Braze, Inc. (NASDAQ:BRZE) Q4 2023 Earnings Call Transcript March 30, 2023
Operator: Welcome to the Braves Fourth Quarter Fiscal Year 2023 Financial Results Conference Call. My name is Michael and I will be your operator for today. I will now turn the call over to Christopher Ferris. Head of Braves Investor Relations.
Christopher Ferris: Thank you, operator. Good afternoon and thank you for joining us today to review Braze results for the fiscal fourth quarter 2023. The I’m joined by our Co-Founder and Chief Executive Officer, Bill Magnusson; and our Chief Financial Officer, is Will Winkle. 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 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 first quarter ended April 30, 2023 and for our fiscal year ended January 31, 2020 and our planned product and feature development and the benefits to us and our customers therefrom, including our AI tools, our anticipated market opportunity, the potential impact of current macroeconomic trends our anticipated customer behaviors, including vendor consolidation trends and their impact on Braze, our growth plan, our vision 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 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 fourth 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 U.S. 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 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 fourth quarter, generating $98.7 million in revenue, up 40% versus the prior year and 6% compared to the prior quarter, again demonstrating the high ROI and long-term value of the Brave solution. Our results were strong despite a challenging macroeconomic environment that elongated sales cycles, particularly in our Commercial segment. We increased our total customer count by 55% sequentially to $1,770 and continue to win against both legacy Marketing Clouds and point solutions. Notable recent new business wins and upsells include Discovery Communications, Finish Line, McClatchy Media Company, My Fitness Bell, Sonic Drive-in and , one of Europe’s leading online marketplaces for high-quality used cars among many others.
Customers continue to recognize the high ROI that can be achieved through personalized, cross-channel customer engagement enabled by the Braze platform. Despite market challenges, we remain confident in our ability to execute on our growth plans. Braze’s momentum continues in key industries such as retail and e-commerce and media and telecommunications and as legacy marketing tools come up for renewal we see traction in newer to braze industries like travel and hospitality. And today, I’m proud to announce that during Q4, we passed $400 million of committed annual recurring revenue, demonstrating our ability to capitalize on our growing market opportunity to deliver best-in-class customer engagement at scale. Thank you to our dedicated and talented team across the globe who help make this happen.
I’m excited to build on our success with you and march toward our next goal of becoming a $1 billion revenue company. Looking ahead, we are confident that whichever way the macroeconomic winds blow, customer engagement will remain a universal business imperative. In tough times, brands shift their focus to higher return activities like life cycle optimization and retention. To stand out, marketers need to use powerful customer engagement technology to drive innovation and productivity, all in service to customer value. And we are increasingly seeing the trend towards vendor consolidation which we think we will benefit from, specifically, Customers come to brace looking to strengthen their customer engagement suite with a platform that is simultaneously comprehensive while being intuitively integrated and powered by real-time data.
These customers are moving from a disparate collection of marketing software, separately sending e-mail, SMS, push notifications and in-product messaging, all with siloed analytics and complex user data tracking. With Brave, customers ranging in size from small digital start-ups up to some of the world’s large enterprises can cost effectively consolidate their customer engagement efforts into 1 solution, breaking down silos between channels and teams simplifying their technical architectures and improving is for customers in one particular new business win with an athletics retailer this quarter, we replaced 3 separate vendors, signing a deal across an array of channels, including e-mail, push, web and content cards. In another case, we’re radiational media company, we replaced the legacy Marketing Cloud and 3 other messaging vendors as they modernize their customer engagement platform with Braze.
We expect this trend to continue as enterprises with ambition and sophistication consolidate their technology ecosystem with modern omnichannel customer engagement solutions, removing legacy marketing clouds and point solutions that don’t scale which we believe will provide a tailwind for Brave in the coming years. In another proof point of our leadership in the industry, I’m pleased to highlight that Brace was recently named a leader in the Q1 2023 Forrester Wave for cross-channel marketing hubs. Their coverage of bra should resonate with those who have been listening in on our earnings calls the last few quarters. So let me just read directly from Forrester’s report. Braze lives up to its start anywhere and go Everywhere product vision via innovative products and expert services to help its clients build human connections with their customers regardless of size or technical competence.
