Braze, Inc. (NASDAQ:BRZE) Q3 2023 Earnings Call Transcript

Braze, Inc. (NASDAQ:BRZE) Q3 2023 Earnings Call Transcript December 13, 2022

Operator: Welcome to the Braze Fiscal Third Quarter Fiscal 2023 Earnings Conference Call. My name is Laila and I will be your operator for today’s call. At this time, all participants are in listen-only mode. After the speakers’ presentation, we will conclude question-and-answer session. I’ll now turn over the call over to Christopher Ferris, Head of Braze Investor Relations.

Christopher Ferris: Thank you, operator. Good afternoon and thank you for joining us today to review Braze’s results for the fiscal third quarter 2023. I’m joined by our Co-Founder and Chief Executive Officer, Bill Magnuson; and our Chief Financial Officer, Isabelle Winkles. We announced our results in a press release issued after the market closed today. Please refer to our Investor 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 the federal securities laws and 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 full fiscal year ended January 31, 2023 and for our fiscal year ended January 31; 2024, the impact of our planned sales initiatives; our planned product and feature development; our competitive landscape and the behavior of our competitors; our anticipated market opportunity; the impact of current macroeconomic trends; our anticipated customer behaviors; our growth plan; our vision; and our long-term financial targets.

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 Investors 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 2023 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 US GAAP included in our earnings release under the Investor Relations portion 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 US GAAP. And now, I’d like to turn the call over to Bill.

Bill Magnuson: Thank you, Chris, and good afternoon, everyone. We delivered a strong third quarter, generating $93.1 million in revenue, up 46% versus the prior year and 8% compared to the prior quarter. For the first nine months of the year, we’ve grown revenue 53% compared to the same period last year, demonstrating the high ROI and long term value of the Braze solution. We also realized solid customer growth, increasing our total customer count by 116 sequentially and by 38% in the last 12 months. While our number of large customers, which is defined as those generating at least $500,000 in ARR increased 53% year-over-year. Notable recent new business wins and upsells include FanDuel, Panera, and Vizio, among others. For Panera bread, a North American fast casual bakery cafe concept with over 2,100 locations will be powering email and mobile campaigns for their award-winning app and industry-leading MyPanera loyalty program that has over 50 million members.

Additionally, Panera will be leveraging content cards to build a personalized messaging inbox spanning web, mobile and in-restaurant kiosks. We also signed a multi-year cross channel deal with a large global brand in travel and hospitality, again demonstrating our ability to land with some of the large enterprises in the world and power best-in-class Omni channel engagement across verticals and geographies. Travel and hospitality is a category where we continue to make great strides and we look forward to updating you on our progress in this important vertical in the coming quarter. I also want to highlight an American multinational fast food chain with tens of thousands of global locations that has renewed and meaningfully grown its seven figure investment embrace.

We’re excited to expand our footprint with this customer across new use cases, channels, and geographies. This reason upsell means Braze will soon be powering marketing, promotional and loyalty campaigns across email and mobile in all of their lead global markets. Continuing our tour of some of Braze’s important verticals, Cyber Week is a critical time of year for many retail and e commerce brands and this was reflected in our messaging volumes over the period this year. From Black Friday to Cyber Monday, we executed over 31 billion total messages across our many channels up 43% from the same period. last year. More importantly, we again achieved 100% global uptime through this year’s cyber week, notwithstanding record high volumes. In our view, this robust messaging growth is a proof point that customer engagement remains an imperative for today’s businesses.

In fact, we continue to see signs that first party engagement is rising in importance for brands as both rapid time to value and robust return on investment are prioritized during this period of economic uncertainty. That said, we did continue to see some of the macroeconomic headwinds reported by many of our software peers, including elongated deal cycles and increased scrutiny on software investments, particularly with new business. In contrast, upsells were particularly strong, achieving a new high water mark in the quarter, led by success with our global strategic accounts and despite the challenging environment, our pipeline is robust and demand for customer engagement solutions remained strong. As we continue to experience these success stories both with new and existing customers, we remain relentlessly focused on the continuous improvement of our products and services.

