Braze, Inc.

Welcome to the BRAZE third quarter fiscal year 2024 earnings conference call. My name is Christine, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. I'll now turn the call over to Christopher Ferris, head of BRAZE Investor Relations.

Thank you, operator. Good afternoon and thank you for joining us today to review Braze's results for the fiscal third quarter 2024. I'm joined by our co-founder and chief executive officer, Bill Magnuson, and our chief financial officer, Isabel Winkles. We announced our results in a press release issued after the market closed today. Please refer to the investor relations section of our website at investors.braze.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the fourth quarter and the fiscal year ended January 31, 2024 and the fiscal year ended January 31, 2025, our planned product and feature development and the benefits to us and our customers therefrom, including our AI features, the potential impact and duration of current macroeconomic trends, our anticipated customer behaviors, including vendor consolidation trends and their impact on Braze, the anticipated benefits of our partnerships, the expected effects of our social impact initiatives, and our long-term financial targets and goals, including the anticipated period in which we may generate positive non-GAAP operating income and positive free cash flow. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investor Relations section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding the company's fiscal third quarter 2024 performance in addition to the impact these items have on the financial results. Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations section of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now, I'd like to turn the call over to Bill.

Thank you, Chris, and good afternoon, everyone. We delivered another strong quarter, generating $124 million in revenue, up 33% versus the prior year, despite a macroeconomic environment that remains challenging. Our execution was strong, and we continued to drive operating efficiency in the business, improving non-gap gross margin by 170 basis points year over year, and non-gap operating margin by over 1,100 basis points compared to the third quarter of last year. We were pleased with the strength of our enterprise business, the continued rapid pace of R&D and the resulting customer excitement about new product launches and announcements, as well as the continued expansion of the global Braze partner and customer ecosystem. In October, we also hosted Forge, our annual flagship customer conference, which brought together leading marketing, growth, and engagement teams to learn best practices for delivering brilliant customer experiences, including incredible stage sessions from brands including Activision Blizzard, Elf Cosmetics, McDonald's, The Walt Disney Company, and Wise Labs. It was an inspiring capstone for what has been an exciting year for Braze's own global events, including the newly introduced City by City series. In total, we hosted events across 21 major global cities and welcomed nearly 4,000 attendees through our doors. Looking ahead into next year, we're already excited to be hosting Forge again in the U.S. and bringing City by City to five continents as our customer community and partner ecosystem continues to prosper. Across our global footprint, Braze has scaled by methodically building a customer base across a wide array of industry verticals, business models, and company sizes. And today, I'm proud to announce that during the month of November, we passed $500 million of committed annual recurring revenue, nearly doubling since our IPO just over two years ago. A huge thank you to our dedicated team across the globe who helped us achieve this milestone. I'm excited to keep building on this success with you as we continue on our journey to make Braze the standard for customer engagement. Brands continue to recognize the significant ROI that can be achieved through personalized cross-channel customer engagement enabled by the Brace platform. New business wins and upsells included FabFitFun, Mythical Games, Oro, formerly Netspend, Papa John's UK, and Sonos, among others. Enterprise new business was strong as we continued to capitalize on the legacy vendor replacement cycle and the consolidation trend that we've highlighted in prior quarters. During the quarter, We added to our growing list of major QSR customers with a competitive takeaway from a legacy marketing cloud. And we're excited to consolidate away a number of other vendors as we begin work with a top news organization looking to simplify their complex technology ecosystem and drive better outcomes for their customers through higher quality engagement. We also continue to win against both startup competitors and legacy point solutions as they struggle to deliver high quality customer engagement seamlessly coordinated across the many channels that matter to the modern B2C marketer. We are excited by our competitive position amongst the category of customer engagement, especially as we reflect on what hasn't changed in our space. And that's that top brands continue to invest heavily in order to deliver increased value and relevance to their consumers, both by understanding the real-time context that surrounds every marketing and product interaction, and by leveraging their growing first-party data assets to harness the gains available from real-time stream processing combined with AI-driven orchestration and personalization. As marketers chart the course of their business goals and customer engagement initiatives in our visual canvas environment, they can increasingly rely on AI, ML, and other forms of automated decision-making to manage the complexity of the modern customer engagement environment while delivering relevance and personalization to their customers at scale. While the macro environment remains uncertain as we head into next year, we are confident that customer engagement will remain a business imperative for brands. In tough times, brands shift their focus to high return initiatives like lifecycle optimization and retention. And to stand out, marketers need powerful customer engagement tools. Sophisticated brands continue to invest in their customer engagement efforts, finding opportunities to initiate new relationships efficiently and strengthening those bonds over time by staying relevant in their customers' lives and delivering value in critical moments. Especially as consumers continue navigating an environment with high interest rates and inflation, the period from Black Friday to Cyber Monday was a particularly important time for brands to break through the early noise of the holiday season and stand out in their customers' minds. At