Its superior innovation road map reflects these concepts by balancing investments across a use, platform depth and workflow flexibility. They continue by saying that brace suits organizations looking for a flexible and marketer friendly cross-channel marketing hub solution to refresh their digital experience strategy. Next, I’d like to briefly highlight our recently announced strategic partnership with WPP a leading creative transformation and services agency. Together, we’ll be partnering on joint product and solution development and integrations aimed at helping brands resolve customer identities at scale and power personalized engagement, alongside coordinated go-to-market efforts to help clients make investments in customer activation, retention and loyalty.
We look forward to partnering with WPP and deepening our relationships with other agencies and GSIs to create better outcomes for our customers. As we look to the future, we will continue to improve our platform and build our competitive moat. Artificial intelligence is a key component of that innovation push. Those that closely follow bras, know we were founded by 2 engineers, myself and our CEO, John Heyman and that existing on the cutting edge of technology innovation is in our very DNA. Let me walk you through a few of our existing AI developments and how we plan to leverage AI to drive customer engagement in the future. In 2017, we invested in a dedicated team of data engineers and data scientists focused on using machine learning to build AI into the product, making marketers more effective in engaging their end users by optimizing timing and targeting strategies inspiring new ideas to enhance relevance for customers and when possible, automating decisions entirely.
In May of 2022, we started investing in generative AI as a marketer copilot, building GPT-3 into Braze for AI copywriting which saves customers’ time when creating subject lines and messaging for their campaigns. Last December, we integrated Dolly into our image library and customers have been using both very effectively to be more agile, speed creative production and more easily test and optimize content for different variants. We’re very excited about the potential for these tools to enable even small marketing teams to wield an immersive creative vision. While also making it easier for them to take advantage of Braze’s sophisticated and differentiated testing capabilities by lowering their creative production burden. We have also already seen examples of that PT successfully leveraged to generate valid message templating syntac and to speed along integration with source code samples.
![](https://imonkey-blog.imgix.net/blog/wp-content/uploads/2016/11/26015659/41913011_m.jpg?auto=fortmat&fit=clip&expires=1755993600&width=480&height=319)
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This is a set of capabilities that enhance the efficiency of our product support and further accelerate time to value for our customers. We’re also experimenting with customizations of GPT-4 which are aware of Braze’s support knowledge base and up-to-date documentation in order to enable a wider swath of base users to leverage our most advanced capabilities more quickly. And as we discussed with you in October at our first Investor Day, we’ve also introduced new machine learning features designed to improve outcomes in brace campaigns and campuses. We introduced personalized variant to automatically determine for each individual message recipient which content variation they will most likely engage with based on data from consumers with similar behaviors and profiles.
And we’ve expanded our predictive suite to use sophisticated machine learning to identify which users are most likely to churn or make a purchase. This generates models that are customized to each brand’s usage fingerprint, a solution that adapts to work effectively across different industries and business models. Finally, we are using machine learning-driven predictive models designed to improve our quality of service while lowering our infrastructure costs. Auto scaling is a technique we’ve used for years to adapt the cloud footprint of our stream processor in response to dynamic messaging workloads. We recently enhanced it to use machine learning to automatically predict upcoming load based on customer usage and a wide array of historical data.
Early tests have shown the potential for meaningful reductions in our infrastructure costs as we continue to drive efficiencies in our core tech stack. You can expect that Braves will continue developing AI and ML-driven products and service enhancements throughout the surface area of our platform in the coming months and years. Finally and before I turn it over to Isabelle, I’d like to spend a moment to discuss some exciting news we announced earlier this afternoon. We have entered into an agreement to acquire North Star, our exclusive reseller of Brave technology in the Australian and New Zealand markets. We have been working with their team for several years and have been impressed by their ability to drive adoption of our industry-leading solution across the region.
We estimate this transaction will close in our fiscal second quarter and we look forward to updating you on the progress in the region in the coming quarters. Thank you for your continued support of Braze. We are very excited about the year ahead and believe the investments in our products, coupled with the strong secular customer engagement tailwinds will keep raise on the path to becoming 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 fourth quarter with revenue up 40% year-over-year to $98.7 million. This was driven by a combination of existing customer contract expansion, renewals and new business. Our subscription revenue remains the primary component of our total top line, contributing 96% of fourth quarter revenue. The remaining 4% represents a combination of onetime configuration and onboarding fees as well as other professional services. Total customer count increased 29% year-over-year to 1,770 customers as of January 31, up 395 from the same period last year and up 55% from the prior quarter. Our total number of large customers which we define as those spending at least $500,000 annually grew 46% year-over-year to 156 and as of January 31 contributed 57% to our total ARR compared to a 52% contribution as of the same time last year.
