Executive Summary / Key Takeaways

• Freshworks delivered a strong Q1 2025, exceeding financial expectations with 19% year-over-year revenue growth to $196.3 million, non-GAAP operating margin expansion to 24%, and adjusted free cash flow margin of 28%, achieving a Rule of 47.
• The Employee Experience (EX) business, including Freshservice and the recently acquired Device42, is the primary growth engine, surpassing $420 million in ARR with 33% constant currency growth in Q1 2025, driven by wins against legacy competitors in the mid-market and enterprise.
• AI capabilities, particularly Freddy Copilot and Freddy AI Agent, are gaining significant traction, demonstrating tangible productivity gains (30%+ for Copilot, 40-45% productivity/50-70% deflection for AI Agent) and contributing to deal wins and expansion across both CX and EX segments.
• Freshworks differentiates itself with uncomplicated, enterprise-grade software offering faster time to value and lower total cost of ownership compared to complex legacy solutions from competitors like ServiceNow (NOW) and Zendesk (ZEN), a key factor in securing significant customer wins.
• The company is focused on durable, profitable growth, evidenced by expanding margins, strong cash flow generation, a $400 million share repurchase program, and strategic investments in EX and AI, while navigating macroeconomic uncertainties and competitive dynamics.

The Uncomplicated Path to Enterprise Service: Freshworks' Strategic Evolution

Freshworks Inc. positions itself as a provider of people-first, AI service software, simplifying customer and employee experiences in a market often dominated by complex, expensive legacy systems. The company operates across two primary product families: Customer Experience (CX), encompassing solutions like Freshdesk and Freshchat, and Employee Experience (EX), anchored by Freshservice and enhanced by the recent acquisition of Device42. This strategic focus, particularly the emphasis on the burgeoning EX market and pervasive AI capabilities, forms the core of Freshworks' investment thesis and its narrative of winning against established, often cumbersome, competitors.

The company's journey has increasingly centered on addressing the needs of the mid-market and lower end of the enterprise – organizations typically ranging from 250 to 20,000 employees. This segment, while sophisticated in its requirements for IT Service Management (ITSM), IT Asset Management (ITAM), IT Operations (ITOM), and Enterprise Service Management (ESM), has historically been underserved by solutions designed primarily for the largest global corporations. Freshworks' value proposition of delivering enterprise-grade functionality without the associated complexity, lengthy implementation cycles, and high total cost of ownership resonates strongly here. This differentiation is not merely theoretical; it is the stated reason behind numerous competitive displacements. Customers are actively seeking alternatives to legacy providers like ServiceNow and Zendesk, citing frustrations with poor user experience, low adoption, manual inefficiencies, and excessive costs. Freshworks steps into this gap, offering a compelling, uncomplicated, and more affordable alternative that promises rapid impact and scalability.

Technological Edge: The Power of Uncomplicated AI

At the heart of Freshworks' competitive strategy lies its differentiated technology platform, particularly its AI capabilities branded as Freddy AI. This isn't AI for AI's sake; it's designed to deliver tangible, quantifiable benefits that directly address customer pain points around efficiency and productivity.

The Freddy AI suite includes key components like Freddy AI Copilot, Freddy AI Agent, and Freddy AI Insights. Freddy AI Copilot acts as an assistant for human agents, providing contextual help to boost productivity. The benefits are measurable: customers report achieving more than a 30% reduction in resolution time with Copilot, with power users seeing over 40% improvement in average resolution time for IT instances. Examples like Razorpay automating 70% of routine queries and Digitrips improving response times by nearly 300% underscore this impact. This directly translates to lower operational costs and the ability for agents to handle higher-value tasks or increased volume without proportional headcount growth.

Freddy AI Agent represents the next generation of self-service, designed to be an autonomous frontline agent capable of resolving queries without human intervention. A key differentiator is its ease of deployment – customers can set it up in minutes by simply pointing it to their knowledge base or relevant documents. Unlike rigid, button-based chatbots, Freddy AI Agent engages in personalized, conversational interactions with memory and reasoning. The operational benefits are significant: customers are seeing average deflection rates around 40%, with some achieving over 70% autonomous handling of inquiries. A healthcare company reported cutting response times in half (from 4 minutes to 2), boosting first call resolution by 30%, raising CSAT from 82% to 94%, and cutting operational costs by 25% using AI Agents. Panasonic North America (PCRFY) uses AI Agent to handle over 75% of customer queries. This capability frees up human agents to focus on complex issues, fundamentally changing the economics of service delivery.

