Braze, Inc. (NASDAQ:BRZE) Q2 2024 Earnings Call Transcript September 7, 2023
Braze, Inc. beats earnings expectations. Reported EPS is $0.04, expectations were $-0.14.
Operator: Welcome to the Braze Fiscal Second Quarter 2024 Earnings Conference Call. My name is Christine, and I’ll be your operator for today’s call. [Operator Instructions]. I’ll now turn 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 second quarter 2024. 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 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.
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These statements include, but are not limited to, statements regarding our financial outlook for the third quarter ended October 31, 2023, and for our fiscal year ended January 31, 2024, our planned product and feature development and the benefits to us and our customers there from, 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 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 aid investors in further understanding the company’s fiscal second 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.
Bill Magnuson: Thank you, Chris. And good afternoon, everyone. We delivered a strong second quarter, generating $115.1 million in revenue, up 34% versus the prior year while continuing to drive operating efficiency in the business. Non-GAAP gross margin increased 70 basis points year-over-year. And we again demonstrated strong leverage with non-GAAP operating margin improving by over 1,300 basis points compared to the second quarter of last year. We were encouraged by the new business we won in the quarter, sales strength in the commercial and enterprise businesses, the progress of our product initiatives and AI development efforts and the adoption of our newest channel, WhatsApp. While the macro environment still presents challenges, we are effectively navigating them and remain confident in our ability to drive top line growth while maintaining cost discipline and delivering on the financial targets that we have set.
Brands continue to recognize the high ROI that can be achieved through personalized cross-channel customer engagement delivered by the Braze platform. Customer growth was solid with our total customer count reaching 1,958, an increase of 92 during the quarter. New business wins and upsells included Miro, the National Basketball Association, Rappi and Stori, among many others. The diversification of new customer wins was also impressive, with the top five new business deals all originating from entirely different types of businesses. A quick service restaurant chain, an e-commerce platform, a provider of coupons and discounts, a digital collaboration platform and a company that connects homeowners to trades people. As those of you who have followed us closely are aware, Braze’s business is highly diversified.
With no single vertical contributing more than 1/4 of our ARR and many others where we have not only a significant presence but also opportunity for growth. The versatility and adaptability of the Braze platform enables its adoption by any business that prioritizes investments in first-party data and customer relationships, regardless of size, vertical or geography. As the field of customer engagement matures, we continue to win against point solutions that have limited channel offerings are not real time or simply don’t scale. We are similarly making progress against legacy marketing clouds as marketers find their fragmented solutions increasingly unfit for modern customer engagement use cases. This quarter, we displaced legacy marketing clouds at numerous enterprises, including at a top quick service restaurant chain, a large consumer discounter and a well-known travel company.
In the case of the restaurant chain, a global systems integrator partner was instrumental in the sales cycle and will be working with the customer to complete onboarding and provide ongoing marketing and data services. As we continue to expand our product surface area and enhance its capabilities by infusing AI throughout our stack, we’re helping brands create personalized, cross-channel solutions faster than ever before speeding the rotation of the Imagine, Create and Evolve loop that lets them compound learnings and increase their ROI over time. Meanwhile, the legacy clouds continue to be held back by antiquated data foundations and complex siloed architectures, limiting their innovation and causing them to fall further behind. We believe our product innovation and R&D focus, coupled with their relative stasis will accelerate the legacy replacement cycle and compel more enterprises to upgrade to the personalized cross-channel customer engagement enabled by the Braze platform.
We also continue to benefit from the vendor consolidation trend we’ve called out the last couple of quarters as brands look to an all-in-one platform to coordinate messaging across the growing array of B2C channels and accelerate their investments into first-party data. In the case of an accessories retailer, we replaced four separate vendors, providing a great example of how Braze wins on technical integration capabilities, aligning with the customer’s vision of working with a comprehensive, best-in-class customer engagement platform. We believe this trend will continue as customers look to capitalize on new AI-driven advancements in customer engagement, an area of innovation, which benefits tremendously from the breadth of Braze’s data footprint and messaging flexibility as well as our real-time stream processing architecture.