Braze, this year again saw record-breaking send volumes, as we sent over 37 billion messages in the four-day period from Black Friday through Cyber Monday. More importantly, we also saw increases in the sophistication of messages, campaigns, and canvases. On Black Friday alone, we processed nearly 25 billion in-pound API calls, and during that day's peak activity periods, our outbound packet throughput more than doubled compared to last year. That rise was driven by more send-time API calls and advanced personalization being used by more customers. Brands also leaned further into cross-channel messaging this year, with Bray supporting a wide array of established and emerging messaging channels, including significant increases in the use of WhatsApp, email, SMS, MMS, content cards, Roku messages, and web push. Zooming out to the orchestration layer, we saw a 67% increase in messages sent using Canvas, our visual development environment, which reflects how marketers are orchestrating multi-step cross-channel messaging flows and relying on differentiated braze capabilities during this critical time. In order to stay on the leading edge of customer engagement, we are relentlessly focused on product innovation that can accelerate the legacy replacement cycle and compel more brands to upgrade their customer engagement. At Forge, we unveiled new low-code and AI-driven product innovations designed to more effectively personalize brands' customer engagement efforts and drive more agile and productive marketing teams. We are always looking for ways to allow our customers to test and iterate more quickly on customer experience, both in and outside of their products. Building on the strong in-product foundation provided by our SDKs, we were excited to promote feature flags to general availability in October. Feature Flags allows marketers to quickly launch, test, and optimize features on mobile apps or websites, providing flexibility to test varying expressions of their product, and promoting an agile and experimental method of product delivery that results in better experiences for customers. These types of experiments are particularly impactful when coordinated with customer messaging and optimized by the AI and testing features native to Canvas. One brand putting this all into action is Immobilare.it, a leading player in the EU real estate industry who used feature flags to test the release of dark mode to a segment of customers who were very active in the evening. After turning on dark mode for that segment and targeting those same users with an in-app message about the new feature, they allowed the test users to experiment for two weeks and then subsequently collected qualitative feedback from them via an in-app survey. After validating both the survey feedback and the conversion data, Immobilare gradually extended the feature to all of their registered users. Normally, a launch like this would have required multiple platforms and complex cross-team coordination. By bringing complementary product and messaging workflows together, one person coordinated this entire launch in Braze and did it in half the time of similar past experiments. At Forge, we also announced several tools in development that we anticipate adding to our Sage AI suite, including an AI recommendation engine that is designed to use machine learning to match relevant items from Brace catalogs with customers most likely to buy them, the addition of a large language model or LLM Canvas step to our visual programming language, and channel-specific message content recommendations paired with performance prediction. The Canvas LLM step uses GenAI to interpret user-provided input, such as survey feedback or reply to a WhatsApp conversation, and then provides a contextual response that can be templated into subsequent Canvas actions or message steps. We are actively testing multiple underlying models for this LLM step, including our own custom trade models built on top of LLMA2, as well as OpenAI-hosted models such as GPT-4 Turbo. Extending on our experimentation with custom-trained models, we are also very excited by our work in channel-specific message content recommendations, paired with a growing ability to automatically predict which variants are likely to perform best using custom-trained predictive transformer models. By providing these predictions before launching a canvas or campaign, we intend to further increase marketer velocity, encourage more creative risk-taking, and free up time that can be spent on further experimentation with deeper personalization techniques. This is just a small portion of our exciting AI-related product roadmap, which we are designing to push the boundaries to deliver the most personalized brand experiences for our customers. As the legacy clouds continue to be held back by antiquated architectures and decades of unpaid complexity debt, we believe our modern foundations, combined with a relentless focus on innovation, will accelerate the legacy replacement cycle and compel more brands to upgrade their customer engagement strategies with the Braze platform. As we zoom out and look at our broader ecosystem, I'm also excited to share an update on our strengthening relationship with AWS. Just last week, we shared Braze's achievement of AWS advertising and marketing technology competency in the category of digital customer experience. And in October, we announced the availability of Braze through the AWS marketplace. These recent announcements build on our broader partnership, which includes AWS retail competency, travel and hospitality competency, and digital customer experience competency. We look forward to growing our relationship with Amazon and other partners as we improve the depth and capabilities of our solutions. Before turning the call over to Isabel, I'd like to update you on our latest social impact initiative, Tech for an Equitable Future, announced just yesterday. This program aims to remove barriers for underrepresented founders by providing introductory free access to the Braze platform. We are also excited to share that Braze recently made our first commitment to a virtual power purchase agreement, an important step for our overall climate commitment, and we look forward to sharing more climate-related updates next year. Thank you to all our stakeholders for your continued interest in Braze. We are excited about our future, meeting customers where they are on their customer journey and empowering them to achieve world-class customer engagement while delivering efficient growth at scale for our shareholders. We look forward to continuing this journey to becoming the de facto standard for customer engagement with you in the coming months and years. And now I'll turn the call over to Isabel.

