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Hello everyone, thank you for joining us and welcome to Freshworks Second Quarter 2026 Earnings Conference Call. (Operator provided 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 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 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 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 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 eight 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 GAAP profitability. At our investor event during Refresh in May, we laid out five 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 five 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 in control. 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 five 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, were unable to adapt workflows as the business evolves, and were paying for dedicated specialists just to manage the complex system. They evaluated the market, they chose Freshservice and were live in three 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 seven business departments beyond IT, and it takes just one administrator less than two 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. Freshservice 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 two years ago. Today, we offer both on-prem and cloud-native advanced ITAM products. About one-third of large new EX lands 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 DriveTime 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 one-fifth of new EX seats are coming from outside IT. Our investment in FireHydrant showed results this quarter. FireHydrant generated its first six-figure expansion deal since joining Freshworks and was one of our top three largest deals of the quarter. This customer is a global cybersecurity leader that chose to consolidate their alerting and incident management onto FireHydrant. Stepping back, Freshworks' EX business is in the strongest position in the company's history. We are winning against incumbent 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 two new AI products for Freshservice: Freddy AI Agent Studio, a no-code environment for rapidly building domain-specific AI agents, and MCP Gateway, which connects Freshservice intelligence to AI tools customers already use, including Claude and Microsoft's 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 AI, 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. iQor demonstrates what Freddy AI can do at enterprise scale: a global BPO with more than 40,000 employees, iQor 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 for 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 outcomes. In Q2, CX AI agent sessions and conversations on Freshdesk Omni were both up 60% quarter-over-quarter and more than fivefold year-over-year. Take Fleet Claims, a U.K.-based motor fleet accident management company. They have reported that they have been able to use our Email AI to resolve about 10% of their tickets without any agent involvement and emphasized 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 Coupa 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 reported and 24% on a constant currency basis. As Dennis 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 ICPs. 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 retention 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 grew 18% year-over-year as reported and 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. On 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 five 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 273 million shares. We expect to generate approximately $265 million in adjusted free cash flow. This results in an 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 adjusted 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 a $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 AI expansion to meet the demand momentum driving us into the second half of the year. Operator, let's open it up to Q&A.
分析師問答
Operator provided 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 enterprise-grade without the costs and 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 FireHydrant now, maybe you have some security ops down the road — how do you think about keeping the product and the implementation experience of that product from getting too complex and potentially weakening that differentiation over time?
Thanks for the question. That's one of the key areas that our engineering and product teams really focus on: how we maintain that usability, ease of use, fast time to value and intuitiveness of the product that got us to where we are as we continue to expand the capability of the platform, the enterprise readiness of the platform and so forth. We work really hard at making that work. We pride ourselves on 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 products would; the design language is the same as what Freshservice is all about. The way you navigate through the product is the same. Data is pulled seamlessly from the asset management capabilities and the CMDB into the Freshservice module. And so the admin can see all that in one place. That's really important. And that approach is what we're going to take to FireHydrant as well later this year. So I think it's something that is critical for us. It will remain critical for us to continue to focus on that usability as we broaden the platform.
Super helpful. Maybe just a follow-up: one thing our team has been hearing more of with this new wave of AI-native or potential new AI-native service management vendors is they're positioning as an intelligent layer that maybe sits on top of whatever ITSM vendor a customer has already. The pitch there is you can modernize the employee experience without ripping out something like ServiceNow, for example. I'm curious, are you starting to hear discussions around that? And how do you think about competing against that approach?
We're cognizant of the startups out there. We have not seen them competitively that much, if at all. 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 and easy for them to get up and running and configure. That's consistent with what we've been building all along in the core Freshservice products. Our AI Agent Studio, which we launched in May for EX, already has over 1,000 customers on it. We launched that product into early access, and we have not priced it yet. The intention is to price it this 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. We are very aware of the startups coming into the space, but as of yet, we have not seen them make a lot of traction. To do AI well, you need to understand the operating environment and the workflows and controls that exist. 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 about a week ago, and it was nice to see Freshworks in this quadrant. I think it's been a long time since they've had one for ITSM. How much does that help? Does that help with lead generation? I saw Ian posted it — I'm just wondering what that actually ends up doing for you guys?
