

So of course, if you're kind of looking forward, you would go with ServiceNow. We didn't have a product that was anywhere near that capability yet. Now today, we do. And customers are seeing that, and we have lots of reference cases. There are some industries where like if you look at heavy industry, doing incredibly well. If you look at -- we have 1,000 universities, we have 1,000 professional services firms, like in law firms, we're the de facto standard. We have 1/3 of the NFL teams, 1/3 of the MLB teams. We have a bunch of professional sports leagues, 1/3 of the F1 teams. So we have proof, right? We have lots of customer references now.

And so customers that are coming up, contracts coming up ending, they're starting to say, you know what, I'm going to look around because this is expensive. And it requires real resources on my team just to keep the system up and running. And in some cases, if they want to go to AI, they got to switch SKUs, and that's another upgrade, that's another cost. So that's provoking a bake-off in an RFP process, and we get in the mix, and we're winning more and more of these big deals.

We entered -- if you look at our business from 50,000 and up accounts, that grew 28% last quarter. If you look at our pipeline coming into this quarter, it was the best pipeline we've ever had for 100,000-plus deals. Last Friday, we closed the biggest deal in company history, which is a large -- very large health system with millions of customers themselves. And that -- again, that was a win against our biggest competitor. So we're pretty confident in our ability to win in that segment. It's really ours to lose.

Got it. And when you think about like the go-to-market investments that you have to make to sort of go after those opportunities, like how are you thinking about that?

Well, I think we've spent the last 20 months since I became CEO, really building that go-to-market muscle and building kind of the team that can actually go after those larger and larger deals. And that's everything from the sales reps to the account management, customer success, building out the engineering team that can serve those larger and larger accounts.

We've brought in engineering leaders from Atlassian and ServiceNow and all the big players to ensure that we can continue to move upmarket. And you just see it in the numbers, right? You see it in that growth rate of the larger accounts. You see it in the wins every quarter that we keep announcing. So I'm pretty confident that's going to continue.

Got it. Another interesting part of the EX business is Device42.

Yes.

It's showing up more and more in the story. It has now reached over $40 million in ARR, and it seems to be getting pulled into a growing portion of larger deals. How do you think about Device42's role over the next few years, both as part of landing new customers as well as a driver for further expansion into your installed base?

Yes. So our -- from a product standpoint, when we go into an account to sell, we -- our prospects and our current customers, they don't just buy helpdesk, right? They're buying a system to power their entire IT department. So they want the IT service management module to work well with IT operations management and asset management and then ultimately outside of IT as well. So that's what we've built over time.

Device42 is an important part of that because Device42 is very good at, in particular, on-prem asset detection, asset management relationship mapping. And that information about -- I mean, we're managing literally tens of millions of assets. We have some customers that are by themselves managing millions of assets in Device42. That by itself is super important for AI because you understand the relationship between all these pieces of software and hardware. You can understand when an item fails, how does that impact the rest of items in the catalog. That's super important. So most customers in that mid-market space, when they're evaluating a switch of a platform, they're looking at all of that.

So Device42 has allowed us to win more and more of these bigger deals. It's in about 1/3 of our largest deals in new lands. The big deal that I just talked about, the largest deal we've ever done last week, that has an asset management module associated with it as well as AI. And so increasingly, the relationship that we have with our customers from day 1 is across multiple departments within IT. It's powering multiple use cases. It's not a straightforward seat model because you have seats for agents, but for Copilot, it's consumption-based; for asset management, it's asset-based.

And then we bought another company called FireHydrant, which is operations management. And that's also based on calls or instance. And that allows the IT department to detect instances before they happen, get ahead of it. And when they do happen, manage them. Also needs a strong tie into the asset base in order to do that. So the system really is coming together as a complete system that can compete in that larger and larger account segment. And that's been really important for us. Device42 by itself crossed $40 million in ARR. But that's not the whole story because it has allowed us to continue to move upmarket and continue to win these larger deals.

Got it. Got it. And maybe to close the loop on EX, maybe you can talk about Freshservice for Business Teams. You recently made it something that you can sell directly into HR, finance, facilities and legal, even if IT is using a different system. Can you share any early feedback on that direct sales motion? And over time, do you see this ESM product primarily as a stand-alone expansion or does it also help create a path to broader ITSM?

Yes, it's both. So we -- the product that we have, Freshservice for business teams, it's a segregated workspace for an HR team. So an HR team, common use case is onboarding and offboarding employees. We have -- an example, we have a security guard company with like, I think, 15,000 security guards, a lot of turnover. They have to onboard security guards all the time. There's -- that's a very IT and HR-intensive process. You have to provision a device or you have to provision software, so forth.

And so that -- we've been pulled into those use cases over time and build a separate product just for that. We launched that product about 3 years ago. The market outside of IT is almost as large as the market in IT. If you look at the TAM for that use case. So -- and we're just getting started there. We crossed $40 million in ARR for Freshservice for business teams. That business is growing incredibly fast. But if the TAM is as equally as large, that's still less than 10% of our total EX revenue. So that opportunity is huge.

We see the stand-alone SKU as an ability to get into a customer that maybe their contract is not up for renewal with their incumbent ITSM for another year or so, but they don't want to increase the vendor dependency on that same vendor because they might be thinking about, well, you know what, in the future, we might make a change.

So for departments outside of IT, they might provision that Freshservice for business teams alongside whatever current system they have. And then when the contract comes up, we've proven value to that other department, and we can get into the core IT department. So that's how we're looking at the stand-alone portion. But by and large, the majority of our business is all attached now. And it's all -- I mean, New Balance is a good example where we started in IT, did a great job for the IT department. They get asked for a similar product to manage workflow and automate AI outside of IT, and they bring us into that other department.

Got it. Got it. Maybe going back to Freddy AI. There's a target for that to become a $100 million ARR business over time. You shared some good proof points around 8,000 customers using AI, exceeding $25 million in AI ARR, nearly doubling year-over-year. What needs to go right for you to reach that $100 million in ARR target? And what does that mean for adoption across your installed base?

I think we're going to see, as I was saying earlier, a lot of different pricing models come with AI. There's going to be experimentation around different pricing models. The models we have today are consumption based on the L1 agent, seat-based for Copilot and then we embed insights into our highest plan, our enterprise plan. I can see over time that evolving to potentially be token-based for some of those products. I could see us evolving so that we actually expose more functionality that's currently in Copilot in other parts of the plans to entice customers to move into a paid experience with the product.

And we -- on the agent side, we launched in November our Agentic AI Studio for the customer support product line. The pricing there is about $0.50 per session, which loosely equates with the resolution. And that naturally scales with consumption over time. So I think all those together, Copilot alone could be a $100 million business, the AI agent alone could be $100 million business, no doubt in the next couple of years.

It's really a matter of us continuing to innovate, continuing to deliver value. Our customers need to come along. It takes -- the actual adoption by the customer takes time. They need to get comfortable with the fact that an agent, an AI agent is going to handle what formerly was an interaction that a human handled. Some customers are ready now. Some customers are going to take some time. So I think those things are all coming together. We're clearly on that path to getting it to $100 million business.

Got it. And on that point about pricing $0.50 per interaction, that's an increase from $0.10 previously. And so I wanted to get your thoughts on what you saw that sort of let you know -- like what proof points you saw that said, hey, customers are willing to pay for that?

Yes. Well, the experience prior to them was not an agentic experience. So what we launched were out-of-the-box agentic experiences for 4 verticals: travel, fintech, e-commerce and logistics. And so out of the box, you can create an experience like changing my flight or returning an item and so forth without any kind of human intervention. And that's really valuable for our customers, right? That's real time and money that humans are spending on pretty low-value activity that they don't necessarily want to be spending their time on. So we're -- our pricing is really now in line, if not much more competitive than, let's say, a Fin or Salesforce. I think Fin is at $0.95 and Salesforce is at $2 per session or per interaction, so.

Got it. Okay. Maybe the other part of the business, the customer experience. You've been pretty clear that the bigger focus is employee experience, but you're also working through that platform migration. Can you give us an update of where you are in that migration to Freshdesk Omni? And as we think about how you're running the business today from a product development standpoint, how are you allocating investments between EX and CX today?

Yes. So as of today, about 2/3 of our investment is on -- 2/3 to 3/4 of investment is on EX and about 1/3 to 1/4 is on CX in terms of engineering resources, marketing, sales and all that. The CX business, our product line was -- we basically have 4 products that were serving a very similar need. We've unified that into Freshdesk Omni that provides conversational experiences. So if I want to interact with -- if I'm a customer, I want to interact with my -- one of our customers through chat or WhatsApp or any other surface, you can do it all in one place. The agencies, all the interactions in one pane, so they don't contact switch.

The admin can actually manage a single experience. So we didn't have that before. Now we do. So that's what launched in November. Like I said, we're expecting to have over 4,000 customers migrated, upgraded into that new experience by the end of April. It's price -- we also changed the pricing for all of our products. We took the price up for Freshdesk Omni because the value really is there.

So we want to get through that migration. We think that retention should be higher, expansion should be higher because it's just much easier to experience the next kind of the better product or the next product within the product line. And so that migration and that upgrade is actually going quite well. I think for the way we're managing that business is it's more of an SMB business. It's more of a high-velocity transaction. It's actually very measurable because most of the sales are just coming in, inbound and we close them very quickly, but they're smaller deals. And the target market there is more of an SMB. That's where that product is really resonating.

So I think it's going to continue to be a good business for us. I think we're going to continue to use the kind of the cash that, that business generates and invest it into the EX business because over time, that's a business that's addressing a much bigger market. We have a much clearer right to win. We have a product that really is resonating. And the customers expand at higher rates, retain at higher rates, all goodness on that side of the business.

Got it. I mean as that platform strategy plays out, and I think you previously mentioned that your win rates there are improving...

On EX.

On non-CX?

I mean CX is -- again, it's inbound, but it's not the same. You're not actually going head-to-head into a field sale in the same way.

Okay. Maybe are there like any signals that you're looking for that may surprise you to the upside that maybe tell you like, hey, maybe invest a little more in CX or is that...

I think we'll see how the upgrade goes to the new Freshdesk Omni and then we'll decide. But again, I think it contributes to the overall profitability story. Remember, we did 27% free cash margin last year. We had our first GAAP profitable year last year. We're aiming for GAAP profitability in the second half of this year as well on a consistent basis. We generated -- we're forecasting to generate close to $250 million in free cash this year. We have $700-plus million in cash on the balance sheet, and we just did a $400 million buyback.