Thank you, Bill. And thank you, everyone, for joining us today. As Bill stated, we reported a strong third quarter with revenue up 33% year over year to $124 million, which includes an approximately $3.5 million contribution from our Northstar acquisition, which closed on June 1st of this year. Growth was driven by a combination of existing customer contract expansions, renewals, and new business. Our subscription revenue remains the primary component of our total top line, contributing 95% of our third quarter revenue. The remaining 5% represents a combination of recurring professional services and one-time configuration and onboarding fees. Total customer count increased 17% year-over-year to 2,011 customers as of October 31, up 296 from the same period last year and up 53 from the prior quarter. Our total number of large customers, which we define as those spending at least $500,000 annually, grew 28% year-over-year to 189 and as of October 31 contributed 58% to our total ARR. This compares to a 56% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 118%, while dollar-based net retention for our large customers was 121%. Expansion was again broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 44% of our total revenue in the third quarter, compared to 43% in the prior year quarter and 43% in the second quarter of this year. In the third quarter, our total remaining performance obligation was $560 million, up 37% year-over-year and up 7% sequentially. Current RPO was $370 million, up 31% year-over-year and up 5% sequentially. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Overall, dollar-weighted contract length remains at approximately two years. The North Star acquisition contributed approximately three percentage points of year-over-year CRPO growth, and we will lap the impact of this acquisition on June 1 of FY25. Non-GAAP gross profit in the quarter was $88.5 million, representing a non-GAAP gross margin of 71.4%. This compares to a non-GAAP gross profit of $64.9 million and non-GAAP gross margin of 69.7% in the third quarter of last year. The 170 basis point year-over-year margin improvement was driven by ongoing personnel efficiencies and the continued cost optimization of our technology stack. Non-GAAP sales and marketing expense was $58.3 million or 47% of revenue compared to $46.2 million or 50% of revenue in the prior year quarter. While the dollar increase reflects our year-over-year investment in headcount costs to support our ongoing growth and global expansion, the improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $20.2 million or 16% of revenue compared compared to $17.5 million or 19% of revenue in the prior year quarter. The dollar increase was primarily driven by increased headcount costs to support the expansion of our existing offerings, as well as to develop new products and features to drive growth. Non-GAAP G&A expense was $19 million or 15% of revenue, compared to $18.6 million or 20% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth, including headcount costs and increases in software subscription and licenses. Non-GAAP operating loss was $8.9 million, compared to a non-GAAP operating loss of $17.3 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $4.5 million, or a loss of 5 cents per share, compared to a loss of $13.8 million, or a loss of 15 cents per share in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $471.9 million in cash, cash equivalents, restricted cash, and marketable securities. Cash used in operations during the quarter was $2 million compared to $23.9 million in the prior year quarter. Including the cash impact of capitalized costs, free cash flow was negative $5.9 million compared to negative free cash flow of $28.1 million in the prior year quarter. As we have stated before, we expect our free cash flow to fluctuate from quarter to quarter given timing of customer and vendor payments. And now turning to our forecast. Demand for customer engagement solutions is solid, our team's execution has been strong, and our pipeline remains healthy. However, we continue to experience macroeconomic headwinds that manifest in elongated sales cycles, constrained marketing budgets, and slower new business growth. We approach our guidance with a prudent and risk-adjusted methodology and assume current macroeconomic conditions remain unchanged going forward. For the fourth quarter, we expect revenue to be in the range of $124 to $125 million, which represents a year-over-year growth rate of approximately 26% at the midpoint. While we're not providing specific gross margin guidance, we expect gross margin will be negatively impacted by higher seasonal activity during the fourth quarter. As a reminder, our long-term non-GAAP gross margin forecast is 67 to 72%. Fourth quarter non-GAAP operating loss is expected to be in the range of $7 to $8 million. At the midpoint, this implies an operating margin of approximately negative 6%, an improvement compared to the better than negative 7% guide that we had provided earlier this year. Fourth quarter non-GAAP net loss is expected to be $4.5 to $5.5 million, and fourth quarter non-GAAP net loss per share in the range of $0.04 to $0.05 per share based on approximately 99 million weighted average basic shares outstanding during the period. For the full fiscal year 2024, we expect total revenue to be in the range of $465 million to $466 million, which represents a year-over-year growth rate of approximately 31% at the midpoint. This includes an estimated $9 million in-year contribution from Northstar, or approximately 2.5 percentage points of growth over FY23, which, once again, we will lap on June 1st of this year. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $39.5 to $40.5 million. Non-GAAP net loss for the same period is expected to be in the range of $25.5 to $26.5 million. Fiscal year 2024 non-GAAP net loss per share is expected to be $0.26 to $0.27 per share, based on a full-year weighted average basic share count of approximately 98 million shares. In addition, we believe we are on track to meet the profitability goals we have previously communicated for fiscal 2025. We expect Braze will achieve positive quarterly non-gap operating income and positive quarterly free cash flow by the end of fiscal year ended January 31, 2025. I'll wrap my remarks by reiterating our commitment to driving product innovation while consistently executing against our financial targets. We remain confident in our ability to grow our top line while maintaining cost discipline and and delivering on the financial targets that we have set for fiscal 2025. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

