Braze, Inc. (BRZE) Q1 2023 Earnings Report, Transcript and Summary

[Call starts abruptly] … I will be your conference operator today. At this time, I would like to welcome everyone to the Braze Fiscal First Quarter Results. [Operator Instructions] Thank you. I'd like to turn the call over to Chris. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today to review Braze's results for the fiscal first quarter 2023. Today's hold music was again composed, performed, and provided by Franky Saxena, a solutions consultant in Braze's London office. Thank you, 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 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 second quarter and full fiscal year ended January 31, 2023; our planned product and future development; our planned social impact initiatives; our competitive landscape; our market opportunity; our anticipated customer behaviors and our anticipated investments; our growth plan; and our long-term financial targets. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investors section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding, the company's fiscal first quarter 2023 performance in addition to the impact these items have on the financial results. Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations portion of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now I'd like to turn the call over to Bill.

Thank you, Chris, and good afternoon, everyone. We are very pleased with our first quarter performance, which again demonstrated the power of the Braze customer engagement platform. We got off to a great start to the fiscal year, generating $77.5 million in revenue, up 62% year-over-year and 10% compared to the fourth quarter. Our dollar-based net retention was 127% overall, and 133% for our customers spending at least $500,000 annually. We also generated free cash flow of nearly $16 million, driven in part by our strong bookings from Q4. We continue to expand across numerous growth vectors as our customers realize the positive business outcomes available through coordinated, personalized, cross-channel customer engagement enabled by the Braze customer engagement platform. Zooming out to our market, we believe the opportunity for customer engagement platforms has never been stronger as businesses increasingly prioritize customer-led growth. Customer-led growth is a strategic approach that leverages customer insights to qualify and quantify customer value, then operationalize and optimize the end-to-end customer experience. Braze is unique in the marketplace as our technology is designed to create an organization wide culture shift to focus on the experience that is most relevant to each customer. Let me give you an example of how an industry-leading streaming music company uses Braze to achieve customer-led growth. I recently discovered the artist Bora Uzer at a live event and have been listening to his recorded music on a leading streaming platform. Picking up on my evolving music tastes, this company uses Braze to send me push notifications as he releases new music. And if I get busy and don't catch a song at release time, they use real-time listening data to remind me when tracks I missed start to trend. Further enhancing my experience and driving other engagement goals, they store my listener profiles home region to send me an email when artists related to Bora are playing in the New York City area, will also alerting me that Bora himself is scheduled to play at the Red Rocks Amphitheatre in Colorado in October, even texting me moments before the show goes on sale, so I don't miss the opportunity to buy tickets. Customer-led growth organizations recognized that the value is not just getting me to stream more music, but to provide a meaningful experience with the music I love to keep me renewing my subscription. As we interact with brands, each of us is continuously signaling our intent and revealing our preferences through our actions, generating first-party data along the way. Processing that amount of data and responding in real-time at scale is challenging. As they look to conquer that challenge, businesses sometimes reduce their customer engagement data processing choice to a false dichotomy that limits their success, either opting for a legacy marketing cloud with siloed data, batch processing limitations and antiquated technology that's not fit for modern purpose, or by a point solution that isn't multichannel or built to scale with them. At Braze, we enable brands to take a customer-centric approach and rise above this false choice by combining the power of modern stream processing with the channel agnostic orchestration engine to enable businesses of all sizes to harness and take action on a constant flow of first-party data to increase customer lifetime value. Braze is well-positioned to win the customer engagement platform market, because we are purpose built to enable our customers to start anywhere and go everywhere. Customers often start with Braze on one or a handful of channels to begin generating value immediately. Then, because of our customer-centric design and vertically integrated data flow, it is easy for them to fast follow into other channels, while evolving to more sophisticated cross-channel campaigns, or brand may start working with Braze for its business in one country and then expand in their local region before finally going global. Braze continues to service and grow a diverse customer base across multiple dimensions. And we were excited to once again see growth across many verticals this quarter, particularly financial services, gaming and quick service restaurants will also securing new business and large upsell opportunities with Little Spoon, Mercari, PaulCamper in Germany and Pizza Hut in Australia, among many others. Digging a bit deeper, I'd like to highlight two recent renewals which demonstrate how businesses grow and sophistication with Braze over time, as market conditions and customer needs evolve. The first is a Japanese e-commerce company that renewed for its sixth year with Braze in April. Known for its marketplace app, the brand, along with its Braze customer success team, identified an opportunity to improve retention rates for shoppers who are multi-platform and