Braze, Inc. (BRZE) Q3 2022 Earnings Report, Transcript and Summary

Good afternoon. Thank you for attending today's Braze Third Quarter Fiscal 2022 Earnings Call. My name is Tania and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Chris Ferris, Head of 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 third quarter 2022. I'm joined by our Co-Founder and Chief Executive Officer, Bill Magnuson; and our Chief Financial Officer, Isabelle Winkles. We announced our results in a press release issued after the market closed today. Please refer to our investor website at investors.braze.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under the federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These may include but are not limited to, statements regarding our financial outlook for the fourth quarter and full fiscal year ended January 31, 2022, the size of our market opportunity, continued momentum on our ESG and DEI initiatives and our expectations regarding our renewal rate, near- and long-term gross margin and free cash flow. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investors section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding the company's fiscal third quarter 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.

Thanks, Chris and good afternoon, everyone. Welcome to our first earnings call as a public company. Today, I'll start by highlighting our third quarter results then review our business, the customer engagement ecosystem, discuss our market opportunity and then detail some exciting product use cases and recent announcements before turning it over to Isabelle to provide more detail on our financial performance. We are very pleased with our third quarter performance which we believe demonstrated our ability to deliver high growth at scale. In the third quarter, we generated revenue of $64 million, up 63% compared to the same period last year and 15% sequentially. We saw increased traction with our customer base as dollar-based net retention rose to 126% in the third quarter, reflecting strong renewals and upsells. For customers with $500,000 or more in ARR, dollar-based retention increased to 136%, demonstrating our ability to land and expand with traditional enterprises and emerging disruptors across many verticals globally. We continue to expand across numerous growth vectors with our customers as they realize the positive business outcomes that can be achieved through coordinated, personalized, cross-channel customer engagement strategies enabled by the Braze platform. These strong results are a testament to the tireless efforts and dedication of the entire Braze team, our business momentum, recent product releases and upgrades across our software systems and data infrastructure as well as rising awareness of Braze and our leadership in the customer engagement category. At Braze, our mission is to forge human connections between consumers and the brands they love through relevant and memorable experiences. We were founded 10 years ago at the dawn of the modern smartphone era with a dual conviction: first, that best-growing businesses will be born and built to be mobile-first; and second, that generation-old companies would be driven by changing consumer behavior to transform the way they deliver products and services. Braze's momentum has accelerated as each of these beliefs prove true. The resulting evolution has provided brands with greater access to their consumers in a world that is always on but that opportunity also creates obligation. Consumers expect real-time, personalized communication seamlessly choreographed across the channels and platforms they prefer in a way that feels relevant and human. To be successful, brand strategy must be focused on establishing that personal connection through customer engagement and seamlessly integrating both product and marketing experiences into people's lives. We believe that great relationships are built on a foundation of shared experience and meaningful exchange. Guided by that human lens, we believe that top-performing companies must strive to listen to their consumers, understand them deeply and then act by communicating in a way that is human, relevant and personal. We further believe that the best results are achieved through an iterative process of creative evolution guided by data, an imagine, create and evolve loop throughout which we support our clients with Braze's products and strategic services. For those of you who are being introduced to Braze's technology differentiation, I will take a moment to briefly explain our vertically integrated software stack. It begins with the ingestion layer. Our SDKs are directly integrated into our customers' native applications and websites. As a trusted party, we become part of our customers' native product experience. Our SDKs serve to both stream new user activity into our data ingestion layer as well as deliver in-product messaging such as Braze Content Cards, our flexible in-app message products, or surveys directly to the end user. Once new data is ingested, it is interpreted and acted upon as it flows through the four remaining layers: classification, orchestration, personalization and action. This vertically integrated engagement stack built on stream processing technology leverages first-party data to enable interactive delivery of personalized messaging in a customer-centric manner, seamlessly transitioning across channels as is appropriate for the use case and the individual. And any action taken by a consumer in response to a message immediately flows back into our system, creating a real-time interactive feedback loop of first-party data powering the brand's engagement strategy. And our technology infrastructure can deliver real-time messaging across channels at incredible scale. The Braze customer base spans across many verticals and Cyber Week is increasingly an important time of the year for nearly all brands and we saw that in our processing volumes just a few weeks ago. From Black Friday to Cyber Monday, we executed over 21 billion messages, including 3.7 billion e-mails, over 3 billion webhooks, over 2 billion Content Card impressions, nearly 370 million in-app and in-browser messages and nearly 12 billion push notifications across iOS android and web. More importantly, despite record-high daily volumes, we achieved 100% global uptime through all of Black Friday and Cyber Monday. These are impressive totals that represent quantitative proof points of our reliability and our ability to deliver personalized, targeted customer engagement at scale. And the global market opportunity is substantial. With the ability for consumers to transact anywhere at any time, customer engagement is the new battleground for brands. Based on our calculations, our total addressable market is at least $16 billion annually in the U.S. alone. And given our existing footprint outside the United States which comprise roughly 40% of our revenue year-to-date, we feel well positioned to capitalize on the expansive international market as well. Given the strength of our platform and the opportunity, we are investing to build momentum with brands of all sizes, inclusive of both traditional enterprises and emerging disruptors. Our total customer count at the end of the quarter marked a 48% year-over-year increase with particular strength across large enterprises and in the disruptor category