We will now begin the Q&A session. If you would like to ask a question, please use the raise hand feature at the bottom of your Zoom window. I will wait one moment while the queue assembles. Our first question comes from Arjun Bhatia with William Blair. Please unmute yourself and ask your question.

All right. Perfect. Thank you, guys. And congrats on a great quarter here. If I could just start with new customer demand, it seemed like, Bill, you called out some competitive takeaways and strong traction in general, but I did notice that the net new customer ad slowed a little bit. So can you just talk about what's happening with deal sizes and enterprise traction in your deals and how that pipeline might look going into Q4 here?

Hey Arjun, it's Isabel. I'm just going to address specifically your question on the net new customer ads. You know, actually where we're seeing kind of more challenges is down at the SMB segment and that's on sort of two fronts. One is the new customer ads and our ability to kind of get new logos in that segment. And then also some challenges, obviously, from a loss perspective, logo loss in that segment. That segment of the market is really experiencing the toughest environment in terms of access to capital and liquidity, ability to kind of spend out their budgets. And we're seeing more business failures down at that level. But rest assured, it's not really a competitive issue. competitive flows were actually positive to Braze during the quarter. So we're very happy in terms of how we're behaving and realizing our reward during the quarter relative to the competitive environment. It's really what you're seeing is just is more a reaction of elements happening at the SMB level. I would also note that while we saw more elevated losses of logos at the SMB level, the dollar level was relatively low in that segment specifically. And overall, the dollars of loss in the quarter was well within our sort of budget tolerances. So this was not unexpected.

Yeah. And as we mentioned, we are seeing relative strength in the enterprise. And we think that's primarily because enterprises are used to planning and operating on longer time horizons. They operate with more stable foundations. And those are the key decision-making ingredients that drive both the legacy replacement cycle and the vendor consolidation trends. And we're seeing those factors play out in our favor, even as budgets have remained constrained and efficiency is being prioritized over growth in most of those companies. However, it's definitely still an opportunity-constrained environment, and those sentiments don't exist across our entire addressable market, which really just brings us back to the imperative for us to continue executing with strength. and investing in the underlying improvements that, you know, in our own efficiency, in our own productivity, in our own velocity, so that we can continue to grow even as the macro persists.

All right, perfect. That's very helpful. And then when we think about some of the Black Friday, Cyber Monday trends, it looked very strong. Obviously, the throughput, the consumption was pretty robust this year. What does that mean for Ray's customers longer term, especially as we think about customers coming up for renewal? Should that... be an indicator of upsell and um isabel i think you touched on this a little bit but i assume that is the gross margin impact that you're that you're talking about where it may not be an immediate bump to revenue but you're recognizing the costs in uh in q4

That's exactly right. Revenue is recognized ratably over the contract term, whereas the cost component is definitely based on utilization and usage. So that's the compression that you see in Q4.

Yeah, and I would say that you shouldn't see that as a forward indicator of consumption-based upsells because marketers certainly plan for Black Friday, Cyber Monday to be higher volume, and that is incorporated.

into their purchasing. However. I do take it as a positive indicator that the increased usage of