use their browsers to buy. With rising inflation and economic uncertainty creating headwinds for e-commerce, improving conversion rates for acquisition efforts and lifting customer value throughout their lifetimes has taken on greater importance. That's why the company added new Braze features to their website, so their marketing team can personalized web-based experiences in coordination with mobile, all while adapting dynamically to user preferences. The other is an American Fitness Equipment and Media company, which has been a Braze customer for five years. The company initially deployed Braze in 2017 for mobile messaging only. Their mission of bringing the community and excitement of boutique fitness into the home resonated with consumers, and the pandemic greatly accelerated their membership growth. As they grew over the last several years, Braze has rapidly scaled with them. Now, with the pandemic winding down, people are rethinking the opportunity to return to in-person fitness. The company recognizes the importance of strengthening customer engagement at this critical moment, and not only renewed with us, but add an email, SMS, web messaging and content cards to their existing mobile messaging capabilities with Braze, so they can create more cohesive customer experiences that power customer-led growth. In our view, this shows the customer engagement remains an imperative for today's businesses. And sometimes it is even precisely because the macro environment is harder, that first-party audience engagement becomes a higher priority. We believe the reason we see businesses grow in sophistication with Braze is because of our four key differentiators: vertical integration; stream processing; Canvas, which is our flagship orchestration tool; and our community. Vertical integration empowers businesses to maximize their data's value with Braze. We designed our platform to enable companies to drive growth by listening to customers, understanding them deeply and acting appropriately in real-time. The goal is simple, create a unified, easy to use platform to collect data, gather meaning from it and take action, all in a way that is not only accessible to business users getting started, but also provides them the agility to experiment and evolve programs over time. This constant flow of data through a live user profile forms the foundation for real-time interactions that enable customer-led growth organizations to reduce churn and increase customer lifetime value. We believe what sets Braze apart from other solutions is the depth and performance delivered to our customers. And we take pride that we sent approximately 1.5 trillion messages and processed over 9 trillion consumer generated data points in fiscal 2022 for our customers with effectively no downtime. We continue to innovate across our vertically integrated stack to maximize performance and enable our customers to launch campaigns without limits. In order to execute on our product roadmap and support our customers, we have kept our talent engine running, growing our team by over 120 headcount in the quarter, bringing our total employee base to over 1,280 at quarter-end. And we know that developers are essential to driving exceptional customer engagement outcomes. With that in mind, we recently launched next generation SDKs for web, iOS, and Android making significant upgrades. Our web SDK now automatically removes unused code with a technique called Tree-Shaking, decreasing our footprint and improving performance. Our next generation iOS SDK has been upgraded fully to Swift, a modern developer friendly language allowing access to all of the latest Braze features in a current tooling environment. And for Android, we migrated from Java to Kotlin, another evolve language option, while also building support for android 13, which is expected to be released later this year. Modernizing these SDKs is critical to staying in stride with a rapidly evolving customer engagement landscape. And we look forward to continuing to roll out innovative solutions for developers in the coming months and years. We continue to focus on deepening our integration with delivery channels as well, because in today's digital first world, brands need to connect with customers on any channel and on any device. This quarter, we upgraded support for our Roku SDK by adding in app messages on Roku devices, allowing customers to easily reach relevant viewers as they browse, make content recommendations that enhance subscriber stickiness and deliver promotions which improves the bottom line. This demonstrates our commitment to ensuring we are delivering both depth and breadth across every channel so businesses can easily reach their customers wherever they are. Our second key differentiator and a crucial component in our data architecture is Stream Processing. With Stream Processing data flows immediately into the highly differentiated and customer centric portion of our Tech Stack, the classification, orchestration and personalization layers, enabling our customers to create more relevant and responsive campaigns such as preference based reminders or limited time promotions, while also enabling them to rely on Braze for mission critical product use cases that are delivered by messaging. By contrast, legacy marketing clouds use batch processing, which even if done frequently, or in small batches, still silos data and introduces both latency and complexity. We're limiting customers to processing information on a time or volume based schedule. We believe it will be very challenging for competitors to pivot towards stream processing because to do so require them to completely rethink and rework their architecture. Braze was built from the ground up as a vertically integrated stream processor. It's core to our architectural DNA. Our flexible data model allows businesses to seamlessly connect data structured or unstructured from a wide variety of sources. We easily ingest data virtually anywhere with minimal configuration. Thanks to our robust APIs, SDKs and integrations built through Braze Alloys, our technology partner program. Braze closes the engagement feedback loop by capturing data during each customer interaction, while also providing real time analytics and in depth