So it's -- the CX business is a contributor to the overall profitability story, which really is that we're being efficient with our use of cash. We're -- in terms of our kind of our stock price, we see a huge opportunity to go into the stock right now given the current levels. That's why we announced the buyback. And I think it really is the way to think of the business going forward in 3 or 4 years, it's going to be an EX dominant business, and that opportunity is the one that we're really going after.

Got it. Okay. And when thinking about the upmarket expansion, are there any particular verticals or segments of the market where you're seeing the strongest traction today? And how is that sort of shaping where you invest next?

It's -- our customer base is not concentrated in any single industry. 45% of our revenues in the U.S., 40% is in Europe and then 15% around the world. I wouldn't say that there's any specific area that we're sort of like focusing the product on, doubling down on. We do very well in certain verticals. Of course, we kind of lean in there from a sales and marketing standpoint. But every company in the world, every mid-market company in the world needs a system to manage all of their IT operations, their assets, their incident response, their service management, and that's what we provide. So that opportunity is huge.

Got it. And you previously highlighted the partners becoming more important part of the process. Particularly as you support larger, more complex deployments, how is that strategy evolving?

So we have thousands of partners. I think what we're doing -- what we've done in the last year is try to be more selective about the partners that really are going to help us push upmarket. Historically, we had lots of partners that were more at the SMB end of the market. Those are still important. But increasingly, investment is around partners like Unisys, which have a much bigger customer base. They have a lot of mid-market customers. Those mid-market customers are open to considering a different solution than what they have now, and they're building a business around our product.

Got it. And maybe just to close out, as you look at 2026 and beyond, what are you sort of more excited about? And what are you keeping your eye on in terms of potential risk?

I think we spent a lot of time on how AI evolves and what can AI do beyond just answering and addressing simpler questions, how can AI actually help with more complex problems, how can AI be much more predictive in understanding what's going on in an IT environment or in the customer support environment and be involved more in helping craft decisions that advance our customers' businesses. That's what they're looking for.

Awesome. Thank you very much.

Thank you.

Hello, everyone. Thank you for joining us, and welcome to the Freshworks Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Kate Scolnick, VP of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Freshworks Fourth Quarter and Full Year 2025 Earnings Conference Call.

Joining me today are Dennis Woodside, Freshworks Chief Executive Officer and President; and Tyler Sloat, Freshworks Chief Operating Officer and Chief Financial Officer.

The primary purpose of today's call is to provide you with information regarding our fourth quarter and full year 2025 performance and our financial outlook for our first quarter and full year 2026. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroeconomic environment in which we operate and market volatility and certain other assumptions made by the company, all of which are subject to change.

These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand and to control operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-K and other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law.

During the course of today's call, we will refer to certain non-GAAP financial measures. 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 or to learn more about Freshworks.

And with that, let me turn it over to Dennis.

Thanks, Kate. I am thrilled to share that Q4 marks a historic inflection point for Freshworks. For the first time in our company's history, we achieved profitability for the full year and generated record free cash flow, a testament to our disciplined execution, product innovation and operational excellence. I'm also happy that we remain on track for sustained growth and profitability exiting 2026.

First, I'll start by summarizing the year. Our business performed exceptionally well in 2025. Quarter after quarter, we achieved or exceeded our top and bottom line expectations throughout the year. In employee experience, we continued winning in the mid-market and enterprise. We successfully are evolving Freshservice into a world-class unified service platform by natively integrating Device42 and acquiring FireHydrant, we have brought ITSM, ITOM, ITAM, and ESM under one cohesive roof. This one platform advantage has enabled us to aggressively win bigger deals.

We're winning the mid-market with a continued roster of displacements, whether it's equipment shares high-growth [ debut ] on NASDAQ or a global sustainability consultancy's global scale, we are winning. Most notably, a global semiconductor company recently abandoned a decade-long ServiceNow environment for Freshservice, projecting a 30% cost savings and 20% to 30% faster resolution times, powered by Freddy AI. Freddy AI is proving that AI at Freshworks is a tangible revenue engine. Customers like iPostal1 are using Freddy AI Agent Studio to resolve 54% of queries automatically and seeing a 99% improvement in interaction speed.

When Vermeer Corporation cut their resolution times by 50% using Freddy AI, they drove customer satisfaction up to 95% in sparked enterprise-wide adoption. We brought stabilization to the CX business. We did this by continuing to simplify our core Freshdesk product experience to make it easier to implement and maintain. We improve time to value, customer retention, and our customers are also staying longer because they are seeing tangible results with AI features in Freshdesk.

Now let's recap Q4. Q4 was a significant capstone to our fiscal year. Freshworks delivered an outstanding quarter with results that surpassed expectations once again. We have outperformed our estimates across growth and profitability metrics for 5 consecutive quarters. And in Q4, we also achieved profitability. We grew Q4 revenue over 14% year-over-year on an as-reported basis, nearly $3 million above the high end of our estimates. We ended the year at $907 million in annual recurring revenue, which represents 18% growth year-over-year on an as-reported basis and over 14% growth on a constant currency basis.

Non-GAAP operating margin expanded to 19%, nearly 5 points above our estimates. Our free cash flow margin was 25%, and this was the sixth straight quarter we achieved a Rule of 40. We saw an upmarket momentum surge with our enterprise cohorts outpacing overall growth, proving our ability to consistently win and scale within the world's most complex organizations. As of Q4, we now have over 1,500 customers with greater than $100,000 in ARR, an increase of 28% year-over-year and over 3,700 customers with greater than $50,000 in ARR, an increase of 23% year-over-year. For our first strategic priority in employee experience, we crossed the $0.5 billion milestone as of the end of 2025, reaching $510 million in ARR. That represents 26% year-over-year growth on an as-reported basis and 22% year-over-year on a constant currency basis.

Now we are witnessing a generational shift where midsize and larger enterprise organizations expect sophisticated software that can handle their complex needs and get fast time to value. Freshservice is uniquely positioned to fill this gap left by legacy providers like ServiceNow. We are capturing a growing share of organizations that demands robust AI native service management that can be deployed in weeks, not years. We believe this is a massive and growing opportunity for us. We saw great success in our Device42 offering as a solution for larger enterprises with complex IT asset management needs.

Device42 ended 2025 with over $40 million in ARR as a result of quality new deals and expansions, including cross-sell from our Freshservice customer base. In Q4, we saw a 30% attach rate of Device42 to our top 50 new EX deals, including our 3 largest deals in the quarter. We have a wide range of customers like Holiday Inn Club Vacation, Dell EMC and SoftBank Group, who use our Freshservice advanced ITAM platform to provide them with a detailed and unified view of their entire infrastructure. supporting their most critical IT services.

Our ESM product known as Freshservice for Business Teams, contributed greatly to our Q4 success. ESM continues to be one of our fastest-growing businesses and exceeded $40 million in ARR in Q4, nearly doubling ARR year-over-year. Today, 1 in 4 eligible Freshservice customers also uses Freshservice for Business Teams for their non-IT needs. We believe both our ITAM and ESM businesses are well on track to achieve our target of over $100 million in ARR.

We are bolstering the scope of our EX business with the acquisition of FireHydrant in early January of 2026. FireHydrant, a leader in AI-powered IT incident management and response software brings large customers like British Petroleum, Palo Alto Networks and SNC Limited into the Freshservice ecosystem. This acquisition opens an $8 billion addressable market in IT operations management, or ITOM, and sets the groundwork for our expansion into AI ops. We will provide updates as we progress through integration of FireHydrant into Freshservice's unified platform over the course of this year.

With all these components, we provide a unified service operations platform for sophisticated global IT teams and beyond. Our ITSM is enterprise-grade for service management. Device42 provides world-class asset management capabilities soon to be in the cloud. Freshservice for Business Teams enables any department in any company to deliver amazing service. And FireHydrant forms the basis for growth in ITOM. We are really excited to have all these pieces of the puzzle together now.

Our second strategic priority, Freddy AI, continued to advance in 2025 with over 8,000 customers using Freddy AI. AI is not just a feature in our products. It's a stand-alone revenue line, delivering measurable value to our customers, which ended 2025 with over $25 million in ARR and remains on a path to reach $100 million in ARR by 2028. Freddy AI agent conversations were up over 80% to $3.5 million in Q4 in CX, and Freddy AI Agent deflected more than 50% of tickets for CX and EX customers. Since Freddy Insights became generally available to EX customers in June of 2025, 1,000 customers have already adopted and are active on the product. In customers with more than $30,000 in ARR, we continue to see Freddy AI copilot attach rates of over 50% and copilot customer growth more than doubled year-over-year. Another clear indication that AI is driving long-term value for our customers is the net dollar retention rate for Copilot customers in Q4, which improved significantly from 112% last quarter to 116% and remains significantly higher than our overall base for both EX and CX.

For our last strategic priority, we drove continued execution in our customer experience business and our AI-driven Freshdesk Omni platform road map. In Q4, we continued to see healthy demand in our flagship Freshdesk business. We ended the year with $395 million in ARR and 9% year-over-year growth on an as-reported basis and 5% growth on a constant currency basis. We continue to improve retention quarter-over-quarter as a result of product simplification, adoption efforts and innovation. We believe Freshdesk Command Center, the unified Freshdesk Omni workspace we launched in December, positions us well to sustain growth, quickly deliver new AI-native capabilities across our entire customer base and deliver increasing value for all customer service needs.

We entered 2026 with clear goals that are built upon our 3 strategic pillars: first, expanding EX, continued to increase our 20-plus percent ARR growth rate in EX fueled by continued focus and investment in our unified employee experience service platform; second, monetizing AI at scale, continued disciplined innovation in AI as a current revenue driver and stay on track to deliver $100 million in AI-driven ARR over the next 3 years; and third, improving retention in CX, focused on our unified platform to drive retention and efficiency in our customer service business.

Freshworks' 2025 results bring me confidence in our march towards $1 billion in annual recurring revenue this year and $1.3 billion by 2028. The opportunity ahead of us is tremendous, and I want to thank our customers, partners and employees for an incredible 2025 and for the collaboration ahead in 202. The best is yet to come.

Now I'll hand it over to Tyler to walk through the financial results in detail.

Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today.

We closed 2025 with a strong fourth quarter, exceeding expectations across both revenue and profitability. These results capped a year of significant financial progress and continued innovation that reinforces our confidence in our long-term strategy. As we build meaningful momentum into 2026, we are well positioned to drive top-line growth with a clear focus on winning in a very large EX market, executing an efficient operating model and delivering strong cash generation.

For our call today, I'll cover the Q4 and full year 2025 financial results, provide background on the key metrics and close with our forward-looking commentary and expectations for Q1 and full year 2026. As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, restructuring charges, the release of our deferred tax asset valuation allowance and other adjustments. We will also talk about our adjusted free cash flow, which excludes the cash outlay related to restructuring costs. To provide greater transparency into our underlying business performance, we will also include constant currency comparisons throughout today's call.

