Braze Inc (BRZE) 2021 Q4 法說會逐字稿

Welcome to the Braze Fiscal Fourth Quarter Earnings Conference Call. My name is Hannah, and I will be your operator for today's call. (Operator Instructions) I will now turn the call over to Christopher Ferris, Head of Braze Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and thank you for joining us today to review Braze's results for the fiscal fourth quarter 2022. I hope you enjoyed today's hold music, which was composed, performed and provided by Franky Saxena, a solutions consultant in Braze's London office. Thank you for the wonderful music, Franky.

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 Relations 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 first quarter and full fiscal year ended January 31, 2023; our planned product and future development; our planned social impact initiatives; our planned investments to maintain or improve our overall unit economics, including ASP, customer payback period and overall average revenue per customer and our long-term target operating margin.

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. 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 fourth quarter 2022 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.

Thank you, Chris, and good afternoon, everyone. Before I dive into our results today, let me take a moment to acknowledge the global situation. Our thoughts are with the people of Ukraine who have found themselves forced to fight for the fundamental right to live in peace. When it became apparent that a conflict might begin, we analyzed our data to quickly identify affected customers, enabling our customer success team to proactively offer support and arming our security teams to protect against potential cyber threats. Our direct business exposure in Russia and Ukraine is very limited, and we currently suspended all new business activity in Russia. We will continue diligent case-by-case assessments as our customer situations evolve. While we have no employees in the region, we have tried to do our part by donating to humanitarian relief efforts, increasing our employee donation match and extending support to employees who are personally affected by the conflict.

And now let me turn to the quarter. We are very pleased with our fourth quarter performance, which again demonstrated our ability to deliver high growth at scale. We achieved high watermarks for new bookings, renewals and net retention in the quarter. We generated $70.4 million of revenue, up 64% compared to the same period last year and 10% compared to the third quarter. We are proud of the strength of our customer relationships as dollar-based net retention rose to a new high watermark of 128%, reflecting strong renewals and upsells. For customers with $500,000 or more in ARR, dollar-based net retention was 136%, up 300 basis points year-over-year, demonstrating our ability to land and expand with large enterprises across diverse industry verticals globally.

This quarter, we also secured our largest single customer land to date, an annual contract value of over $3 million with a European-based video game developer and publisher. All of this caps an incredible fiscal year 2022 with Braze in which we grew total customer count by 54% and revenue by 58%.

To give you a sense of the operational scale of our platform, at the end of fiscal 2022, our monthly active user count was approximately 3.7 billion. And in fiscal 2022, we processed over 9 trillion consumer-generated data points and sent over 1.5 trillion messages, and all of this happened with nearly 100% global uptime, a testament to our ability to reliably deliver effective, targeted customer engagement programs for our customers at scale.

Customers are recognizing the high ROI that can be achieved through personalized, cross-channel customer engagement enabled by the Braze platform. And as we look to the future, we are focused on executing on our rapidly growing market opportunity. And today, I'm proud to announce that we recently passed $300 million in committed annual recurring revenue. These accomplishments wouldn't have been possible without our amazing and talented team across the globe. Thank you for your tireless efforts and dedication. I'm immensely excited to keep building the future of Braze together.

At Braze, our mission is to forge human connections between consumers and the brands they love through relevant and memorable experiences. We were founded over 10 years ago with the dual conviction that new smart businesses we built to be mobile first and that legacy companies will be driven by changing consumer behavior to transform the way they deliver products and services.

To help our customers forge those connections and create those experiences, we have continued to invest and evolve our product offerings to enable them to deliver better customer engagement. As consumers emerge from the pandemic and enter their next normal, Braze is poised to continue to capitalize on their ever-rising expectations for seamless cross-channel brand experiences.

And that's why our recent product announcements have focused on helping brands better understand customers and improving platform usability with actionable real-time insights, better personalization and enhanced audience targeting.

Earlier this week, we announced Braze for Commerce, a series of new products and enhancements aimed at allowing retail and e-commerce marketers to create highly personalized campaigns, driven by first-party data. Most notable in this launch is Braze catalog, a new product which enables marketers to streamline message personalization by seamlessly infusing product data into messages across any campaign on any channel. Beautifully branded recommendations can be quickly built from catalog data using our newly enhanced Braze content blocks inside our drag-and-drop e-mail editing experience. This allows brands to quickly pair individual shoppers with the most relevant products, offers and updates with clicks, not code. Other new features in Braze for Commerce include our new SMS click tracking, an enhancement of SMS performance metrics for better retargeting and segment extensions, an advanced segmentation tool that helps brands build a deeper understanding of customers based on behavioral data.

As part of the evolution of our overall data strategy, we're also working on expansions to segment extensions that will directly integrate with our customers' data warehouses, decreasing the engineering effort required to integrate and manage data pipelines and ETL processes.

To improve real-time insights, we've also been rolling out updates to our report builder, making it easier for brands to quickly gauge campaign performance, spot trends and patterns without leaving the Braze platform and then immediately modify their engagement strategies as needed. This is an important way that we enable brands to tighten the imagine, create and evolve loops to upgrade their strategies faster.

For e-mail specifically, we launched machine opens analytics to help customers understand their e-mail campaign performance by differentiating between user activity and the automatic e-mail open behavior that was introduced in iOS 15. We also added a number of workflow improvements, including adding Inbox Vision to our recently overhauled drag-and-drop e-mail composition experience.

Finally, I'm excited to share our product edition for our fast-growing Japanese market that has also laid important groundwork that we believe will enhance our support for future regional expansion. We began rolling out a translated and localized version of the Braze dashboard, allowing Japanese language-focused brands to create best-in-class customer engagement campaigns in their users' native language. Look for us to continue debuting localized versions of the Braze dashboard as part of our global growth plan.

As we look to the future, our product road map is both focused and ambitious. Today's consumers expect highly relevant, tailored brand experiences. And it's critical that we continually arm our customers with improved functionality within existing channels while also adding new channels and features. While I can't detail our entire road map on this call, I can say that our priorities are to drive best-in-class functionality to compete in any channel with legacy marketing clouds and single point solutions, tackling sophisticated use cases in order to empower our customers while driving time to value.