Compared to last quarter, this reflects a 5% increase from 148 large customers that contributed 56% of our total ARR as of October 31. Measured across all customers, dollar-based net retention was 124%, while dollar-based net retention for our large customers, those spending at least $500,000 annually was 126%. And Expansion was broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 43% of our total revenue in the fourth quarter in line with the prior quarter and up from 40% at the end of fiscal year 2022. In the fourth quarter, our total remaining performance obligation was $456 million, up 22% year-over-year and up 11% sequentially. Current RPO was $313 million, up 31% year-over-year and up 10% sequentially.
The year-over-year increase was driven by contract renewals and upsells and the signing of new customer contracts. Overall, dollar-weighted contract length remains at approximately 2 years. Now I’ll review the income statement in more detail. As a reminder, some of the metrics I will discuss are non-GAAP. We’ve 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 $66.2 million, representing a non-GAAP gross margin of 67%. This compares to a non-GAAP gross profit of $47.3 million and non-GAAP gross margin of 67.2% in the fourth quarter of last year and 69.7% in the third quarter of this year. In addition to normal seasonality which reduces gross margin in Q4 due to higher levels of customer activity, our cost of revenue in Q4 included the impact of a onetime expense true-up.
Excluding this impact, Q4 non-GAAP gross profit was $67.5 million, representing a non-GAAP gross margin of 68.4%, up 120 basis points year-over-year due to continued economies of scale in our core technology expenses and ongoing efficiencies related to our customer support functions. Turning to operating expenses. Non-GAAP sales and marketing expense was $46.5 million or 47% of revenue compared to $35.3 million or 50% of revenue in the prior year quarter. While the dollar increase reflects our investment in headcount to support our ongoing growth, global expansion and increased travel and entertainment expenses, the improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $19 million or 19% of revenue compared to $13.1 million or 19% of revenue in the prior year quarter.
The dollar increase was primarily driven by increased headcount 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 $17.5 million or 18% of revenue compared to $12.4 million or 18% 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 $16.7 million compared to a non-GAAP operating loss of $13.4 million in the prior year quarter. Non-GAAP net loss attributable to Brave shareholders in the quarter was $13.7 million or a loss of $0.14 per share based on 95 million weighted average basic shares outstanding during the period. This compares to a loss of $13.8 million or a loss of $0.18 per share based on 78.4 million weighted average basic shares outstanding in the prior year quarter.
Now turning to the balance sheet and cash flow statement. We ended the quarter with $482.7 million in cash, cash equivalents, restricted cash and marketable securities. Cash provided by operations during the quarter was just over $12,000 compared to a use of approximately $24.5 million in the prior year quarter, driven by lower net loss and positive changes in working capital. Free cash flow was negative $1.9 million in the quarter compared to a negative $26 million in the year ago 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. And now turning to our forecast. We continue to see solid interest in high-quality customer engagement solutions, tempered by macroeconomic headwinds that persist in a number of geographic regions and industry verticals.
Like many of our peers, we continue to experience elongated sales cycles and slower new business growth. As such, our guidance assumes an elevated level of conservatism and that the current macro environment persists throughout fiscal 2024. And as we navigate this fiscal year, we will continue to maintain cost discipline and believe that we are well positioned to make significant progress towards our long-term operating targets outlined last October. For the first quarter, we expect revenue to be in the range of $98.5 million to $99.5 million which represents a year-over-year growth rate of approximately 28% at the midpoint. As a reminder, our first quarter contains 89 days or 3 fewer days compared to the other 3 quarters of the year which each contain 92 days.
Because we recognize revenue ratably over the course of the year, the Q1 day count is reflected in our revenue guidance. First quarter non-GAAP operating loss is expected to be in the range of $19 million to $20 million. First quarter non-GAAP net loss is expected to be in and first quarter non-GAAP net loss per share in the range of $0.18 to $0.19 per share based on approximately 96.2 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 $433 million to $438 million which represents a year-over-year growth rate of approximately 23% at the midpoint. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $57 million to $61 million.