Starting with the income statement. Q4 total revenue increased to $222.7 million, growing 14% year-over-year on an as-reported basis and 13% on a constant currency basis. Professional services revenue ticked up modestly quarter-over-quarter to $2.5 million as a result of strong bookings and earlier-than-expected project kickoffs and milestones achieved in the fourth quarter. Our EX business crossed the $0.5 billion ARR mark in Q4, reaching approximately $510 million in ARR, representing 26% year-over-year growth on an as-reported basis and 22% on a constant currency basis. We finished the year strong across the EX portfolio with both ESM and advanced ITAM, each exceeding $40 million in ARR. Our CX business is at $395 million in ARR, reflecting year-over-year growth of 9% on an as-reported basis and 5% on a constant currency basis. We continue to drive solid growth in CX as we focus on unifying our technology and customer base around our AI-led Freshdesk Omni platform.

Moving to margins. We maintained a non-GAAP gross margin of 86.8% in Q4. Included in the Q4 cost of service is a $1.5 million credit from our AWS contract. Excluding this item, non-GAAP gross margin for Q4 was in line with prior quarters in 2025. Non-GAAP operating income for Q4 was $41.6 million, representing a non-GAAP operating margin of nearly 19%. We which was ahead of our prior expectations. These strong results were driven by top line outperformance and continued gains in operational efficiency. GAAP net income for Q4 was $191.4 million.

In Q4, our GAAP net income was favorably impacted by 2 items. First, there was a favorable impact of $41.1 million from a onetime reduction for fiscal year 2025 stock-based compensation related to our Executive Chairman's departure. Additionally, there was a favorable impact of $151.7 million from a onetime income tax benefit for the release of a valuation allowance on our U.S. deferred tax assets. This is a result of our improved profitability over the course of fiscal 2025, leading us to conclude that our valuation allowance on these deferred tax assets is no longer necessary. Achieving GAAP profitability for the first time in our company history is a significant milestone that demonstrates the healthy and profitable trajectory of our business.

Looking ahead, we remain on track to hit sustainable GAAP profitability in Q4 of 2026. Reflecting our trajectory of consistent profitability, we are adopting a long-term projected tax rate of 24%. We believe this rate provides an accurate representation of our long-term tax profile and should be utilized for all non-GAAP financial modeling. There is no cash impact associated with these onetime benefits, and they are excluded from our non-GAAP net income.

Moving to operating metrics. Net dollar retention was 108% on an as-reported basis and a strong 104% on a constant currency basis, in line with prior expectations. This includes a headwind of around 70 basis points from Device42, similar to prior quarters. As we look ahead, the strengthening demand and momentum we see within our EX business gives us increased confidence in our expansion trends. As a result, we expect net dollar retention to improve to approximately 105% on a constant currency basis in Q1 2026.

We ended Q4 with nearly 75,000 total customers. As noted last quarter, we continue to focus our efforts on moving upmarket, and we'll discontinue reporting this metric on a quarterly basis as we believe larger customer measures better reflect the trajectory of how we manage our business. The number of customers contributing more than $5,000 in ARR as of the end of Q4 grew 10% year-over-year on an as-reported basis and 8% on a constant currency basis to 24,762 customers. This customer cohort continues to represent over 90% of our ARR. The number of customers contributing more than $50,000 in ARR grew 23% year-over-year on an as reported basis and 19% on a constant currency basis to 3,760 customers. This cohort now represents nearly 55% of our ARR.

For our larger customer cohorts, the number of customers contributing more than $100,000 in ARR grew meaningfully to over 1,500 customers, representing 28% year-over-year growth on an as-reported basis and 22% on a constant currency basis. We also closed 2025 with 15 customers paying us over $1 million in ARR.

Now let's turn to calculated billings, balance sheet and cash items. Calculated billings were $259.6 million in Q4, representing strong year-over-year growth of 17% on an as-reported basis and 13% on a constant currency basis. Our calculated billings were impacted by slightly lower contract duration from Device42 and fewer [ foreign ] renewals than we've historically seen in Q4. Looking ahead, we expect billings to be in line or slightly better than revenue growth for 2026. For Q1, we are estimating calculated billings growth of approximately 13% year-over-year on an as-reported and constant currency basis. For the full year, we are estimating calculating billings growth of approximately 14% year-over-year on an as reported and constant currency basis.

Turning to our cash items. We generated $56.2 million in free cash flow in Q4, outperforming expectations due to strong cash collections and disciplined execution. This resulted in a free cash flow margin of 25%, which represents a nearly 4 percentage point improvement year-over-year. For the year, adjusted free cash flow margin was 27%, representing an over 5 percentage point improvement compared to the prior year.

We are proud of the excellent progress we have made in our cash generation over the last 3 years, going from negative free cash flow in 2022 to over $223 million in 2025. Looking ahead, we expect to generate free cash flow of $55 million for Q1 of 2026 and see linear quarter-to-quarter improvements thereafter, reflecting our focus on consistent operating performance and disciplined expense management. For the full year 2026, we expect to generate approximately $250 million of free cash flow. We expect this will represent a free cash flow margin of 25% and 26% for Q1 and full year 2026, respectively.

Fully diluted share count as of December 31, 2025, was approximately 308 million shares, a decrease of 6% year-over-year. The fully diluted calculation includes 283 million basic shares outstanding, which also represents a decrease compared to the prior year. We continue to manage and offset share count dilution by net settling invested equity amounts. During Q4, we used approximately $11 million for that purpose. In 2026, we will continue to net settle invested equity amounts and expect Q1 cash usage of approximately $11 million. And for the full year, cash usage of approximately $54 million at current stock price levels. This activity is reflected in our financing activities and is excluded from our adjusted free cash flow calculation. We ended the quarter with cash, cash equivalents, marketable securities and restricted cash of nearly $844 million.

Now on to our forward-looking estimates. As a reminder, our non-GAAP net income projections assume a tax rate of 24%. For the first quarter of 2026, we expect revenue to be in the range of $222 million to $225 million, growing 13% to 15% year-over-year. Non-GAAP income from operations to be in the range of $33 million to $35 million, and non-GAAP net income per share to be in the range of $0.10 to $0.12, assuming weighted average shares outstanding of approximately 287.4 million shares.

For the full year 2026, we expect revenue to be in the range of $952 million to $960 million, growing approximately 13.5% to 14.5% year-over-year. Non-GAAP income from operations to be in the range of $181 million to $189 million and non-GAAP net income per share to be in the range of $0.55 to $0.57, assuming weighted average shares outstanding of approximately 291.5 million shares.

Our financial outlook is based on a few assumptions that we would like to call out for modeling purposes. First, we are increasing our fiscal year '26 revenue growth expectation from what we outlined at our Investor Day last September, reflecting the strength and growth opportunities we are seeing in the business, particularly in EX. We expect revenue growth to accelerate in the second half as we further build on that momentum.

Using the midpoint of the range for Q1 estimates, we expect revenue growth rates of approximately 14% in Q1, Q2 and Q3 and 14.5% in Q4. As a reminder, last year's Q3 revenue had a $1 million benefit from Device42 that we do not anticipate this year. In December, we announced our acquisition of FireHydrant and closed the deal on January 1. We believe the acquisition will meaningfully enhance our ITOM capabilities, allowing our customers to quickly respond to incidents. We expect FireHydrant to have an immaterial impact on our Q1 and fiscal year 2026 revenue growth and approximately 1 point of headwind on our Q1 and fiscal year 2026 non-GAAP operating margin. We have taken these factors into account in our estimates.

For our non-GAAP operating margin, we expect approximately 15% in Q1 using the midpoint of our guide. For the subsequent quarters, we expect operating margins to increase by approximately 200 basis points in Q2 and will exit the year at roughly 23.5% in Q4. This reflects a shift in the timing of our annual merit increase process as well as other administrative changes. As we have previously mentioned, we also continue to be on track to achieve GAAP profitability exiting the year. Finally, our forward-looking estimates are based on FX rates as of February 6, 2026, and do not take into account any impact from currency moves.

To close, 2025 was a year of meaningful progress as we sharpened execution and strengthened our financial foundation to support our growth engine. As we look ahead to 2026, we see a compelling opportunity to build on this progress by continuing to invest with discipline expand our uncomplicated AI-powered EX and CX solutions and scale the business in a durable and profitable way. With a clear strategy, a strong operating model and a motivated global team, we are confident in our ability to drive sustained growth in our business.

Thank you for your continued support and confidence in Freshworks. And with that, let us take your questions. Operator?

[Operator Instructions] Your first question comes from David Hynes with Canaccord Genuity. Please go ahead.

Congrats on the quarter. Nice to see the durable [ IT EX ] growth. I'm going to actually ask about the CX side of the business. I think there was some optimism that AI can drive a little bit faster growth there that didn't play out in Q4. Could you just talk about some of the factors maybe creating some headwinds in that side of the business and kind of what you're doing to rectify those?

Yes. Well, first of all, thanks for the question. As you know, we've been -- our investment really is focused on that EX side of the business and then, of course, AI. The big move that we've made recently on the CX side has been to unify our conversational and ticketing capabilities in a new platform, which we released in Q4, and we're in the process now of upgrading all of our customers on to that. That will give us a single code base to innovate off of which we know will allow us to move faster on that side of the business and drive both retention and expansion.

I wouldn't say there was any like meaningful trend in Q4. Remember, we lapped the -- an initiative that we had last year called Free to Paid. So that accounted for some of the growth change, but we're managing that business to kind of grow where it is now, which is in that mid-single-digit range, while we invest over in that EX side, which is where we're seeing the growth, where we're seeing the move up market work quite well for us. So I wouldn't think that -- I don't think that Q4 was anything outside of our expectations. And if you look at our plan for next year, it's pretty consistent with where we think -- for this year, where we think we're going to grow that business this year.

Yes. Okay. Makes sense. And then Tyler, maybe a follow-up for you. Look, when we think about kind of intermediate-term targets that you have out there, call it, 14%, 15% growth. Today, you're getting about 1/3 of that from that revenue retention, right? I think it's $104 million on a currency adjusted basis. Does that feel like the right ratio to drive durable 14%, 15% growth, like 1/3 from expansion and 2/3 from net new? Or do we need to see NRR inflect higher to drive that growth durability?