We think it helps a lot. 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. We're quite happy with that result. We have 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 and other customers. We have 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: the number of $100,000 accounts growing 26% year-over-year and 40% of our business 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. Those are the kinds of evidence that show the work we've put into building this complete platform that can handle service operations from frontline employee questions to solving problems when they arise through FireHydrant and our advanced asset management. That's what IT departments want in particular in the segment we're focused on: agile enterprises up to 20,000 employees. They don't always have the resources or want to spend the time and money on managing a more complicated system. They want something modern that they can modify and that will work for them. I think Gartner validates that, and we're very proud of it, 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 question: it seems like there's strong momentum in EX from ITAM and ESM cross-sell. Can you talk about how much runway remains for those products within your existing EX customer base? What does penetration look like today versus where you think it can go?
We outlined at our investor event almost a year ago that we believe both of those businesses will be $100 million businesses in the next two years. We've seen proof points each quarter that we're gaining momentum. ESM grew 67% in the quarter. Our ITAM products were attached in over one-third 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. The intersection between ITAM and operations is important because to respond to incidents, you need to understand the asset base. We think those are self-reinforcing. As we get more momentum with FireHydrant and integrate that product, we'll put more focus behind ITAM. ITAM actually accelerated this past quarter; I think we had our best quarter ever for asset management. We launched the cloud-based version of Asset Management last quarter, and we're tapping into a slew of customers that otherwise would not have bought an on-prem product. The hypothesis that many customers, including smaller ones, would be interested turned out to be true — we beat our internal goals by a wide margin. We think there's a long way to go. For ESM in particular, we're really early in driving that business overall. We'll continue to invest in capabilities for teams outside of IT: HR capabilities like onboarding and offboarding, workflows out of the box, and focus on teams like facilities and finance. Those teams also have internal employee service needs, and we can build capabilities that are agentic and expand our reach. Those are huge areas for us and we're very excited about both.
One quick follow-up: constant currency NDR has been stable sequentially at about 105% while Freddy AI Copilot attach rate is strong — I think you mentioned over 70% on new enterprise deals. While 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? When should we expect it to show up in NDR?
You're right that NDR has been pretty consistent on a constant currency basis and slightly improving in some cases. The Freddy attach rates for new deals are a strong expansion motion. It is harder to get existing customers to adopt Copilot because they have existing ways of working, but we have prescriptive sales plays around it. We expect it to continue to be one of our larger expansion motions going forward. I can't say exactly when the impact to NDR will be visible, but as a percentage of expansion, Copilot is increasing.
Your next question comes from the line of Taylor McGinnis with UBS.
I'd love to ask about the EX business. There was a slight deceleration in Q2 to 24% constant currency. Tyler, could you 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 help unpack the confidence there.
Taylor: 25% in Q1, 24% constant currency in Q2. This is up from 22% at the end of the year. EX continues to be the driver of growth. The 25% to 24% is a bit of noise quarter-to-quarter, but it's nothing outside of what we expected and we're very confident on mid-20s growth. As Dennis mentioned, we're seeing larger and larger deals and the pipeline is reflecting that for new business. On the expansion side, we have strong attach rates on ITAM and ESM: about 20% of seats are ESM and about one-third of lands include ITAM, which means two-thirds still have Device42 as potential to sell. We went live last quarter with Advanced ITAM Cloud — Device42 on the cloud — which opens up potential across our installed base that wasn't using asset management previously. FireHydrant is a brand-new product for us; we have been selling it and one of our biggest lands in Q2 was a FireHydrant standalone. That opens opportunities to cross-sell ITSM, ESM and others into that account, and as we build that muscle, it's another way to land with different EX products across different buying segments. So yes, we're confident in mid-20s growth and EX continues to be the driver.
To add: the market we're focused on, the mid-market and lower end of enterprise — about 60% of the overall market — is still fairly fragmented. No single competitor holds more than 20% share. We're seeing momentum: Gartner validated us, customers are saying good things, and the platform has multiple ways to win. We land with ITSM and expand into ITAM, ops, ESM, and AI. All of that is building momentum and gives the team optimism about the second half.
Perfect. My next question: there was a one-point acceleration on a constant currency basis for revenue in the quarter. Could you unpack what drove the upside? And as we look into the back half, the guide is strong on a revenue basis — any bigger drivers in the second half compared to what you saw in the first half?
