Q2 2025 Freshworks Inc Earnings Call
Good day, and thank you for standing by. Welcome to the Freshworks Q2 2025 earnings conference call.
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I would now like to hand the conference over to your speaker today, Brian Lawn, Director of Investor Relations. Please go ahead.
Thank you. Good afternoon, and welcome to Freshworks.
Second quarter, 2025 earnings conference call.
Joining me today are Janice 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, 2025 performance and our financial estimates, for our third 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 and the macroeconomic environment, in which we operate. And Market volatility the timing of future repurchases of our class a common stock.
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 10K and other periodic filings with the SEC.
Fresh Works 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.
For historical periods, these 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 reply of today's call or to learn more about fresh works.
And with that, let me turn it over to Dennis.
Thank you. Brian freshworks delivered, an outstanding Q2 surpassing expectations across growth and profitability.
We grew Q2 Revenue, 18% year-over-year to 204.7 million expanded. Our non-gaap operating margin to 22% and delivered a strong adjusted free. Cash flow margin of 27%.
Collectively, these results clearly illustrate our ability to balance strong growth with profitability.
We ended the quarter with over 7,468, leading international law firm Covington and Burling LLP, leading recruitment experts, Reed, and retail energy supplier AEP Energy.
In Q2, we held our very successful refresh Europe, customer event, where we introduced product Innovations within the Freddy, agentic AI platform and across our ex and CX portfolio, which I'll talk about throughout this call.
Our strategy has focused on 3 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.
On the first strategic imperative employee experience.
Ex continues to lead in growth achieving over 450 million in ARR, which represents 24% year-over-year growth on an as reported basis and 22% on a constant currency basis.
With over 19,000, customers are first lever in this area is growth in the mid-market and Enterprise together. Representing more than 3/4 of a ARR Enix.
Our IT momentum underscores the value Freshworks brings to our customers.
We continue to displace Legacy competitors, as organizations, choose fresh service, because we reduce complexity accelerate and enable tangible growth through our AI powered platform.
As an example Steel, Dynamics, 1 of the largest, and most Diversified us steel, producers replaced service now with fresh service.
another example, is kayak a leading Global Travel search engine who chose fresh service to replace Dura service management
System implementation Kayak has reported improved ticket volume, productivity, and visibility.
Kayak has also been using Freddy, AI features like the ticket summary generator and ticket field suggestions, to help agents work faster with greater accuracy.
The second ex growth driver and expansion lever is our Enterprise service Management Solutions.
Our customers are increasingly using fresh service in other areas of their businesses outside of it.
For example, nexstar Media Group 1 of the largest local broadcasting companies in the US streamlined its employees support experience by migrating to Fresh service.
Next. Next are went live. Across 3. Distinct, workplaces consolidating it digital HR payroll and legal into a single unified platform in weeks.
Press service reduced complexity for the employees, and over 200 support agents at Nexstar achieved a 35% cost savings.
Another customer, Michaels Stores, the leading creative destination in North America with over 1,300 locations, chose Freshservice to modernize its business operations as part of a strategic initiative to streamline operations and drive scalable growth.
Michael's, onboarded 900 agents migrated over 3 years of ticket, history, and deployed, fresh service across it, HRM facilities to streamline Incident, Management asset, tracking employee Journeys, and vendor risk.
at the end of Q2, we released fresh service Journeys, a powerful new tool designed to help HR teams automate and streamline, the cumbersome process of managing employee transitions including onboarding off-boarding promotions and relocations,
Qualls DP of IT operations said Freshservice has completely transformed their onboarding process.
Hours.
He also said it is enabled him to reduce risk and deliver a more secure compliant off-boarding experience at scale.
We believe that our esm solutions could be a hundred million dollar plus opportunity for us and a meaningful long-term way to grow ex Beyond it.
Our third growth driver, Enix, is our advanced ITAM offering with Device42.
2 of the top 5 deals in the quarter included device, 42.
Customers like Seagate deployed press service to modernize it operations and later expanded to device 42.
Tapping into the seamless Integrations between the 2 products to unify asset Discovery and service management.
Finally, we introduced a fresh service for MSPs: a new ITSM product for small managed service providers.
This solution is built on the core fresh service foundation and is designed to help growing msps seamlessly manage. Multiple clients without adding complexity or overhead.
In addition to these 2 product Innovations, we released key features for press service that are designed to improve productivity. And reduce mean time to resolution like the ability to make parallel approvals in a workflow.
Now onto our second imperative, delivering, AI capabilities and driving adoption of AI.
Customers are no longer just experimenting with AI. They're moving beyond the pilot phase, finding practical applications that drive measurable, transformative results.
Over 5,000 customers are now paying for our co-pilot and AI agent products, and ARR from these two SKUs crossed $20 million in Q2, more than doubling ARR from a year ago.
In Q2, Freddy co-pilot was included in more than 55% of our new large customer deals over $30,000, and we saw double-digit attach rates for new SMB customers.
We ended the quarter with over 3,300. Customers, a sequential growth of 21% quarter over quarter.