So where we're at right now, DJ. I think that is the rate that it's at. But as we've talked about, our EX business is growing a lot faster than our CX business as well, EX has a better net dollar retention kind of make up to it, along with the fact that we have been adding different mechanisms to grow within the EX portfolio, specifically ESM products, our Device42 products. And then now with our recent acquisition of FireHydrant later in this year, hopefully, a new SKU on the ITOM side, that's all on top of the Freddy copilot ads that we have.

As the mix shift continues to change, we're going to expect to see that we're going to see some benefit from net dollar retention. We did say for the first quarter really that we're going to see some upside on net dollar retention in Q1, moving up to $105 million. is what we said. And that's the first time we've seen that in a while. And that confidence is driven really largely on the results that we're seeing on the EX side.

Your next question is from Elizabeth Porter with Morgan Stanley.

You got Oscar Saavedra on for Elizabeth. And congrats on the strong performance on the EX side of the house, really nice to see a cross in the [ $110 million ]. I wanted to touch on Device42. You highlighted the 30% attach rate across your top [ 6 ] new EX deals. As we think about 2026 and the updated guide you gave for '27. How should we think about that attach rate trending? How should we think about it going higher? And then what's the typical incremental ACV uplift when you include those versus Freshservice alone.

Yes, I'll take the first part of the question. I think Device42 is a piece of the bigger puzzle. We've built a platform that can power all the needs of a mid-market IT department, from ITSM to ITAM, now we're building out ITOM and then ESM. So Tyler mentioned this, those are the growth levers that we see enabling us to sustain this mid-20 growth rate for EX for a long time to come. We said at our Analyst Day back in September, ITAM is a business that is on track to drive $100 million in ARR for us over the next couple of years. We crossed $40 million this past quarter. It's -- the Device42 product is integral to our continued motion upmarket because larger organizations need that asset management capability really to power their IT department. So it's not just an attach on a net new sale. It's important for retention. It's important for expansion. And it's really been so far a huge success for us in terms of enabling us to kind of continue to move upmarket.

Tyler can comment on some of the specifics in terms of...

Yes. And Oscar, I just want to add also, we still have not launched the native cloud offering of Device42, that which is -- which we've been working on since kind of we brought on the company. and that's still on track to launch at the beginning of Q2 here. And that's going to be an initial phase of cloud because what we've been selling so far is still the on-prem.

The ARPU of Device42, we haven't disclosed, but you could tell from our Q3 disclosure about the $1 million that we had in Q3 of last year that we don't expect to repeat necessarily. That was a stand-alone Device42 deal. It wasn't a $1 million deal because of the term license we recognized more upfront, but it was very significant, as you can imagine. And so the ARPUs can go anywhere from the $20,000 level all the way up to the multiple hundreds of thousands for Device42 depending on the size of the organization that we're serving. But what you're seeing is that this is just another piece of a broader platform that we feel that is a holistic offering across all of EX and adding ITOM to is something that our customer has been asking for that we're really excited about.

Your next question is from Alex Zukin with Wolfe Research. Please go ahead.

Dennis, maybe one for you. Just as you think about Freddy AI tailwinds to growth that you saw in calendar '25, and you look at those for calendar '26, maybe just help us understand kind of what those could be. And also to the extent that folks plug in alternative solutions, agentic solutions into your platform. Maybe just remind us how do you monetize or how can you monetize that as well? And then I have got a quick follow-up for Tyler.

Yes. So AI for us, as we kind of shared in the remarks earlier, we crossed the 8,000 customer mark for customers that are paying for AI. In terms of revenue, we crossed $25 million in ARR as well, and that nearly doubled year-over-year. So we've got good momentum. We've got, I would say, a good start. We still got 75,000 customers. So we have a long way to go in terms of driving full penetration.

We launched our AI agent studio in late November. So that is in the market now. We've got hundreds of customers using that product to create their own agents on the customer support side. And we're bringing that into EX later in the first half of this year. So we -- in some ways, we're really getting started on the agentic side because our pricing prior to that was all focused on the old structured bots. We increased our pricing to $0.50 an interaction from $0.10 an interaction. We're just starting to see that flow through in terms of ARR. And we -- as that product scales, we think that, that's going to create significant upside in our overall AI business. Copilot continues to grow. We continue to see productivity improvements at 30% plus among customers that use copilot. So that, I think, is going to continue to drive increased penetration as capabilities there improve.

So all of these are either upsells to existing customers or included in deals, especially in large deals where over half of our customers are taking AI from the start. And it's really core to our sales motion now. It's what customers expect. And as far as the customers that might be experimenting with over-the-top solutions, we don't see it that much. We tend to be the first port of call for that midsized enterprise company that's looking to understand how AI can benefit their business, both on the IT and the CX side. Of course, we've got to put out a competitive product, but we've got the right to win with every one of those customers.

Understood. And then maybe, Tyler, on the guidance, obviously, nice to see outperformance there versus consensus. In terms of both the billings guide for next year as well as the revenue guide. Maybe just remind us and compare and contrast the level of conservatism that you're putting in there versus a year ago kind of how we should think about that, particularly as we get through the year? And then any color on billings seasonality you gave us kind of the revenue seasonality, but some billings seasonality would be helpful, too.

Yes. I mean, for the conservatism, Alex, as you know, first guide of the year is the toughest for the whole year because you have the least amount of visibility. Now clearly, just 1.5 quarters ago at Investor Day, we had guided to 13% to 14% growth for all of 2026. And essentially, we're saying that's now 14%. We wouldn't put that out there if we weren't confident in that. We are really excited about our EX opportunity. It's a strategy that we've been very clear about for 1.5 years now. that we're executing against, and it's working. And we're clearly the leader in that segment of the market that we're attacking right now. We're going to continue to go attack that and make that our priority.

So clearly, we wouldn't have put out the number right now if we didn't feel good that we can go execute against it. And hopefully, as we go throughout the year, we'll be able to update as we perform.

Your next question is from Scott Berg with Needham & Company.

I just wanted to follow up on the guidance question there. You're clearly getting some good momentum with Freddy in particular from the AI perspective is. How do we think about the impact on guidance this year? I know it's still a small amount, $25 million in ARR exiting the year. But should we expect a material contribution to that next year from what you're seeing in the pipeline? Or you're still a little measured there?

Yes. So Scott, I think our biggest opportunity on Freddy is still on our existing installed base. If you actually look at the numbers we've put out on attach rates on new business, specifically for larger deals, we're still over 50%. That means that as companies are choosing us as a new customer, part of the reason they're choosing us is because of what they see on our Freddy capabilities. and that is real time. And as a reminder, the dollars we put out on our AI revenue is purely on the SKUs that we sell. And so it doesn't include things like AI agent on EX right now because that's included in some of our plans. We're not trying to do an allocation there.

The products are working. We have 8,000 customers now. The growth rates there are good, and we still feel we're very confident that these can each be a $100 million product, AI agent and copilot in the next 3 years. And we think that's going to continue to be a lever of growth. That being said, the other areas that we have, including ESM, where we've really only had that as a stand-alone product for 1 quarter, we're very excited about that as well. on our capability to go expand with existing customers but also land there. And we just have to keep proving that out and think that, that could actually be a really good tailwind into the year.

Got it. Helpful there. And then Dennis, your market sales motion is clearly going well. as you move your ITSM kind of products and solutions up there with Device42, et cetera. I mean, by my math, your customers above $50,000, I think you grew that net new comp by over 30% or roughly 30% year-over-year. I guess as you look at '25 versus '24, and I know you had Device42 for the entire year. But outside of that, is there anything else to really call out that's kind of driving some of the extra strength of upmarket?

Yes. Well, a number of things. First of all, that midsized enterprise is looking for choice and they're looking for a platform that satisfies all of the different needs that you have in running a midsized enterprise IT department from ITSM to ITOM to ITAM to ESM. And that's what we built over the last couple of years.

If you think about a lot of the decisions that were made 2 or 3 years ago to stay with BMC or Vontier, ServiceNow, we were not in the market the way we are now. And those customers are coming up for renewal. They're looking around. They're seeing the recognition that we have. From Forrester and Gartner, they're seeing all the customer references that we now have from large meaningful companies that have made the switch. They're talking to the CIOs of those companies that have made the switch. We've got a really positive referral cycle going and they're seeing the value. And so we -- that market, by our estimates, the mid-market of -- in the TAM we're competing in is as large as the true enterprise, think of [ the G2K ]. It's a lot more companies, but it's a massive TAM. And in many ways, we're just getting started in terms of getting that referral network going, the messaging going all that, and that's just creating this momentum.

That market for us is enormous. And I know there's a lot of talk about the impact of AI and how is AI going to affect seat-based pricing. For us, it's a share gain. So we're taking seats with every win that we make. We've always been in a competitive market. We've always had to take share from bigger players and that's what we continue to be able to do. If you look at the growth rate for ESM at 22%, we think we're the fastest-growing player in that midsized market. And so some of these fears that seats are going to erode because of AI. We've got multiple ways of monetizing the relationship we have with the customer. But more importantly, we're not the incumbent that has a lot to lose. We're the attacker who's taking share, and that is going to continue to be true for some time.

So we think that the market that we're playing in that EX site, you add AI to that, you add these capabilities that we've been building out. It's just a huge opportunity for us. And that's why you see us talking about the investment that we're making there. We're running CX lean to enable us to invest in that EX opportunity and really leaning into it. And that's what you're just going to see every quarter this year.

[Operator Instructions] Our next question is from Rob Oliver with Baird.

Great. Dennis, for you, and this is, I guess, a follow-up to Scott's question. So on that Freshservice plus Device42 side, clearly, you guys have shown meaningful large win stand-alone on D42 and sort of proven it out and simultaneously, you guys are seeing a ton of momentum upmarket on the Freshservice side. Can you talk a little bit about the sort of the combined go-to-market there. where you are today, where you need to be in terms of your ability to have all hands on deck and kind of rowing oars at the same pace in order to compete for these deals? And is that something that's already done and ready to go today as we enter '26?

Yes. So I think we're all feeling pretty confident in the sales and marketing motion. If we internally look at our win rates, it's consistent improvement quarter-over-quarter in our win rates against our largest competitors really good predictability in the business compared to where we were 18 months ago. And you see that in our numbers. You see that in our ability to consistently beat the top end of our estimates. And that -- so I think the sales motion we got nailed down. I think where we're really focused is stitching all the product pieces together in a way that makes sense for our customers. So the first step there is bringing Device42 fully to cloud, and that's happening later this quarter. That's going to open up a slightly different market for us because if you're a cloud-first company, you don't want an on-prem solution, and that's what Device42 has been up until now. So that will open up another set of customers for us.