At Braze, we are constantly evaluating new ways for brands to communicate directly with their customers by delivering more relevant content and engaging experiences in the channels that resonate most. In March of this year, we launched a native WhatsApp integration that enables marketers to create, orchestrate and send WhatsApp campaigns directly from the Braze platform. With more than 2 billion active users in 2022, broad international penetration and the ability to engage in content-rich conversations that build retention and loyalty, WhatsApp is a highly valuable addition to our cross-channel portfolio. And I’m happy to report that new and existing customers have responded very favorably to our offering with dozens of customers using the channel and a fast-growing pipeline.
One early WhatsApp success story I’d like to highlight is Rappi. One of the most popular and trusted technology companies in Latin America. Rappi has expanded its investment in Braze, specifically adding WhatsApp as an additional channel to its innovative customer engagement strategy that already included e-mail, SMS, push and in-app messaging. Rappi was looking for a more effective out-of-product channel to directly reach their audience and successfully leverage WhatsApp to motivate lapsed users to return to the app to make new purchases and to drive active users to make more purchases over time. Leveraging WhatsApp and Braze’s campus environment, Rappi was able to drive an 80% uplift in purchases versus a control group that received only push notifications and e-mail.
Case studies such as these demonstrate how marketers can immediately leverage the flexibility of Canvas and the power of our streaming architecture with new channels like WhatsApp to target personalized and orchestrate sophisticated campaigns that drive high engagement and ROI. Beyond additional channels, we continue to improve and enhance our competitive moat by expanding our product surface area and deepening our existing capabilities, particularly around data management and governance. Yesterday, we announced new data transformation and integration options to enable brands to get data into Braze quickly and easily with less ongoing maintenance burden and lower lift from technical teams. I won’t go through all these enhancements in detail, but I’ll mention a few key innovations that we believe will be particularly impactful for customers.
First is data transformations, a feature that gives brands the ability to easily map incoming data from third-party services on to Braze user profiles. Even more exciting, the code that defines these transformations can be automatically generated using a generative AI capability within our Sage AI suite. Second, we are expanding cloud data ingestion to include an integration with Databricks Lakehouse Platform, while expanding the capabilities of our existing integrations into the Snowflake Data Cloud, Amazon Redshift and Google BigQuery. This flexible data ingestion capability helps customers reduce total cost of ownership in their data ecosystem by eliminating complexities when accessing their first-party data. Third, we infused generative AI into our query builder and SQL segment extension tools to empower teams to easily transform natural language prompts into insightful reports and audience segments.
SQL segment extensions itself is a recently released addition to our classification layer that enables comprehensive and flexible targeting on top of a customer’s entire Braze data set, enabling marketers to execute on more advanced targeting use cases completely within Braze instead of relying on their in-house data teams or third-party tools. Leveraging these advancements, brands will be able to easily access and activate their valuable first-party data to power personalized customer engagement strategies that enhance loyalty, retention and revenue. We also recently launched Braze Instant Insights, a Snowflake native app that provides turnkey visualizations for analysis use cases like attribution, high-value actions, retention and investigating monetary value across cohorts.
In the same way that we built Snowflake data sharing to reduce the effort and time to value for customers building outgoing data pipelines from Braze, Instant Insights reduces the effort to go from data in the warehouse to sophisticated reporting. And in June, we announced Sage AI, a set of advanced AI and ML capabilities integrated into the Braze platform. Sage AI is designed to enhance marketer productivity while powering better and more effective customer engagement results. The most recent additions to Sage included three main innovations. First, an AI recommendation engine that utilizes a custom-trained transformer model to match items for Braze catalogs with customers most likely to buy them, providing content personalization that outperforms competing techniques in our tests.