reporting to understand performance, draw on actionable insights and sharpen campaigns across all channels and platforms. This data can then be seamlessly transported back into a data warehouse or CDP with Braze Currents, further informing future customer engagement. Many businesses rely on stream processing to provide customers with up to the second updates, which can have a meaningful impact on customers lives. We recently saw a great example within the Braze community. One of our employees recently went on parental leave to attend to his four month old daughter who has a severe allergy. His child requires a special formula, which has been in short supply across the U.S., creating major challenges for many parents. Thankfully, a consumer goods and food delivery company that leverages real time communication with Braze sent him an immediate alert at 10:26 AM that the formula they use had just been restocked. He ordered shortly thereafter and was able to receive delivery of the formula less than an hour later. Real time inventory alerts like these easily scale and braise across massive product catalogs, even with the difficult combination of matching up global consumers to constantly changing local inventory. Batch processing technology is simply not built for our always on future. Our third key differentiator is Canvas. Our proprietary no code visual development environment that empowers marketers to easily build, operate and understand the real time results of personalized multichannel campaigns. With Canvas, brand marketers can bring their data to life, creating multi step cross channel customer journeys with limited technical training. We want to empower marketing experts to quickly build effective campaigns that would otherwise require the expensive time of software engineering teams and the long delays associated with heavyweight software releases. Canvas fulfills this promise, helping brands deliver the cohesive, responsive and personalized experiences that consumers have come to expect at any moment, which leads me to the final Braze differentiator, our community of employees, partners and customers. We firmly believe that businesses don't just buy technology, they buy solutions. That's why we've invested in our Braze Alloys program, which includes both technology and solutions partners, such as Global Systems Integrators, who are actively building Braze expertise, and providing us with new client opportunities. We have expanded Braze Alloys overall, adding more than 30 new partners in the last year and 9 in Q1, including companies like Microsoft and Heap. In the case of Microsoft, this new connection will enable brands to easily ingest data and insights into Braze via our APIs, allowing shared Braze and Microsoft Dynamics 365 customers to seamlessly act on data in real time to orchestrate customer journeys. We're also investing in our customer success, professional services, support and education teams to help businesses of all sizes navigate the wave of workplace disruption post pandemic and shift to customer led growth marketing. Just last month, we announced Braze for success, a series of new offerings and enhancements to provide customers with end-to-end support allowing for more flexible onboarding, robust creative services, enhanced customer education, and new channels for customer support. We have an excellent track record of delivering for our customers as evidenced by Braze winning the prestigious NorthFace Scoreboard Award 3 years in a row and the 2021 Customer Success Team of the Year by the Customer Success Collective. And I would be remiss to talk about people and not talk about Braze Bonfire, our customer community launched right before the pandemic. We have grown Bonfire to over 6,000 members globally across nearly 2,000 brands, which leads me to an exciting announcement to make on this call. We will be hosting our annual customer conference Forge in-person both here in New York City in early October and in London in early November. We look forward to bringing our entire community together for what promises to be a week of deep learning and connection. Before turning it over to Isabelle, I want to update you on our social impact and ESG initiatives as we continue to make progress against our goals. In our Tech for Black Founders program, we've added nine companies in our 2022 cohort, including FemConnect, which responds to women experiencing health issues in sub Saharan Africa, and King [indiscernible], which is on a mission to help people uncover their family histories with DNA insights. Our total number of Tech for Black Founders companies now stands at 23. In connection with our 1% Pledge, we transferred our first tranche of Braze Class A common stock to Tides, our donor advised fund to support our social impact, environmental and governance initiatives. In addition, we are working on our first materiality assessment and greenhouse gas emissions audit. We look forward to providing you with an update on both of these initiatives through our inaugural ESG report, which we plan to publish this fall. I'll wrap my remarks with a few comments on the state of the macro environment generally. While the world is confronting increased macroeconomic volatility and geopolitical uncertainty, we remain confident in our outlook. We had a great quarter and feel very good about our fiscal 2023 outlook. Our commitment to helping our customers build strong and lasting customer relationships through great customer engagement becomes even more relevant in a challenging environment. And we believe that our customers will continue to prioritize our services, even in times of uncertainty. We also believe that the necessity of customer engagement, coupled with our rapid time to value, makes Braze more resilient during a potential slowdown. We are confident that customer engagement represents a massive market opportunity that remains under penetrated. And we will continue to lean into our growth potential, while accepting the responsibility to deliver against that potential through relentless execution, creative innovation, and winning strategy. Thank you to all of our customers, team members and shareholders, and I look forward to updating you on our progress again in the coming months.