At our recent Forge customer conference, we outlined our Start Anywhere Go Everywhere framework, in which we recognized that Braze customers exist across the full spectrum from small pre-launch startups up to the world’s largest multinational enterprises and that we are committed to meeting our next generation of customers wherever they are in the transformation of their customer engagement practice, getting them up and running quickly and helping them rapidly realize high ROI. The brands and teams that use Braze range from ambitious small businesses that may only have a single dashboard user through a diverse array of rapidly scaling companies with agile, interdisciplinary teams, all the way up to complex multinational enterprises with marketing and engagement teams that span across hundreds of people and they’re all leveraging the same Braze software.

Some customers even start by simply migrating their existing email or push notification strategies into Braze, but once those early campaigns are live, rapid results build the case for further expansion and Braze is built to help teams quickly leap forward in sophistication while expanding across new channels and use cases, all while enhancing the customer experience of their products and building first party relationship assets. Meeting the distinct needs of this diverse set of customers requires ongoing innovation and nimble, efficient execution. With the Braze philosophy of start anywhere, go everywhere, we are committed to ensuring their accessible starting points into Braze paired with a smooth on ramp to get up and running quickly while also investing to promote the continued growth and maturation of our customers’ usage of Braze over the long term.

The start anywhere go everywhere mentality also informs the evolution of our addressable market in tandem with that of the profession of marketing and customer engagement. Many of the job titles and teams that rely on Braze today were not around when we were founded in 2011 and their continued rise in prominence is an important indicator that Braze’s moat extends into our customer community and is reinforced by the mutual evolution of our product along with the maturing skill sets in our space that continue pushing customer engagement strategies to new heights. As businesses evolve to better serve their customers who then reward them with stronger first party data and more valuable relationships, we will continue to see brands progress the maturity and sophistication of their customer engagement practices.

We further believe this strategy could expand our total addressable market in the long term through adoption among data engineers, product teams and creative groups and we are investing in R&D accordingly.. To illustrate the impact of our R&D, I’d like to briefly highlight recent product innovations and integrations that we announced at our Forge events in New York and London in October and November, respectively. We introduced a number of updates to help customers more quickly bring new data sources into Braze and efficiently use them over time. A great example is cloud data ingestion, which allows customers to directly connect their data warehouse into Braze, quickly importing and activating customer data with just a few clicks. Customers are already unlocking new use cases and solving difficult problems like identity resolution by sinking audiences into Braze that are created from queries in their data warehouse.

For example, a quick service restaurant might want to message all users who ordered special menu items in a promotion from a previous year, but haven’t sent that data to Braze or a financial services company might want to message users with low account balances but need sensitive account balance details to stay on-prem. Early access customers report significant weekly reductions of developer hours, which can now be redirected to product improvements. By greatly reducing the operational requirements of managing data pipelines, these efficiencies can also improve relationships between the marketing teams that use Braze and the engineering teams they often rely on to help bring new ideas to life. Early examples of customer case studies include a streaming service running a multitude of data syncs for everything from account updates originating in their back end to targeting based on sensitive information such as credit cards.

And a gaming company that is aggregating all of their purchase data from different channels, in-store, online and platform marketplaces and syncing it with Braze via cloud data injection for targeted messaging to recent purchasers and their biggest spenders. Snowflake is our first partner for this turnkey integration, and we plan to expand to the other major data warehouse partners, Redshift and BigQuery, enhancing the data flexibility of Braze for our customers. Just as we are working to improve the ease with which data and engineering team members interact with Braze on behalf of their marketing teams, we are also building features and interfaces for them to use directly. One recent example is the introduction of feature flags, which enable customers to easily launch and test new features with limited audiences or within targeted geographies before committing to a broader rollout.

We also launched a programmatic API for our existing data feature catalogs, which enables our customers to co-locate new data sets within the Braze infrastructure, making it easily available for real-time personalization use cases within Canvas. And by leveraging a broader data architecture built on Snowflake, MongoDB, Kafka and others, Braze provides businesses with the most flexible customer engagement platform for data activation. We believe these product innovations help build on the value generated by the ever closer collaboration between product developers and marketing experts in service of a better customer experience. A central tenet of our product vision at Braze is that we help our customers reach their users on the channels that they care about most.

This is why we built our product to be omnichannel, and as customer behavior evolves, we continue to expand the breadth of Braze’s vertically integrated channel set. As such, we also recently announced native channel support for WhatsApp, a platform used by over two billion users in 180 countries, which is currently in early access with a handful of customers. Once early access is concluded in early 2023, marketers around the world will be able to create, orchestrate and send WhatsApp campaigns directly from the Braze dashboard to strengthen customer relationships with content-rich messaging. Braze is directly integrated with the latest version of Meta’s recently overhauled WhatsApp cloud APIs, and our solution is designed to be marketer friendly, allowing customers to build WhatsApp campaigns and a native composer and manage the channel similarly to how they use SMS.