We believe this feature, which will become a separate SKU, will boost campaign revenue and improve customer loyalty for the brands that use it. Second, our AI content QA tool that leverages Open AI’s GPT-4 to check messages for tone, structure, grammar and appropriate language was promoted into general availability and has now been used by hundreds of brands. We’re seeing the advantage of being early movers in generative AI as we’re quickly expanding beyond obvious use cases and integrating capabilities that are finally tuned to marketer workflows. Third, we added winning path to Canvas, our visual development environment, which marketers use as a no-code journey orchestration tool. This feature automatically optimizes how customers flow through paths in a Canvas, allowing brands to boost conversions with a single click.
Finally, we were refining an A/B test prediction feature designed to use a combination of large language models and other neural network architectures to automatically predict the winner of an A/B test without a pilot send, helping marketers execute on new experiments more efficiently and improving their overall performance. Finally, I wanted to update you on our social impact initiatives. In July, Braze published its second annual ESG report. This report included our FY ’23 greenhouse gas emissions audit, an overview of our diversity, equity and inclusion activities and details on our grant-making efforts as part of our Pledge 1% equity donation program. Our social impact mission is to amplify employee impact to create opportunity for underserved groups within our communities and to accelerate science-based climate solutions.
We look forward to growing these efforts through continued employee advocacy and participation over time. Thank you to our customers, team members and shareholders for your continued support of Braze. We’re excited about our path ahead and believe the investments in our product, people and ecosystem, combined with strong secular tailwinds, position Braze to become the industry standard for customer engagement. And now I’ll turn the call over to Isabelle.
Isabelle Winkles: Thank you, Bill. And thank you, everyone, for joining us today. As Bill mentioned, we reported a strong second quarter with revenue up 34% year-over-year to $115.1 million. This was driven by a combination of existing customer contract expansion, renewals and new business. Our acquisition of North Star closed on June 1 and contributed nearly $2 million of revenue in the quarter. Our subscription revenue remains the primary component of our total top line, contributing 95% of our second quarter revenue. The remaining 5% represents a combination of recurring professional services and onetime configuration and on-boarding fees. Total customer count increased 22% year-over-year to 1,958 customers as of July 31, up 359 from the same period last year and up 92 from the prior quarter.
Our total number of large customers, which we define as those spending at least $500,000 annually grew 24% year-over-year to 173, and as of July 31, contributed 57% to our total ARR. This compares to a 55% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 120%, while dollar-based net retention for our large customers was 123%. Expansion was again broadly distributed across industries and geographic regions. Consistent with the prior quarter, revenue outside the U.S. contributed 43% of our total revenue in the second quarter. In the second quarter, our total remaining performance obligation was $524 million, up 28% year-over-year and up 10% sequentially. Current RPO was $353 million, up 29% year-over-year and up 9% 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 2 years. Non-GAAP gross profit in the quarter was $80.6 million, representing a non-GAAP gross margin of 70%. This compares to a non-GAAP gross profit of $59.7 million and non-GAAP gross margin of 69.3% in the second quarter of last year. The 70 basis points year-over-year margin improvement was driven by ongoing efficiencies related to personnel costs and continued economies of scale in our core technology expenses. Non-GAAP sales and marketing expense was $51.8 million or 45% of revenue compared to $44.3 million or 51% of revenue in the prior year quarter. While the dollar increase reflects our year-over-year investments in headcount costs to support our ongoing growth and global expansion, improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization.
Non-GAAP R&D expense was $18.9 million or 16% of revenue compared to $16.3 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 $17.4 million or 15% of revenue compared to $16.5 million or 19% 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 subscriptions and licenses. Non-GAAP operating loss was $7.6 million compared to a non-GAAP operating loss of $17.5 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $3.9 million or a loss of $0.04 per share compared to a loss of $15.2 million or a loss of $0.16 per share in the prior year quarter.
Now turning to the balance sheet and cash flow statement. We ended the quarter with $476.2 million in cash, cash equivalents, restricted cash and marketable securities. Cash used in operations during the quarter was $17.5 million compared to $16.3 million in the prior year quarter. Taking into consideration the cash impact of capitalized costs, free cash flow was negative $18.7 million compared to negative free cash flow of $24.7 million in the prior year quarter. The improvement in free cash flow is primarily due to lower capital expenditures compared to the prior year quarter which included CapEx for our London office expansion. Now turning to our forecast. We’re encouraged by the strong first half of the fiscal year. Demand for high-quality customer engagement solutions remain solid, and we’re optimistic in our ability to execute against our long-term financial targets.