One area where we continue to invest is our data ingestion strategy. The data landscape is evolving as customer demands for clean, seamless data integrations are increasing. As most of you know, our SDKs are integrated into the mobile sites and applications of almost all of our customers, and this vertical integration is an important feature that allows Braze to seamlessly deploy differentiated functionality for our customers. As such, we will continue focusing on streamlining the ways in which data can flow into and out of Braze, particularly reinforcing our connections to data systems.

We're advancing our Snowflake partnership with more direct connections in Snowflake's Data Cloud as well as investing into partnerships with other companies in the data ecosystem. In order to execute on our product road map and support our customers, we continue to expand our team, growing by over 400 people in the last year, bringing our global head count to over 1,100. During the quarter, we officially opened both our new Austin, Texas location and an expanded office space for our Chicago-based team. We also continued to grow our footprint internationally, announcing plans for new locations in Toronto, Canada and Paris, France, where hiring is underway.

With these expansions, we'll have 10 locations across the globe, servicing customers in over 60 countries. France builds on our presence in EMEA and our successful expansion in the DACH region 1 year ago. We also look to continue expansion in APAC, our fastest-growing region by ARR, with new partner programs in Thailand and other Southeast Asian countries in order to expand our presence in those markets.

Finally, I'll note that we are exploring partnerships with additional resellers in Latin America, another fast-growing market for us. We believe the investment in these 2 countries will enable Braze to offer localized support for existing customers as well as capitalize on growing opportunities and strategic partnerships in the region, which brings me to our customer base where we have seen continued momentum with new and existing customers.

This quarter, we saw strength across numerous verticals, including health and lifestyle, financial services, gaming, media and QSR. We secured new business and large upsell opportunities with Canva, Course Hero, ESL Gaming, Shake Shack and Flip, just to name a few. We are excited by the breadth of innovative and creative customer engagement use cases that our expanding base of customers rely on Braze to deliver in the moments that matter most.

Let me take a few minutes to walk through some recent compelling customer use cases that illustrate the differentiated power of Braze customer engagement tools. Each of these stories demonstrates how differentiated Braze capabilities such as surveys and Content Cards are able to live directly inside or alongside a brand's products going beyond due to directional messaging to power engagement through a seamless in-app or in-browser experience for the consumer. The first is the fitness company, Equinox, who successfully leveraged 2 of our proprietary tools, Canvas and Content Cards, to deliver an improved customer experience this quarter.

Using Canvas, our visual customer journey management tool, Equinox was able to optimize their new customer welcome journey through AB testing, personalized push messages, in-app messages and Content Cards to motivate customers to try a fitness assessment with a personal trainer within 30 days of sign-up. With Canvas, Equinox saw a meaningful improvement in the number of new users booking a class compared to their prior onboarding flow while generating meaningful upsell revenue. Equinox also leveraged our Content Cards to feature class offerings to discover the user's fitness preferences and then provide more personalized offerings.

Further, personalization was realized using our Audience Paths feature, combining the users' preferences and behaviors across multiple channels with minimal added complexity. This ability to expand the footprint of an engagement strategy without becoming shackled by the complexity associated with multichannel communication is a direct byproduct of Braze's customer-centric design and is a differentiated advantage that we will continue to invest in.

The second use case I'd like to highlight is Kickstarter, which employed Braze's recently released in-app message survey tool, allowing them to collect user attributes, insights and preferences to power their campaign strategies. Surveys represent a way to deliver more sophisticated functionality for customers in a turnkey function, again leveraging our customer-centric, vertically integrated stack design. Kickstarter used surveys to assess whether a recent change they made in their checkout flows had improved users' understanding of reward fulfillment. The survey achieved a 74% response rate, Kickstarter realized a considerable uptick in users knowledge of fulfillment, and it enabled them to continue improving their in-app experience based on the results. Retargeting off of survey results is also a great example of how Braze enables feedback loops to deliver high-quality personalization. We built surveys on top of an overhaul of our in-app and in-browser messaging system. So look for more message types in the future as we continue to leverage the flexible foundation we've created for in-product experience.

The third customer use case I'd like to highlight is Ellevest, an investment advisory platform designed primarily for women. In this case, Braze utilized its webhooks and rest APIs to integrate with the company's customer relationship management tool, allowing them to effectively manage e-mail campaigns spent from Braze. In addition, Ellevest uses [current] to send the engagement data to their Google Cloud storage as well as their CRM, creating a feedback loop that helps their financial consultants understand their clients and inform future conversations with them. This business was also a competitive takeaway from a legacy marketing cloud and is a great testament to the flexibility of Braze. We look forward to continuing to grow with them.

Before I turn it over to Isabelle, I wanted to make a few remarks on our DEI and social impact initiatives. As I mentioned on our last call, we recently launched a social impact department charged with driving our diversity, equity and inclusion program and our corporate social responsibility initiatives. We are making great strides. And last month, we put out a call for applications to accept a new cohort of 15 companies into our Tech for Black Founders program, which provides black-owned start-ups with a 3-year of Braze technology and resources to support their company's early growth.

Through our Braze Cares initiative, which focuses on our charitable giving and fostering opportunities for our employees to volunteer in their communities, we've made contributions to 567 organizations and our employees have also volunteered with new numerous organizations worldwide as part of this program in fiscal 2022. And as I mentioned last quarter, Braze has also joined the 1% Pledge, committing a portion of our Class A common stock over the next 10 years to fund our social impact in environmental, social and governance initiatives. We have taken acts on this initiative, signing an agreement with a donor advice fund provider. The funds will be available for grants later this year. As a technology leader, Braze remains committed to increasing diversity, equity and inclusion in our industry, and we plan to meaningfully expand our social impact initiatives in the year ahead.

I'll conclude my remarks by reiterating our commitment to helping our customers build strong and lasting customer relationships through great customer engagement. We continue to make progress in this mission around the world, and we look forward to continuing this journey with our customers, team members and shareholders and updating you on our progress in the coming quarters.