In addition to the usability benefits afforded by our direct integration, our WhatsApp offering is further differentiated by its seamless integration into the Braze platform’s orchestration capabilities. With Canvas Flow, our visual development environment for customer engagement programs, customers can harness all of the power and sophistication of Braze to seamlessly incorporate WhatsApp messaging into their marketing mix and easily orchestrate 2-way WhatsApp conversations with end users. For another example of channel expansion, we look to Braze Audience Sync, which helps customers drive efficiency and reduce costs in the ad buying ecosystem by allowing them to leverage the real-time first-party data flow managed by Braze to optimize their usage of expensive advertising channels through enhanced targeting, suppression and look-alike audience development.

Customers have historically seen strong success with Audience Sync integrations through Facebook and Google. So at our forge event in London last month, we were excited to announce early access for Audience Sync with TikTok. This integration will enable brands set dynamically and securely sync first-party user data from Braze directly to TikTok for audience classification. Brands can send custom audiences to TikTok for fine grand ad targeting alongside first-party messaging as well as optimize their ad spend through precise real-time suppression less and versatile look like audience creation. Lifesum, a digital health company in EMEA is currently using the beta version of TikTok Sync to target TikTok ads to users and convert them into paying members while suppressing ads to active premium users.

It took them just one day to get up and running and the integration has proven very valuable in extending their paid social reach, while improving cost efficiencies. Before turning the call over to Isabelle, I’d like to take a few moments to highlight our inaugural environmental, social and governance report published last month. As I’ve stressed on past earnings calls, Braze believes its responsibility as global citizens and technology leaders is to be a positive force for our employees, communities and shareholders. This report was the product of our social impact department and includes our first greenhouse emissions audit, first materiality assessment and it outlines our inclusion first approach to diversity, equity and inclusion. The report can be found under the governance section of our investor website.

Thank you again for your continued interest in and support of Braze. We remain committed to delivering industry-leading engagement solutions for our customers and efficient growth at scale for our shareholders and we look forward to continuing this journey to become the de facto standard for customer engagement with you over the coming months and years. And now I’ll turn the call over to Isabelle.

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Isabelle Winkles: Thank you, Bill, and thank you, everyone, for joining us today. As Bill mentioned, we reported a strong third quarter with revenue up 46% year-over-year to $93.1 million. This 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 96% of our third quarter revenue. The remaining 4% represents a combination of onetime configuration and onboarding fees as well as other professional services, which are subject to similar annual contract terms as our subscription-based revenues. Our customer count increased 38% year-over-year to 1,715 customers as of October 31, up 116 from the prior quarter and up 468 from the same period last year.

Our total number of large customers, which we define as those spending at least $500,000 annually grew 53% year-over-year to 148 and as of October 31, contributed 56% to our total ARR. This compares to 97 large customers contributing 51% to our ARR as of the same time last year. Compared to last quarter, this reflects an increase of 9 from 139 large customers that contributed 55% to total ARR as of July 31. Turning to dollar-based net retention. As a reminder, our dollar-based net retention represents a 12-month trailing statistic and sources of upsell dollars include growth to existing contracts through increases in pre-committed volumes of monthly active users and messaging entitlements and the addition of add-on features and recurring professional services as well as signing new business units as we continue to further penetrate our existing customer base through both geographic and brand expansion.

Our renewal rate, combined with upsells from our successful land and expand motion drove strength in our dollar-based net retention statistics. Measured across all customers, dollar-based net retention was 126%. Dollar-based net retention for our large customers, those spending at least $500,000 annually was 129%. Expansion was again broadly distributed across industries and geographic regions. Our global footprint continued to expand in Q3 and revenue outside the U.S. contributed 43% of our total revenue in the third quarter, up from 42% in the prior quarter and 40% in fiscal 2022. Moving to our remaining performance obligation. In the third quarter, our total remaining performance obligation was $409 million, up 34% year-over-year and generally flat sequentially.