as savvy, mobile-first start-ups recognize the imperative of strong customer engagement as a pillar for successful long-term growth. I'd like to briefly walk you through a few third quarter customer use cases, demonstrating how Braze delivers meaningful ROI for customers. The first is a leading quick-service restaurant brand which used Braze multichannel capabilities to promote and educate it's users on a promotion tied to their loyalty program. The brand partnered with a leading financial investment platform to reward customers with cryptocurrency after they completed a purchase of $5 or more as a loyalty member. By combining the powers of e-mail, SMS, push and in-app messaging, they effectively reached users across their preferred mediums, driving a substantial increase in app downloads and digital sales as well as boosting acquisition on their newly launched rewards program. One of the major keys to success was connecting the push-based channels that drive people into the app with follow-on messaging to guide them further down the activation funnel. Once in the mobile app, Braze serves as an interactive message experience, highlighting the details of the full promotion, reward redemption and other high-value consumer actions that can be used to drive future retargeting campaigns and inform experimentation. A second example I'd like to highlight is a wellness brand that effectively promoted their new streaming series via multichannel Canvas journeys. The customer needed a way to educate it's customers about the program, leveraging the cross-channel power of Braze to optimize awareness and drive engagement. By orchestrating multiple campuses to target unique user cohorts across push, e-mail and in-app, they successfully tailored their messaging strategy to engage users on the launch of the new series. As a result, the brand experienced a significant conversion rate with it's targeted subscription users. The third is a leading European delivery platform providing takeout and groceries to millions of users who combines several Braze intelligence and customization features to turn their previously static campaigns into personalized experiences for their customers. First, by employing Audience Paths, a product launched earlier this year inside our campus environment, the company designed a messaging strategy personalized by combining the users' revealed preferences and recent behaviors across multiple channels without incurring the operational complexity that is all too common in competitive tools. As each of their customers navigated those paths and triggered new message actions, the brand then use Connected Content, our dynamic personalization tool, to layer in additional customization based on the specific path the user had previously entered, including details like their favorite store or recent food purchases. From there, the Braze Intelligent Channel feature targeted the individual users through their highest activation probability channel mix. The company realized immediate results, boosting impressions and driving higher orders by sending highly personalized messages. Throughout these customer examples, you have now heard of many of the great features that combine together into the rapidly evolving Braze products. To underscore that pace of evolution, I'd like to highlight a few innovations from the third quarter. We launched new product solutions, including updates to Canvas. With Action Paths, our newest Canvas component, customers can dynamically send users down different paths based on their behaviors. This new feature allows customers to automatically segment their users based on the actions they have taken in a given time frame, funnel those users into a variety of custom paths and deliver personalized messages for users within each path at scale. Our customers are already seeing great results with this product, including a financial services company that has driven a 14% conversion rate by personalizing onboarding journeys for new members; and an on-demand streaming service that saw a 61% conversion rate by sending users some custom paths based on their engagement with e-mails and livestreams. This quarter, we also added four new partners to Currents, our continuous customer engagement data streaming product, Amazon EventBridge, RudderStack, Tealium and Treasure Data. By tapping into one of our new real-time Currents connections, customers can break down data silos by streaming granular customer engagement and behavior data to even more technology partners within their data analytics ecosystem. We also enabled brands to build direct integrations themselves with custom Currents connectors, giving customers the ability to send Braze data to more custom destinations like an in-house CDP or other data store. Alongside it's launch, we also rolled out new iOS 15 push notification settings, enabling customers to designate the urgency and relevancy of each push notification, ensuring that users receive relevant notifications at the right time. Finally, I'll mention MMS Contact Card creator which allows brands to easily create a contact card in Braze to deploy MMS campaigns, building brand recognition. Message recipients can quickly save a brand's number to their contact list to distinguish who is texting them. Of course, building all these amazing products can't be achieved without talented people. Globally, we've increased head count by more than 300 this fiscal year across all functions to support our growth, bringing our global head count to over 1,000 as of the end of the third quarter. As we continue building a best-of-breed customer engagement platform and capitalize on our substantial market opportunity, it will be essential to acquire talent who can fuel our success and live our values. And as we deepen our engagements around the world, we hold ourselves to a high cultural standard. We've recently created a new social impact department, inclusive of our diversity, equity and inclusion program and our corporate social responsibility initiatives. One such initiative that we're very proud of is Tech for Black Founders which is focused on providing resources and technology for black-empowered businesses like Plain Sight, a new social platform facilitating virtual networking. Braze helps Plain Sight consolidate it's personalized communications within one comprehensive platform, allowing them to optimize customer experiences and increase retention. We are also joining the Pledge 1% movement, committing to donating a portion of our Class A common stock over the next 10 years to fund our social impact and ESG initiatives. These efforts are reflections of our core values and you should expect further momentum on ESG and DEI initiatives as we continue on our public company journey. I'll wrap my remarks by stating that we are committed to our long-term mission to build strong and lasting customer relationships through great customer engagement. With billions of these relationships under our stewardship, our progress towards realizing this mission reaches consumers in nearly every country around the world. It's humbling and exciting to be working on this goal with all of our employees, partners and shareholders. We look forward to continuing on this journey with you and updating you on our progress in the coming quarters. And with that, I'll hand the call over to our Chief Financial Officer, Isabelle Winkles. Isabelle?