1 such customer a global law firm with nearly 50 offices and 20 countries and thousands of employees replaced service. Now, with fresh works and is using Freddy co-pilot to drive efficiency and accelerate time to value.
Freddy, AI customers are realizing tangible business value. Our recent annual fresh service Benchmark, report revealed that organizations using Freddy, copilot reduced resolution Time by 76% and first response time by 41%
With Freddy AI agent organization, we saw a ticket deflection rate of 65% and over 400,000 hours of agent time saved across IT and ESM.
Now in June we launched several agentic AI Innovations. First we introduced Freddy AI agent studio for fresh desk. A powerful platform to build and manage AI agents that take autonomous actions like issuing refunds checking order statuses and updating customer records.
Organizations, can build dozens of agentic, workflows defined, business rules and connect to external systems all using a visual, no code intuitive interface.
Secondly, we launched Freddy AI agent for email in freshest designed for organizations where email is the primary support Channel.
The agent reads the request, finds the right answer, responds, and closes the ticket entirely on its own.
Third, we added the Freddy AI agent for unified search in Freshservice, designed to connect to systems like Microsoft's SharePoint and Teams, so that employees can receive faster and more accurate answers.
And finally, Freddy AI insights for Freshservice became generally available in Q2.
It provides proactive, actionable intelligence to IT teams about the operational health of their IT service footprint.
We're pleased with the early signals we're seeing from customers and look forward to providing updates on customer use cases in the coming months.
Our third strategic imperative customer experience. Saw meaningful improvements.
CX grew to over 380 million in ARR. Which represents 11% growth year-over-year on an as reported basis and 8% on a constant currency basis.
We believe this acceleration and growth reflects customer sentiments that fresh desk is easier to implement and use than the Legacy competitors.
While our small business customers continue to represent over half of our CX in Q2, we saw strong momentum with large organizations turning to Freshdesk for our powerful, uncomplicated customer experience software.
Our AI products continue to be an expansion driver for CX.
Honda motor Europe.
Selected Freshdesk to modernize its customer support operations across 36 countries, deploying 220 agents with Freddy, the AI co-pilot.
The team needed a solution that could scale across the region and provide real-time Auto translation to serve a multilingual dealer and technician Network.
By replacing its Legacy Java based system. Honda now delivers faster, more consistent support experience is through freshes
With Freddy co-pilot agents, we can streamline communication, deflect tickets via multilingual self-service, and work more efficiently, all on a flexible, secure, and AI-powered platform built with a strong focus on supporting European operations.
Freddy AI agents are driving measurable results for fresh desk, customers.
1 example is a healthcare provider who reduced response Times by 35% improved, first Contact, resolution by 40% and saw a 25% boost in seasat all while scaling support and containing costs with AI now, handling 35% of queries autonomously
In addition to the new AI capabilities for Freshdesk that I mentioned earlier, we released significant product updates such as CSAT, versioning, and analytics.
This feature is designed to give supervisors deeper insights into customer satisfaction drivers by connecting CSAT scores to specific operational, behavioral, and performance indicators.
They can then make data-driven coaching decisions and identify which agent actions and ticket handling patterns correlate with higher customer satisfaction scores.
Another expansion path in CX is customers adopting existing products after having a positive experience with Freshdesk.
A recent example of a customer using fresh, Works products to drive efficiency across both customer and employee experiences is momentum software, a cloud-based, provider serving, nonprofits, and mission-driven organizations.
after successfully deploying fresh desks for customer support, momentum expanded to Fresh service, replacing service now,
within weeks of launch momentum, reported measurable efficiency, gains, including fewer ticket reassignments, and stronger SLA performance, early, validation of improved efficiency, and user satisfaction
We're pleased with the results in our CX business, underscored by the improved growth rate during the second quarter.
Now across both ex and CX are momentum in specific industry. Verticals continues.
We are privileged to serve 2025 sports champions, including NBA champions, Oklahoma City Thunder, European football, champions Perry stir, men's, and Scottish Football Champions Celtic Football Club.
I'm also excited about the partnership we announced earlier this month with the McLaren Formula 1 team, the 2024 Constructors' champions.
Pressworks branding appeared on both McLaren cars, last weekend at the Belgian Grand Prix. Where the McLaren team? Finished 12 on top of the podium.
We anticipate that this multi-year partnership with McLaren will build further brand awareness and engagement with CIOs.
These sports organizations trust us to power their world-class operations behind the scenes so that they can power greatness on the track, court, and field.
We're honored that press works plays a part in their historic runs.
In the public sector, more than 1,000 local, state, and national government entities trust Freshworks, including the State of California, Franchise Tax Board, Maryland Department of General Services, and the State of Oregon's Department of Forestry.
Finally, in Q2 we saw momentum in the new Global partner program that we announced earlier in the year.
Our partners touched more than one-third of our ARR in Q2, and we have onboarded over 130 new partners to our ecosystem this year.
Additionally, we signed a deal with another global Service. Integrator, this partnership will help us reach more mid-size companies and entities in higher education, local government and other public sectors in the UK Market.