FireHydrant is the next piece of that. Now we've got to build out the integration plan, but we have a lot of customers that work with us that are looking for a more modern solution for IT operations management, incidence response and ultimately much more proactive incident detection our primary customers over in the IT department, but a lot of these customers are over in the technology organization. And that's an interesting adjacency for us where customers are using Freshservice to in some cases become alerted to instances that as they're happening. In other cases, they're using Device42 to understand the kind of the relationship of assets to one another and get ahead of problems before they happen there.

So ITOM is a natural complement. A lot of our customers are looking for an integrated solution. That's what we're going to deliver in the back half of this year, and that's another natural next step. And then ESM. Our ESM capabilities are getting better all the time. We said -- it used to be 1 in 5, now it's 1 in 4 of our eligible customers are using ESM that's great, but that means we have a lot more customers to go after in departments like finance and legal and HR.

So building out the capabilities there, bringing genetic AI into those workflows, those are huge opportunities for us. And now we can offer our ESM product to companies that might not have Freshservice that might be stuck for a little bit longer on a legacy solution for their IT department because of contractual reasons, but want to lessen vendor dependency on that incumbent wants something that's more flexible for them that meets their needs better, and ESM is a great entry point into those types of customers where we can prove ourselves, earn the trust of the customer. And then when that ITSM contracts up for renewal, we can win it.

So we've got a lot of levers on that side of the business, and there's a lot more that we're excited about going into to continue to build out that platform to serve larger and larger customers.

Your next question is from Patrick Walravens with Citizens.

Great. This is Austin Cole on for Pat. Dennis, you mentioned the just the work to do to help penetrate the customer base with Freddy AI, and it sounds like there's a lot of momentum there. But what are -- what do you kind of see as the 2 or 3 big bucket items in terms of increasing that penetration?

Yes. So the focus now is very much on building out the agent capabilities of our AI agent studio. We focused initially that set of launches on CX just because there's much more quarries to be handled through AI or on the customer support use case than an employee use case, but the employee use case is super important, too. And we'll be coming out with prepackaged workflows and automation later in the first half of the year that's focused there. But that's a really good business for us because it just scales the usage. And we've already seen customers that have adopted on the CX side. Once they get going, the usage spirals up for them. They get the benefit of deflecting a ton of inbound. They answer questions faster. CSAT often goes up. and they're perfectly happy paying the session-based pricing that we have set in the market.

So I think that on the AI-side agentic, L1, agentic in particular, is, I think, a growth lever that we're going to really see if it takes off this year. Copilot is a little steadier, right? That's a very clear value proposition. We've got lots of customer examples that are working for us. And so that also is scaling about half of our customers among the 8,000 are copilot customers. We've got a long way to go. And then we're investing in AI across the product portfolio to be much more proactive in delivering service. Insights is an example of that, where a manager can come in, they can see their service desk understand exactly what's going on. The AI suggests areas to look into, anomalies, those sorts of things, the agent can troubleshoot in a natural -- or the manager can troubleshoot in a natural language way to understand any kind of issues or problems in the data. They don't have to hunt and peck through a bunch of Power BI dashboards. So that proactive service delivery is really where we see AI taking us, and there's a lot of places we can go from there.

Your next question is from Brian Peterson with Raymond James.

This is Johnathan McCary on for Brian here. So kind of dovetailing off that last question. So I wanted to ask about sort of -- are you guys seeing a halo effect in the business where you're having a customer that's coming live on the CX or the EX side, and realize there's some difference there on the ideal customer profile. But they're seeing a lot of value from the Freddy products on one side of the business and that actually brings them back to the table and unlock the cross-sell opportunity on the other side.

We're definitely seeing the impact of AI in terms of driving greater expansion and retention. So our for customers that are taking our AI paid SKUs was 116% last quarter. And I think that's up from like 112% the prior quarter. So you think about that, if we can eventually, all of our customers are going to use AI. We know that. If we can continue to drive that penetration and continue to see those kinds of results, that's fantastic for our business. It tells us that our customers are seeing value both on EX and CX from the AI capabilities that we're bringing to market, and they're expanding at a much faster rate than those without AI. So it's a critical imperative for us to get as many customers as possible on.

In terms of like what are the things that we have to do to get there, a lot of it is about education, right? We have a broad spectrum of customers. Right now, I'd say AI adoption isn't confined to any specific industry or any specific size of customers. It's pretty broad. But there's still a lot of customers out there that are hesitant or need to be educated on how the data is being used and all that stuff. And that's what our go-to-market teams do every single day. And that's why you're seeing the 50% attach rate on new deals, that's why Tyler is constantly pushing the teams to drive penetration to the existing base because we know once customers get onto our AI. They see the value. They see the business cases very clear and that just enhances their relationship with us and leads to a lot of positive upside.

Your next question is from Taylor McGinnis with UBS.

Tyler, just on the guide. If I look at the 4Q numbers, it looks like 13% constant currency growth across revenue and billings and then the high end of the guide going into 2026 implies an acceleration. So could you just unpack for us what gives you comfort in that outlook when you think about each of the individual pieces? And as a second part to that, we look at the CX business and knowing that you guys are making this platform change, is there a potential to see any tailwind from that as we get through 2026?

Thanks, Taylor, for the question. So you're right. We are guiding to some slight acceleration, right, even into the back half of the year. on the revenue side. And it really is just coming off of the confidence that we have driven by EX performance. And we just had another great quarter, and we strung 4 great quarters together. And we know that the attributes of that customer base are really, really strong. And now we're starting to push a whole bunch of other products into that customer base and some that we never had before. And so the confidence is really driven by the execution and the continued momentum and things like pipeline, right, where we're seeing more $100,000 deals than we've ever seen in pipe currently. And this all gives us a lot of confidence.

To be honest, on the CX side, we've been very, very clear now for a number of quarters, like our main focus is to bring all of our customers on to our new platform, our new Freshdesk Omni platform. And we're being relatively conservative in our expectations on growth from the CX side of the house until we get through all that. Now that being said, we're still closing new customers every single quarter, a lot of them the AI adoption is continuing, and we're getting really good feedback. But from what we've built in, we're being relatively conservative in what we expect in terms of CX growth. A lot of the confidence or all the confidence is coming from EX and our expectations there.

Our last question will be from Billy Fitzsimmons with Piper Sandler.

[ Steer ] from the metrics healthy momentum of market, and I want to focus on maybe mid-market specifically. And I won't focus on mass market because obviously, it's probably hard to disaggregate [ back ] given the shift in strategic priority. But in terms of mid-market, I bring this up because in a couple of prints this cycle, there are some narratives around kind of the health of a sub enterprise-type customers and some other companies in the software space called that weakening macro or potential higher [ passive ] customer acquisition. Just curious if you can kind of comment on some of the metrics you're seeing in real time for the, call it, like sub enterprise-type customers exiting 2025 and kind of what you're baking in 2026 in terms of the guide.

Yes. Yes. So we'll just define -- the way we define mid-market call it, a 5,000-person company, that's kind of the sweet spot, maybe $1 billion to $3 billion in revenue. That's what we're growing our business off of. That's what the sweet spot for us. That's where our growth is coming from right now. So we're not seeing anything negative at all. In fact, as Tyler alluded to, we entered this quarter with the best pipeline we've ever had from that segment of the business. That's what our field market -- field motion is primarily focused on. And that's where we have a really strong position in in EX in particular, where increasingly those customers are turning to us as the solution that makes sense.

So we think that, that's a large segment over time that is going to continue to grow with us, if anything, if those customers are squeezed for cost or efficiency or anything like that, they're going to turn to us more than they would to a legacy platform like a BMC or [ onto ] your ServiceNow which are much more expensive, not just from a licensing cost, but they're expensive to run. They're expensive to keep up and running and keep current with their business processes. Their AI takes longer to implement. All that is much easier on our platform. That's why the growth is coming from there.

You can see it in our over $50,000 customer count and the percentage of our revenue that's coming from over $50,000 customers. Tyler alluded to a number of customers over $1 million. I mean all that is coming from that mid-market, which is where we're orienting the company. That's what we're focusing on. That's where our growth is going to continue to come from. And those customers expanded higher rates they retain at higher rates, everything is good there. We're in the middle of that journey to move the entire company to focus on that part of the market is super important for us.

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

Good day, and thank you for standing by. Welcome to to the Freshworks Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Brian Lan, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Freshworks Third Quarter 2025 Earnings Conference Call. Joining me today are Dennis Woodside, Freshworks' Chief Executive Officer and President; and Tyler Sloat, Freshworks' Chief Operating Officer and Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our third quarter 2025 performance and our financial outlook for our fourth quarter and full year 2025.

Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroeconomic environment in which we operate and market volatility and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand and to control costs and improve operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-K and other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law.

During the course of today's call, we will refer to certain non-GAAP financial measures. 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 or to learn more about Freshworks. And with that, let me turn it over to Dennis.

Thank you, Brian. Freshworks delivered an outstanding Q3, marking the third consecutive quarter this year that we surpassed our estimates across growth and profitability metrics. We grew Q3 revenue 15% year-over-year to $215.1 million on both an as-reported and constant currency basis, approximately 3 points above the high end of our previously issued estimates. Non-GAAP operating margin expanded to 21%, 5 points above our estimate. Our free cash flow margin was 27%, and we added a fifth straight quarter of Rule of 40 plus.

We ended the quarter with nearly 75,000 customers, including new logos such as global auto manufacturer, Stellantis; multinational bank, Societe Generale; the Pennsylvania Gaming Control Board; and Travis Perkins plc, the U.K.'s leading distributor of building materials. Our positive results also reflect significant expansion deals with existing customers like Wiley, the Access Group and iRhythm Technologies. In Q3, we saw a more than 40% year-over-year increase in the number of new and expansion deals with greater than $50,000 in ARR.

Our strategy has focused on 3 key growth drivers: investing in employee experience; delivering AI capabilities across our products and accelerating adoption; and driving continued expansion in customer experience. At our Investor Day in September, we outlined our path to $1.3 billion in ARR in the next 3 years, and we continue to make progress towards our goal of ESM, AI and ITAM, each generating over $100 million in ARR.

Before we dive into the results, I want to speak to the transformative AI opportunity ahead for Freshworks. We have over 50 AI-driven applications in the hands of customers right now, and the direct monetization of these products demonstrates that we are driving incremental growth and that customers are realizing tangible outcomes from our AI. The headline here is that businesses need the right foundation, workflow, data and security that all work together, and that's what we provide. Companies will continue to rely on us because we have the operational context, data connections and governance needed to manage full-service functions like customer support and IT service at scale. Security, privacy and compliance are already built into our architecture. That's what makes our AI enterprise-ready compared to general purpose AI.