Thank you, Bill, and thank you, everyone, for joining us today. We reported a strong fourth quarter. And as Bill mentioned, fourth quarter revenue rose 64% year-over-year to $70.4 million. This was driven by a combination of customer expansion, new business sales and strength in our renewals.

Our subscription revenue remains the primary component of our total top line, contributing nearly 94% of our fourth quarter revenue. The remaining 6% represents a combination of onetime configuration and onboarding fees as well as other professional services that are subject to similar annual contract terms as our subscription-based revenues.

Customer momentum during the fourth quarter was strong, with total customer count increasing 54% year-over-year to 1,375 customers as of January 31. This represents an increase in customer count of nearly 500 over the last 4 quarters and 128 during Q4.

Our total number of large customers, which we define as those with ARR of $500,000 or more grew 51% year-over-year to 107. And as of January 31, they contributed 52% to our total ARR. This compares to a 50% contribution as of the end of FY '21. Customers with ARR of more than $1 million grew 58% year-over-year to 49. And as of January 31, they contributed 38% to our total ARR, which compares to 33% as of a year ago.

As Bill mentioned, we recorded our single largest customer land in Q4 at over $3 million. And Q4 was a high watermark for total bookings, renewal rate and retention rate. Our renewal rate, combined with our strong upsell, drove the increase to our dollar-based net retention rate as we continue to execute on our effective land and expand motion. For the whole company, dollar-based net retention rose to 128%, up over 500 basis points compared to the prior year and up over 200 basis points sequentially compared to the third quarter. Dollar-based net retention for our large customers, those spending at least $500,000 annually was 136%, up nearly 300 basis points compared to the fourth quarter of last year and up 75 basis points compared to the third quarter.

As a reminder, our dollar-based net retention represents a 12-month trailing statistic. Upsells include increases to precommitted volumes across monthly active users, additional messaging entitlements, signing new business units within existing parent companies as we continue to further penetrate our existing customer base through both geographic and brand expansion and the addition of add-on features and recurring professional services. This expansion was strong across industries and geographic regions, with revenue outside of the U.S. contributing 40% of our total revenue in both the fourth quarter and full year.

Moving to our remaining performance obligation. In the fourth quarter, our total remaining performance obligation rose 60% year-over-year and 23% sequentially to $374 million. Current RPO rose 59% year-over-year and 19% sequentially to $238 million. These increases were driven by strong business momentum, including new contracts, contract renewals and term extension. Our overall dollar-weighted contract length increased slightly compared to the end of the third quarter and is now at just over 24 months.

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 $47.3 million, representing a non-GAAP gross margin of 67.2%. This compares to a non-GAAP gross profit of $27.9 million and non-GAAP gross margin of 65% in the fourth quarter of last year and 70.3% in the third quarter of this year.

Gross margin improved year-over-year due to the continued economies of scale in our core technology expenses and ongoing efficiencies realized in our personnel expenses. Sequential gross margin evolution reflects seasonally higher levels of activity for many of our customers during Q4.

Turning to our operating expenses. Non-GAAP sales and marketing expense was $35.3 million or 50% of revenue compared to $19.5 million or 46% of revenue in the prior year quarter. This reflects our continued investments in sales and marketing head count to support our strong growth and global expansion.

Our R&D and G&A expenses illustrate our continued efficiencies at scale. Non-GAAP R&D expense was $13.1 million or 19% of revenue compared to $8.2 million or 19% of revenue in the prior year quarter. The dollar increase was primarily driven by head count to support the expansion of our existing offering as well as develop new products and features to fuel growth.

Non-GAAP G&A expense was $12.4 million or 18% of revenue compared to $8.1 million or 19% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public market requirements. Non-GAAP net loss attributable to Braze shareholders in the quarter was $13.8 million or a loss of $0.18 per share based on 78.4 million weighted average basic shares outstanding during the period. This compares to a loss of $8 million or a loss of $0.42 per share based on 19.2 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 $518.1 million in cash, cash equivalents, restricted cash and marketable securities. Cash used in operations during the quarter was $24.5 million compared to approximately breakeven in the year ago quarter. This change was driven by a higher net loss and increased cash used for working capital.

As we indicated during our third quarter call, the fourth quarter included the impact of 2 significant prepayments related to one of our technology vendors and directors and officers liability insurance. Combined, these 2 prepayments were approximately $17 million during the fourth quarter.

Now turning to our outlook for the first quarter and full year of fiscal 2023. We remain very optimistic about our potential for revenue growth as evidenced by our strong pipeline of both new business and upsell opportunities. Our first quarter revenue guidance includes appropriate risk adjustment for new business and renewals we have yet to close this quarter. For the first quarter, we expect revenue to be in the range of $72 million to $73 million, which represents a year-over-year growth rate of approximately 51% at the midpoint. First quarter non-GAAP operating loss is expected to be in the range of $20 million to $21 million. First quarter non-GAAP net loss is expected to be $19 million to $20 million, with first quarter non-GAAP net loss per share in the range of $0.20 to $0.21 per share based on approximately 93.5 million weighted average basic shares outstanding during the period.

For the full fiscal year 2023, revenues are expected to be in the range of $338 million to $342 million, which represents a growth rate of 43% year-over-year at the midpoint. Fiscal year 2023 non-GAAP operating loss is expected to be in the range of a loss of $79 million to $83 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $76 million to $80 million. Fiscal year 2023 non-GAAP net loss per share is expected to be a loss in the range of $0.80 to $0.84 per share based on a full year weighted average share count of approximately 95.1 million shares.

As I noted during our IPO road show as well as during our third quarter conference call, fiscal year 2023 is an investment year. However, investment spend is deployed with significant levels of discipline and oversight. As a result, we reiterate our long-term target operating model of 20% operating margin.

In summary, we are very pleased with the results of the quarter. New and existing customers are realizing the value of our best-in-class customer engagement technology, and our execution remains strong. With that, we'll now open the call for questions. Operator, please begin the Q&A.

(Operator Instructions) The first question is from the line of Mark Murphy with JPMorgan.