I'm energized by the opportunity ahead to serve businesses that demand speed, simplicity, and value.
Our enterprise-grade software delivers faster time to value and a lower total cost of ownership, which is what thousands of businesses want today.
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 the call and via webcast today.
We're seeing healthy demand for our easy to use innovative solutions that help businesses of all sizes improve productivity and deliver exceptional customer experiences.
We exceeded our Topline 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.
For our call today, I'll cover the Q2 2025 financial results and provide background on the key metrics.
And close with our forward-looking commentary and updated expectations for Q3 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 adjusted free cash flow.
Which excludes the cash outlay related to the restructuring costs?
We continue to benefit from foreign exchange tailwinds. This quarter has provided a modest uplift to our Q2 revenue while contributing over 2 percentage points to our ARR growth.
Translating to a nearly 18 million dollars increase to ARR.
To provide greater transparency into our underlying business performance, we will include constant currency comparisons throughout today's call.
Starting with the income statement.
Q2 total revenue increased to 204.7 million growing 18% year-over-year on an as reported basis and 17% year-over-year on a constant currency basis.
Professional services revenue contributed $2.7 million in the quarter, driven by strong bookings, as well as several early project kickoffs and completions that led to one-time increases.
Our eex business grew to over $450 million in ARR, representing growth of 24% year-over-year on an as-reported basis and 22% year-over-year on a constant currency basis.
As expected, growth moderated this quarter as we lap the anniversary of the Device 42 acquisition from last June.
Adjusting for this, we're encouraged by the strong underlying performance across our ex portfolio, which continues to deliver our highest area of growth.
Our CX business increased to over $380 million in ARR, reflecting growth of 11% on an as-reported basis and 8% year-over-year on a constant currency basis.
The growth. The growth acceleration versus recent quarters was driven by healthy momentum and our fresh desk business and stronger execution across the board.
Moving to margins.
we maintained a strong non-gaap gross margin in Q2 of 86% reflecting, our continued progress in scaling, our business efficiently,
This represents an improvement of approximately 100 basis points compared to the prior year.
Our non-gaap operating income for Q2 came in at 4448 million representing a non-gaap operating margin of 22% which was ahead of Prior expectations.
This reflects strong revenue outperformance and disciplined expense management, including lower-than-anticipated personnel-related costs, some of which will be shifted into future quarters.
Moving to operating metrics our 2 key business. Metrics are net dollar retention and customers contributing more than dollars in our
While growth expansion Trends, remain pressured. Work. Encouraged by the steady improvements in our overall turn rate.
Net dollar retention came in stronger than expected at 106% on an as-reported basis and was in line with our expectations on a constant currency basis at 104%.
Retention was modestly affected by Device 42.
Primarily due to turn in its partner business that we had anticipated following our acquisition last year.
As expected, this represented a headwind in net dollar retention of just over two-thirds of a percentage point.
We expect Device 42 retention to improve gradually as we continue to integrate the Device 42 products with our ITSM offering.
Looking ahead.
We estimate net dollar retention of approximately 105% on an average reported basis and 104% on a constant currency basis for Q3.
For our second key business metric, the number of customers contributing more than $5,000 in ARR, as of the end of Q2, grew 10% year-over-year on an as-reported basis and 9% year-over-year on a constant currency basis to 23,975 customers.
This customer cohort continues to represent 90% of our ARR.
For a larger customer cohort. Contributing more than $50,000 in the are as of the end of Q2, we saw growth of 22% year-over-year on an as reported basis and 19% on a constant currency basis to 3,460 customers.
This cohort represents over 50% of our ARR.
For a total customers, we added over 1300 net, new customers in the quarter.
Which also includes contributions from our ongoing free-to-paid initiatives.
We ended the quarter with ever with over 74,000 customers.
Now, let's turn to calculated Billings, balance sheet, and cash items.
Our calculated billings grew to $213.1 million in Q2, representing growth of 15% year-over-year on an as-reported basis and 13% growth on a constant currency basis, driven primarily by stronger-than-expected booking performance in the quarter.
Looking ahead to Q3 2025, our initial estimate for calculating billings growth is 14% year-over-year on an as-reported basis and 13% 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, the latter of which is in line with our expectations from last quarter.
Moving to our cache items, we generated $54.3 million in adjusted free cash flow in Q2, driven by strong collections and continued operational discipline.
This resulted in an adjusted free cash flow margin of 27%, which represents over a 7 percentage point improvement year over year.
As a reminder, these results do not include a one-time use of cash of $700,000 related to restructuring costs.
For the full year 2025, we are expecting to generate approximately $215 million of adjusted free cash flow, with approximately $55 million in Q3 and $50 million in Q4.
In Q2, we repurchased an additional 8.2 million shares at an average price of $13.89 per share.
We have now repurchased nearly 15.9 million shares, using over $240 million through Q2.
In addition to the repurchase program, we continue to manage and offset share count dilution by net settling vested equity amounts.
We use approximately $14 million during the quarter for that purpose.
This activity is reflected in our financing activities and is excluded from our free cash flow calculations.