Thank you, Bill and thank you, everyone, for joining us today. We reported a strong third quarter and as Bill mentioned, third quarter revenue rose 63% year-over-year to $64 million, driven by a combination of customer expansion, new business sales and a record in-quarter renewal rate. Our subscription revenue remains the primary component of our total top line, contributing nearly 93% of our third quarter revenue. The remaining 7% represents a combination of onetime configuration and onboarding fees as well as other professional services that are subject to similar annual contractual terms as our subscription-based revenues. Customer momentum during the third quarter was solid, with total customer count increasing 48% year-over-year to 1,247 customers as of October 31. Our total number of large customers which we define as those with ARR of $500,000 or more annually, grew 45% year-over-year to 97. We continue to execute on our land-and-expand strategy, improving our dollar-based net retention rate to 126%, up over 200 basis points compared to the prior year and up almost 100 basis points sequentially compared to the second quarter. Dollar-based net retention for our largest customers was 136%, up nearly 200 basis points compared to the third quarter of last year and up over 100 basis points compared to the second quarter. As a reminder, our dollar-based net retention represents a 12-month trailing statistic. Our dollar-based net retention rate reflects strength in our third quarter renewals and upsells to existing customers. Upsells include increases to precommitted volumes across monthly active users, e-mail and SMS 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 professional services. This expansion was strong across industries and geographic regions, with revenue outside the U.S. continuing to contribute 40% of our total revenue in the third quarter. Moving to our remaining performance obligations. As a reminder, the first period in which we began disclosing RPO was the fourth quarter of fiscal 2021 and we will therefore have our first year-over-year RPO comparison when we announce our fourth quarter and full year fiscal 2022 results in a few months. Therefore, my comments on RPO will address only the sequential evolution. Our total remaining performance obligation rose 13% sequentially to $304 million in the third quarter and current RPO rose 10% sequentially to $199 million. These increases were driven by solid business momentum that included new contracts, contract renewals and term extensions. While our overall dollar-weighted contract length increased versus the end of the second quarter, we still remain in the range of approximately 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 $45 million, representing a non-GAAP gross margin of 70.3%. This compares to a non-GAAP gross profit of $25.1 million and non-GAAP gross margin of 63.8% in the third quarter of last year and 66.7% in the second quarter of this year. Gross margin improved year-over-year due to several factors: first, efficiencies realized in our personnel expense as we better aligned management structures as well as the roles and responsibilities to cost of revenue action items; second, we continue to achieve economies of scale in our core technology expenses, most notably across our database, hosting and e-mail vendors through volume discounts and precommits. And we note that these benefits have contributed to the improvements in gross margin percent over the last several quarters. Sequentially, gross margin percent increased 360 basis points which includes a degree of seasonality with respect to cost of revenue. As a reminder, the third quarter typically experiences lower levels of activity for many of our customers and we have already seen an increase in overall activity early in the fourth quarter, as Bill indicated, by our Black Friday to Cyber Monday statistics. Turning to operating expenses; non-GAAP sales and marketing expense was $28 million or 44% of revenue compared to $18.2 million or 46% of revenue in the prior year quarter. This reflects our continued investments in sales and marketing head count to support our solid growth and global expansion against our strong revenue this quarter. Non-GAAP R&D expense was $11.1 million or 17% of revenue compared to $6.8 million or 17% of revenue in the prior year quarter as we continue to invest in R&D to develop new products and features to fuel future growth. Non-GAAP G&A expense was $10.9 million or 17% of revenue compared to $6.6 million or 17% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public market readiness. Non-GAAP net loss attributable to Braze shareholders in the quarter was $3.3 million or a loss of $0.16 per share based on 20.7 million weighted average basic shares outstanding during the period. Now, turning to the balance sheet and cash flow. We ended the quarter with $80.9 million in cash, cash equivalents, restricted cash and marketable securities. Cash used in operations during the quarter was $2.5 million compared to $5.9 million in the year ago quarter. After taking into consideration capitalized expenditures and capitalized software, free cash flow was a negative $3.5 million, resulting in a free cash flow margin of negative 5.4% in fiscal third quarter of 2022. In the same period last year, our free cash flow and free cash flow margins were a negative $6.8 million and negative 17.3%, respectively. The improvement in our free cash flow margin was driven by the increase in deferred revenue year-over-year as well as improved earnings adjusted for noncash expenses such as stock-based compensation and amortization of deferred contract costs. Rounding out the cash flow statement with our financing activities, I will note that both the third quarter of this year and third quarter of last year included a $2.5 million cash contribution by our partner, Japan Cloud Computing, to our Japan joint venture. Now, turning to our outlook for the fourth quarter and full fiscal year 2022. We continue to feel highly optimistic about our potential for future revenue growth, as evidenced by our strong pipeline of both new business and upsell opportunities. Our fourth quarter revenue guidance includes appropriate risk adjustments for new business and renewals we have yet to close this quarter. For the fourth quarter, we expect revenue to be in the range of $65 million to $66 million which represents a year-over-year growth rate of approximately 53% at the midpoint. Fourth quarter non-GAAP operating loss is expected to be in the range of $15.5 million to $16.5 million. Fourth quarter non-GAAP net loss is expected to be $15 million to $16 million with fourth quarter non-GAAP net loss per share in the range of $0.19 to $0.20 per share based on approximately 79.8 million weighted average basic shares outstanding during the period. For the full fiscal year 2022, revenues are expected to be in the range of $232.5 million to $233.5 million which represents a growth rate of 55% year-over-year at the midpoint. Fiscal year 2022 non-GAAP operating loss is expected to be in the range of a loss of $33.5 million to $34.5 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $31.5 million to $32.5 million. Fiscal year 2022 non-GAAP net loss per share is expected to be a loss in the range of $0.90 to $0.93 based on a full year weighted average share count of approximately 35.1 million shares. A few notes on our guidance. While we are not providing specific gross margin guidance, we expect gross margins will be impacted by seasonally higher activity in the fourth quarter. This will likely result in a fourth quarter non-GAAP gross margin percentage in the mid-60s and we continue to expect our long-term non-GAAP gross margin target to be in the range of 65% to 70%. While we expect to continue to pursue optimizations to achieve scale in both our cost of revenue for personnel and technology costs, we also expect to invest some of these gains back into the business as we find opportunities to enhance our offering that may increase our computational and storage capacity requirements. Finally, I'll note that while we are not providing free cash flow guidance, free cash flow may vary materially from quarter-to-quarter based on the timing of when we receive customer payments and when we make vendor payments. For example, we expect the fourth quarter will include some large vendor payments that will impact cash from operations by up to $15 million to $20 million in the quarter. In summary, we are very pleased with the results of the quarter. New and existing customers are realizing the value of best-in-class customer engagement technology and our execution remains strong. And 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 Gabriela Borges with Goldman Sachs. Your line is open.

