Freshworks Inc. Q4 2025 earnings call

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 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. 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 EquipmentShare's 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%-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% and 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 improved 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 five 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 five points above our free cash flow margin was 25%, and this was the sixth straight quarter we achieved 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 $500 million 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 demand 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 expansion, 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 Vacations, 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, one in four 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 2026. FireHydrant, a leader in AI-powered IT incident management and response software, brings large customers like British Petroleum, Palo Alto Networks, and Snyk 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 AIOps. We will provide updates as we progress through integration of FireHydrant into Freshservice 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 standalone 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 roadmap. 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 continued 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 enter 2026 with clear goals that are built upon our three strategic pillars. First, expanding EX.

Continue to increase our 20%+ ARR growth rate in EX, fueled by continued focus and investment in our unified employee experience service platform. Second, monetizing AI at scale. Continue disciplined innovation in AI as a current revenue driver, and stay on track to deliver $100 million in AI-driven ARR over the next three years. And third, improving retention in CX. Focus 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 2026. 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 to 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 $500 million 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%, 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 two items. First, there was a favorable impact of $41.1 million from a one-time 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 one-time 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 one-time 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 will 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 multi-year 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 calculated 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 free cash flow margin of 25%, which represents a nearly 4 percentage point improvement year-over-year. For the 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 three 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 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 vested equity amounts. During Q4, we used approximately $11 million for that purpose. In 2026, we will continue to net settle vested 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 calculations. 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-$225 million, growing 13%-15% year-over-year. Non-GAAP income from operations to be in a range of $33 million-$35 million, and Non-GAAP net income per share to be in the range of $0.10-$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-$960 million, growing approximately 13.5%-14.5% year-over-year.