Freshworks (FRSH) Q2 2025: AI ARR Doubles to $20M as Attach Rates Top 55% in Large Deals
Freshworks’ Q2 revealed a decisive inflection in AI monetization, with ARR from its AI suite more than doubling and attach rates exceeding 55% in large deals, signaling a durable pivot from experimentation to material adoption across its customer base. The business continues to scale efficiently, balancing robust EX and CX growth with disciplined margin expansion, while management’s outlook points to further AI-driven upside and sustained operating leverage into 2026.
Summary
- AI Adoption Surges: Over 5,000 customers now pay for AI, with ARR doubling and attach rates climbing in larger deals.
- EX and CX Both Accelerate: Employee Experience (EX) and Customer Experience (CX) segments each post robust expansion, with EX leading growth and CX momentum improving.
- Operating Model Delivers Leverage: Margin expansion and disciplined investment support a long runway for profitable growth.
Performance Analysis
Freshworks delivered a quarter of high-quality growth, with revenue up 18% YoY and robust profitability as non-GAAP operating margin reached 22%. Both core business lines contributed: Employee Experience (EX, IT and HR workflow automation) grew ARR 24% YoY to over $450 million, accounting for the majority of incremental revenue, while Customer Experience (CX, customer support platform) ARR increased 11% to over $380 million. Notably, AI monetization emerged as a key lever, with AI-related ARR surpassing $20 million—more than doubling YoY—and AI features now included in over half of large deals.
Customer expansion remained solid, with over 1,300 net new customers added for a total base above 74,600. The cohort contributing more than $50,000 in ARR grew 22%, now making up over half of total ARR, reflecting Freshworks’ continued upmarket traction. Net dollar retention stabilized at 106%, with Device42 integration (IT asset management, acquired in 2024) creating a temporary headwind but expected to improve. Adjusted free cash flow jumped 65% YoY, driving a 27% margin, as the company continued to manage costs tightly.
- AI Attach Rate Momentum: Freddie Copilot and AI agent products now feature in 55% of new large deals, up from prior quarters, and are seeing double-digit attach rates in SMBs.
- EX Outpaces CX in Growth: EX’s 24% ARR growth outstripped CX’s 11%, with mid-market and enterprise customers representing over three-fourths of EX ARR.
- Margin Expansion: Non-GAAP operating margin improved by 14 points YoY, with gross margin holding at 86% as scale efficiencies materialize.
Freshworks’ ability to drive both top-line acceleration and margin expansion, while scaling its AI monetization engine, positions the company for continued outperformance as adoption broadens across its base and new product innovations reach general availability.
Executive Commentary
"Our strategy has focused on three key growth drivers: investing in employee experience or EX, delivering AI capabilities across our products and accelerating adoption and driving continued expansion in customer experience or CX."
Dennis Woodside, Chief Executive Officer and President
"We exceeded our top-line growth estimates and improved our non-GAAP operating margin to 22%, an increase of over 14 percentage points compared to a year ago. We grew our adjusted free cash flow 65% year-over-year to $54.3 million, which resulted in an adjusted free cash flow margin of 27%, also ahead of our previously provided estimates."
Tyler Sloat, Chief Operating Officer and Chief Financial Officer
Strategic Positioning
1. AI Monetization Moves Beyond Experimentation
Freshworks’ AI suite, including Freddie Copilot and AI Agent, has rapidly transitioned from pilot to production use. With over 5,000 paying customers and ARR more than doubling YoY, AI is now embedded in the majority of large deals and increasingly in SMBs. Management signaled that 2026 will be a pivotal year, as broader rollout and usage-based pricing for new agentic AI features are expected to drive incremental growth and margin leverage.
2. EX as the Growth Engine
Employee Experience (EX) continues to outpace the overall business, with ARR growth of 24% and a customer base now exceeding 19,000. The segment’s expansion is fueled by mid-market and enterprise wins, legacy displacement (notably ServiceNow and Jira Service Management), and cross-sell of advanced IT asset management via Device42. ESM (Enterprise Service Management) and new vertical-specific features are broadening the addressable market, with management estimating ESM as a $100 million-plus opportunity.
3. CX Momentum Rebounds
Customer Experience (CX) growth accelerated to 11% ARR YoY, with large organizations increasingly selecting Freshdesk for simplicity and rapid deployment. AI is a key cross-sell driver, evidenced by high-profile wins like Honda Motor Europe and measurable customer outcomes (e.g., 35% reduction in response time, 25% boost in CSAT). CX is also benefiting from improved sales rigor, conversion of free users to paid, and product changes that encourage expansion.