Non-GAAP net loss for the same period is expected to be in the range of $53 million to $57 million. For fiscal year 2024, non-GAAP net loss per share is expected to be $0.55 to $0.59 per share based on a full year weighted average basic share count of approximately 97.1 million shares. As we look further out, we are focused on growing revenue while improving operating income and free cash flow margins and expect base will generate positive quarterly non-GAAP operating income and positive quarterly free cash flow in the fiscal year ended January 31, 2025. In addition, we expect our non-GAAP operating income margin in Q4 of this year to be negative 7% or better. I’ll conclude by reiterating our excitement in Braze’s future. We are focused on growing our business, partnering with customers to help them achieve incredible customer engagement outcomes while effectively managing our expenses 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: Our first question comes from DJ Hynes at Canaccord.
DJ Hynes: Bill, first for you — look, with more accessibility to third-party streaming data solutions and then continued advancements in AI and ML. Are you seeing any signs that legacy Marketing Cloud customers are figuring out workarounds to make the existing solutions any more productive. I’m just trying to think about like implications for willingness or appetite to swap out existing marketing infrastructure and move to somebody like race.
Bill Magnuson: Yes. Thanks for the question. I mean, first, I would highlight the vendor consolidation trends that that I just spoke about a little bit ago, in both of those cases, we’re seeing legacy Marketing Cloud and point solution deployments that are consolidating on to Braze. And I think that’s showing you 2 things. One is that replacement cycle, legacy tool. And two, the fact that there was a legacy Marketing Cloud alongside point solutions in their original deployment means that they’re just not delivering across the touch points in the channels that modern customer engagement requires and demands. We’re similarly seeing — and I highlighted this about the travel and hospitality industry but across verticals that have been a little bit slower to move over starting to see that legacy marketing tool and it’s not just legacy marketing clouds.
We’re also seeing some other some other software that was in the last generation, getting wholesale replaced in the enterprise. And increasingly, what we’re seeing is that the default for that is not moving to one of those legacy marketing clouds but moving over to raise. And when we look at AI within that — and I can speak about this more later, I’m sure I’m going to get more questions around AI and ML before we finish this call. But I think that because we have access to a more complete picture of the customer, combined with the ability to directly interact with them and we have our vertically integrated real-time data flow and the comprehensiveness across these customer touch points and messaging channels, that puts us in a position in the technology stack with respect to the data flow and access to it in real time as well as comprehensiveness of the entire picture of the first-party data that will just allow us to have more flexibility and optionality in what we build out from an AIML perspective into the future.
DJ Hynes: Yes. Helpful color. And then is about one for you. Just in terms of the guidance, like what are your expectations in terms of the mix of growth from the base, so NRR versus contribution from net new in fiscal 2024, that gets you to that midpoint 23% growth guidance?
Isabelle Winkles: Yes. Thanks for the question. So first of all, I just want to say, I think we’ve been performing very well against an increasingly tough environment here that we’ve been seeing over the course of this past year. And we’re seeing the same dynamics that a lot of our peers are seeing with regards to elevated levels of deal scrutiny, certainly when it comes to kind of that net new business and then continuations of these elongated deal cycles. So, I think we are going to continue and we’ve incorporated into our guide a good degree of conservatism across a number of fronts. And so specifically across a number of KPIs, we have incorporated the expectation that we’ll see some further degradation. That’s true for pipeline generation and therefore, some ongoing weakness in kind of net new business.
Conversion rates, win rates, the deal cycle length, we think will continue to stay long or we’ve assumed that rather in the context of our guide. We’re assuming limited improvements to sales productivity. This is all embedded in the guidance. And so I think it’s fair to say that we do expect in the context of the guide for the net new business to continue to struggle. We’ve also been able to incorporate the events of kind of the last few weeks that have led to a little bit more market disruption and a little bit more uncertainty and maybe how net new buyer behavior and net new investment is going to behave over the coming months and quarters. And as a result of that, we feel really comfortable with where our guidance is right now against many of the possible scenarios that might play out for FY ’24.