This is Pinjalim in for Mark. Congrats on the strong quarter. I wanted to ask you just a high level, what is driving the strength overall? I mean if you think about it, I mean, your billings growth is -- seems really strong on top of a very tough comp. So I mean is it the IPO kind of putting a spotlight on Braze? Or is this just awareness of the category? Or is this kind of tailwind from the first-party data that you guys have versus -- depending on cookies for others, maybe? Can you help us understand what's at a high level driving the strength in the business?

Yes. I mean first, thanks for the compliment on the quarter. We're obviously very pleased with the execution from the team and the response from our customer base. I think that when we analyze the tailwinds behind the business, it's really important to keep in mind that we are benefiting from multiple dimensions of generational trends that have been changing in the direction of what we've been building for, for over a decade now.

When we look at it from the perspective of digitization trends, the move to first-party data, the move -- the continued enhancement and sophistication within customers as they move to more interdisciplinary strategies and customer engagement, we continue to see more and more companies out there that are structuring their teams and ways that they can really take advantage of Braze's approach to customer engagement. We continue to see the community of Braze practitioners and customer engagement practitioners that really approach this problem from a more technical and data advanced perspective grows year-over-year, quarter-over-quarter. Our sales team, our market presence, all continue to grow. So when we kind of look at it all together, we think we're continuing to grow in the early innings into an enormous total addressable market that we've got a number of generational trends that continue to add together in our favor, and we continue to execute at a very high level.

And we -- as we look further into the future, we're continuing to invest for that growth, and we're continuing to execute at that same high level as our customer base continues to grow on some. And a lot of these trends that you just highlighted continue to grow as well.

Yes. Understood. Okay. And Isabelle, just a follow-up. Any way to unpack kind of the net retention -- the dollar-based net retention strength? I think you said renewals were strong. I'm assuming you're talking about gross dollar retention. With that uptick and within expansions, is there any 1 or 2 major drivers that you're seeing jumping out?

Yes. So it's a couple of things. So certainly, yes, on the renewal front, that's definitely -- we hit a new high watermark of gross renewals in the quarter. So that's fantastic. Another factor that we're seeing is in the quarter -- the in-quarter specific net retention rate was very strong, but also we're seeing some tailwinds from the fact that we are calculating this on a 12-month trailing statistic, and we are lagging out of some weaker quarters from a few quarters ago. So you're seeing a combination of those things. But the in-quarter results were in and of themselves is very, very strong.

The next question is from the line of Ryan MacWilliams with Barclays.

How do you think about the interaction between customer data platforms and Braze, it seems like we've seen some customer data platforms try to add more messaging features. And then we've also heard some [with] Braze replacing CDPs in organization. So -- and you talked about vertically integrating. How should we think about partnering? How long is the potential competition from CDP for Braze?

The data landscape across our customer base continue to be fairly heterogeneous. So certainly, you're seeing that in certain customers. We coexist with CDPs. And other customers, they pursue designs in their architecture that don't require CDPs. There might also be other people that are moving toward new implementations or new and [instantiations] of CDPs that are doing things like reverse ETL or some of the open source CDP-type solutions and doing hybrid approaches to data management. At Braze, we continue to stay focused on our vertical integration strategy, and that is going to apply to the generation of user data, which is happening directly inside of apps and websites. And so in those cases, even when we work with CDPs, we're not -- they're not in the critical path for the data flow. And that's been part of our implementation of our design from the very beginning. There's a lot of reasons for that, that I can get into if you're curious.

When we look at our own road map with respect to those same concepts around data integration, we're also really excited about our own efforts. I touched on a couple of these in the script. But when we look at the concept of vertical integration for data generation, we want that to extend beyond the user interfaces in the apps and websites and move into other sources of first-party data such as inside a customer's data warehouse. And so we're exploring new partnerships as well as building out our own vertical integration in order to make sure that we can kind of colocate with more of those data sources. We can change the nature of the data relationship from one where engineers are going to be responsible for things like babysitting ETLs and making sure data pipelines are healthy and instead have Braze vertically integrate that responsibility, allowing for the marketing teams that utilize us to be able to get access to more data in order to drive deeper personalization, more sophisticated orchestration through our Canvas, visual forming language as well as get richer data from Braze's current feature set.

So we continue to invest heavily across the data ecosystem. The exact right mix of products that is appropriate for a given customer and their own kind of data footprint will continue to evolve, and we think that's going to be a heterogeneous landscape. But what has always been really important to Braze given where we sit in kind of the value chain with respect to engagement, owning the relationship with the customer, being integrated into those first-party interfaces and being in the user for experience and look in the field of the product and all the end product messaging is that we need to continue to be in control of our own destiny to ensure that our customers can have rapid time to value, that they can act on their data instantaneously so that we can power those interactive cross-channel use cases, and that's going to require us to continue to invest in our vertical integration even as we continue to partner with CDPs for certain types of data use cases.

Excellent. I'll definitely dig in on that offer maybe some time offline. And then for Isabelle, just looking at your fourth quarter revenue, anything to call out there from a seasonality or maybe COVID-impacted standpoint? And how should we think about this quarter's deep first guidance as the landmark for Braze going forward?

Yes. So we're definitely really pleased with where the quarter came in. I think seasonally, we kind of go back to actually how our ACV plays out, our bookings plays out throughout the year. And so the way that plays out is Q1 is typically the lowest at sort of 19%, 20%. And then we sort of edge up in Q2, Q3. And then by the time we hit Q4, that's the single largest quarter, and we're about -- we'll do about 1/3 of our bookings in Q4. And so the way that sort of plays into the evolution of revenue is from a sequential perspective, you'll get the strongest sequential revenue growth in Q2 and Q3. And then the smallest sequential growth will tend to be in Q4 and then Q1. And so we're very happy with where we landed this quarter. And sequentially, that's a little bit of what you're seeing is kind of that stack button around how the ACV plays out.

The other piece is that from a timing perspective, and I mentioned this in the Q3 call, Q3's ACV was fairly evenly distributed month-over-month. We're typically -- we typically book most of it in the last month of the quarter, but we actually managed to book 60% of it in the first 2 months of the quarter. In Q4, we booked 60% of our ACV in the third month of the quarter. And so when you're looking at the sequential revenue growth between those 2 quarters, there's also that fact pattern of how the ACV distributed within the months of the respective quarters. So with that in mind, we're very pleased with the revenue results in this quarter.

