FRSH Q2 Deep Dive: AI Adoption, Operational Investments, and Mixed Market Sentiment

Business software provider Freshworks (NASDAQ: FRSH) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 17.5% year on year to $204.7 million. The company expects next quarter’s revenue to be around $208.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.18 per share was 55.9% above analysts’ consensus estimates.

Is now the time to buy FRSH? Find out in our full research report (it’s free).

StockStory’s Take

Freshworks’ Q2 results outpaced Wall Street’s revenue and profit expectations, yet the market responded negatively, reflecting concerns about future growth and profitability. Management credited the quarter’s performance to robust expansion in its Employee Experience and Customer Experience platforms, with CEO Dennis Woodside highlighting, “Our strategy has focused on three key growth drivers: investing in Employee Experience, delivering AI capabilities, and accelerating adoption in customer experience.” The company pointed to steady demand for its AI-powered solutions and significant customer wins across both new and existing accounts as major contributors to quarterly growth.

Looking ahead, Freshworks’ guidance is shaped by continued investment in AI innovation, expansion of its enterprise sales force, and increased spending on marketing initiatives. Management believes that recently launched AI features, broader adoption of the Device42 platform, and a growing partner ecosystem will support future growth. However, CFO Tyler Sloat noted that incremental spending in the second half of the year—especially in sales and marketing—will impact margins, stating, “We are going to make some investments in the back half of the year…but we will invest in growth.”

Key Insights from Management’s Remarks

Management attributed Q2’s outperformance to strong demand for AI-driven solutions, expansion in mid-market and enterprise segments, and momentum from recent product launches and partnerships.

• Employee Experience (EX) growth: The EX portfolio saw over 24% year-over-year growth, fueled by large customers switching from legacy providers to Freshservice and increased adoption of enterprise service management solutions.
• AI product traction: More than 5,000 customers now pay for Freshworks’ AI copilot and agent products, with ARR from these offerings doubling year-over-year. Freddy Copilot was included in over half of large new deals, and organizations using these AI features reported significant reductions in ticket resolution times.
• Device42 integration: Device42, acquired last year, contributed meaningfully to larger deal sizes and cross-sell opportunities, especially as customers modernize IT operations. Management expects Device42, AI, and enterprise service management to each become $100 million ARR businesses in the near term.
• Momentum in partner channels: Over one-third of ARR was influenced by Freshworks’ partner ecosystem, which added 130 new partners. Larger partners are generating bigger deals and opening access to mature enterprise customers, particularly in international markets.
• Cross-sell and customer expansion: The company cited successful cross-sell initiatives, with customers starting on one platform (like Freshdesk) and expanding to others (such as Freshservice), validating improved efficiency and user satisfaction across both customer and employee experience portfolios.

Drivers of Future Performance

Freshworks’ outlook for the year is anchored in further AI adoption, partner-led expansion, and investments in sales and marketing initiatives that are expected to support both revenue growth and operational scale.

• AI monetization and adoption: Management views AI as a multi-year growth lever, citing the early success of Agentic AI products and a long runway for customer adoption. As newer AI features move from early access to broader rollout, Freshworks expects increased attach rates and incremental revenue, particularly as enterprises seek automation and efficiency.
• Device42 and ESM opportunities: The integration of Device42 and expansion of enterprise service management (ESM) offerings are expected to drive larger deal sizes and higher value contracts, especially as Freshworks moves upmarket. Management anticipates that each of these segments could reach $100 million in annual recurring revenue, reflecting strong demand from enterprises seeking unified IT solutions.
• Sales and marketing investments: Freshworks plans to increase spending on sales capacity, brand initiatives, and strategic hires in the second half of the year. While these investments are intended to capture new growth opportunities and expand market reach, they are also expected to put near-term pressure on operating margins as the company balances growth with profitability.

Catalysts in Upcoming Quarters

As we look to upcoming quarters, our analysts will be monitoring (1) the pace and breadth of AI feature adoption and its effect on expansion within the existing customer base, (2) the impact of Device42’s cloud rollout and integration on enterprise deal momentum, and (3) the effectiveness of increased sales and marketing investments in driving new customer acquisition and partner-led growth. The trajectory of net revenue retention and cross-sell success will also be important indicators.

Freshworks currently trades at $12.76, down from $13.91 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free).

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