Freddy AI Insights, currently in public beta and included in the Freshservice enterprise plan, provides AI-powered intelligence for managers, offering proactive and actionable insights to enable smarter decisions.

Freshworks' R&D efforts are focused on enhancing these AI capabilities and integrating them seamlessly across the platform. The company is actively testing various Large Language Models (LLMs), balancing cost, performance, and data security, benefiting from competition among LLM providers which drives pricing down. The strategic intent is clear: to make AI a core, indispensable part of the Freshworks offering that delivers measurable ROI, strengthens the competitive moat, and drives adoption and monetization. Monetization occurs through a per-seat add-on for Copilot ($29/month sticker price), consumption-based pricing for the CX version of AI Agent (upon GA), and inclusion in the enterprise plan for the EX version of AI Agent and AI Insights. This multi-faceted approach aims to capture value as customers realize the benefits of AI-driven efficiency.

Strategic Execution: Driving Growth Upmarket and Across Segments

Freshworks' strategic imperative to invest in its EX business is yielding significant results. This segment has grown rapidly, reaching over $420 million in ARR in Q1 2025, representing robust 33% year-over-year growth on a constant currency basis. This growth is heavily influenced by the company's success in the mid-market and enterprise, which now accounts for over 75% of EX ARR. Wins against major competitors are a recurring theme. Companies like Travis Perkins (TPK) (replacing ServiceNow), Sophos (replacing a legacy provider), the largest title company in the U.S. (replacing ServiceNow), the City and County of San Francisco (choosing Freshservice over ServiceNow), and a multi-billion dollar hard drive manufacturer (dropping ServiceNow after 13 years) highlight Freshworks' ability to displace incumbents by offering a more user-friendly, cost-effective, and agile solution.

The acquisition of Device42 in June 2024 was a strategic move to bolster the EX offering, specifically in advanced IT Asset Management (ITAM). This capability was identified as a key requirement in larger deals where Freshworks was previously at a disadvantage. The integration is already showing promise, with Device42 components included in 2 of the top 5 largest deals in Q1 2025 and 3 of the top 10 in Q4 2024. The roadmap includes delivering an improved integration between Freshservice and Device42 by Q1 2025 and a cloud-native version of Device42 by late 2025/early 2026, aiming for seamless functionality and broader market reach. This acquisition expands the addressable market and enhances Freshworks' competitive position in larger, more mature organizations.

Enterprise Service Management (ESM), leveraging Freshservice for Business Teams, is another key growth lever within EX. Adoption nearly doubled over the past year, with ESM ARR growing 2.5x in 2024. Customers are extending Freshservice beyond IT to departments like HR, finance, and facilities, seeking the same efficiency and ease of use for employee service delivery.

While EX is the primary growth driver, Freshworks is also focused on accelerating growth in its CX business. This segment reached over $370 million in ARR in Q1 2025, growing 7% year-over-year on a constant currency basis. Although this business has faced macroeconomic pressures, particularly impacting expansion rates in the SMB segment, Freshworks has seen improvements through focused efforts on reducing churn (achieving the lowest churn quarter ever for customer support products in Q3 2024) and improving free-to-paid customer conversions. AI is also a tailwind for CX, with customers adopting AI Agents and Copilot to improve agent productivity and customer satisfaction. Cross-selling between CX and EX is also contributing to growth, with customers like the City of Bellevue and Travel Counsellors adopting solutions from both families.

Strategic partnerships are increasingly important, with over 500 transacting partners globally touching one-third of ARR in 2024. Recent enhancements to the partner program and agreements like the one with Unisys (UIS) aim to provide partners with more predictability and enable them to build long-term practices around Freshworks products, potentially increasing go-to-market efficiencies.

Financial Performance: Profitable Growth and Operational Discipline

Freshworks' recent financial performance underscores its focus on driving profitable growth. Q1 2025 results demonstrated significant progress: revenue grew 19% year-over-year to $196.3 million. More notably, the company achieved substantial margin expansion, with non-GAAP operating margin reaching 24%, a more than 10 percentage point improvement compared to the prior year period. This operational discipline is also reflected in strong cash flow generation, with adjusted free cash flow margin hitting 28% in Q1 2025, a 5 percentage point improvement year-over-year. The combination of revenue growth and adjusted free cash flow margin resulted in a Rule of 47 for the quarter.