The next question is from the line of Gabriela Borges with Goldman Sachs.

Bill and Isabelle, on the commentary on appropriate risk adjustments in the guidance, how do you think about the potential risk of a macro slowdown leading to less investment in marketing software? And how sensitive do you think your business might be to pull back in marketing software spend or real-time campaign? And then if you could just remind us how much exposure you have to Europe and if there are any indicators of the slowdown in marketing software spend in Europe specifically.

Yes. Thanks, Gabriela. So a few things there, and I've spoken about this before, but we think that within the broader marketing landscape and the marketing -- both spend as well as from the perspective of focus and prioritization within organizations that the first-party focus of Braze causes us to actually have a large comparative benefit in times where there's either a slowdown or there's increased scrutiny on profitability. I think both of which are being experienced in the market right now.

So when we look at the kind of the history where we've seen our individual clients that have maybe experienced certain slowdowns or other sorts of individual issues, as an indicator for what may happen in recession-like conditions, we see kind of 3 different things that actually really benefit us where not only are we sticky, but we've grown in prominence within those organizations.

The first one is that, in many cases, that leads to more expensive R&D resources, either being cut or refocused as they're not growing as quickly. In those cases, the flexibility that Braze provides without the need of a direct engineering team doing custom implementation becomes even more important for teams that want to continue innovating and deploying new engagement strategies during those times.

The second one is that if you're working to stimulate additional demand or drive enduring incremental revenue, your existing customer base is often the first place that you go as a marketer because the incremental cost of communicating with those users is low and conversion is high, meaning the ROI is very attractive. That's exactly where Braze is focused. And so vis-a-vis the overall bucket of marketing spend, we have seen ourselves take up actually a larger proportion whenever there's pressure in the way that a recession or other sorts of kind of increased scrutiny on profitability would drive itself.

And then the third one is that even during a period of decreased demand, the need to maintain healthy conversations and relationships with your customers remains always on. We saw that even for heavily impacted industries like travel and hospitality during the first year of COVID. And we believe that no matter what happens with respect to kind of economic headwinds, that will demonstrate strong growth and just strength within the existing customer base as that needs to maintain those relationships -- remains a priority for all businesses with a long-term focus.

With respect to Europe, we don't break out specific regional breakdowns beyond the 60-40 that we have between the United States and the rest of the world. We are -- we highlighted actually the continued expansion in Europe as we continue to grow our office in the DACH region. And we've just announced our entrance into the French market with the opening of an office in Paris, and we're actively hiring for today. We think that we're still so early in the addressable market within that region that even if there is a broader slowdown that our ability to continue to execute against our goals will be unhindered from that perspective as we just continue to execute with our sales team and with the pipeline generation activities that we have in the region.

That's really helpful detail. And a follow-up, though, is on your commentary on the next normal. We understand that a portion of that model is based on pricing via monthly active users. And so maybe talk just about categories like e-commerce quick service restaurants saw a really nice acceleration during COVID. Are you seeing any signs of mean reversion or a slowdown in monthly active users in those particular category?

So we don't break out monthly active users by category, so we can't share specifics on that. But what we do see is that there's a number of things that really I think even out a lot of our growth in our contracts within Braze, first is that monthly active users and the ability to retain them is very high when customers are utilizing Braze. And we see that even in kind of broad changes in user behavior that, that ability to engage with them once a month for them to remain being a monthly active user is something that all of our customers broadly are capable of doing in -- especially in growing markets. So a reversion to the mean in terms of overall activity level would not necessarily imply that there's a reversion to the mean impact in monthly active users.

The other is obviously that we're not consumption based from a messaging standpoint as well. And so the monthly active user concept itself already has some smoothing in it. As we spoke about as we IPO-ed, that does mean that we didn't experience some of the consumption-based tailwinds from things like COVID that you saw in a lot of other businesses, but we think that it leads to a more predictable revenue model, a more predictable growth for us as well. And we've included a lot of those factors into our models.

We also see that the overall trend of continued adoption of mobile devices, of continued digitization of whole industries, of the continued move toward investing in direct-to-consumer relationships and relationship building, those we are more heavily indexed to than any particular category because we're so well diversified across geographies and across categories. And so even if you see general consumer behavior switching from one category to another as we did during COVID, the overall kind of trend toward digitization, toward the move for modern customer engagement strategies, toward the building of first-party data assets and first-party relationship assets, all of those, we continue to see up into the right. And there's really no trend toward mean reversion that we're seeing across that board.

The next question is from the line of Derrick Wood with Cowen.

Congrats on a really strong quarter. Bill, you mentioned this $3 million ACV land deal. Pretty impressive to see such a large net new win. I'm just curious, is landing a 7-figure deal out of the gate, is that an anomaly? Or is that a dynamic that could take greater hold? And anything else you can share with respect to how you won this deal and what edged you out over the competition?

Yes. So we've seen continued year-over-year improvement in 7-figure land deals over the last several years. I'm not going to put specific numbers to it, but that's definitely a trend that we continue to see happen. There's a few things that drive that. One of them is that our product portfolio continues to grow year-over-year.

So as we've added more channels over time, as we've added more comprehensive data integrations and as brands in general, if you go back to the question that I just walked through are continuing to grow their own direct-to-consumer audiences and start to embrace new customer engagement strategies that all of those just mean that the overall size of the audiences that we're engaging, the scope of the services that we're providing and the amount of focus and prioritization that customers are putting on it have grown. And all of those multiply together to give us the ability to land larger and larger deals within more and more categories. And so I would say I'm very happy with our ability both to land those some bigger deals, but also with the diversity of geographies and verticals that we actually do land 7-figure deals in.

I will further underscore that you can see that our dollar-based net retention in those customers that are greater than $500,000 are higher than the rest of the customer base. And so in many ways, even when we land with these big deals, there's still opportunity to continue to grow the footprint of those within a lot of these organizations. And we will obviously continue to invest in the product to continue to grow from there. So all of those come together, I think, creates some really good dynamics for the business that we've been able to take advantage of.