We see momentum on the EX side given that product strategy and go-to-market are coming together. We also have confidence because we 'cracked the code' on pipeline. A year ago we were more challenged on pipeline; we entered the year with strong pipeline generation and the pipeline is maturing and coming due in the second half of the year. That gives us confidence. This was the second quarter in a row that we accelerated revenue slightly. So far, so good this year, and we're optimistic about the back half. Tyler can add on guidance.
Yes, Taylor — what Dennis said. We talked about record pipe building earlier in the year. A lot of the momentum is on the EX side in agile enterprise and high mid-market. We're becoming the product of choice for those companies and it's building on its own. We rolled through our $4 million beat, and that already encompassed a $2 million FX headwind. So it would have been a $6 million beat for the back half of the year without that FX. Again, we're super confident; EX is still the driver of growth and CX is stable at 4%.
Your next question comes from the line of Patrick Schulz with Baird.
Maybe could you touch on the linearity 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 cut back and reassess where their AI investments are going?
No, we're not seeing any impact on sales cycles or decisions related to AI. We're not seeing the sort of market reactions that have been reported with some other vendors. Linearity is pretty similar to prior quarters: as we go upmarket, more of the deals fall in the back half of the quarter, but nothing unusual. AI is more of a motivator for customers to think about their vendor. Many of our deals come from customers re-evaluating incumbents because of AI. They often contact Gartner and peers and hear about us, and that leads to a shot at winning. That's driving more of our business — customers saying 'we need to do something on AI' is provoking discussions, which often results in Freshworks getting considered.
That's helpful. I appreciate the commentary on ITAM this quarter. I'd like to dig deeper: how important is an enterprise-grade ITAM solution as you move further upmarket? Do you expect Device42/ITAM to become a leading driver of new logos, or is it still more of a cross-sell opportunity? Also, update on the cloud transition and how much of that business is still on-prem license?
Customers aren't buying just ITSM; they're buying the full capability to power their IT department, especially upmarket. Asset management, ESM and ops are table stakes. In our larger deals, it's typically multiple components out of the box. It's essential for us to continue to move upmarket. Customers come off products that have those capabilities and expect them, which is why we've invested in those areas to build a complete platform. You see it in the numbers — it's working.
Your next question comes from the line of Scott Berg with Needham & Company.
Nice quarter. Apologies I did jump on late. I attended the Refresh event in May. One thing I thought was interesting is some of the commentary around partners and how the partner program is maturing into more of a long-term account ownership strategy instead of something transactional. As that structure evolves, do you see that driving better retention and better expansion opportunities if partners maintain that ownership more? Or should we see other benefits from that program?
It's both new business and retention and expansion that benefit when we have partners. We know when partners are involved, retention rates are higher, expansion happens faster and close rates are higher. We've been purposeful about cultivating a select group of partners with the expertise to manage our business, which is a bit different than some competitors in terms of ongoing requirements and migration. We focus on fewer, higher-leverage partners, especially on the EX side — partners like Unisys and CGI. We're focused on partners that invest to serve our customers well and that collaborate with us to grow both of our businesses.
That's helpful. The partners we spoke with seemed positive. How do you think about partner impact on the business today and where it should be in 12 to 24 months? Is it more than 50% of your business, 75% of leads and interactions, or more muted longer term?
It will continue to grow as we move upmarket, because larger companies often need expertise to migrate and configure new systems. That creates greater opportunity for partners. Right now, about 40% of our business has partner influence in some way. We're investing there. We have a relatively new head of the partner team who is building the next level of partner program, and we'll continue to invest.
Your next question comes from the line of Matt VanVliet with Cantor.
First, if we think about the magnitude of expansion or deal size growth when Freddy is attached, where do those sit today? With more products and more on the way, what should we expect over the next couple of years in terms of deal size growth from adding extra capabilities through Freddy?