Looking ahead, we will continue to settle vested equity amounts and expect Q3 cash usage of approximately $17 million at current stock price levels.
For the full year, we expect to use approximately $64 million to net settle vested equity amounts.
We ended the quarter with cash, cash equivalents, and marketable securities of approximately $926 million.
Turning to our share count as of June 30th 2025, we had approximately 320 million fully diluted shares.
Would represent a decline of 2% year-over-year.
For fully diluted calculation, there are 292 million basic shares outstanding, which represents a reduction compared to both the prior year and quarter.
It also includes 25 million shares related to unvested RSUs and PRCs, and 2 million shares related to outstanding options.
We expect to thoughtfully manage your account dilution with net settlement activities and share repurchases into the future.
Now, on to our forward-looking estimates.
For the third quarter of 2025, we expect.
Revenue is expected to be in the range of $207 million to $210 million, growing 11% to 12% year-over-year on an as-reported and constant currency basis.
Non-gaap income from operations, to be in the range of 31.2 million to 33.2 million.
And non-gaap net income per share to be in the range of 12 cents to 14 cents. Assuming weighted average shares outstanding of approximately 294.2 million shares.
for the full year, 2025, we expect
Revenue to be in the range of 822.9 million to 828.9 million growing 14% to 15% year-over-year.
In constant currency, using FX rates from Q3 of last year, this reflects growth of 14% to 16% year-over-year.
From operations, we mean the range of 153 million to 157 million.
And non-GAAP net income per share is expected to be in the range of 56 cents to 58 cents, assuming a weighted average of approximately 296.9 million shares outstanding.
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 July 25, 2025.
And do not take into account any benefit from currency moves, which we estimate could be $1.5 million to $2.5 million increased to a full year 2025 revenue.
In addition.
We expect spending to increase in the second half of the year, driven by the timing of certain personnel and brand-related expenses, along with incremental investments in sales and marketing to capture the growth opportunities ahead.
All while remaining focused on driving operational, efficiencies in the business.
This increase is reflected in our financial outlook.
In closing.
We are pleased with our strong Q2 execution, which reflects the strength of our business. The growing demand for our products and the incredible dedication of our Global team.
We are excited about the opportunities ahead as we continue to innovate, delight our customers, and deliver sustainable, profitable growth.
We also look forward to sharing more about our long-term vision and strategic priorities at our Investor Day.
Which will be held in San Francisco on September 11th.
We will send out more details regarding the event in the coming days.
Thank you for continued support and we look forward to keeping you updated on our progress.
With that. Let us take your questions, operator.
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Please stand by while we compile the Q&A roster.
Our first question comes from the line of David Hines with Canon Court, genuity, your line is now open.
Hey, thank you, guys. Uh, congrats on the quarter. I don't know if this is a better question for Dennis or Tyler, but specifically with the AI agent, right? You're selling session packs. From a forecasting perspective, I'm sure you have to make some assumptions around the pace at which those are consumed and presumably re-ups.
What is that consumption? How does it look relative to your expectations? Is it happening as expected? Faster? New thoughts slower? Any color? There would be interesting.
Yeah, so thanks for the question. Overall, AI is pacing at or slightly ahead of what our internal expectations have been, uh, what on AI agent? Remember we have, uh, we introduced a an agentic platform just in June, so it's pretty early days for that product. The AI agent that we've had previously is, uh, is more of a question and answer, uh, product that does not take action on behalf of the user. Uh, we're seeing good traction with all the AI products we announced in June. We've got hundreds of customers, uh, that are, that are in the early.
Access programs for products, like AI insights and so forth. I think we'll get better fidelity on the AI agent product as the core as the second half of the year rolls through on Co-pilot.
We've got a pretty solid motion that's been the product that is now attached to over 55% of our larger deals. That's the product that is of interest to pretty much all of our customers. A lot of customers are really ready to adopt. Co-pilot takes some of them a little bit longer to be willing to hand off an interaction with an employee or an end customer to an AI agent. So, Co-pilot, I think we've got a really good read on, and I think it's going to take a little bit more time for us to get that same read on the agentic products.
Yeah, makes sense. And then Tyler, if I could ask you 1 on Q3 guidance, so you know it's 12%. Growth at the high end
if I do the math,
CX is 46% of the business, growing steadily at around 7 to 8%. That gives you like 3.5 points of growth, right? So the balance comes from EX.
If my math is right, to get to 12% growth in Q3, it implies about 16% growth in EX in Q3, which seems lower than I would have expected. It's, you know, I think, 6 points lower than what you just reported.
What? What am I missing? Something? Is that math correct? Are we just being conservative? Any color would be helpful.
Yeah, we haven't, we haven't broken out the exact Revenue, uh, impacts of each product, right? We're kind of giving our greater than our numbers, DJ, uh, and then there's other components to, to revenue in there, right? We have some usage components we have Professional Services, uh, that are in there a little bit. We also have a revenue Reserve that we take every single quarter, uh, and so, you know, the growth rate that we're seeing for ex, you know, is is strong, right? And the growth rates of the are the greater. The are our numbers, we can kind of use those. And so, I wouldn't try to round out too much from it in general. Everything is kind of going according to our plan. We did anniversaries of device 42, uh,
Acquisition, and that has a different compare now. But we've been talking about that and kind of preparing the market for that for the last six months.