Now that being said, we've also invested very heavily on the SMB side of the business over the last year in particular. And we're seeing really good health metrics and improvements in the metrics both around things like dollar-based net retention and gross retention coming out of that group. So even though we're obviously super happy on the 7-figure side, we're also very happy with the progress that we're seeing on the SMB side and the velocity of that. And you see that in the net new customer adds and the continued growth there.

With respect to that specific deal, I would just say that it's -- it was a great team effort that really went into creating the right levels of confidence around the work that we're doing from a scale perspective as well as the ROI that we will be able to drive for that business. Braze has been very focused on making sure that we're able to live in the right part of the value chain so that we can value sell over time. We're very confident in the ROI that we can provide the businesses, especially at scale. And we've got the testament to be able to deliver from an operations perspective at very large scale. And all of those come together to give us the confidence to go out and land deals like that.

That's great color. And I guess as a follow-up on the announcements you made around commerce this week. Can you just give us a sense in terms of what's incremental from a platform capability standpoint and maybe help us think about how this may drive more revenue opportunity or what the modernization approach is going to be?

Yes. So I think that when you look at the overall product investment trends that -- we're doing a few things. And what we're really trying to do is lean into our advantages and also go through and continue to improve time to value and improve just the -- our ability to control the complexity that's inherent in these deployments so that our customers can use more and more Braze's products as we continue to grow the portfolio.

So when you look at the commerce side, there's a lot of improvement in terms of data integrations, making sure that we've got the right data models and reporting capabilities as well as integration into platforms like Shopify that we continue to deepen continuously, making sure that, that's all there so that those customers can get up and running quickly so that as they grow with us over time, they can bring in more and more interesting data insights to their strategies.

We've also continued to really improve and upgrade in advance Canvas, our visual programming language, to allow for customers to achieve those more sophisticated strategies as customers go through, in many cases, multi-touch or long-term journeys that they're going through. When we see commerce, there's obviously some specific things there related to product catalogs and recommendation. There's a lot around recommendation that especially for certain types of retailers involve things like inventory and margin that they want to optimize for when they're looking at different customer personas and their ability to compare together their first-party engagement strategy with what, in many cases, also involves heavy acquisition strategies and making sure that there's a really good feedback with there. There's just -- there's a lot that's specific to that use case that we've been really building as we've been working with both our large and small commerce customers over time. And we're really excited to continue to invest heavily in that vertical.

The next question is coming from the line of Arjun Bhatia with William Blair.

Perfect. And I'll add my congrats on the quarter. Bill, maybe if I can actually follow up on that last point on the commerce investments you made. Obviously, very interesting. But I'm curious how you think about the opportunity to verticalize for other industries where you already have a presence like QSRs or media, financial services. Is there an opportunity to take this commerce playbook and apply it to those verticals? Or should we think of the commerce investments that you're making as maybe a little bit more of a one-off given the size and growth in that industry?

I think you should expect to see us continue to add vertical-specific capabilities and vertical-specific go-to-market resources over time, both from a sales and marketing perspective as well as from a post sales perspective as we start to look at things like our customer success and technical account managers and strategy that's tied to these specific areas. We've definitely noticed over time that there -- each of the kind of product adoption curves, if you will, apply to different verticals, and there's a lot of intuitive ways that those verticals act versus each other.

So when we look at places that are either highly regulated or capital intensive, they've moved a little bit slower. So finance and insurance or health and wellness are great examples of that. We've had tremendous growth amongst the innovative younger companies in those spaces. We've also had early progress in terms of the more traditional parts of the -- of those very, very large industries. And we fully anticipate to kind of lean into taking more of the majority of the technology adoption curve within verticals like those over time by making more pointed verticalized investments, both from a product and a go-to-market standpoint.

So you're seeing this in the early days with commerce. There's other categories where I think that the product of Braze is because of its flexibility and its sophistication can really go through and is built for purpose in those verticals right out of the gate. And that doesn't mean that we wouldn't approach those verticals with a go-to-market that becomes verticalized over time. And then within the product -- from a product and R&D perspective, there's other places, I mentioned finance and insurance and health and wellness where there are specific product innovations that will help us unlock even more of that addressable market. And that's absolutely going to be part of our strategy over time.

I think that we've tackled a very fundamental business problem with Braze where we're focused on trying to invest in customer relationships over the long term, doing that through communication and understanding of customers. Those are things that generically apply to all businesses of all shapes and sizes in every vertical all over the world. It's why we have such a large addressable market. But we also know that for us to efficiently go to market across especially some of these more specialized verticals that we'll need to do more than just solve the generic business problem. We're prepared to do that.

It's really just a question of prioritization for us because there's so much addressable market and potential out there that when we look at these different ways that we can grow the business and grow our revenue line, we're balancing across geographic expansion, product expansion, verticalization, channel expansion, et cetera. And that's a good problem to have, obviously, as we try to optimize across all of those dimensions. But verticalization is absolutely one you should expect us to continue to exercise over the next few years.

Awesome. Yes. No, that's a great problem to have. One more follow-up, if I can. Obviously, the gross margins have been improving year-over-year. Can you just touch on how much traction you're seeing for some of the in-app messaging features that you rolled out, Content Cards, surveys, et cetera? And I'm curious, do you see customers adopt these off the bat? Or should we think of that as something that's further down in the maturity curve, further down in the customer journey after they've done push notifications, e-mail, et cetera?

Yes. So new customer deployments are actually pretty diverse. We actually have a lot of customers who will start out with just Content Cards or start out with just in-app messages. And obviously, there are also been customers that start out with only e-mail or only SMS or only push notifications or any collection of them. I think that in many cases, when a brand has really made the decision that they want to start investing in a sophisticated platform like Braze that we're pretty adaptive finding the first opportunity for them to really get up and running. One of the huge benefits of our vertical integration is that when you start with any of those channels, the data integration is always complete at the end of that. And so the ability for a customer to start in any channel and then incrementally move into the other ones is pretty easy and straightforward from that point because the vertical integration of the data flow is already complete.