Current RPO was $283 million, up 42% year-over-year and up 3% sequentially. The year-over-year increase was driven by contract renewals and upsells and the signing of new customer contracts. While total RPO was generally flat compared to last quarter, we did experience a modest decline in the RPO value beyond one year. This is attributable to slower new business growth a higher percentage of shorter duration contracts than in the prior periods and fewer renewable dollars available in the quarter. Overall, dollar-weighted contract length remains at approximately two years. Now I’d like to review the income statement in more detail. As a reminder, some of the metrics I will discuss are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release and accompanying earnings presentation.

Non-GAAP gross profit in the quarter was $64.9 million, representing a non-GAAP gross margin of 69.7%. This compares to a non-GAAP gross profit of $45 million and non-GAAP gross margin of 70.3% in the third quarter of last year and 69.3% in the second quarter of this year. Non-GAAP gross margin percent declined 60 basis points year-over-year due to several factors, including higher hosting and infrastructure costs, higher third-party messaging fees, increasing headcount costs as we continue to invest for growth and onetime hosting migration costs we incurred as we continue to optimize our tech stack. Turning to operating expenses. Non-GAAP sales and marketing expense was $46.2 million or 50% of revenue compared to $28 million or 44% of revenue in the prior year quarter.

This reflects our investment in head count and increased travel and entertainment expenses as the easing of COVID-related travel restrictions allowed for more in-person events including our New York forge customer event, in-person employee training and customer meetings. Non-GAAP R&D expense was $17.5 million, or 19% of revenue compared to $11.1 million or 17% of revenue in the prior year quarter. The dollar increase was primarily driven by headcount to support the expansion of our existing offering as well as to develop new products and features to drive growth. Non-GAAP G&A expense was $18.6 million or 20% of revenue compared to $10.9 million or 17% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public company expenses.

Non-GAAP operating loss was $17.3 million compared to a non-GAAP operating loss of $5 million in the prior year quarter. Non-GAAP net loss attributable to Braves shareholders in the quarter was $13.8 million or a loss of $0.15 per share based on 94.5 million weighted average basic shares outstanding during the period. This compares to a loss of $3.3 million or a loss of $0.16 per share based on 20.7 million weighted average basic shares outstanding in the prior year quarter. Although the global macroeconomic environment has been challenging over the last two quarters, this environment has also presented a unique opportunity to execute on our post-IPO investment plan. In the 4 quarters since our IPO, we have successfully built out teams across functions and geographies in order to capitalize on the significant market opportunity ahead of us and the unique hiring environment over the last several months, particularly in R&D.

At this time, we feel the investments we have made to date position us well to continue to drive sustainable growth while delivering on our commitment at our Analyst Day in October to focus on our path towards profitability. While headcount will continue to increase moderately as we close out FY ’23 and look ahead into next year, we have recently chosen to slow our recruitment activity for net new hiring. Therefore, while this investment momentum will continue into the beginning of next year, you should expect the rate of OpEx growth to moderate as we increase our focus on driving operating leverage across the business. Now turning to the balance sheet and cash flow statement. We ended the quarter with $477.6 million in cash, cash equivalents, restricted cash and marketable securities.

Cash used in operations during the quarter was $23.9 million compared to a use of approximately $2.5 million in the prior year quarter, driven by higher net loss and increased cash used in working capital. Combined with higher capital expenditures, free cash flow was negative $28.1 million in the quarter. As we have stated in previous quarters, we expect our free cash flow to fluctuate from quarter-to-quarter given the timing of customer and vendor payments. Before we turn to our forecast, I’d like to take a few moments to discuss what we are seeing in the marketplace. As Bill remarked, our pipeline remains strong, and we continue to see solid demand for customer engagement solutions. However, like many of our peers, we continue to experience macroeconomic headwinds across geographies and industry verticals.

These challenges manifest in elongated sales cycles, slower new business growth and fewer multiyear contracts. As such, we are continuing to approach our forecast prudently and guide on a risk-adjusted basis. For the fourth quarter, we expect revenue to be in the range of $95 million to $96 million, which represents a year-over-year growth rate of approximately 36% at the midpoint. While we’re not providing specific gross margin guidance, we expect gross margins will be impacted by seasonally higher activity during the fourth quarter. Fourth quarter non-GAAP operating loss is expected to be in the range of $18.5 million to $19.5 million. Fourth quarter non-GAAP net loss is expected to be $17.5 million to $18.5 million with fourth quarter non-GAAP net loss per share in the range of $0.18 to $0.19 per share based on approximately 97.5 million weighted average basic shares outstanding during the period.