Employee experience continues to lead in durable growth, achieving over $480 million in ARR. That represents 24% year-over-year growth on an as-reported basis and 23% year-over-year growth on a constant currency basis, an acceleration from Q2. Three primary growth drivers that contributed to these results include expansion into departments outside of IT, continued growth upmarket and deepening our foothold in IT asset management with Device42.

Enterprise service management continues to be an important expansion lever as customers increasingly use Freshservice in areas of their business outside of IT. Our ESM solution, Freshservice for Business Teams, has doubled its annual recurring revenue in the past year and exceeded $35 million in ARR in Q3. Customers like Databricks, RingCentral and Qualcomm are using our ESM offering to automate workflows and deliver more personalized employee experiences at scale.

As of Q3, 1 in every 4 eligible Freshservice customers are using Freshservice for Business Teams. To meet the surging customer demand, today, we announced that we are expanding enterprise service management access by making Freshservice for Business Teams available as an independent product for non-IT functions. With a stand-alone product, we are no longer limited to using IT as our entry point, and we can now sell directly to HR, finance, facilities and legal, even if an organization is already locked into another ITSM tool.

Second, we continue to move upmarket with midsized and enterprise customers. In Q3, ARR from customers who spend more than $100,000 with us grew 25% year-over-year. The steady flow of new product innovations like employee journeys, our AI-powered onboarding and offboarding capability and increased adoption of business teams contributed to the momentum of these larger customers.

Freshworks is positioned as a clear alternative to legacy players, and we continue to displace incumbents. In Q3, we delivered our highest ITSM competitive win rates in 2 years as customers selected Freshservice for its ease of use, fast deployment and lower total cost of ownership. Freshworks has an established track record in ITSM. Mid-market and enterprise organizations want speed and simplicity, and Freshworks delivers. One example is Holt Cat, the largest U.S. dealer of Caterpillar equipment, who saw significant improvement in efficiency and productivity as agents were able to handle nearly 10,000 tickets within 6 months and bring their average ticket resolution time to under 5 hours.

The third growth lever in EX is our advanced IT asset management offering expansion with Device42. In Q3, we closed our biggest Device42 new deal to date with the largest U.S.-based sporting goods retailer. Device 42's deep integration with Freshservice and its differentiated discovery engine made it the clear choice for enterprises that are seeking real-time visibility and control. The momentum is evident as half of our top 10 largest deals in the quarter included a Device42 component.

In addition to these 3 growth drivers, we're deepening our presence across key verticals. For example, in Q3, we doubled our law firm customer count reaching over 1,000. In sports, we want to congratulate the Los Angeles Dodgers, one of several major League Baseball teams that rely on Freshservice on winning back-to-back World Series and also the McLaren Formula One team for winning back-to-back Constructors Championships.

Finally, we continue to drive greater efficiency and focus on our go-to-market motion. On the leadership front, we welcomed Enrique Artagon as Senior Vice President and General Manager of America Field Sales. Enrique's experience leading high-performing sales organizations will help sharpen our execution, accelerate growth and strengthen our GTM discipline across North and South America.

Now let's talk about our AI tailwind. Freddy AI continues to be a growth driver and expansion opportunity across EX and CX and is delivering exceptional results for thousands of customers who are seeing tangible business value and returns quickly after adoption. As we stated before, we believe this can be a $100 million stand-alone revenue stream over the next 3 years.

AI is becoming a core productivity engine for every team, not just for IT. And here's why Freshworks is winning. Our products sit where real work happens in customer support, IT, HR and operations, helping businesses automate tasks, resolve issues faster and deliver better experiences with less effort. Our AI is deeply embedded in how our customers work every day. It's writing replies, classifying tickets, generating insights and increasingly taking action on behalf of employees and customers.

The results speak for themselves. AI ARR has doubled year-over-year. Customers are now using Freddy AI to resolve millions of problems every week. And our new AI agents are performing real work across industries from handling returns in e-commerce to managing employee requests in HR. As a testament to our AI momentum, we have seen AI agent usage expand more than sixfold in the past 7 months, while our existing AI Copilot solutions continue to double in usage year-over-year.

Freddy Copilot ARR grew 160% year-over-year and was included in over 60% of our new customer deals over $30,000, a 5-point increase from the prior quarter. We also saw double-digit attach rates again for new SMB customers in Q3. The number of customers using Copilot grew significantly too by over 130% year-over-year.

Travis Perkins plc upgraded from legacy complexities to service efficiency with Freshservice and Freddy AI Copilot. Travis Perkins is now able to provide best-in-class IT service management to 17,000 employees across 1,400 locations while improving operational execution, optimizing costs and increasing productivity for HR and IT teams.

These Freddy Copilot customers stick with us. Their net retention rate is 112% in Q3 for both CX and EX, higher than our overall base and a tangible sign that AI is driving deeper engagement and long-term value. We believe this tailwind will continue to strengthen our growth trajectory. The number of Freddy AI agent sessions grew over 70% in Q3, and we have seen 650,000 sessions per month since launch. Freddy AI Agent deflected more than 50% of tickets for CX and EX customers. Those who had early access to Agentic workflows that we launched in June are seeing their average deflection rate jump to 65% with a handful of customers seeing 80% of service issues resolved by AI Agent.

We're seeing positive feedback from customers who have had early access in Q3 to several products we announced at our June refresh event. For example, Gale's Bakery, a midsized U.K. cafe chain with over 170 locations, used Freddy AI Agent Studio for Freshdesk to build AI agents. These Freddy AI agents now handle 1,000 inquiries per month to deflect more than 1/3 of total volume. Employees are freed from repetitive work and can dedicate more time to more complex customer cases like allergies, ingredients or complaints that require personal care.

Next week, we'll share new product announcements across our entire portfolio at Refresh North America on November 13 in San Francisco and at our Virtual Summit on November 18. This includes new vertical Agentic AI agents that bring our growth strategy to life, demonstrating how we're executing through AI innovation that expands our addressable market and deepens customer value.

Our third imperative, customer experience, grew to over $390 million in ARR, representing 8% growth year-over-year on an as-reported basis and 7% on a constant currency basis. Q3 growth was driven by deeper product adoption and customer sentiment that Freshdesk is easier to implement and use than the legacy alternatives. To build momentum, we refocused our CX products, and we'll be announcing a new unified experience at refresh next week, a single workspace that consolidates Freshdesk, Freshchat and all of our Freddy AI products for customer support teams. This hub centralizes all conversations, context and tools to help agents resolve inquiries and get work done more efficiently. This will be a force multiplier for frontline support teams, helping them improve the speed and quality of customer service.

Freddy AI continues to be an expansion driver for CX with measurable impact for customers using Freddy AI agents in Freshdesk. For example, Birds Eye, a leading German outdoor retailer, uses Freddy AI agents to automatically retrieve real-time order data and provide status updates, return label and invoices with customers in seconds. This has significantly reduced ticket volume and improved response times, driving higher satisfaction and greater trust in the Bird's Eye brand. The potential of Agentic workflows is tremendous. Traditionally, building AI agents like this took months, designing customer support workflows, training data and endless testing. Our prebuilt AI agents help our customers deploy on day 1 to handle tasks like expediting orders, processing returns or checking delivery status. That means faster setup, faster results and a better customer experience from the start.

While SMB and commercial segments continue to turn to Freshdesk, we are also seeing larger implementations with midsized and enterprise organizations like the University of Pennsylvania, who consolidated its finance support into a single hub with Freshworks. In just 6 months, the university processed more than 30,000 service tickets, streamlining workflows and improving stakeholder satisfaction. We believe customers of all sizes continue to choose Freshworks CX solutions for its AI-driven efficiency and uncomplicated customer support experience.

Around the world, businesses are choosing software that delivers real outcomes, speed, simplicity and measurable ROI, and that's exactly where we stand out. Our enterprise-grade products deliver faster time to value and lower total cost of ownership, aligning perfectly with what today's buyers demand. With solid momentum behind us, we're leaning into the global opportunity ahead to expand our pipeline, acquire new customers and fuel durable growth.

Thank you to our customers, partners, employees and shareholders for your ongoing support. Now let me turn it over to Tyler to go through the operational and financial details.

Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today. We are very pleased that we continued our streak of outperforming across both growth and profitability during the third quarter. We once again exceeded our revenue, non-GAAP operating income and adjusted free cash flow expectations. This strong overperformance reflects the continued demand for our AI-powered and uncomplicated EX and CX solutions. Our consistent execution and financial discipline position us well to capture the significant long-term opportunities ahead.

For our call today, I'll cover the Q3 2025 financial results, provide background on the key metrics and close with our forward-looking commentary and updated expectations for Q4 and full year 2025. As a reminder, most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, restructuring charges and other adjustments. We will also talk about our adjusted free cash flow, which excludes the cash outlay related to restructuring costs. To provide greater transparency into our underlying business performance, we will also include constant currency comparisons throughout today's call.

Starting with the income statement. Q3 total revenue increased to $215.1 million, growing 15% year-over-year on both an as-reported and constant currency basis. Revenue outperformance includes a onetime $1 million contribution coming from our on-premise Device42 business. Professional services revenue modestly declined quarter-over-quarter to just over $2 million, consistent with our ongoing shift in leveraging our partner network as we scale our business.

In 2025, we saw partner involvement expand significantly across our largest deals. Partners helped to lead implementations for over half of our ARR deals greater than $50,000, a notable increase from last year, underscoring the success of our robust and growing partner ecosystem.

Our EX business accelerated in Q3, growing to over $480 million in ARR, representing growth of 24% year-over-year on an as-reported basis and 23% year-over-year on a constant currency basis. Our faster growth was driven by strength across our entire EX portfolio as we saw positive momentum in not only ITSM, but also meaningful progress in ESM, advanced ITAM and AI, each of which we believe can eventually be $100 million ARR businesses.

Our CX business increased to over $390 million in ARR, reflecting growth of 8% on an as-reported basis and 7% year-over-year on a constant currency basis. We continue to see healthy and predictable demand for our Freshdesk products.

Moving to margins. We maintained a non-GAAP gross margin of 86% in Q3 as we continue to scale our business efficiently. Our non-GAAP operating income for Q3 came in at $45.2 million, representing a non-GAAP operating margin of 21% and ahead of our prior expectations, reflecting our continued top line momentum and effective cost management.

Moving to operating metrics. Our net dollar retention came in at 105% on an as-reported basis and 104% on a constant currency basis, both in line with our expectations. Just like last quarter, Device42 represented a small drag of 60 basis points to net dollar retention. We expect Device42 retention to improve gradually as we continue to scale the business with our ITSM offering.