Hi, good afternoon. Congrats on the quarter and the IPO. Bill, I'm hoping you can help us talk through some of the competitive noise on other companies that make claims on real-time marketing. We'd love to hear a little bit on what feedback you get on where Braze stands out when you can compete on bake-offs and when maybe the competitors fall short? And then vice versa, in any scenario where you don't want a bake-off, curious what that feedback looks like.

Absolutely. So our competitive environment has definitely always been varied. And as you're aware, Braze has always built ourselves to deliver value and appeal to the sophisticated, the ambitious amongst the kind of marketer set. So we've always wanted to build Braze to be a platform you graduate to and then never graduate from. And a part of that has been a lot of these differentiators when it comes to the vertical integration of the product, the differentiation through our streaming architecture which enables these not just quick but actually interactive and real -- truly real-time use cases. And so when we're in a competitive sales cycle and we're working with customers that are in varying points in their journeys, those that have already embraced the interdisciplinary aspect of doing kind of modern customer engagement where you have the creativity for marketing and growth teams coming to light quickly through collaboration with product engineering and then having those results being analyzed to kind of drive additional experimentation through collaboration with data science, that those are groups that can look at the differentiation that Braze provides through our vertical integration and through our real-time capabilities and really vividly understand the ROI that that's going to bring to them. But the kind of entirety of the addressable market are at varying stages in that journey. And in our go-to-market process and through our sales cycle, we often will take a challenger mentality where someone comes in with a kind of older approach to communicating with their customers. Maybe they're used to batch-and-blast technology. They're sending out things that are undifferentiated or utilizing list-based mail sending or what have you as just some common examples that we run into. That will take a trusted adviser approach. We will be consultative with them. We will kind of challenge those preconceived notions about how customer engagement should be done. And in the cases where they come along with us and that we kind of grow with them and can kind of help get them to the point where they're thinking about the customer engagement problem the way that we do and the way that Braze has been built to service, that in those cases, we defend our premium price point and we have -- we experience very high win rates against competition. But there are other cases where customers are still thinking about things in a single channel mindset, or maybe other parts of their systems are not kind of ready to embrace the new kind of data streaming paradigm and they just can't get over that hump for they kind of perceive it as a bridge too far to leap over today but those are places where a product that is maybe built for a less sophisticated audience is going to have a more appealing lower price point and maybe they don't experience the ROI or kind of vividly understand it as much. And so in those cases, we're going to be patient in those sales cycles. We'll continue to work with those customers over time. We have a saying around here that they always come back and that's definitely something that we've seen over time and play out many times.

I appreciate that color. One follow-up for Isabelle. Would love to get a little bit of color on your priorities for sales and marketing investment as we go into the new year and maybe a little bit of commentary on how we should typically expect new productivity to ramp and what that ramp typically looks like for new folks that join the team.

Yes, sure thing. So I'll answer that last question first. Typically, we expect our productivity to achieve full ramp within a year. That's kind of across the board, we'll expect within a year. It's obviously faster down at the SMB level and can take that full year at the more strategic and enterprise levels. But that is the -- across the board, we do expect our ramps to occur within a year. When we think about the investments, we're going to be adding head count across our major locations around the world. We're actually looking to enter with feet on the street in two new markets next year. So last year, we entered the DACH region with folks in Germany. We also entered our Japan JV to expand our reach into the Japanese market. We are looking at both Toronto and Paris, France for next year. So there will be some investments as we start to ramp head count there as well. And then all of our major regions across the West or the East Coast of the U.S., London and Singapore are our major existing regions and we will continue to invest across not only those regions but also the classifications of customer type that we're going after. So it's SMB, the commercial area and then up into our enterprise and strategic accounts.

Sounds good. Thank you.

Thank you, Ms. Borges. The next question is from Mark Murphy with JPMorgan. Your line is open.

Yes, thank you very much. So Bill, when we see the top line acceleration that you're reporting here in this quarter, I guess I'm curious whether you're seeing any extra type of tailwind from some of the large brands that they could be just fundamentally rethinking their whole stance on first-party relationships and maybe pivoting in that direction kind of in the wake of Apple's changes to IDFA. Just wondering if that is something that's tangible to you. Is it driving business your way? Perhaps more brands seeing Braze as kind of the high ROI solution for living in this first-party world.

Yes. I think we are absolutely seeing that but I wouldn't say that, that trend is isolated to this kind of post the most recent IDFA change. This shift to first-party data is something that has been ongoing for several years and it's not just platform changes like we see in Apple, although this is probably the fourth or fifth generation of changes to the advertising identifiers and other sorts of rules if you look across both Apple and Google. It's also things like GDPR, it's changes to other sorts of permissions and platform sentiment and then also just broadly customer sentiment around these. And so when we look at that investment in first-party data, Braze decided to focus in on being a good listener as opposed to kind of being a creepy detective and have that really be the basis of how we think about understanding a customer in a deep way in order to personalize and tailor the engagement journey that they're on with you as a brand. And so that's been part of our ethos and our product focus for our entire lives. Now obviously, we benefited from being on the right side of history with respect to first-party data but by no means think that that's a recent mindset shift. You're hearing about it a little bit more in the public markets because it visibly hit people, like Snap earnings and some of these other places where you've heard mornings like that from the big advertising platforms but we've been seeing it for the last several years. And it's just one of many secular trends that I think have been supportive of Braze's growth, that focus on first-party data, the continued drive to mobile, the ongoing transformation and marketing and growth teams to embrace interdisciplinary collaboration, as I mentioned on the previous answer and then the digital transformation tailwinds that you see from COVID. These are all kind of in a big basket and they're all pushing Braze to have increased momentum and we think that we're still in the early innings of a lot of them.

Okay, understood. That's very clear. And then Isabelle, just as a quick follow-up, I'm a little surprised on the gross margin improvement to 70%, positively surprised. I mean I don't think we saw that seasonal aspect of it or I don't -- I guess I don't recall that in prior years. And you mentioned a couple of factors driving it. I guess I'm just specifically wondering. Did you happen to see any lower mix of SMS than e-mail? Or were -- is this really more around -- is that piece of it relating more to securing lower pricing across some of those channels?

Yes. So I think it's a combination. So we've been on a multiyear journey over the last couple of years, certainly since the day I arrived almost two years ago, to attack this gross margin and to make sure that we're optimizing across a number of dimensions which we have been very successful on over the last sort of seven or eight quarters. I think on the volumes, sequentially, so there's been growth across all the major categories of messaging spend. But yes, in the third quarter, the sequential change in the portions of our messaging that tends to be a little bit on the lower margin side was a little bit slower. And actually, we saw higher growth rates in the messaging components that actually tend to be in-house, proprietary built and that are on the higher margin side. So that definitely was part of the seasonality that I mentioned. We certainly -- we have some data for November and Bill obviously ran through this in his prepared remarks as it relates to the Black Friday statistics. We do anticipate that a lot of that messaging volume that was a little lighter on a sequential basis in Q3 will come back very much so in Q4. And so, we -- when we talk about the seasonality, we wouldn't expect this 70% to persist through the end of the year.