For the full year 2023, we expect total revenue to be in the range of $352 million to $353 million, which represents a growth rate of approximately 48% year-over-year at the midpoint. We’re pleased to be able to raise our full year revenue outlook. But given the dynamics I discussed, we believe it’s prudent to do so only modestly. Fiscal year 2023 non-GAAP operating loss is expected to be in the range of a loss of $71.5 million to $72.5 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $64.5 million to $65.5 million. Fiscal year 2023 non-GAAP net loss per share is expected to be a loss in the range of $0.68 to $0.69 per share based on a full year share count of approximately 94.8 million weighted average basic shares outstanding during the period.

In summary, we are very excited about the future of Braze. We are focused on growing our business, meeting customers where they are on their journey and empowering them to realize world-class customer engagement. Our priority remains capitalizing on our long-term market opportunity, delivering revenue growth at scale and realizing our long-term margin targets in the coming years. And with that, we’ll now open the call for questions. Operator, please begin the Q&A.

Q&A Session

Operator: Our first question comes from Ryan McMillan — excuse me, Ryan McWilliams from Barclays. Please go ahead.

Ryan MacWilliams: So Bill, what have renewal conversations been like at this point? Glad to hear upsells are strong, but are you experiencing the usual contract increases that Braze historically received at renewal.

Bill Magnuson: Thanks for the question. We’re moving through renewal conversations at a pretty steady clip especially here in Q4. And actually, through Q3, we had our lowest amount of available renewable dollars. But we saw those renewal conversations acting for — across the whole year. We saw those renewal conversations acting pretty similarly to Q2, we’re seeing it in Q4 as well. And as I mentioned, it was a new high watermark for upsells in the quarter. We’ve got a lot of really robust increases in terms of the new use cases that people are running, expanding into new geographies, expanding into brands. So a lot of the cross-sell and upsell motions that we’re used to are still intact. I would say one of the things that we’re seeing that’s impacting the downside is that there are still — there’s a lot of turnover happening within teams as layoffs are happening in other parts of the economy, a lot of M&A type disruption activity.

And so those types of things that we’ve seen in new business deals that are causing either deal elongation or the delays on decision-making. Those are happening for certain types of expansions within renewals, and so we are seeing that, especially in the more complex multinationals. But as you heard in the prepared remarks, a lot of the upsell strength actually came out of our global strategic group this quarter as well. And so I think we’re seeing robust signs of great renewal cross-sell and upsell motions across the customer base and around the world, but the portions of upsell that are acting more like new business because they’re expanding to a new team, a new set of stakeholders, maybe accessing a brand-new net new budget, those are acting more like new business, and we’re seeing some of the similar effects that we referenced earlier.

Ryan MacWilliams: Appreciate the color there. And for Isabelle, we’re seeing questions about the sequential step down in ARPU in the quarter. Should we think about a mix higher of percentage of shorter contracts to continue. And how could ARPU will fluctuate with more seasonal dollars available for renewal in 4Q?

Isabelle Winkles: Great. Thanks for the question. So yes, you can — there are more available renewal dollars in Q4. Because we do a number of early renewals, some of those have already been pulled forward, but there are still more today in Q4 than there have been in the other quarters. So that will help. We don’t guide on the quarter specifically for RPO. But yes, it is true that there will be more. And I’m sorry, what was the first part of your question?

Ryan MacWilliams: Should the mix of shorter contracts like contract duration, new bookings continue.

Isabelle Winkles: Yes, we do absolutely expect this trend to generally continue. We think it is part of the dynamic that we are seeing in the context of the macroeconomic environment around us. And we believe it’s prudent to expect all of these dynamics that are related to the macro to continue to persist.

Bill Magnuson: Braze has continued to grow in its own prominence in the market, that we’ve been successful at moving more and more of our installed base from one year to multiyear contracts at renewal. That’s something that we’ll continue to prioritize in the future, and we continue to see that be robust customer that were on multiyear contracts before, in general, are recommitting to multiyear contracts. But one thing that we haven’t seen as robust in Q2 and Q3 as we have prior year periods are those people who signed a 12-month deal upfront, more of them are opting to continue on a 12-month deal just because of environment. But we expect much like we did through a lot of the jitters that were in the economy during COVID. It moved buyer sentiment toward those shorter contracts.