DX business is a durable, 20% grower for now.
We think the execution is going really well, and we view it like there's a ton of potential upside even there. We are very encouraged with Vice 42 and how it's going, and the whole thesis of that purchase is playing out kind of as we planned.
That we obviously have our Freddy AI products and upsells to EX, as well as our ESM business team products. And then the market for EX, we're just continuing to see larger and larger customers come to us trying to switch off of legacy players, and we're just going to continue to execute there.
As a reminder, we ask that you please limit yourself to one question. Our next question comes from the line of Scott Burke with Naming Company. Your line is now open.
Hi everyone, really nice quarter here. I, I guess for my 1, question, uh, tennis in your prescriptive remarks, you talked about how your new Global, uh, partner program contributed. I believe it was over 1/3 of uh, ARR. Um, in the second quarter. I I guess it's it's still early in that program. You talked about signing another SI with a, I guess a higher ed in government um uh focused there. But how do we think about the right long-term contribution of that partner channel in general for you? Are you are you seeing the best strength out of the ex side or uh, maybe the CX side and then I don't know anything different in terms like deal size or composition of those deals coming.
Out of those partner-related transactions, we should be aware of. Thank you.
Yeah, sure. So we've had, uh, you know, our network of Partners continues to expand, we added over 130, new partners to the ecosystem, in the first half of the year. Um, and as you mentioned about a third of our bookings are impacted in some way shape or form by Partners, it's pretty equally distributed across CX. And ex, um, what I'm expecting is as we move into these larger Partners like Eunice is like this new 1 that we just signed, uh, we are seeing that the pipeline that they're able to generate tend to be larger. Deals, tend to be uh, more mature companies with a lot greater expansion opportunity over time. But at the same time, it's still pretty early. We signed the units, this deal in q1. Uh, we've seen some really promising results there. Um, and then we just signed our second, real GSI. And that is going to be focused on the UK Market to start with uh, this past quarter. So I think, if I look longer term, we would expect a greater percentage of our business is touched by partners for certain over the course of the next couple of days.
Years.
Helpful. Thank you. Congrats again.
Our next question comes from the line of Brent D. with Jefferies. Your line is now open.
Hi, this is Leonardo on for Brentville. Thank you for taking the question regarding Ian Official stepping in as the new CEO. I’m just wondering how much change you’ve left in sales or going forward and how the new team is settling in as well.
Sure. So just just as a reminder we have we have 2 Revenue leaders, Mika Yamamoto leads, the SMB and Commercial Business, which is is an inbound business, um, and service entirely out of India and through partners. And then Ian leads our field business, which is focused on 8 counties around the world. He also has the partner side of things as well. Uh, Ian was our head of international and had done a really good job over the course of the last year. He's got a long history in Enterprise sales. He was a Dono prior to joining us. He was a cro there. Um, and uh, he stepped into the role in April and partway through the quarter. We decided to make change from an interim status to permanent status. And I think the results really speak from the for themselves. We did really well in our field sales team. Uh in Q2 um all of our regions exceeded their internal targets, obviously it shows up in the numbers. So, pretty happy with, uh, with how he's he's been driving things. He's been able to build his bench, he just brought on a new leader for, uh, Europe.
I brought in a new leader for sales, engineering overall, and uh, and we're pretty, we're pretty happy with uh, with where we're headed there. I don't anticipate major changes going forward.
Great. Thank you.
Our next question comes from the line of Patrick Wall. Ravens with Citizens Bank, your line is now open.
Oh great, thank you. Um, I don't think we've really hit on the macro yet, Dennis. So, this time last quarter, we were all really worried about international exposure.
And tariffs and uncertainty and decision-making. What, what did you, um, what did you see in your customer conversations? And if you could maybe comment on how uh this month has gone to, that would be really helpful.
Specific industry, that's over representative over over represented in our portfolio. Uh, so we don't have big exposure to industries that are particularly hit by tariffs and the software that we're providing for customer support. And it teams it's must have software every team. Every company in the world needs to automate. Those operations needs to bring AI into those operations become more efficient, more effective or drive growth faster. So I we really have not seen. It's been a it's been a really good first half of the year for us and if I look at kind of what the pipeline looks like, what the second half looks like you see it in the guide. We're pretty, we're pretty bullish on where the business is going to go and being able to continue that momentum.
Great. Thank you.
Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is now open.
Great. I wanted to come back to the AI co-pilot and agents revenue. $20 million is impressive, just given how recently many of these solutions have gone GA.
I'm curious if you're thinking about any, you know, stakes in the ground for how ARR evolved through the year, or next, just especially as the agent capabilities expand. And when we think about this incremental kind of ARR, is it kind of truly incremental, or do we think about any puts and takes on the core side of the business? Thank you.
Yeah, so on AI.
