10-Q: Freshworks Narrows Losses, Boosts Revenue Amid Macroeconomic Headwinds

Freshworks Inc. reported an 18% revenue increase and significantly reduced its net loss for the second quarter and first half of 2025, driven by subscription growth and operational efficiencies, despite ongoing macroeconomic pressures.

Summary

• Revenue for the three months ended June 30, 2025, increased by 18% to $204.7 million, up from $174.1 million in the prior year period.
• Net loss for the three months ended June 30, 2025, significantly narrowed to $1.7 million, compared to a net loss of $20.2 million in the same period last year.
• Operating loss improved substantially to $8.7 million for the three months ended June 30, 2025, from $43.8 million in the prior year.
• Gross margin improved to 85% for the three months ended June 30, 2025, from 84% in the prior year, benefiting from economies of scale in hosting costs.
• Operating expenses decreased by 4% to $182.2 million for the three months ended June 30, 2025, primarily due to lower headcount from restructuring and reduced stock-based compensation.
• The number of customers contributing more than $5,000 in Annual Recurring Revenue (ARR) grew by 10% to 23,975 as of June 30, 2025.
• Net cash provided by operating activities increased to $116.6 million for the six months ended June 30, 2025, up from $77.0 million in the prior year period.
• The company repurchased $113.6 million of Class A common stock (8.18 million shares) during the three months ended June 30, 2025, and $225.4 million (14.91 million shares) during the six months ended June 30, 2025, under its $400 million share repurchase program.

Sentiment

Score: 7

Explanation: The company demonstrated strong revenue growth and significant improvements in profitability (reduced net and operating losses), indicating effective cost management and operational efficiency. The flat net dollar retention rate and ongoing macroeconomic concerns are noted, but the overall financial performance shows positive momentum and strategic focus on AI and customer expansion.

Positives

• Net loss significantly narrowed for both the three and six months ended June 30, 2025, demonstrating improved financial performance.
• Strong revenue growth of 18% year-over-year for both the three and six months ended June 30, 2025, driven by subscription services.
• Gross margin improved to 85% from 84%, indicating better cost management and economies of scale.
• Operating expenses decreased by 4% for the three months ended June 30, 2025, reflecting successful cost management and restructuring efforts.
• The number of customers contributing over $5,000 in ARR grew by 10% to 23,975, showing continued success in attracting and expanding with larger businesses.
• Net cash provided by operating activities increased to $116.6 million for the six months ended June 30, 2025, indicating strong operational cash generation.
• The company's share repurchase program is actively returning value to shareholders.
• The securities class action complaint was granted summary judgment in the company's favor, resolving a significant legal matter.

Negatives

• Net dollar retention rate remained flat at 106% as of June 30, 2025, primarily due to lower expansion within existing customers driven by macroeconomic pressures.
• Cash and cash equivalents decreased to $486.0 million as of June 30, 2025, from $620.3 million as of December 31, 2024.
• Total stockholders' equity decreased to $984.6 million as of June 30, 2025, from $1,137.9 million as of December 31, 2024, largely due to share repurchases.
• Accumulated deficit increased to $3,738.9 million as of June 30, 2025, from $3,735.9 million as of December 31, 2024.
• Interest and other income, net, decreased by 5% for the three months ended June 30, 2025, primarily due to lower balances in marketable securities portfolios.

Risks

• Macroeconomic uncertainties, including high interest rates, foreign exchange rate volatility, global geopolitical uncertainties, and inflationary pressures, could adversely affect demand for products and services.
• The net dollar retention rate may fluctuate in future periods due to difficult macroeconomic conditions, expected growth, the level of penetration within the customer base, and the ability to upsell and cross-sell products.
• Reliance on a single third-party cloud infrastructure partner (Amazon Web Services) exposes the company to operational disruption risks.
• The company is subject to ongoing legal proceedings, including a stockholder derivative complaint, and potential future claims related to intellectual property infringement, defamation, labor, privacy, and contractual rights.
• The ultimate impact of macroeconomic conditions on the business and operations remains highly uncertain, and it is not possible to predict the duration and extent of the effect.
• Foreign currency exchange rate fluctuations could adversely affect results, particularly changes in the Indian Rupee, British Pound, and Euro against the U.S. dollar.
• Future investment income may fall short of expectations due to changes in interest rates, or losses in principal may occur if securities are sold due to declining market value.