Understood. Thank you very much.

Thank you, Mr.Murphy. The next question is from the line of Raimo Lenschow with Barclays. Your line is now open.

Hey, thank you and congrats from me as well. Bill, can I get back to the differentiation point you started to address in the beginning remarks and then to the first question? The message in architecture that you have, like if you think about it, how difficult is it to kind of replicate it or build it? Because from what I've seen, most of your competition is kind of still on legacy while you have like a rebuild of the stack completely. Just can you speak to that? Like because it's -- we obviously have like public companies, the Confluent and Snowflake, well, that are living in this kind of new world but I'm just trying to understand how long does it take someone to kind of actually live in this new world. And then I have a follow-up for Isabelle.

Yes. So I think that there's two major components to this. The first one is the kind of vertical integration inclusive of in-product integrations. And so when you look at the footprint of our SDKs and libraries that have been integrated into the products of our customers and not just doing so in a way where they kind of sit in the background but are actually integrated into the user experience, into the UI and the look and feel of those products, that's something where we've had to build in a ton of technical sophistication to be really good citizens inside the world's largest mobile applications across all the different platforms and across the web as well and then be able to kind of both instrument and deliver messaging in an interactive way through all the platforms. And so that's kind of an aspect that even when you look at a lot of the multichannel vendors out there, very few of them have crossed the chasm of being able to deliver interactively both in product and out of product. When we then go from there into the stream processor that underlies our customer engagement stack which I mentioned during -- or which I kind of spoke through the layers of during the prepared remarks, that's a proprietary stream processing architecture that we've built over the last 10 years. The demands that are placed on that to be able to do both kind of large, kind of volume-based, things like breaking news alerts and other sorts of kind of just-in-time or urgent kind of large volume messaging while also being able to deliver those interactive in-product messages and do so on the basis of a real-time data platform where everything is always live and able to seamlessly move back and forth across platforms and channels, this is just an immensely hard problem to do at scale. It's something where you can't build this just on top of out-of-the-box software even if you're sitting on top of something like a Snowflake or a Confluent which we certainly use for other aspects our systems but the customer engagement engine itself is entirely proprietary. It's involved a lot of investment to provide the stability and the performance at scale. And all of that is really also just focused on the infrastructure side that doesn't even mention a lot of the Braze differentiation that lives higher up in the stack through things like our Canvas environment, where we've created an ability for a business user to intuitively express creativity and sophisticated strategies in a way that we can then execute on with the stream processing engine. So there's a bunch of different dimensions to it. They really interplay with each other. And when you go back to the thing I've mentioned a couple of times already which is that customer engagement in it's modern form is best executed on by interdisciplinary teams and so there's a layer of collaboration and intuitiveness and kind of removing friction and controlling complexity which needs to be designed into these systems to enable those collaboration loops to happen. And that's where you start to see really outsized ROI. So, I think I could probably -- I started this answer by saying there's two main things and there's obviously a lot more to it there but we believe that the design and technology this year has really been purpose-built for more than a decade now in a really focused way for what the modern customer engagement should be and how it should be approached. And that has created a pretty enduring differentiation.

Yes. Okay. Super helpful, that's really clear. And then one question, Isabelle. The -- if you look at companies that are coming to the stock market to have their IPO, there's kind of a branding thing that goes with it in terms of the -- as a CFO, you have less calls with prospective customers around like financial stability and stuff like that because people can see your numbers. But you can also see it in terms of attractiveness to new employees and we saw the big hiring numbers as well. Can you see some of that already coming through? Or what have been your first experience? Obviously, I'm aware it's only like a couple of days.

Yes. Thanks, Raimo. So look, I think we're really, really excited about what that's going to do to us over the coming weeks and months. I do think it's a little bit early days. We're also kind of -- this was all happening in conjunction with the holiday period. So I know for my group even specifically, I've had to sort of put off a couple of calls to talk about hiring the next person because they're on holiday and there was the Thanksgiving holiday and all of that. So I definitely -- we have spoken internally about this and we're really excited, our -- whether it's a pipeline of new business that continues to be a strong pipeline of new candidates that we continue to be really excited there both in the U.S. and abroad. So I think it's absolutely multidimensional but this is, in fact, our very first earnings call. So we're excited to kind of keep that momentum going and to leverage all of the benefits of the IPO across a number of dimensions for the benefit of the company.

Perfect. Thank you. Congrats, again.

Thanks.

Thank you, Mr.Lenschow. The next question is from Arjun Bhatia with William Blair. Your line is open.

Perfect. Thank you. And I'll add my congrats on a great quarter out of the gate here. One thing I noticed in the metrics, it seems like new customer growth has just been incredibly robust this year and we had another quarter -- another record this quarter, rather, of net new customers. I'm just curious. Where are you seeing these customers coming from? Is it a lot of the legacy vendors, the batch processing, marketing clouds that these customers are migrating from? And would you maybe attribute this to execution? Or is it just the beginning of the market moving in your direction more and more with the data capabilities, mobile, et cetera, that we've talked about?