We look at ARPA and ARPA growth, which has been double digits for some time. We look at attach rates on new deals and overall attach rate. Over 7,000 accounts are paying for an AI SKU today. As AI infuses across the platform, pricing models will continue to evolve. Some AI capabilities are embedded into higher-priced plans; others are add-ons. Copilot today is an add-on. Some products are consumption-based, like AI Agent. We have elements introduced that we haven't monetized yet: AI Agent Studio was introduced in May for EX and we chose not to monetize it initially; we want many customers using it first. In the fall we will monetize it on a usage basis. The important thing is whether AI is helping us win. In competitive situations, AI is essential to the RFP but not the only thing needed to win. It requires a complete solution. We put the $1.4 billion ARR target out for the next couple of years because we have confidence in the overall business and see it in pipeline numbers and large customers. AI is an important piece, but there's more than just AI driving our plan.
Very helpful. As you look at the CX business, you talked about efficiencies and consolidating organization around India. How much is internal usage of AI driving that efficiency? How much more can be unlocked as that business becomes more stable and more customer-led growth?
A couple of points: we consolidated the teams driving CX into India at the end of last quarter. Most of that business is SMB and inbound, so most of the team was already there. Now there's a single go-to-market team driving that business, which creates more focus on retention and ensuring we're focused on the right customers. Previously we acquired many smaller customers that churned; we are trying to avoid that and focus on higher-end SMB and mid-market. We invested in the CX product in moving to Freshdesk Omni so customers can upgrade from email-based ticketing to chat, conversational and voice with AI. We have 90% of customers on the new platform and a much more focused go-to-market. On internal usage, AI is suffused across our business. Our product development lifecycle changed: designers can work in Figma, create a product and push it directly to code; we built hooks between production and Figma so the code comes out compliant with internal coding standards. QA is highly automated with AI, leading to about 30% faster cycle times and a two-week shipping cadence for AI products. We've implemented our AI Email agent internally for billing questions and saw about 30% of those questions handled completely by AI when we turned it on. AI is transforming many parts of our business and helped drive profitability; GAAP profitability this quarter was ahead of our expectations. Cash flow looks good. AI is now part of how we do business across the company.
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 think it's important. If you look at net new ARR growth for the EX business in the first half, it looks like it's about 14%. The guide for the second half implies about 18%. Tyler, you mentioned some noise on why net new ARR for that business was down year-over-year. Can you help us understand that better? What are you seeing in the pipeline to give you confidence to guide for an acceleration of net new ARR in the back half?
Thanks, Alex. As I mentioned earlier to Taylor, there's some nuance quarter-to-quarter, but we're confident on mid-20s growth for EX. We talked about record pipeline building at Refresh and the momentum on the EX side. Expansion products like FireHydrant and Advanced ITAM Cloud being available open up additional avenues to grow. We rolled through our $4 million beat which already included a $2 million FX headwind. We're very confident EX remains the driver of growth and CX is stable at 4%. The pipeline and expansion opportunities give us confidence in the back half.
To emphasize: this was a beat-and-raise quarter. We counted the FX headwind and raised our targets accordingly. The core momentum in EX is real and visible in pipeline and large deals.
Got it, helpful. One other thing: stock-based compensation was 16% of revenues, down from 19% in Q1. What's driving that decline and how should we think about SBC outlook for the rest of the year and beyond? Any changes you're making there?
I'll start and Dennis can add. This is not new — we've been discussing SBC discipline for a couple of years. One of the biggest hurdles to GAAP profitability was SBC, and some of the larger drops reflect the winding down of IPO-era grants. We're now flowing through ongoing new grants. Under Dennis' leadership we've added a lot of discipline and will continue to do that. We're ensuring we are competitive but prudent in equity usage. We're focused on free cash flow per share as a North Star metric. We've reduced fully diluted shares since going public and will continue to manage equity thoughtfully.
I'd add: we reward performance with equity, but we've been a bit broad historically. We've put in place a performance-managed process to make sure equity is a scarce resource and allocated to people with the biggest impact. That creates a more prudent approach. We'll continue the trend we've put in place.
We have reached the end of the Q&A session. I will now turn the call back to Dennis Woodside, CEO, for closing remarks.
All right. I just want to thank everybody for joining the call today. To emphasize, Q2 reinforced each one of the five priorities we laid out at Refresh. We demonstrated EX-first momentum, category leadership for the mid-market and the agile enterprise, that AI is an expanding tailwind to our growth, and that we've been disciplined around profitability and capital management. Thanks, everybody. Look forward to speaking to everyone next quarter. Bye.
This concludes today's call. Thank you for attending. You may now disconnect.