And so we've been really happy with the traction that we've had from the in-product messaging types. It's actually a place where we've been able to acquire customers that we probably wouldn't have otherwise been able to do so because we start there. We have a focus there. And then for plenty of other customers that are just looking to replace a like a ESP right out of the gate, we then can work with them over time and bring them into the in-product use cases, which are highly differentiated for Braze.

So we're really happy with how that motion works for us. And you definitely see that in the dollar-based net retention results that we continue to put up as well as just the diversity of use cases that Braze deployments represent across the market.

The next question is from the line of Brent Bracelin with Piper Sandler.

Maybe I'll start with Isabelle and a follow-up for Bill. Isabelle, appreciate the color around the prepayment fees. But as we take a step back, I know there's a bit of a hypersensitivity that investors have just around fully funded models. You have a very large cash position. Can you talk a little bit about kind of cash burn on a normalized basis going forward? What is the path to kind of more of a breakeven scenario? And as you think about the existing cash you have, does that kind of get you enough leeway to get to a positive free cash flow environment?

Yes. Thanks for the question. So we don't currently have any plans to do any further capital raises. So I think we're comfortable with sort of the level of cash that we have right now. And we have reiterated our plans to achieve our target operating model of 20% operating profitability, and cash flow will definitely -- will certainly come a little bit sooner than that. You can see that even in some of our historical data. I think the way to look at it is not to be sort of focused on any one particular quarter. And I think I said this in the past, it's really better to be looking at cash flow on sort of a 4-quarter trailing statistic. And there can be anomalies in any given quarter just given timing of collections of payments from customers and then payments that we make, as you can see from this particular quarter.

And so we believe we are extremely well funded at the moment and have no plans to do any further capital raises to fund the business going forward.

Good. That's helpful color there. And Bill, I spent the first 2 days of this week at Shoptalk. It just seems like direct-to-consumer increasing personalization, this land grab around first-party data was kind of all the rage at the event. I guess as we think about the business, 3 quarters of accelerating subscription growth, how much has IDFA sees data privacy change has been a catalyst for the business and a catalyst for larger -- these larger lands? And how can that be a potential catalyst for the business kind of going into next year as well?

Yes. So I think that from our vantage point, we've seen this as a multiyear trend that has been building over at least the last half decade. And I think that the public markets have woken up to it more recently because you're starting to see it impact things like the earnings at Facebook or Snap and other places that are more advertising focused. But when we really started Braze in the early days, we looked at the first-party data as just the more respectful way to work on a relationship over the long term. We wanted our customers to have a long-term focus about how they thought about their own customer relationships. And the right way to do that was to focus on opted in, consent, mutual respect, having reciprocity. If you're going to give me as a brand the right to buzz your phone no matter where in the world you are or what you're doing, I better have something important to tell you and I better be basing on off of data that you wanted me to know because I was acting as a good listener and not being like a creepy detective, if you will.

And so those are all trends that we've seen in our space for years now. We're really happy to see that the rest of the world is starting to wake up to that more. When you look at the regulatory scrutiny that's out there, whether the regulations are coming from Apple and Google as they're making changes to their identifiers or other ways that their advertising networks were, when you look at changes that are happening in the regulatory environment, these all add compliance costs, but they actually refocus people where they should be for the long term, which is on respectful relationship building, being a good listener and focusing in the long term.

So I think that the -- we're certainly happy to see the continued awareness. This has been a drumbeat that we've been both beating and marching to for many years now. And I think that being respectful and being a good participant in a relationship, it's the end game. You don't evolve from here. And so we're happy that the market is getting to this point, and we're going to continue to realize the benefits from that as we grow into this enormous TAM that lies in front of us.

The next question is from the line of Brian Peterson with Raymond James.

I'll echo my congrats on the strong quarter. So just one for me. I know you guys talked about some international investments that you're making. That was clear in the call today. I'd just be curious, how much of that is a product-oriented investment? And I guess I'm thinking about data ingestions and things that might take place there. And if we think about the go-to-market infrastructure that needs to be built there, is that something that you feel like will be done in fiscal year '23? Or is that kind of a multiyear investment?

When you look at the history of our international expansion, we've actually tended to lag customer demand and customer activity in each region that we've gone to. And the first focus has been really providing more in time zone, in region, post-sale support for customers, helping activate the communities in those places in order to improve the efficiency of our go-to-market so that we can take the early wins in a given market really catalyze that into advocacy and support within those areas. There's other examples where, for instance, our ability to sell 2 startups in the DACH region remotely was something that was prevalent, not necessarily relatively easy, but certainly easier than selling to more traditional industries that are going to have a stronger expectation that we're well established in those areas.

So I think what you should expect to see is that as we continue to crack into more and more verticals and move off that adoption curve that I was referencing earlier to sell into the enterprises in the kind of the majority part of the curve in these regions that we'll continue to deploy go-to-market resources in those places.

If you look at the history of Braze, I think that the product investment to be able to sell into new markets is relatively minimal with some exceptions. We did highlight the localization of our dashboard in Japan into Japanese or support the growth of our Tokyo team. And that has been growing really well. Japan is obviously a unique market for a variety of reasons, and we wanted to be able to accelerate the investment that we're making there.

We're currently evaluating what our next steps for localization are going to be. You're certainly going to continue to see us adding new languages over time. You'll also see us continuing to add more offices over time. There's other aspects of this, for instance, WhatsApp, which is a new message channel that we're working with Meta on deploying in this year, hopefully, depending on what their time lines end up being as they continue to mature that product. But that's particularly important in certain markets where SMS is either less adopted or more cost prohibitive to be able to use for the types of engagement use cases that we're running.

And so in all of those examples, there are certainly aspects of it that will require product investment for geographic expansion. We balance those against our penetration in those markets, the nature of those markets. And we'll continue to put go-to-market resources closer to [locuses] of customers, especially as we see the potential to grow into a very large markets or if there's particular ways that the traditional industries in those areas work. And so for all of those reasons, you should expect to see our international expansion continue and not be something that's finished in this year, but rather an opportunity that we continue to invest into for years to come.

(Operator Instructions) The next question is from the line of Yun Kim with Loop Capital Markets.