So I think there's a few things at play here. It's all of the things that you said above that are all these secular tailwinds that I've already enumerated earlier on in some other answers. And we're seeing migrations from the legacy cloud. Certainly, we're also seeing migrations from a lot of the point solutions that we kind of spoke about as we talk through the competitive landscape before. We also are seeing a lot of new greenfield use cases that come about as well. When you look at, for instance, the -- like the streaming platforms that have all come about, those were all brands that we're working with, legacy players before in order to send out messaging. But as they pivoted their businesses to have more of a direct-to-consumer focus, the use cases for them and customer engagement have multiplied tremendously. So when you think about the kind of migration from the legacy clouds, certainly, that is happening in the enterprise but you also need to kind of amplify it by the fact that in so many cases, customer engagement is becoming not only more strategically important but it also has a much larger surface area than it did before. And you can further amplify that by looking at the new channels that Braze has unlocked when we look at things like Content Cards, messages and the ability to kind of seamlessly communicate across these channels so that brands don't need to think about the full properties and their web properties and their e-mail loyalty programs, their in-person experiences. It's living on these different islands and we can bring all of those together and allow for them to kind of coherently communicate with the customer with confidence that they're always acting on real-time data. Every single thing that you do there helps increase the number of use cases that they're running. It creates these kind of new greenfield opportunities for Braze to expand into. So you're seeing all of that. We also internally have been investing a lot in our -- what we call our SMB segment. That is the segment of zero to 200 employees that we're selling into. And we're seeing a lot of really fantastic growth within that category as well. From a go-to-market perspective, we are still selling at a $30,000 annual minimum into that customer segment. And so these are certainly brands that are really focused on kind of pushing for sophisticated customer engagement even if they are operating at smaller scale but we're seeing a lot of growth in that category as well and we're excited about what that means for continued expansion over time.

Perfect, that's very helpful. And then Isabelle, one more on gross margins, if I can. I know you mentioned a handful of items that drove gross margins up this quarter. But as we look into next year and beyond, what kind of -- how should we think about maybe just the benefit that is long-lasting from some of the efficiencies and scale improvements that you mentioned versus those that may be fluctuating from quarter-to-quarter like volume and seasonality?

Yes. So I would definitely think of the volume and seasonality as being the key driver of quarter-over-quarter volatility. Obviously, the revenue that we record is pro rata -- ratably over the course of a contract and the expense is going to be based on usage. So you're going to see that volatility there. As we think about the benefits that have accrued to us as a result of some of the management realignment and roles and responsibilities realignment, that, we feel, will persist, right? Those are permanent changes that we've made within the organization. I think similarly, on the technology cost side, whether it's the prepayment or just cost efficiencies with scale or other optimizations that we've achieved, those similarly will persist. I think what I would say though is that we will continue to invest in our own technology and our own capabilities in order to improve and enhance our offering. And those improvements are going to come at a cost. And so we provided, in the context of the road show, a long-term target of 65% to 70% gross margin and we stand by that. And so we're very proud of what we've achieved over the last many quarters to get to this point but we stand by that range of 65% to 70% as it relates to the longer term.

Great. Thank you very much and congrats, again.

Thank you, Mr.Bhatia. The next question is from Brent Bracelin with Piper Sandler. Your line is open.

Thanks for taking the question here. Super impressed by the fourth straight quarter of accelerated top line growth. I guess, Bill, for you, one thing that stood out this quarter was the large customer cohort. $500,000-plus customers, I think, jumped to 97 from 82 last quarter. What's resonating most here with these early adopters? Do you think we're seeing a tailwind to net retention from a higher velocity of mobile campaigns and personalization and higher ROI, such as driving higher velocity of marketing campaigns versus, let's say, e-mail campaigns? Or are there other factors, maybe new products that are contributing to the strong expansion of some of those large early adopter customers?

Yes. So I think there's a few things there. Most of them go back to a lot of the use case expansion that I was just talking about in the competitive context. But when we look at the growth amongst especially our larger customers, it's a combination of a variety of things. One is that those customers are growing. As our product works, we have aligned our pricing to essentially -- we -- the largest component of our pricing comes through monthly active users. And so as our customers grow their engaged user base which is obviously something we help them with and if they're successful with us, that component grows. We also have had a lot of product expansion over the last several years. And so there's been more and more channels and more premium features for our customers to purchase and continue to grow their use of Braze. We also see the teams that are utilizing Braze continue to grow. So whether that's cross-expansion through a large parent company over to other brands, it's starting out with a mobile team and then bringing in a web team and a loyalty team over time, it's expansion through use cases or maybe we'll start out with just kind of recurring promotional and then we move into life cycle and then we start to add things like transactional messaging as well. So there's just a lot of different dimensions under which Braze customers can grow. Now, speaking specifically to your velocity point, we are not -- we're tied primarily to monthly active users. So while certainly higher message volumes do translate into higher levels of revenue over time, it's -- you shouldn't model it or think about it in the same way that a kind of strictly usage or strictly consumption-based pricing model would have velocity translate into growth like that. This is really more about the durable expansion of use cases, increased ROI, more teams, more company initiatives, more brands, et cetera.

Super helpful there. And then I guess, Isabelle, just a quick follow-up for you as we think about the consumer constraints and headwinds to the business, Omicron variant starting to become a more meaningful headline risk, supply chain constraints in the marketplace. How does that impact demand for direct-to-consumer? Is there limited impact to kind of activity around mobile campaigns? Is there a stimulation of need to go direct-to-consumer versus in-person? Just trying to think through as we think about some of the headline risks out there have an impact to the business. I appreciate the color on Black Friday, Cyber Monday. It sounds like these are very strong this quarter but thinking through some of the headline risk out there and how we should think about it or how that potentially could impact your business would be helpful.

Yes. So look, there's a whole host of secular trends that have been at play for some time that have been -- I would actually not call them headwinds but they've been the wind at our back. The shift towards the importance of first-party data, the overall shift to a need to ascend to a customer-centric engagement strategy, we've been in this sort of COVID world now for the last 22 months. And that's been, by and large, a bit of an accelerant in just sort of pulling forward some of these trends and the necessity to be able to continue to be direct-to-consumer. But we see a lot of this as kind of a one-way door and so we don't look at COVID as a particular -- it's just another data point on the map of all of the things that have been impacting the business. We have not seen any shift in consumer trends or customer trends over the last several weeks as Omicron has kind of taken hold. So I would just add that to kind of the mosaic behind us but no particular headwind to speak of there.

Very clear, that's all I had. And have a safe and happy holidays.

Thank you.