4. Partner Channel Scaling Up
The global partner ecosystem now touches over one-third of ARR, with 130 new partners onboarded in 2025 and two major global system integrator (GSI) deals signed. Larger partners are enabling Freshworks to access more mature, higher-value customers and expand into new verticals, particularly in public sector and international markets.
5. Disciplined Capital Allocation and Buybacks
Share repurchases continued in Q2, with nearly 16 million shares bought back to manage dilution and support per-share value. The company maintains a strong cash position ($926 million) and plans to continue balancing growth investments with ongoing buybacks and operational discipline.
Key Considerations
Freshworks’ Q2 marks a strategic inflection, as AI monetization, upmarket expansion, and partner leverage converge to support both growth and profitability. Investors need to focus on the durability of these trends and the company’s ability to sustain operating leverage as it invests for scale.
Key Considerations:
- AI Monetization Durability: With only 5,000 of 74,600 customers paying for AI, the runway for further penetration is significant, but pricing and competitive dynamics will shape the revenue opportunity.
- EX Expansion and Legacy Displacement: Continued migration from legacy ITSM providers (e.g., ServiceNow, Jira) validates product-market fit and supports upmarket momentum.
- Partner Channel Maturity: Early results from GSIs and new partners are promising, but longer-term contribution will depend on pipeline conversion and deal size expansion.
- Margin Trajectory: Q2 margin expansion was aided by disciplined cost management and FX tailwinds; H2 will see higher investment in go-to-market and brand, tempering near-term margin gains.
- Device42 Integration: Device42’s integration is progressing, with cloud launch planned for Q1 2026; retention headwinds are expected to abate, unlocking further upsell potential.
Risks
Risks include slower-than-expected AI adoption among the broader customer base, competitive pressure from legacy and cloud-native rivals, and execution risk around partner channel scaling and Device42 integration. Macro headwinds appear muted given Freshworks’ diversified base, but any slowdown in enterprise IT spending or shift in customer priorities could impact growth and retention, particularly as expansion motions become a larger share of ARR uplift.
Forward Outlook
For Q3, Freshworks guided to:
- Revenue of $207 million to $210 million, 11% to 12% YoY growth
- Non-GAAP operating income of $31.2 million to $33.2 million
For full-year 2025, management maintained guidance:
- Revenue of $822.9 million to $828.9 million, 14% to 15% YoY growth
- Adjusted free cash flow of approximately $215 million
Management highlighted several factors that will shape H2:
- Increased investment in sales, marketing, and brand to capture growth opportunities
- Continued operational efficiency and margin discipline, with higher H2 spending already reflected in guidance
Takeaways
Freshworks is demonstrating a rare combination of rapid AI monetization and operating leverage, with both EX and CX segments delivering robust growth and partner channels unlocking new upmarket opportunities.
- AI Monetization Inflection: The doubling of AI ARR and rising attach rates point to a multi-year growth lever that is only just beginning to scale.
- EX and Device42 Drive Upmarket Momentum: Continued displacement of legacy platforms and successful integration of Device42 are expanding Freshworks’ reach and deal sizes.
- Watch for H2 Execution: Investors should monitor the pace of AI adoption, partner channel conversion, and integration of new product innovations as key drivers of 2026 growth and margin trajectory.
Conclusion
Freshworks’ Q2 results confirm its emergence as a scaled, efficient SaaS platform with multiple growth vectors—AI, EX, CX, and partner expansion—all contributing to a durable, profitable model. With AI monetization just beginning to impact the P&L, and a healthy balance sheet to fund growth, Freshworks is well positioned for sustained outperformance as adoption broadens and new innovations reach scale.
Industry Read-Through
Freshworks’ rapid AI monetization and attach rate acceleration provide a key signal for the broader SaaS and ITSM (IT Service Management) landscape: customers are moving quickly from AI pilots to production, and willingness to pay for tangible automation benefits is rising. Legacy vendors face increasing displacement risk, particularly where ease of use and rapid deployment are valued. Partner channel leverage and cross-sell between EX and CX are emerging as critical growth engines for SaaS platforms aiming to move upmarket and drive expansion. Investors should expect similar AI monetization themes to play out across horizontal SaaS and workflow automation peers, with product integration and usage-based pricing as key differentiators.