We intend to maintain cost discipline and reiterate that we believe that we are well positioned to achieve a non-GAAP operating margin of better than negative 7% in Q4 of this year. For the third quarter, we expect revenue to be in the range of $116.5 million to $117.5 million, which represents a year-over-year growth rate of approximately 26% at the midpoint. For the third quarter, non-GAAP operating loss is expected to be in the range of $15.5 million to $16.5 million. At the midpoint, this implies an operating margin of negative 13.7%. The sequential reduction in non-GAAP operating margin relative to Q2 is driven by onetime expenses related to the company’s annual customer conference, Forge as well as other sales and marketing expenses related to sales enablement, which will be concentrated in Q3 and are not projected to materially impact Q4.
Third quarter non-GAAP net loss is expected to be $13 million to $14 million and third quarter non-GAAP net loss per share in the range of $0.13 to $0.14 per share, based on approximately 100.2 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 $451.5 million to $454.5 million, which represents a year-over-year growth rate of approximately 27% at the midpoint. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $47 million to $49 million. Non-GAAP net loss for the same period is expected to be in the range of $37 million to $39 million. Fiscal year 2024 non-GAAP net loss per share is expected to be $0.37 to $0.39 per share based on a full year weighted average basic share count of approximately 98.8 million shares.
We remain committed to driving revenue growth while improving operating income and free cash flow margins in the coming quarters. We reiterate that we expect Braze will achieve positive quarterly non-GAAP operating income and positive quarterly free cash flow by the end of the fiscal year ended January 31, 2025. I’ll conclude my remarks by reiterating our excitement in Braze’s future. We remain focused on partnering with our customers to deliver best-in-class customer engagement and growing our top line while maintaining cost discipline to achieve our long-term financial targets. And with that, we’ll now open the call for questions. Operator, please begin the Q&A.
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Q&A Session
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Operator: [Operator Instructions]. Our first question comes from Ryan MacWilliams with Barclays.
Ryan MacWilliams: For Bill, let us see the improvement in monthly active user growth this quarter. I know that’s not a perfect metric but would love your thoughts on where your customers’ usage and marketing spend currently stand at this point in the year. Like are they becoming more willing to make growth investments at this point? Or is it more stabilization? I’ll love your thoughts here.
Bill Magnuson: So I think overall throughout the year, we’ve seen pretty consistent conditions for our customers and just broadly around the macro, and we’re seeing that same consistency around the globe. Everyone’s experiencing pretty similar interest rate conditions. A lot of marketers are operating with flat or frozen budgets. And so while we’re — we’ve been really happy with our execution through the environment. We obviously highlighted the new business growth. We’ve been really happy with the diversification of new customers that are coming in. I also do think that we’ve got some gas in the tank from the perspective of a lot of the product expansion that’s happened, a lot — the WhatsApp launch. We’ve been happy with the traction there.
But in an environment where marketers in general are sitting on frozen budgets, a lot of scrutiny from procurement and a lot of scrutiny from their CFOs, the opportunity for a new product launch like that or expansion to continue to really see its full potential is going to be more limited. And so we’re — from the beginning of the year, we’ve seen things continue to be challenging and unpredictable. I’d say that conditions broadly haven’t improved, but they also haven’t gotten worse. And we’ve been really happy with the execution that we’ve seen across the company. We’ve strengthened a lot of the foundations, both in our product as well as in our go-to-market strategy and our sales organization. We’ve been really focused for setting up the organization for our path to 1 billion in ARR, but it is definitely still challenging out there.
Ryan MacWilliams: Appreciate the color. And then for Isabelle, good to see the continued improvement in gross margin? What were some of the drivers of the gross margin improvement in the quarter? And do you think you can continue to see step-ups in this metric as your customers begin to utilize more large language model capabilities?