While we have 5,000 paying customers for those 2 skus, you know, we have 73,000 customers. So it's still pretty early in the overall adoption of AI by our customer base. And, you know, we're continuing to add, uh, well, over a thousand of the customers, every quarter, uh, that are that are paying for those 2 skis. Remember, we have ai in other parts of our products. So, uh, if you buy the Enterprise plan for ex, uh, you have access to AI insights and you also have access to AI agents uh, for for ex, but you have to buy the Enterprise plan which is priced higher. So there are different ways that we're monetizing over on CX where the volume is greater. We monetize based on usage for that AI agent. Now for for the new, um, agentic agents that we just released into Early Access.
We've not settled on the final pricing for them. So they're in Early Access now will be pricing them out, uh, later in the fall. Um, and most likely those will be based on, uh, something along the lines of resolution. Um, and we'll be, you know, we'll look at competitive pricing there to see where that that lands out, but that is something that we're going to watch closely. I think that's a big Catalyst for growth. Especially on that CX side where we are going to are going to be taking. And we see this already in the Early Access program, uh, you know, affecting labor directly and you, you simply don't need as many people answering wrote questions as you have before, when you're relying on on an AI agent, that can take actions.
On behalf of the, on behalf of the company, so that we think is going to be a big challenge for growth. Uh, mostly in the course of 2026. Um, as we move out of EA sometime later this year, and as we, we settle on a final pricing there.
Thank you.
Our next question comes from the line of Alex Zukin with Wolf Research. Your line is now open.
Yeah. Hey guys, thanks for taking the question. Maybe I guess to to Elizabeth's question. When is the thought process that? In some time in 26 we're going to start to see uh, AI become a growth Catalyst for the business where it's driving higher asps, it's driving higher uh, NRS where that trajectory kind of inflect. Is that the right way to think about the business uh, from here?
So, I think that there's multiple levels of growth in the business.
If if we just look at the ex side to start with, so first, there's the share growth that we're seeing and, and we're seeing every quarter, you know, more and more of these large customers like Seagate like Steel Dynamics, um, like Michael's and qualify on a bunch of customers moving over from, it could be a Lassen or a service now or some of the older players. So that's 1 driver. A second driver is esm so esm. Um, we think has the potential to be a really large business for us. We we launched a deeper workflow for onboarding and off-boarding into EA this past uh quarter
We're seeing good traction of that in the early, you know, in the early program as well. A lot of customers have been asking for something like that to help them handle, uh, the the mundane tasks of onboarding and offboarding their people, uh, the, the third, the or the the, the next growth driver really is uh, the vice 42 and and the vice 42, we beat our expectations. Uh, this past quarter, we're right on track for the business plan that we laid out when we acquired the company and, um, and and that continues to be a big driver in larger and larger deals, both winning New Deals and then selling into our base.
Ai and device 42. They all could easily be hundred million dollar our business for us, uh, relatively, you know, relatively quickly. And, and that's how those are the big growth levers on that side of the business that we're that we're driving. AI also positively affects the CX business as well. Um, and they're a lot of our effort from a product standpoint. In terms of driving growth is consolidating functionality into fresh desk. Especially the conversational capability that previously is was in other products. So, we have a single product that any customer can use. It's easier to sell easier to consume easier to buy, um, and then over time easier to upgrade. So I think we've got multiple paths to growth. AI is certainly an important part of it, but there's a lot more than just AI.
Got it, and then Tyler. Maybe for you, on the billing side, was there any, uh, kind of pull-ins or push-ups for the last quarter, that that maybe is worthwhile to call out, uh, clearly, strong kind of constant currency Billings to go with the quarter but you're also guiding for that kind of be stable for for the second half of the year. Um, on tougher comps. I just wanted to make sure I understood where the confidence is coming from.
Yeah, I mean we usually do a, you know, a kind of a much bigger, deeper reconciliation. We kind of had, you know, a 1% pull-in, which is, uh,
It wasn't super significant, uh we have Poland's every single quarter, so there wasn't anything that uh that we felt like we had to to to call out. Uh, that was like a big reconciling item. We're actually really pleased with how we did in the quarter. Uh, and from the guy you can see, you know, when we're looking at for the back half, we actually, you know, expect to continue to do well.
Got it. Thanks guys.
Our next question comes from the line of Rob Oliver with Beard. Your line is now open.
Rob Oliver, your line is open. Please check your mute button.
Our next question.
Comes from the line of Brian Schwarz with Oppenheimer and Company. Your line is now open.
Yeah, hi guys. Thanks for taking my question. Tyler, I want to ask you about NRR trends. You know, your guidance clearly indicates you're not ready to call a bottom, but that is a lagging metric. I was wondering if you could shed light on what you're seeing in terms of in-period NRR, in comparison to that metric. Thanks.