Looking ahead, we estimate net dollar retention of approximately 105% on an as-reported basis and 104% on a constant currency basis for Q4. As of the end of Q3, the number of customers contributing more than $5,000 in ARR grew 9% year-over-year on both an as-reported and constant currency basis to 24,377 customers. This customer cohort continues to represent over 90% of our ARR. For our larger customer cohort, as of the end of Q3, the number of customers contributing more than $50,000 in ARR grew 20% year-over-year on an as-reported basis and 19% on a constant currency basis to 3,612 customers. This cohort represents over 50% of our ARR as we have continued to move upmarket successfully.

For total customers, we added over 260 net new customers in the quarter and have nearly 75,000 customers as of the end of September 30. Given the continued success of our upmarket strategy and our focus on mid-market and enterprise customers, we believe total customer count is no longer a meaningful indicator of our performance. Starting with the release of Q1 results next year, we would discontinue reporting this metric on a quarterly basis and shift our focus to larger customer measures that better reflect how we manage the business and its trajectory.

Now let's turn to calculated billings, balance sheet and cash items. Our calculated billings grew to $224 million in Q3, representing growth of 14% year-over-year on both an as-reported and constant currency basis, matching our prior expectation on an as-reported basis and coming in ahead of our constant currency forecast of 13%.

Looking ahead to Q4 2025, our initial estimate for calculated billings growth is 17.5% year-over-year on an as-reported basis and 14% on a constant currency basis. For the full year 2025, we expect calculated billings growth to be approximately 16% year-over-year on an as-reported basis and 14% on a constant currency basis, both of which are in line with our expectations from last quarter.

Moving to our cash items. We generated $57.2 million in adjusted free cash flow in Q3, driven by continued operational discipline and strong collections. This resulted in an adjusted free cash flow margin of 27%, which represents an over 5 percentage point improvement year-over-year. For the full year 2025, we now expect to generate approximately $222 million of adjusted free cash flow with approximately $55 million in Q4.

As a reminder, we successfully completed our inaugural $400 million share repurchase program after buying back an additional 12 million shares in Q3 at an average price of $13.28 per share. In total, we repurchased approximately 27.9 million shares at an average price of $14.35. We continue to manage and offset share count dilution by net settling vested equity amounts. During Q3, we used approximately $15 million for that purpose. This activity is reflected in our financing activities and is excluded from our adjusted free cash flow calculations. Looking ahead, we will continue to net settle vested equity amounts and expect Q4 cash usage of approximately $12 million at current stock price levels. For the full year, we expect to use approximately $58 million to net settle vested equity amounts. We ended the quarter with cash, cash equivalents and marketable securities of approximately $813 million.

Turning to our share count as of September 30, 2025. We had approximately 309 million fully diluted shares, which represents a decrease of 7% year-over-year. The fully diluted calculation includes 282 million basic shares outstanding, which represents a decrease compared to both the prior year and quarter. It also includes 24.5 million shares related to unvested RSUs and PRSUs and over 2 million shares related to outstanding options. We remain committed to thoughtfully managing our share count dilution over time.

Now on to our forward-looking estimates. For the fourth quarter of 2025, we expect revenue to be in the range of $217 million to $220 million, growing 12% to 13% year-over-year. Adjusting for constant currency using FX rates from Q4 of last year, this reflects growth of 11% to 13% year-over-year; non-GAAP income from operations to be in the range of $30.6 million to $32.6 million; and non-GAAP net income per share to be in the range of $0.10 to $0.12, assuming weighted average shares outstanding of approximately 284.5 million shares. For the full year 2025, we expect revenue to be in the range of $833.1 million to $836.1 million, growing approximately 16% year-over-year on both an as-reported and constant currency basis; non-GAAP income from operations to be in the range of $167 million to $169 million; and non-GAAP net income per share to be in the range of $0.62 to $0.64, assuming weighted average shares outstanding of approximately 293.9 million shares.

Our financial outlook is based on a few assumptions that we would like to call out. First, our forward-looking estimates are based on FX rates as of October 31, 2025, and do not take into account any impact from currency moves. As a reminder, we had a $1 million revenue benefit in Q3 related to a large Device42 deal that we would not expect to repeat in Q4. Secondly, given our strong operating and go-to-market execution this year, we are strategically reinvesting a portion of our earnings outperformance to further build on that momentum. As such, we anticipate a onetime increase in spending during Q4 to expand our pipeline and drive customer acquisition with a modest corresponding impact on operating margins. These planned investments are reflected in our financial outlook and position us well for continued growth.

Looking beyond Q4, we are reaffirming the long-term model we outlined at our Investor Day in September. Based on our current forecast, we continue to expect full year 2026 revenue growth of 13% to 14%, and we remain on track to achieve GAAP profitability by end of year. As a reminder, the fourth quarter has historically been our largest bookings quarter and a good indicator for us. So we will follow our typical cadence of providing a more detailed outlook for 2026 on our next earnings call.

With that said, let me provide some additional color on our operating margin linearity for the full fiscal year 2026. We anticipate that our Q1 2026 operating margin will be slightly better than Q4 2025 and represent the low point for next year. This is driven by the strategic decision to move the timing of our annual merit increase process from April to January as well as the reset of U.S. payroll taxes and the start of new benefit plans. Following this Q1 low point, we project a subsequent linear ramp-up throughout the remainder of fiscal year 2026, culminating in an operating margin exiting Q4 2026 at over 23%.

Our results underscore the exceptional execution and financial discipline our global team has demonstrated throughout the year. As we get ready to close out 2025, we remain focused on continuing that momentum and thoughtfully reinvesting in our growth to capture the multitude of significant opportunities ahead. We appreciate your continued confidence in Freshworks as we execute on our strategy to deliver long-term profitable growth. And with that, let us take your questions. Operator?

[Operator Instructions] Our first question will be coming from Scott Berg of Needham & Company.

Really nice results here in the quarter. Dennis, I wanted to talk about the announcement today, you're selling ESM as a stand-alone solution. That's certainly not news to us that we're paying attention at the Analyst Day. I just want to hear kind of, I guess, how you're thinking about that solution? Is this going to be sold with, a, I guess, a separate sales force now as you're selling it stand-alone, it's going to be sold with the same sales folks that you're using? And any changes to, I don't know, pricing or I guess, whatever the marketing message looks like around that in the stand-alone environment?

Yes. Thanks, Scott. So first of all, we launched Freshservice for Business Teams in 2022. We had a lot of demand outside of core IT departments for a service desk solution. And that, as you know, has been a huge driver for us. We crossed $35 million in ARR. That business has doubled year-over-year. About 1/4 of our customers now for Freshservice customers now are using Freshservice for Business Teams in some way, shape or form. So it's a really strong value proposition. And what we've seen is some prospects where they might be locked into a contract for their core ITSM with a larger incumbent, they don't necessarily want to increase their vendor dependency on that incumbent. They want to preserve optionality to potentially move to us at a later date, but they need a solution now for the teams outside of IT, and that's why we launched this. In those cases, we can sell to them now. We can preserve that optionality, get to know them a little bit. So when that contract does come up for renewal for core ITSM, we're there, and they've had a positive experience with us.

There's no new sales force around this. We already have a pretty well-worn try-to-buy way of getting a lot of customers started. So all of our typical outbound and inbound marketing methodologies apply here. It's going to be the same sales force we have. So we think we'll get a lot of scale out of that. And this is on top of the core ESM business that we have, the product that is attached to Freshservice. We think that alone, when we talked about this at Analyst Day, that alone has a path to $100 million. This is additive to that. So we're launching it today. We'll have more next quarter in terms of early traction, but we're pretty positive about where this is going to go, just given the success of the products that we've had in the market already.

Excellent. And then from a follow-up perspective, maybe this is for Tyler, is it's around your buyback program expired in the quarter. You've certainly been buying back some shares at higher levels. I didn't see that repeated here, which I kind of almost expected, I guess, in the quarter or at least an expansion of those efforts. Should we take that as maybe an indication or a shift in your capital allocation strategy? Or maybe there's something more on just on a timing basis there. Any details there would be great.

Yes. Thanks, Scott. Yes, so we finished the inaugural buyback in [ Q3. ] So we just finished it 1.5 months ago. That was authorized a year ago for $400 million, and we completed that. And we were happy to get that done. I think the weighted average price is just over $14. We are committed to working with the Board on a continued capital allocation strategy. We've always said we've been open to M&A. If that come forward, we're obviously going to invest in the business where that's needed, but we're producing a lot of cash flow now. And we'll continue to talk about the Board about other uses of capital, including other buybacks. We are still doing our net settles, and we provide the data there. And so we're still spending money every single quarter on net settlements, and that's been outside of the buyback. So that will be a continual discussion that we will have with the Board.

And our next question will be coming from Alex Zukin of Wolfe Research.

This is Mark on for Alex Zukin at Wolfe. Congrats on great results. Can you just give us a little bit more color on how you're balancing the monetization versus adoption play with the Freddy AI suite of tools? Any way we should think about how that might change with the new agent capabilities?

Yes. So just to recap our strategy, we have a Freddy AI agent, which is a consumption-based model for CX, where our customers pay us on a per session basis. We have Freddy Copilot, which is a per seat license adder. And then we have our Freddy Insights, which is only available in the enterprise plan. So different products have different monetization levers and paths.

For AI agents, we've historically priced those based on sessions with our Agentic AI agents coming out in a matter of weeks. We have revisited pricing. We're not revealing that now, but we are going to be more in line with industry pricing, which is considerably higher than where our pricing historically has been. We think that the market will support that based on what we've seen in early access with some customers seeing up to 80% deflection rates based on their use of AI agents. What's coming in a couple of weeks are agents that are focused on very specific verticals like fintech, like travel, logistics, e-commerce that take action on behalf of the end customer, and we know that those interactions are quite valuable.

We're not quite at the point to move to full resolution-based pricing and frankly, neither are our customers. So the session-based pricing makes a lot of sense for where we are now. We're always open to evolving that as our customers ask us to and as customer demand warrants, but you will see a meaningful price change with that, the launch of those products, which will allow us to monetize it quite well.

And our next question will be coming from Patrick Walravens of Citizens Bank.

Congratulations on the third quarter in a row this year. So the big question I still get, Dennis, believe it or not, is for investors who are just looking at Freshworks, they still want to know, is it an AI winner or an AI loser. And I see lots of evidence that it should be in the winner's camp, including your $100 million target and what you just talked about actually is really interesting about the specific verticals for agents. But just to make it easier for people, if you're going to boil it down to 2 or 3 key points that you would make on that topic, why Freshworks as an AI winner? What are they? What would you lay out?