Thank you, Mr.Bracelin. [Operator Instructions] Our next question is from the line of DJ Hynes with Canaccord. Your line is open.

Hey guys, thanks for taking the question and congrats on a great start here. I'll keep it to one and actually, I'm going to go to Isabelle. So Isabelle, I'm sure everyone's going to do the calculated billings math and see the really strong results, right? I think it was 70% growth if our math is right. As you know, right or wrong, investors are going to use that as a proxy for bookings growth, right? The other metric they're going to look at is RPO or CRPO. And I know we're going to get a year-over-year growth rate for RPO for the first time next quarter. I just want to get ahead of any surprises with that metric. Is billings growth in the right ballpark range for what RPO growth might look like? Or is there anything we should be thinking about that drives the divergence there?

Yes. So when I think about the billings growth, just remember, obviously, a strong revenue this quarter is obviously a contributor to that 71% or 70% billings growth. But in addition, there's also that change in deferred revenue. And we've continued to improve the annual upfront, the component of our billings, our customer contracts that are annual upfront. And so the more cash you collect from your customers upfront, the stronger that metric will be -- continue to be on a sequential basis. And so that -- there's an element there as well that is adding to that strength.

Okay, got it. So, when we -- CRPO growth next quarter, don't be surprised if it's a little bit lower because it won't benefit from that -- the invoicing benefit you're seeing now from the upfront. Is that the right way to interpret it?

So -- and on a quarterly basis, the fourth quarter will actually tend to be the highest quarter of change in deferred revenue. So we do -- I would just caution you to sort of use the billings number as kind of indicative of future growth because there is an element in there of just timing of the payments of when we receive them and how that plays into that number. So I would -- look, you'll see in the -- I don't know how the RPO number will play out once the fourth quarter is fully done and dusted but we'll be happy to talk through that at the end of the fourth quarter.

Yes, very helpful. Okay, guys, congrats.

Thank you, Mr.Hynes. The next question is from Derrick Wood with Cowen & Company. Your line is open.

Great, thanks and I'll echo my congratulations. I guess my question for Bill, you mentioned partnering with Snowflake and Confluent. You called out new partnerships with Tealium and EventBridge. I'm just curious, when you look at integrated into the broader data stack landscape, CDPs, cloud data warehouses, your own capabilities with SDKs, are you seeing the makeup of these architectures change much particularly when it comes to new architectures being laid out? And then I'd just be curious about what the demand level is on your Snowflake data sharing add on.

Yes. So we're definitely seeing a trend toward streaming architectures. We're seeing a trend -- and we -- kind of broadly before that, we're obviously seeing trends toward the cloud and for service-oriented architectures and kind of really taking a close look at how the separation of responsibilities between kind of first-party, home-built software and then purchased SaaS software. Broadly, I would also say that Braze occupies this part of the cloud services ecosystem where we want to be able to be both a kind of SaaS product that you buy that can be turnkey use by your business-user heavy teams but also provide a set of APIs that can be built on top of by product and engineering teams. And that's the magic of how Braze connects those APIs to the kind of the dashboard product, if you will. It's also what promotes a lot of the really productive collaboration that I was talking about earlier. And so, when you take that point of view when you look at how that's translated into the rest of the technology ecosystem and just the way that all of these various data players and such work with each other, we're definitely seeing a trend toward more expressive data models, toward higher-performance APIs, toward streaming interfaces and then also toward interconnects where the brands themselves are actually becoming responsible for maintaining the connections between their partners. And so that's why you continue to see the expansion of our current partner set and one where we'll continue to build these bidirectional data flows where we can manage that for our customers. Obviously, there's a lot of tooling out there which allows for engineering teams to manage and build these. We have a vision and a belief that to the extent that product and engineering teams are going to work in the customer engagement space, we want them to be doing productive, creative things in collaboration with marketing teams. We don't want them to be babysitting data transfers and kind of dealing with a lot of those questions that are more operational or maintenance-oriented. We want them to be having fun and to be building new things and to be driving differentiated ROI through that. And so we'll obviously continue to pay attention to how the rest of the technology ecosystem evolves from an architecture standpoint. It's really important for us from a partnership strategy standpoint. And ultimately, we look at all of that in service to our goals around customer engagement outcomes with all our customers.

Perfect, thank you.

Thank you, Mr.Wood. The next question is from Brian Peterson with Raymond James. Your line is open.

Thanks for taking the question and I'll echo my congrats as well. So there were a couple of mentions of strength in the pipeline. And obviously, there's a lot of things that are emerging as tailwinds. I'd be curious of that pipeline kind of expansion or increase, how much of that is kind of with the existing customer base versus net new? And is there any noticeable impact from the IPO? And I don't know if there's a way to isolate that. I'd be -- but I'd be curious to get your thoughts there.

Yes. So the IPO question, I think, somewhat came up in a prior question. I think it's a little bit early days there, whether it's on the customer side or our employee base side, particularly since there were a couple of holidays in the interim. But we are very, very pleased with what we're seeing in the pipeline. It's across the board. It is absolutely across the board from a global perspective. It is across the board in terms of strength across customer types, industry types, customer sizes. And then we continue to be really excited about our new business opportunity, so net new parent companies to bring on board. And you're seeing the trends in our dollar-based net retention. That obviously speaks to our ability to continue to further penetrate our existing customer base. We're excited about the strength there and see opportunity for ongoing strength in that area; so it's really multidimensional. We are -- when you think about the level of revenue that we're currently at relative to this $16 billion market opportunity in the U.S. alone, there is just so much opportunity to expand across so many different vectors and so many different dimensions; so we're seeing strength in a number of areas.

Good to hear. Thank you.

Thank you, Mr.Peterson. The next question is from Scott Berg with Needham. Your line is open.

Hi, Bill and Isabelle [ph]. Congrats on the fantastic quarter. I guess the one question I had is you talked about net revenue retention rates that ticked up in the quarter that were super strong. But how about initial land? What are you seeing on new customer sales today versus maybe a year ago? Are you seeing any differences either in the kind of the solutions how they're using the product? Is there -- or a big difference in maybe pricing change?

