FRSH Q2 2025: AI Attach Rate at 55% Boosts Outlook
- Robust AI Adoption & Innovation: The Q&A highlighted strong traction in AI products with an attach rate of over 55% in large deal motions, along with promising early access adoption for new agentic AI offerings, suggesting significant future revenue expansion from AI initiatives.
- Expanding Partner Ecosystem: Executives emphasized that partners are now impacting over one‑third of ARR, and the addition of over 130 new partners strengthens their market reach and the ability to secure larger, more mature deals across both EX and CX segments.
- Solid Customer Retention & Revenue Growth: The discussion underscored healthy recurring revenue dynamics, including net dollar retention coming in at 106%, supporting a stable customer base and providing a strong foundation for upsell opportunities in both the EX and CX businesses.
- Integration and churn risk: Device 42’s integration continues to pressure net dollar retention, with nearly two-thirds of a percentage point negative impact, and uncertainties remain regarding its cloud version rollout in 2026, potentially delaying revenue synergies.
- Margin compression from increased spending: Management indicated that higher investments in headcount, go‐to‐market spending, and brand initiatives are expected in the back half of the year, which could lead to a lower operating margin in Q4 compared to previous quarters.
- Uncertainty around AI monetization: While AI products show strong initial attach rates, new offerings like the agentic (AgenTic) solutions are still in early access with pricing not yet finalized, raising concerns about the timeline and scale needed to realize their full revenue potential.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q3 2025 | $197.3 million to $200.3 million | $207 to $210 | raised |
Non-GAAP Income from Operations | Q3 2025 | $27.8 million to $29.8 million | $31.2 to $33.2 | raised |
Non-GAAP Net Income per Share | Q3 2025 | $0.10 to $0.12 | $0.12 to $0.14 | raised |
Revenue | FY 2025 | $815.3 million to $824.3 million | $822.9 to $828.9 | raised |
Non-GAAP Income from Operations | FY 2025 | $139.5 million to $147.5 million | $153 to $157 | raised |
Non-GAAP Net Income per Share | FY 2025 | $0.56 to $0.58 | $0.56 to $0.58 | no change |
Calculated Billings Growth (%) | FY 2025 | 13% (as reported) and 14% (constant) | 16% (as reported) and 14% (constant) | raised |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
AI Adoption & Innovation | Discussed across Q1 2025, Q4 2024, and Q3 2024 with strong integration, early pilots, and consistent emphasis on improving productivity | Q2 2025 highlights concrete adoption numbers (5,000+ paying customers, ARR > $20M), new product launches, and multi-year growth potential | Consistent focus with increasing traction and product innovation, showcasing growing customer value and market adoption |
AI Monetization Uncertainty | In Q1 2025 and Q3 2024, noted experimentation with pricing and early-stage monetization; Q4 2024 was optimistic on attach rates | Q2 2025 emphasizes unsettled pricing for new AgenTeq agents despite promising early traction, planning to finalize pricing in fall | Ongoing uncertainty remains but with a clearer roadmap toward pricing finalization, reflecting a more mature outlook |
Partner Ecosystem Expansion & Pipeline Momentum | Q1 2025 detailed a revamped partner program and strong pipeline; Q3 and Q4 2024 had little to no mention | Q2 2025 shows aggressive partner expansion with 130+ new partners and strong pipeline momentum, impacting 1/3 of bookings | Increased emphasis and expansion in the partner ecosystem, indicating a shift toward channel-led growth |
Customer Retention & Revenue Growth | Q1 2025, Q3 2024, and Q4 2024 consistently reported steady net retention and growing ARR with healthy NDR and customer metrics | Q2 2025 demonstrates strong revenue growth (ARR for EX & CX) with NDR around 104%-106% and improved customer metrics | Sustained retention and growth with slight improvements, underscoring the resilience of the business across segments |
Device42 Integration Challenges | Q3 2024 highlighted integration challenges and pipeline seeding; Q4 2024 showcased improved integration; Q1 2025 was largely positive | Q2 2025 notes modest churn impact from Device42’s partner business, expecting gradual improvement as integration with ITSM continues | Ongoing integration challenges that are slowly improving, with expectations for better retention as integration deepens |
Margin Pressure & Operating Costs | Q1 2025 reported margin improvements and cost management; Q3 2024 detailed efficiency measures; Q4 2024 noted restructuring benefits | Q2 2025 shows stable non-GAAP operating margins with an outlook of increased spending (personnel, branding, sales) coming later in the year | Consistent cost discipline with cautious optimism, though upcoming investments may moderate margins in future quarters |
Macroeconomic Uncertainty & Demand Impact | Q1 2025 and Q3 2024 mentioned stable demand and resilience despite macro headwinds; Q4 2024 noted cautious optimism in SMBs | Q2 2025 emphasizes a diversified revenue base and strong demand, with no significant negative impact observed from macro uncertainties | Steady resilience amid macro uncertainty, with a positive sentiment driven by a diversified customer base and essential product offerings |
Employee (EX) & Customer (CX) Business Growth | Q1 2025, Q3 2024, and Q4 2024 consistently reported robust EX growth and steady CX expansion, with notable upmarket wins | Q2 2025 shows EX ARR growth to over $450M (24% YOY) and CX ARR at over $380M (11% YOY), with AI boosting results | Sustained strong growth with EX outperforming CX, reflecting successful upmarket expansion and AI-driven efficiency improvements |