Yeah, thanks, Brian. So yeah, that's all the retention. We come into the quarter, saying it was going to be 104. Uh, we came in at 1:46 as reported, um, the device 42 business actually had, uh, let's call it a negative impact. On, on that dollar retention is 1, we expected, right? When we bought it, uh, the company we talked about how we expect
Expected some churn, uh, to be out of that their existing base because they're with a competitors, uh, and we did see some of that. And so there's about a 2/3 of a point. Uh, pressure on that dollar attention, we're calling 104 for Q3, uh, on the, on the constant currency basis and it's really, again, you're right. It's a look back. We look at the, you know, the the prior are based from a year ago and kind of look at the activity, the expansion motion. You know, we had really good expansion in in, uh, Q2 so that was very positive for us. And we still continue to do well, uh, on insurance making, you know, kind of subtle progress. But we've, we've been doing well on churn for, uh, for a while now. And we're, we're very, uh, kind of optimistic on continue to make progress there. So in general, it happened just as expected, there's no big surprises on that dollar retention.
Thank you.
Our next question comes from the line of Brent Braceland with Piper Sandler. Your line is now open.
Uh, thank you. Uh, Tyler second consecutive quarter that uh, fresh works, his, uh, maintained a rule of 40 model on an organic basis, guidance. Implies that won't be the case in the second half. Can you just maybe frame? What is the the appetite and maybe longer term kind of goal to, to drive efficient growth and maybe drive a sustainable return to to rule of 40 and then Dennis, if you could just remind us on the AI opportunity, triple digit growth here 2% of ARR, but I think you did mention law.
Larger deals. You're seeing, like, a 25% attach rate. Pretty big delta— their 2% versus...
555. So, uh, what's the line of sight to sustaining the triple-digit growth in that AI business? I know it's small, but certainly growing very fast.
We expect Q3 and Q4 to be, and for the full year, uh, which is, you know, well, above what we did kind of coming into the year. In fact, I think it's 12 million dollars more for the full year, uh, than what we said. We're going to do coming into the year. Uh, this is a growth business and we've, we've always said that we want to make sure that we are not sacrificing bottom line, uh, for growth. Uh, and as we look in in front of us, you know, there's there's Investments, we want to make on the go to market side. All of those Investments are taken into account in, in our guidance. But uh, there was some, that was timing and others that were going to lean into uh but in general, we're very pleased with how we're doing, kind of on the balance of growth and free cash flow and we will lean into growth where we have the opportunities.
Yeah, so on AI just to clarify because I'm not sure it came through our attach rate for large deals, uh, for co-pilot was over 55% and that's up from the prior quarter. So the AI opportunity is is huge. I mean, we have well, we've had quite a bit of success in going from uh GA with co-pilot just in q1 of last year uh to where we are now. Uh, we have 5,000 customers paying for the 2i, excuse that we monetize, but we've got 73,000 customers. So there's a very long way to go and we do believe that every 1 of our customers should be using AI in in both the it space and the CX space and our customers are starting to kind of come around to that point of view as well. So that's a very big opportunity. That's a multi-year opportunity to sustain growth create.
And that's just those two SKUs that were monetizing today. We also indirectly monetized through the inclusion of AI functionality, like AI insights into the higher paid plans, like Enterprise on the ex side.
So there there's a, there's a long way to go. Uh, we're just getting started with a gentic. Just just releasing our, uh, first true agentic capabilities into EA in June, uh, that's another level of growth that pricing model will be slightly different than our current AI, uh, agent without actions. Um, will will be pricing closer to what you see some of our competitors pricing for their agentic products.
And that could be a meaningful driver for us because, you know, for our customers, they're going to be able to take costs out.
We're going to share in a fraction of that, uh, cost reduction. They can redeploy people to, to do other things, and answer real questions or do take Road actions. And, um, and that's that we think is a big driver for us as well. So, um, you know, more to come there, but we're pretty optimistic about how we're going to be able to continue to sleep. Monetized AI over the course of the next several years.
Couple of color. Thank you.
Our next question comes from the line of Rob Oliver with Beard. Your line is now open.
Great thanks guys. Uh sorry about that. Um my question is on device, 42. Dennis you talked about some of the uh strength there. And I was wondering if you could give us a sense for, you know, particularly with those larger larger deals, where it sounds like it's impactful. Like, what kind of uplift you guys are seeing in the device 42 products, uh, relative to core ex, and then, could you just remind us as to? And I'm sure we'll get more on this in September, but as to kind of what the timeline is relative to both full product integration and, you know, business model uh integration translation transition as well. Thank you. Yeah. So thanks Rob. I'll start with the second part of the question. So the timeline that we're operating on and that we're on is to uh, release a cloud version of device 42 in the first quarter of 26. Um, and that will that will roll out over time in phases, in terms of the the functionality that we embed into uh
The first release versus, you know, where we'll be down the road. But that's that's when we'll get uh a cloud version that um that we can sell alongside fresh service in terms of the impact on the the business at the deal level. You know, we see deals where de the device 42. Uh, recurring revenue is a third, uh, of the total bill for a customer. Um, and you know, multi hundred thousand dollars, we're doing multi hundred thousand dollar deals uh in that space. Uh so it can be very meaningful if you have
Have a a few of the business with a lot of uh you know mix of on-prem and Cloud assets. Uh you we we priced device 42 on a per asset basis and the larger your device footprint, the you know, the higher the bill over time and it's worth it for the customer because they get visibility into um, into their Assets in a way that they didn't have before. It's, well integrated into fresh service today. So if there are any issues they can do root cause analysis all that stuff. Um, so it it can be it can be quite meaningful. Uh, it we have had success in bringing device 42 into these new larger deals so it's helping us move up market. We've also had success in selling it into our current account base.