So, I can -- I'll start with kind of the size of lands and the -- and kind of the size of contracts. And then I think maybe on the use cases, Bill can kind of dig into some of the elements there. So if you rewind the clock to about a year ago, we were definitely -- still, we were in the depths of COVID. So we are continuing to see expansion in the size of our lands. So that trajectory is definitely strong. And so -- and it's -- whether they're starting with multichannel, landing multichannel, certainly, at the enterprise and strategic side of our business -- sides of our business. So we're seeing strength certainly in the size of the lands and what it is they're purchasing upfront with the knowledge that there's still lots of room for expansion once we've gotten our foot in the door with a new customer. And Bill, if you want to talk about the use cases.

Yes. I mean from a use case perspective, I think that there's a good combination of a lot of the tried and true strategies that we enable because the technology shows up and it's differentiated from what people were doing before. We definitely work with our customers to map out the entirety of their, well, crawl-walk-run journey over time. And we encourage them to set it up in a way that enables experimentation. And so the -- I don't think there's been a kind of meaningful shift in the starting use cases that you see as many of these are the -- their straightforward customer engagement use cases. And then over time, we build them into more and more advanced strategies especially as we start to incorporate more data inputs and signals and as customers continue to advance their integrations over time.

Excellent. Congrats on the strong quarter, guys.

Absolutely. Thank you.

Thank you, Mr.Berg. The next question is from Yun Kim with Loop Capital. Your line is open.

Thank you. So, my congrats as well to Bill and Isabelle. So in the prepared remarks, you talked about renewals as one of the key drivers behind the strength in the quarter. And obviously, that's reflected in the net expansion rate. Can you just talk about the dynamics around renewals, especially for large customers? For instance, how much of it is driven by expanding deployment to more channels versus just simply increasing more volume of the existing channels? And also, are you seeing customers upsizing their deals well before the contract expires, especially those on multiyear contracts?

Yes. Sure. So the -- on the last question, yes, we definitely see customers of all sizes engage in what we call early renewals or upsells and increase the volume, either the volume of things they've already purchased such as e-mail, SMS, monthly active users or simply decide to purchase additional features or channels that they hadn't yet unlocked in the original contract. So we definitely see midterm upsells and early renewals at larger sizes. And then, I'm just making sure I caught all of your other questions. So yes -- so then, yes -- the new renewals, when you think about the renewals, yes, that was strong across the board. We've made a number of investments over time to really improve that renewal rate, not the least of which is the investments that we've made in our SMB sector that historically has had a lower renewal rate relative to company average. And we've really been able to improve that over the last few quarters. So we're definitely seeing strength there. And then in terms of the larger customers, it's a mix. They're increasing their volumes of what they've already purchased and expanding into new products and features. So it's definitely a mix in terms of what is adding to the dollar-based net retention.

Yes. And I think what we're continuing to see is that there are just so many different dimensions by which people increase their usage of Braze that the answer to some of these questions has been all of the above because there's just engagement across multiple teams, multiple use cases, multiple channels, multiple platforms, multiple geographies. And when you kind of expand those together, you have a lot of different ways that you expand use cases. You've got a lot of ways to drive ROI. And as you combine them together, it gets very differentiated. And we certainly benefit from that in terms of the accelerating growth rate and the predictability of it.

Okay, great. Thank you so much.

Thank you, Mr.Kim. The last question is from Pat Walravens with JMP Securities. Your line is open.

Hi Team, it's Jeremy [ph] on for Pat. Thank you so much for the question. Can you talk about your relationship with Twilio? And then just give us some more color about how you work with CDPs like Segment.

Yes, for sure. So Braze, obviously, we've spoken a lot about our vertical integration and the importance of differentiation there. And we're going to continue to invest heavily in that vision to kind of conquer the modern problem of customer engagement and maintain our leadership in the space. We also -- I've spoken a lot about the interdisciplinary lens that we think drives a lot of that. And so when you look at our relationship with Twilio, I think they've always done a great job of building tools for developers. And that's the reason that we're going to continue to have a strong partnership with them both through go-to-market collaboration as we work on certain deals together and they're also a CPaaS vendor for us for certain Braze channels, including SMS and e-mail. Also, when you look kind of more broadly across the CDPs and the product analytics companies, these are all places where the kind of the smooth flow of data certainly benefits people being able to do more advanced use cases over time. And so we remain committed to our customer-centric vision. And we're going to continue to partner with companies that share our vision for how best-of-breed technology should interact with each other in order to assemble world-class technology ecosystems for our mutual customers. And we also know that customers want to build and buy in ways that are going to vary from place to place which is why if you go back to kind of the dual purpose that we try to serve with Braze where we are both going to be that turnkey SaaS solution and be a collection of powerful robust APIs that product engineering teams can build on top of, all of those are also conducive to our engagement with the rest of the partnership ecosystem as well. And so over time, we expect that certain partners that we have today will start to move into the customer engagement space, as they have over our history. We -- similarly, we will continue to expand our own product and we will continue to work with the partnership ecosystem in a way that is transparent in places where we think that there is mutually beneficial interconnections and integrations that can be built out. We really believe that the -- having best-of-breed focused technology delivers differentiated ROI. And so we want to stay focused on our customer-centric view for how customer engagement should be done and do that in a way that's vertically integrated. And that's going to have implications for our own R&D investment and our partnership strategy and we'll be paying a lot of attention to how that evolves elsewhere in the ecosystem.

Thank you, Mr. Walravens. I will now turn the conference over to Bill Magnuson, CEO, for closing remarks.

Absolutely. So thank you, everybody, for joining us today. We're super excited to kind of close out our first-ever earnings call as a public company. We're really looking forward to having a regular cadence with all of you. Thank you for all the insightful questions that we were able to answer today and I hope that they gave you a good lens into the opportunity that's ahead of Braze and we're going to continue to build into. And with that, I think we'll close it out.

That concludes the conference call. Enjoy the rest of your day. You may now disconnect your lines.