So first of all, look, we are the system of record for our customers in IT and in customer support. We have the native workflows that they're running their business off of. And that is super important for all of what we're focused on. The products that we ship have ready-made skills, guardrails, governance, things that our customers all need in order to run their support and IT departments, and that's what they demand. So there's a mean that, oh, everybody is going to go directly to OpenAI or to Anthropic to build their solutions. That's just not going to happen in such complex environments as Seagate's IT department or some of these others. The customers need the AI to be integrated into their workflow. They need the security. And we can tap into the best-of-breed models as the LLMs evolve by tapping into Anthropic for coding or Gemini for image and so forth. So we think that we're actually really well positioned as the market evolves and as customers continue to adopt AI to succeed there.

Our next question will be coming from Elizabeth Porter of Morgan Stanley.

This is Oscar on for Elizabeth. Congrats on a great quarter. I wanted to ask in terms of government exposure for Freshworks tends to be more state and local. But I just wanted to check if you have seen any impact from the government shutdown, either in the form of longer sales cycles or smaller deals and either directly or indirectly, if it has pressured any small businesses within CX.

Yes, it's Dennis. So we've seen no impact whatsoever. We do not have large federal government exposure. Our government business comes from state and local entities, municipalities, universities, none of which we've seen at least any kind of change. We actually landed quite a few governments and universities this last quarter, and we've seen quite a bit of expansion there. So we really just have not seen any impact at all from the shutdown or any of the federal issues.

Our next question will be coming from Brent Thill of Jefferies.

Tyler, I apologize if you covered this, but this onetime investment you're talking about in Q4, can you articulate a little in more detail what that is?

Yes. This is really -- Brent, this is kind of reflecting on the fact that we've now strung together 4 really, really good quarters and really see a very strong demand environment for our EX products in the field specifically. And so because we've also done really, really well on our efficiencies this year, where we beat our operating kind of margin goals and consistently every quarter said, hey, part of it's timing, we're going to reinvest. But just keeping, we actually, at the beginning of this quarter, did release spend specific to building pipe for EX in the field because the market opportunity is there. And we're still beating our goals, but we actually decided to release that spend for the year. It's more onetime just for Q4, not repeated. That's why we also kind of give the linearity for operating margins for next year as well.

And I'm sorry, where does that go? Into reps, marketing? Like what's the...

Yes. It's -- majority of it is marketing, and it's really pipe and demand gen efforts.

Okay. I got some good ideas. We'll talk later about the campaign. It has to do with Rogers. Freddie Fresh. The -- and just for Dennis, when you talk about that 25% growth above $100,000, it seems like the referenceability is building really well. Like what do you -- what are kind of the next milestones? It's been going well. It seems like it's headed in the right direction. But what are the next kind of hurdle that you'd like to see cross where you're like, okay, we're clearly on a continued trajectory and not that you aren't. It's just like what's the next stop, if you will?

Yes. Look, I think we've got a really good sweet spot in customers ranging from 5,000 to 20,000 employees. That's where there's a ton of business out there that's looking for a solution that is enterprise grade, that is faster time to value that's got AI built in. And we're going to continue focusing there.

I think in terms of where we're headed, we talked in the Analyst Day about continuing to drive our EX business in the low to mid-20s in terms of growth. You saw a slight tick up in growth on a constant currency basis this quarter. We're going to keep pressing these larger and larger deals every single quarter. For us, the attach rate for D42, that's an important metric that we look at, how many of our larger deals are including Device42.

We have a big milestone coming up in Q1 where we expect to release Device42 on cloud. Once we do that, we'll be able to tap into another segment of the market that doesn't want to go on-prem with any solution. They want everything to be in cloud. It will also make it easier for us to upsell our existing customers into Device42 as a product. That's going to be another accelerant to growth.

So we've got a lot of positive, I would say, momentum and positive accelerants to that business. And Tyler was just talking about the demand gen investment we're making in Q4, that's all going into the EX business and into AI, but that really is a huge driver for us as well. So I think EX has a lot of kind of positive momentum behind it, and we're just going to keep leaning into it every single quarter.

[Operator Instructions] Our next question will be coming from Brian Peterson of Raymond James.

This is Jonathan McCary on for Brian. So I wanted to ask on some of the AI deployments in your customer base. Can you talk about the appetite for that and how that may differ between the SMB and then the more mid-market and enterprise customers? I'm curious specifically if you're seeing that it's more important piece of the conversation in certain parts of the customer base or SMBs versus enterprises are moving from pilots to kind of forward deployments quickly. Just I'd be curious how that differs across the different customer sizes.

Yes. So as we look at our AI paid footprint, it's actually pretty even across SMB, mid-market and enterprise. We've seen traction across all 3. And different companies are in different stages of understanding AI and adopting. In terms of products, the product that clearly is leading for us has been Copilot. That's the product that for us is both most mature functionally. And if you think from a customer standpoint, that's the first port of call where you still have a human in the loop, they still have some control. So they feel more comfortable going there first. But what we've seen in the last couple of months is really an uptick in AI agent. And we think with the launch of our Agentic capabilities in CX in particular, that's really going to take off, and we're going to lean into it heavily. That, plus the fact that we're going to monetize at a much higher rate than we have before, we've been, I would say, quite underpriced relative to the market when it comes to our AI agent capabilities. That, we think, is going to create a big opportunity for us going into next year.

So I think overall, the customers, there's not one vertical. There's not -- it's not an SMB or mid-market enterprise issue. It's relatively even across CX and EX in terms of the monetization opportunities today. And we just think every one of our customers over time is going to need the AI that we offer. We're a little over 5,000 customers that are paying for AI now. That's just going to continue to grow. It's a core part of how we're selling now.

Very helpful. And then maybe one for Tyler here. It's good to see the continued strength in EX, the slight acceleration there. Just hoping, can you unpack the growth a bit in terms of what's trending, how NRR is trending there versus net new and kind of where you think that should head longer term as you look to continue the low 20s growth profile?

Yes. I mean we're growing across all segments of the business, right? We talked about how ITSM core is strong, but also ESM that we gave out the number of over $35 million now. Device42, we've talked about as well, and then the Copilot components within there. If you look at how that's going to trend, you asked about NRR, our EX products have always had strong NRR. Device42 is a little bit of a drag because of the stuff we inherited when we made that acquisition. But we also said, hey, we expect that to actually start coming up. And we've also said that EX has kind of always had enterprise-grade net dollar retention numbers -- I'm sorry, churn numbers, which is single -- high single digits. And that continues, and it's just a very, very strong product.

And our next question will be coming from Rob Oliver of Baird.

Dennis, I wanted to go back to the ITSM win rates that you called out, I think the best in 2 years, and that's also coming, I think, as you've really pivoted the business up towards that mid-market or upper end of mid-market. And just wanted to get a sense from you for kind of what the biggest key differentiators have been there in terms of repositioning for that opportunity? And then as you look at kind of your pipeline today, how you feel about the pipeline as it sets up relative to the competition and kind of what's winning when you go head-to-head with some potentially bigger players at the low end of their stack? And then I had a quick follow-up question.

Yes, sure. So look, what we've built over the last couple of years is a complete enterprise-grade solution for -- that helps an IT department drive their operations, power their operations and deliver great employee service. And that's what we're selling. That's what's working in the marketplace. So enterprise-grade product that has the kind of security and extensibility that you'd expect and that can work in a large account, the kind of extensibility outside of core ITSM. That's why Device42 is super important for us. Typically, buyers are looking for their ITSM and their asset management solution all in one. That's what we provide now. The functionality outside of IT, that's also something that everybody looks for when they're making these decisions.

2 years ago, 2.5 years ago, the product wasn't there. So a lot of this momentum has happened relatively recently. A lot of customers are looking for choice in that market. There hasn't been a lot of choice. The largest provider is very focused on the biggest customers in the market or the biggest companies in the market. And that leaves a lot of room for us to compete in that kind of lower end of enterprise, upper end of mid-market.

Think of New Balance with 5,000 or 6,000 employees or Seagate with 20,000 employees or we had a customer this time through Flowserve was about 20,000 employees. These are sophisticated customers. They've got sophisticated IT departments, but they're looking for something that's more modern, more flexible, enterprise-grade AI built in, and that's what we have.

So I think we're just going to continue to invest in our capabilities and functionality there. We've got our customer advisory board next week. We've got 40 customers coming in, and we're going to hear from them on what -- share our road map, talk about what can we do to move faster to solve more of their needs. We got a lot of ideas last year at our cab that we put into practice and launched an innovation that has delivered and that has helped us continue to move upmarket.

And then at the same time, the whole go-to-market side of things has matured as well. That's why we're confident in investing more in Q4 in demand gen because we have a much better sense for how investment in demand gen connects to actual return. And we feel if we do that now, we'll just get a head start on Q1 because we've got a really good pipeline going into the last quarter.

In terms of the pipeline, I would say that when we look at -- when I looked at pipeline, let's say, 18 months ago, a $100,000 deal was a big deal and we made a big deal about it. Now we have tons of $100,000 deals. That's not an unusual deal anymore. The bigger deals are $0.5 million lands. And the other thing is that we would be invited into those $0.5 million RFPs 2 years ago, and we would often lose. And we'd win the $100,000 deal or the $30,000 deal, we lose the $500,000 deal. This last quarter, I don't -- I can't recall a deal over $200,000 were involved with that. Now it may have happened, but nothing that I was involved in was a loss. So I think we're just getting better at competing and winning for those larger deals and the capability is there, the functionality is there. All that's a winning combination for us.

Great. That's really helpful. And then, Tyler, I apologize if you touched on this at all, but that net revenue retention number is kind of really stabilized in that kind of 104% to 105% range on a constant currency basis for the last 3 quarters, and you guys are getting some market momentum. I realize trailing indicator, but how you think about that kind of leveling off and potentially starting to improve and what kind of visibility you have into that?

Yes. We're pleased with the progress we've made there, both on the expansion products we've introduced, and we think ESM is going to be a new land, but then have a much bigger expansion opportunity once we start landing with that if we can bring in Freshservice, but obviously, with Device42 and others and on what we've been doing on churn. We've been talking about churn for a year now, how we've just been getting a little bit better incrementally, and that's not something that moves really quickly.

We guided to essentially the same amount for Q4, which is stable. And obviously, at the end of the year, based on what we learned this quarter in terms of expansion in the pipe, we'll guide for next year. But yes, I feel like it's heading in the right direction. And then we've been talking about this as the mix shift of our business continues to move more towards EX, and that is the majority of our business now, the attributes of that business are much better, and we will get a tailwind from that at some point.

And this concludes today's conference call. You may disconnect.