Gross margins remain healthy, increasing to 85% in Q1 2025, benefiting from economies of scale, particularly in hosting costs. While operating expenses increased modestly (3%) in Q1 2025, strategic shifts were evident: sales and marketing expenses decreased by 6% (influenced by restructuring and lower advertising/travel costs, offset by Device42 amortization), while R&D increased by 15% (driven by personnel costs, including Device42 integration, and capitalized software development), reflecting the prioritization of investment in EX and AI. General and administrative expenses also increased (12%), partly due to stock-based compensation and personnel costs.

The company maintains a strong liquidity position, ending Q1 2025 with $594.2 million in cash and cash equivalents and $401.1 million in marketable securities, totaling over $1 billion. Operating activities provided $58.0 million in cash in Q1 2025. This financial strength supports organic investments and strategic initiatives like the Device42 acquisition ($238.1 million consideration). Furthermore, the board authorized a $400 million share repurchase program in November 2024, signaling confidence in the company's value. $111.8 million was used to repurchase 6.73 million shares in Q1 2025, with $272.7 million remaining available. The company also manages share count dilution through net share settlement of equity awards.

The workforce realignment approved in November 2024, involving a 13% headcount reduction, was undertaken to align resources with strategic priorities and improve operating efficiency, contributing to the observed margin expansion.

Outlook and Risks: Navigating the Path Ahead

Freshworks' outlook reflects continued confidence in its strategy and operational execution, while acknowledging potential macroeconomic headwinds and specific integration nuances. For the second quarter of 2025, the company expects revenue between $197.3 million and $200.3 million, representing 13% to 15% year-over-year growth. Full-year 2025 revenue expectations were raised after the strong Q1 performance, now projected to be between $815.3 million and $824.3 million, or 13% to 14% year-over-year growth (13% to 15% constant currency). Non-GAAP income from operations is guided to be $139.5 million to $147.5 million for the full year, with non-GAAP EPS of $0.56 to $0.58. Adjusted free cash flow for the full year 2025 is expected to be approximately $210 million.

The guidance assumes FX rates as of April 25, 2025, and acknowledges that the Device42 anniversary in early June 2025 will lead to tougher year-over-year revenue comparisons in the second half of the year. Q2 2025 operating margins are expected to decrease quarter-over-quarter due to the annual merit cycle and planned investments in sales and marketing, before potentially improving in the latter half of the year as the business scales.

While management states they have not seen a meaningful impact from macroeconomic factors to date, they continue to monitor conditions closely. Risks include ongoing pressure on expansion rates within existing customers due to macroeconomic uncertainty, foreign exchange volatility (with significant revenue exposure to EUR and GBP), and potential disruptions related to the Device42 integration, particularly the expected decline in partner business involving competitors. Reliance on a single cloud infrastructure provider (AMZN) also presents a risk. The company is also involved in legal proceedings, including a securities class action related to its IPO (where summary judgment was granted in the company's favor, but the plaintiff has until May 12, 2025, to appeal) and a related derivative suit.

Freshworks believes its value proposition of efficiency and lower cost positions it well even in a challenging economic environment. Mitigation strategies include hedging foreign currency exposure and ongoing efforts to integrate Device42 and streamline operations.

Conclusion

Freshworks is executing a clear strategy focused on leveraging its uncomplicated, AI-powered platform to capture the significant market opportunity in employee and customer experience software. The EX business, bolstered by the strategic Device42 acquisition and a targeted upmarket sales motion, is driving robust growth and displacing legacy competitors. AI capabilities, particularly Freddy Copilot and AI Agent, are proving to be powerful differentiators, delivering tangible productivity and efficiency gains for customers and creating new avenues for monetization and expansion.

The company's recent financial performance demonstrates a commitment to profitable growth, with expanding operating margins and strong free cash flow generation. While macroeconomic uncertainties and integration challenges from the Device42 acquisition present risks, Freshworks' differentiated technology, competitive wins, and disciplined operational approach position it to continue its growth trajectory. The share repurchase program underscores management's confidence in the business's long-term potential and commitment to shareholder value. For investors, Freshworks represents a compelling story of a company successfully challenging established players by offering a modern, uncomplicated, and AI-driven alternative, poised for continued profitable growth in large and essential software markets.