Future Outlook

The company expects macroeconomic uncertainties, including high interest rates, foreign exchange rate volatility, global geopolitical uncertainties, and inflationary pressures, to persist and continue to impact business spending and the overall economy. The net dollar retention rate may fluctuate due to these conditions, and the effects of macroeconomic conditions on the subscription-based model may not be fully reflected in revenue until future periods. The ultimate impact on the business remains highly uncertain. The recently signed One Big Beautiful Bill Act is expected to have an immaterial impact on tax expense for Q3 and Q4 2025 due to net operating loss carryforwards, with further evaluation needed for provisions effective in 2026.

Management Comments

• We provide people-first, AI service software that organizations use to deliver exceptional customer and employee experiences.
• Our latest generative AI solutions, Freddy AI Agent and Freddy AI Copilot, further enhance the customer and employee experience.
• Freddy AI Agent offers always-on, autonomous, personalized resolutions to customer and employee queries.
• Freddy AI Copilot provides always-on contextual assistance for customer support, employee support, marketing and sales use cases to boost productivity.
• We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
• We believe we will meet longer-term expected future cash requirements and obligations through a combination of our existing cash available balances, cash flow from operations, and issuances of equity securities or debt offerings, as needed.

Industry Context

Freshworks operates in the competitive and rapidly changing software industry, specifically in Customer Experience (CX) and Employee Experience (EX) solutions. The company is actively integrating generative AI (Freddy AI Agent, Freddy AI Copilot) into its offerings, aligning with a broader industry trend towards AI-driven automation and productivity enhancement in enterprise software. The macroeconomic headwinds, such as high interest rates and inflation, are noted as impacting business spending and customer expansion, a common challenge across the software-as-a-service (SaaS) sector. The flat net dollar retention rate reflects these industry-wide pressures on existing customer growth.

Management Changes

Legal Proceedings

• Securities class action complaint (filed November 1, 2022) alleging material misstatements in IPO offering documents was granted summary judgment in the company's favor on April 10, 2025. Plaintiff has until July 31, 2025, to appeal.
• Stockholder derivative complaint (filed March 20, 2023) asserting state and federal claims based on similar alleged misstatements as the securities class action, currently stayed by the court.
• No currently pending legal proceedings are believed to have a material adverse impact on the business or condensed consolidated financial statements.

Stakeholder Impact

• Shareholders: Positive impact from reduced losses, revenue growth, and share repurchase program. Potential for continued share price volatility due to macroeconomic factors and flat net dollar retention rate.
• Employees: Impacted by the restructuring plan initiated in November 2024, which resulted in employee terminations. Ongoing investment in R&D and product development.
• Customers: Benefit from continued investment in AI-powered solutions (Freddy AI Agent, Freddy AI Copilot) and comprehensive IT solutions following the D42 Parent, Inc. acquisition. May experience lower expansion opportunities due to macroeconomic pressures.
• Suppliers: Continued reliance on third-party cloud infrastructure partner (Amazon Web Services).

Next Steps

• Evaluate the overall impact of the One Big Beautiful Bill Act on consolidated financial statements, including provisions effective beginning in 2026, as further guidance becomes available.
• Plaintiff has until July 31, 2025, to appeal the judgment in the securities class action lawsuit.
• Sublease agreement for adjacent office space at headquarters expected to commence no later than November 2025.
• Extended lease term for existing headquarters and expanded office space will expire in July 2031.
• Continue to evaluate all available positive and negative evidence in future periods to determine whether a release of the valuation allowance against U.S. federal and state deferred tax assets is warranted.
• Monitor exposures in other currencies and assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.

Key Dates

Recommendation

While Freshworks demonstrated strong revenue growth and a significant reduction in net losses, indicating improved operational efficiency and cost management, the flat net dollar retention rate and persistent macroeconomic headwinds suggest ongoing challenges in expanding within the existing customer base. The share repurchase program is positive for shareholders, but the overall market conditions and the company's current profitability trajectory (still a net loss, albeit smaller) warrant a 'hold' recommendation. Investors should monitor the impact of macroeconomic factors on customer expansion and the effectiveness of new AI product adoption.

Keywords

Freshworks, FRSH, Software, SaaS, Customer Experience, Employee Experience, CX, EX, AI software, Freddy AI, Financial results, Revenue, Net loss, Operating expenses, Cash flow, Share repurchase, SEC filing, 10-Q, Quarterly Report, Cloud infrastructure, IT asset management