We're on track for, you know, like I said earlier, the business plan that we put together before we acquired the company. We're pretty pleased with how the whole thing is working out.
Great, very helpful. I appreciate it. Thank you, guys.
Our next question comes from the line of Brian Peterson of Raymond James. Your line is now open.
Gentlemen, thanks for taking the question. So I just wanted to follow up on the comments on the AI kind of going Beyond experimentation. I'm curious. Is that something you're something you're seeing with existing customers where that's really driving the expansion or you also seeing that with new customers. I refer. Uh, I know you referenced the 55% attach rates but I'm curious. How are the sizes of those initial lands with AI versus your expectations? Thanks guys.
So yeah.
We're seeing adoption across, both new business and our expansion motion, uh, and that's for both SMB and and our larger accounts SNB. Attach rates are in the double digit range and for those larger deals it's you know, north of 55%. Uh it's it's if if you are evaluating an IT solution or a customer support solution, you are going to be evaluating AI for the most part now. Uh, and and our customers typically are going to want to make the decision to uh to
Uh, build in the AI capabilities when they're making the overall decision to switch from another vendor or to move from some, you know, legacy platform. So, you know, I wouldn't say that there's any trend specifically to point to; it's not like it's a specific industry or specific size customer that's driving the adoption. It's pretty broad. Uh, and I think that, you know, we really saw the momentum in the first half of this year across both the co-pilot products and AI agent. And like I said, AI agent is just getting better with a true agentic capability now available.
thank you.
Our next question.
From the line of Matt Van Fleet with Cantor Fitzgerald, your line is open.
Yeah, good afternoon. Thanks for taking the question. Um you highlighted a handful of deals that um smaller CX. Customers were were now buying ex so curious on what what changes or programs have you been putting in place for your go to market team to improve that cross sell um into the CX base and and then kind of a separate question. Can we go the other direction are, are you implementing anything to help drive more CX? Penetration, um, into the larger Enterprise? Mid-market ex customer base.
Sure, so on CX there are really 3 drivers of growth over the last couple of quarters 1 is just improved rigor in the sales and marketing Motion in driving growth. Uh, the second is, um, the we made some product changes uh, that encouraged customers that were on free plans to convert to pay plans. Now, these are relatively small customers but we did have a large uh, free user base that um, that that we
Changed the plans on, so that you used to have be able to have, um, a fairly large number of free users on a given plan, we limited the number of users, because it ought to be more of a trial. Not a Perpetual free product. Uh, we limited the time that they can use the product for it and that led to a bunch of conversions from free to paid plans. And then, the third lever is AI, where AI is, you know, part of every discussion and is motivating conversations with with us. Uh, so all that is great on the larger account side, you know? When we last, I I think we revealed we talked about this in the past, but about half of our top, uh, 50 accounts are are using both CX and ex roughly half. So at the large end of the space. We've got pretty good cross sell. Its kind of the, the, the mid-tier and the long tail where we need to do a better job of driving that cross sell over time. And that's, and that's really a program that we have ongoing. Um, so we do think that there's opportunity
Unity there, as well.
Great. Thank you.
Our next question comes from the line of Taylor McGinness with UBS. Your line is now open.
Sure. So on the second 1 on the operating margin. Yeah. We, you know, we we brought through a 12 million uh, from our beat, but we also called out in the call that we are going to make some investments in the back half of the Year some of its timing. Some of its you know headcount relayed things that uh you know hires that that then that we didn't get the full quarter of expense and things like that. Some of it some of the brands stuff that we just mentioned and in general investments in the go to market side that uh we think are the right thing to do. Um, because we do see there's a huge opportunity uh and so from an operating margin perspective. Yeah. We said there's going to be a little bit of spend increase in the back half going into next year. We haven't given any, you know, kind of vision into next year, but uh, I hope you guys can see, we've been running the business. Very efficiently, we're going to continue to do so but we will invest in growth on the revenue side. I mean the our you know our forecast for the remainder of the year are reflective of everything we see right now and we actually have had a really good q1 and Q2 and you know from a pipeline perspective and expectations for Q3 and
Q4 we've built all of that in uh and you know, we're we're positive on the business right now and and, you know, both on the CX and on the ex side.
And just just on that, just remember Q4 is is our biggest quarter for ex and for Fields where the business is, is skewing more and more towards DX towards Fields. Um, and we've got, you know, we've got some visibility into the pipeline for Q4. We certainly know where we are in this quarter. So, all that's reflected in the, in the guide and that there is, there is
Bit of acceleration from a billing standpoint in there.
Great, thank you so much.
Thank you. I currently have no further questions at this time. Thank you all for your participation. This concludes today's conference call. You may now disconnect.