SMB Market Dynamics | Q1 2025 and Q3 2024 highlighted strong SMB wins and healthy net adds; Q4 2024 noted stable to improving conditions despite interest rate challenges | Q2 2025 offers minimal detail but notes continued AI adoption and free-to-paid conversions among SMBs | Ongoing focus on the SMB market remains steady, with signals of stability and incremental improvements driven by AI-enabled efficiency |
Emergence of Agentic AI Offerings | Q1 2025 emphasized AI as table stakes and early adoption; Q3 2024 detailed Freddy AI agent capabilities; Q4 2024 discussed AI broadly without the specific term | Q2 2025 introduces dedicated agentic AI offerings (Freddie AI Agent Studio, Email Agent) with tangible early adoption metrics | Broadening and maturing of autonomous AI offerings, reflecting a shift from early trials to structured, monetizable platforms |
Managed Service Provider (MSP) Partnerships | Q1 2025 described enhanced partner programs for MSPs; Q4 2024 highlighted the Unisys partnership and product enhancements; Q3 2024 noted 1,000+ MSPs with feature gaps | Q2 2025 introduces Freshservice for MSPs, a new ITSM product tailored for small MSPs, reinforcing the strategic focus on this channel | Evolving focus on the MSP channel with dedicated product offerings, aiming to fill feature gaps and capture new market segments |
Agent Addition Challenges | Q1 2025 noted offsets in agent expansion; Q3 2024 highlighted slowing agent addition rates with a shift to non-agent revenue; Q4 2024 mentioned stabilization with ongoing pressure | Q2 2025 reports hesitation in adopting autonomous AI agents and unresolved pricing for new AgenTeq agents, reflecting persistent challenges | Persistent challenges in agent addition growth, with a strategic pivot toward diversifying revenue beyond traditional agent expansions |
Workforce Reduction and Operational Disruption | Q1 2025 mentioned a 20% headcount reduction for efficiency; Q3 2024 provided detailed workforce cuts; Q4 2024 cited restructuring expenses | Q2 2025 provides only a minor note on restructuring costs ($700K), with no significant mention of operational disruption | Reduced focus on workforce cuts in the current period, suggesting stabilization after previous rounds of significant reductions |
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AI Consumption
Q: Are AI session packs consuming as expected?
A: Management noted that AI adoption is pacing at or slightly ahead of internal expectations, with early access programs performing well despite the agentic product being in its early days. -
Revenue Guidance
Q: Is Q3 revenue mix on track?
A: They explained that while CX grows at around 8%, the remaining growth is driven by strong EX performance—though exact revenue breakdown details weren’t provided, the overall guidance remains solid. -
Device42 Impact
Q: How significant is the Device42 uplift?
A: Management indicated that in larger deals, Device42 can account for about one-third of the total recurring revenue, with a cloud version expected in 2026 to further integrate and grow this segment. -
AI Revenue Expansion
Q: Is the $20M AI ARR truly incremental?
A: They emphasized that while 5,000 customers currently pay for AI features, the long-term vision is for broader adoption across the base, making AI a multi-year, incremental growth driver. -
Partner Channel
Q: How impactful is the partner program?
A: Management highlighted that partners influenced over one-third of ARR, with 130+ new partners onboarded, benefiting both CX and EX segments and promising larger, more mature deals. -
Operational Efficiency
Q: Will Rule of 40 be sustained?
A: Despite planned investments in growth, they remain pleased with strong free cash flow performance, maintaining a balanced focus on efficiency and revenue expansion that supports a robust Rule of 40 model. -
Retention Trends
Q: How is net dollar retention trending?
A: The company reported a net retention of 106%—slightly above expectations—with Device42’s initial churn partially impacting it, and a guidance of around 104% for Q3. -
AI Adoption Dynamics
Q: Are new and existing customers adopting AI?
A: Both new business and expansion within existing accounts are embracing AI, with SMB attach rates in the double digits and over 55% attach rate for larger deals, reflecting broad-based adoption. -
Cross-Sell Strategies
Q: How is cross-selling between CX and EX evolving?
A: There’s a concerted effort to drive cross-sell, particularly as nearly half of the top accounts use both solutions, with product adjustments and pricing changes boosting conversions from free to paid plans. -
Q4 Growth & Margins
Q: What drives Q4 revenue and margin changes?
A: Management expects Q4 acceleration in revenue due to stronger EX performance and higher field activity, while margin guidance is slightly lower because of intentional spend increases related to headcount and marketing investments. -
Sales Leadership Update
Q: How is the new CRO and sales team performing?
A: The transition to a permanent CRO has been smooth, with the field sales team consistently exceeding targets and new leadership appointments further strengthening the team. -
Macro Outlook
Q: Is there any macro headwind affecting performance?
A: They reported broad-based demand with minimal impact from macro uncertainties, as their diversified customer base across regions helps mitigate issues like tariffs and economic exposure.
Research analysts covering Freshworks.