Congrats on a continued strong momentum, Bill and Isabelle. So Bill, can you just talk about any shift in your vertical mix as some of the more supply chain impacted verticals like auto and consumer goods, while they're still healthy, may not have increased their marketing budget as much in the quarter? And just curious, does certain verticals carry meaningfully different gross margins over other verticals?

Yes. So the -- I'll tackle the supply chain side of it first. We started to get questions like this all the way back in the fall because people were obviously worried about incremental marketing spend in the face of constrained supply. And actually, the best way to think about that is to go back to some of the questions -- or some of the answers I spoke through with respect to our analysis of recession impacts or other sorts of slowdowns in Europe, which is that when you are supply chain constrained, it doesn't mean that your need to communicate with your customers has changed in any way. In fact, when you have disruptions in service, that's often some of the most important times to be having ongoing communication and conversation with your customers in order to maintain the relationship while your service might be impacted.

The other aspect of it is that, well, certainly, we would expect a brand in the commerce space to spend less money to instigate or to kind of create marginal demand if they don't have marginal supply to meet it, that when you look at engagement with already owned customers in already existing relationships that, that is the highest ROI place to be communicating and stimulating demand. And so you might expect to see that broadly across the marketing space. You shouldn't expect to see that be a problem in Braze's results because of those 2 primary factors.

With respect to gross margin across verticals, I think that this is something where some of the kind of intuitive things that you would expect to see where maybe the LTV of a customer in a certain vertical or industry is, on average, different than other places. We're also still just so early in our addressable market that we're able to qualify into the right types of businesses where we're able to maintain and actually improve year-over-year, our pricing power and the margin profiles of what we're selling. The same thing is true for geographies as well. Certainly, there are developing markets where if we were trying to push into them more aggressively, we might run into pricing pressures, but our addressable market remains so large, and we continue to see those markets developing. And so we're being patient about that to make sure that we're putting our resources and kind of prioritizing them into the right places, and we continue to grow the business the way that we want to.

And in the meantime, we obviously continue to invest in the product to improve the value that we can deliver to customers and be able to maintain those targets and improve them over the long term.

The next question is from the line of Patrick Walravens with JMP Securities.

Let me add my congratulations. Bill, I love hearing you say that Braze focuses on being respectful and a good participant in a relationship. We don't hear that often enough. That's fabulous. My question is on the relationship.

Thank you. Thank you.

Yes. I share that with my wife later. She'll love it. But -- so my question was the -- can we get an update on the relationship with Twilio? It's been almost 6 months since Twilio Engage came out. They've been a great partner, and then they have this product. So just love to hear where that is all sitting today.

Yes. So we continue to have a great relationship with Twilio. They've always done a great job of building tools for developers, and that's the reason that we will continue to have a strong partnership with them, both through got a market collaboration as we work on certain deals together and as a CPaaS vendor for certain grace channels like e-mail and SMS as we've spoken about in the past.

I mentioned at the top when the question was asked about CDPs that we employed in a variety of different data footprints and different types of architectures. We're going to continue to be focused on making sure that we invest in our vertical integration. But there is always a space for collaboration with CDPs as well, depending on the particular customer. And so we continue to have a great teamwork with the Twilio team. They're going to be an important multifaceted partner for the long term. And that's something that we'll continue to evolve and develop over time. But we're excited about the potential future opportunities as we keep working with them.

The next question is from the line of Scott Berg with Needham & Company.

This is John Godin on for Scott Berg. Just curious if you guys have seen any evolution upmarket in the buy versus build conversations, particularly around companies who are trying to do this more interesting things with their data stack. Just thinking in the context of obviously current and some of these other data connectors that you guys have been coming out with over the past year.

Yes. I think when we look upmarket and we see Braze continuing to be a huge accelerant regardless of where you land on the build versus buy spectrum, we've been really focused on having an ability for people to build with Braze for a long time now. I mentioned at the top of the call that one of the ways that we're thinking about the vertical integration and our data story is also about the nature of the relationship between marketing or growth teams and the data science or developer teams that they work with in order to bring new customer engagement ideas to life.

And so when you kind of look at a lot of the trends in the space right now, a lot of it is about helping data engineers and product engineers really work at the higher value-add points, getting out of the data pipelines, getting out of the ETLs, making sure that they can use more and more sophisticated APIs over time, making it easier for them to collaborate with the people that are closer to the business problems like with the marketing and the growth teams. And Braze is really being architected to enable all of those. So when you look at the power of our APIs, our continued investment in stability at scale and the ability for developer teams to do, use Braze as a more sophisticated primitive within their stack when they need to build certain parts of either the product offering or their engagement strategies.

When you look at our Canvas tool, which continues to advance from the perspective of being a visual programming language and bringing that ability for more of an organization, not just those with computer science degrees to be able to really build sophisticated behaviors. When I look at a lot of the Canvases that our customers are building, and I wonder just as a former CTO, like what it would have taken to have software engineers go and build these really sophisticated behaviors that are being implemented with clicks by the marketing and growth teams that use Braze every day. And not just implemented upfront, but actually, why experimented with over time as they bring in innovative new ideas, and they've really sped off that feedback loop of being able to look at results, iterate on them over time, test and experiment, that these are all capabilities that just drive tremendous value at much higher ROI than building on top of more [permitted] APIs across this entire space.

So we really look at a lot of different dimensions of this, and we understand that customer engagement in 2022 and beyond is an interdisciplinary sport. We want to make sure that we're accommodating all the different ways that people are going to utilize Braze and depending on whether they're coming from a data engineering or product engineering or the marketing or growth background and as well as actually taking a step back from that and looking at how we're engaging with creative teams as the nature of the messaging that gets delivered becomes more and more interactive and more immersive as well.

So there's still a lot of room to run there. We feel really good about the position that we're in. I think that when you look at build versus buy, it's a false dichotomy. We really want people to be building with Braze over time, and we've been very successful in continuing to lean into that.

There are no additional questions waiting at this time. So I will pass the call over to Bill Magnuson for closing remarks.

Yes. Absolutely. Thank you, everybody, for joining us for this. We're really excited to continue to execute and continue to communicate with everyone as we're pushing ahead and growing Braze. And thanks for all the great questions.

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.