Isabelle Winkles: Thanks for the question. Yes. So I think the trajectory that we’re on within our gross margin metric is very consistent with our long-term targets that we’ve stated. So our long-term target is 67% to 72%. We’re operating well within that range and already at 70%, which is great to see. And we’re really kind of just ticking up as we continue to experience and realize cost efficiencies and operations of scale across our technology stack and then, some personnel efficiencies that we have. I think some of the ongoing things that we can look to that I’ve talked about before in terms of our path to profitability is ongoing economies of scale across the tech stack, which we will continue to leverage and continue to improve over time.
And then specifically across personnel, we’ve talked about our leveraging cost optimized locations as we continue to grow that headcount finding ways to do so in a more optimized fashion. So I think the combination of those two things will continue to kind of lead us to where we are and beyond within that range that we’ve stated for the long term.
Operator: Our next question comes from Jake Titleman with Goldman Sachs.
JakeTitleman: Congrats on a great quarter. Bill, you mentioned an AI recommendation engine that will be a separate SKU. Can you talk a little bit more about that, what the plans are to monetize it? And maybe are there some other AI SKUs that are coming down the pipe that you also charge for separately?
Bill Magnuson: Yes. So across our AI and machine learning investments, we expect there to continue to be a mix of ways that we will realize returns on it. Some parts will be monetized independently. Our predictive suite has actually been in the product as a separate SKU for a while. And if you look at the transformer driven recommendation engine, we anticipate that to both, be a separate SKU and also to support additional upsells for another product we have called product Catalogs, which could be used with or without the recommendation engine. And so those are both great examples of places where we have independent monetization and then, we also have support of other aspects of the product that independently monetize. In addition to that, I think that a lot of the generative AI investments that we’re making, which are improving marketer productivity and allowing for marketers to just bring their ideas to life more quickly, to be able to inspire them more.
In the example of the SQL segment extensions or the data transformers that I spoke about earlier, we think that these are really good places where the generative AI is actually helping build confidence for marketers to take on more technical tasks within the platform. And what all of those lead to is faster time to value, more usage, the confidence to deploy more use cases. And of course, when we see new use cases coming to the picture, those usually come with more monthly active users, and they often come with expansion into new channels or expansion into new data products. And so they’re all very much self-reinforcing even without independent monetization. And of course, across the board, we make marketers more productive and when we make the teams that use Braze more agile, it also leads to higher levels of experimentation, which compounds ROI, improves customer satisfaction and ultimately leads to a better differentiation for Braze.
And so we see this kind of flywheel effects happening where, yes, we are absolutely going to independently monetize. But even if we weren’t, we still think there’s a lot of monetary benefit. And the ability for our community to continue to up-level themselves more quickly, so that Braze can further separate from our competition in the sense that we are certainly characterized in the market as being the top of the sophistication pyramid in the space. And so the more that we have marketers who are operating with agile team methodologies and who are comfortable with more kind of data-driven strategies as well as using more technical features. All of those things lead to them being able to utilize the parts of Braze that are very differentiated and very hard to mimic or copy, and that leads to pricing power and other sorts of benefits for us.
Jake Titleman: That was very helpful. And then I just wanted to follow up on the GSI being instrumental in one of your displacements of the legacy marketing clouds. Can you just talk a little bit about the GSI relationships, the global agency relationships, how those are evolving? And when do you think that, that could actually be a material driver to revenue growth?
Bill Magnuson: Yes. So we’re continuing to deepen our relationships with solutions providers, including global systems integrators, the big agency holding companies and also a vast global network of smaller marketing and growth agencies. And the fundamentals of those relationships continue to be really solid. We’re investing to allow that mutually beneficial flywheel that I’ve spoken about in prior quarters to continue to spin up. And I’d say we’re also advancing at varying speeds depending on the partner, but we’re really excited about the overall trend line, and we’re seeing examples of tremendous success where we’re generating really strong services revenue for those partners that are leaned into their Braze practices and our joint go-to-market motions.