Thank you, Bill, and thank you everyone for joining us today. We reported a strong first quarter and as Bill noted, first quarter revenue rose 62% year-over-year to $77.5 million. This was driven by a combination of new business sales, expansion of existing customer contracts, and renewals. Our subscription revenue remains the primary component of our total top line, contributing 94% of our first quarter revenue. The remaining 6% represents a combination of one time 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 first quarter was strong, with total customer count increasing 50% year-over-year to 1,503 customers as of April 30, up over 500 customers from the same period last year. Our total number of large customers, which we define as those spending at least $500,000 annually grew 65% year-over-year to 129 and as of April 30, contributed 54% to our total ARR. This compares to a 51% contribution as of the same time last year. Turning to dollar base net retention. As a reminder, our dollar base net retention represents a 12-month trailing statistic, and sources of upsell dollars include increases to pre-committed volumes of monthly active users and messaging entitlements, signing new business units 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. Our renewal rate combined with our strong upsells drove the year-over-year increase to our total dollar base net retention rate as we continue to execute on our effective land and expand motion. For the total company, dollar base net retention was 127%, up 260 basis points compared to the prior year and down 80 basis points sequentially compared to the fourth quarter. Dollar base net retention for our large customers, those spending at least $500,000 annually was 133%, down 130 basis points compared to the first quarter of last year and down 300 basis points compared to the fourth quarter. Expansion was strong across industries and geographic regions with revenue outside the U.S contributing 41% of our total revenue in the first quarter, up from 40% in the prior quarter. Moving to our remaining performance obligation. In the first quarter, our total remaining performance obligation rose 57% year-over-year, and 5% sequentially to $391 million. Current RPO rose 56% year-over-year and 7% sequentially to $255 million. These increases were driven by strong business momentum including new contracts, contract renewals and term extensions. Our overall dollar weighted contract length continues to be approximately 2 years. Now I'd like to review the income statement in more detail. As a reminder, some of the metrics I will discuss are non-GAAP. We have provided a reconciliation of GAAP to non GAAP financials in our earnings release and accompanying earnings presentation. Non-GAAP gross profit in the quarter was $52.5 million, representing a non-GAAP gross margin of 67.8%. This compares to a non-GAAP gross profit of $32.3 million and non-GAAP gross margin of 67.4% in the first quarter of last year, and 67.2% in Q4. Gross margin percent improved 40 basis points year-over-year due to continued economies of scale in our core technology expenses and ongoing efficiencies in core personnel costs. Turning to operating expenses. Non-GAAP sales and marketing expense was $40.2 million, or 52% of revenue compared to $22 million, or 46% of revenue in the prior year quarter. This reflects our continued investments in headcount to support our strong growth and global expansion. Non-GAAP R&D expense was $15.3 million, or 20% of revenue compared to $9.2 million, or 19% of revenue in the prior year quarter. The dollar increase was primarily driven by headcount to support the expansion of our existing offering, as well as to develop new products and features to drive growth. Non-GAAP G&A expense was $15 million, or 19% of revenue compared to $7.1 million, or 15% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public company expenses. Non-GAAP net loss attributable to Braze shareholders in the quarter was $17.7 million, or a loss of $0.19 per share, based on 93.2 million weighted average basic shares outstanding during the period. This compares to a loss of $5.9 million, or a loss of $0.30 per share based on 19.7 million weighted average basic shares outstanding during the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $534.1 million in cash, cash equivalents, restricted cash and marketable securities. We believe Braze is currently a fully funded business and consistent with comments made since our IPO roadshow and during our last two earnings calls, we continue to execute on our growth plan through FY '23. Cash generated from operations in the quarter was $17.9 million, compared to a use of approximately $3.8 million in the year ago quarter, with the change driven by strong cash collections from customers, as evidenced by $22 million decrease in accounts receivable and $30 million increase in deferred revenue. Taking into consideration the cash impact of capitalized costs, we generated a record $15.7 million of free cash flow in the quarter. As we have indicated in previous quarters, we expect our free cash flow to fluctuate from quarter-to-quarter, given the timing of customer and vendor payments. Before I turn to our forecast, I would like to take a few moments to frame our plan for capitalizing on our long-term opportunity while navigating a more uncertain macro environment. We remain excited about our potential for revenue growth given the strong demand for our solution and a significant market opportunity ahead of us. And we are confident that our investments have the ability to drive strong returns. And while this is an investment year, we remain focused on driving efficiencies across the organization and managing discretionary spend with an eye towards long-term profitability. Our second quarter revenue guidance includes appropriate risk adjustments for new business and renewals we have yet to close this quarter. For the second quarter, we expect revenue to be in the range of $80.5 million to $81.5 million, which represents a year-over-year growth rate of approximately 45% at the midpoint. Second quarter non-GAAP operating loss is expected to be in the range of $19.5 million to $20.5 million. Second quarter non-GAAP net loss is expected to be $18.5 million to $19.5 million with second quarter non-GAAP net loss per share in the range of $0.19 to $0.20 per share, based on approximately 95.4 million weighted average basic shares outstanding during the period. For the full fiscal year 2023, we are raising our revenue guidance. Revenues are now expected to be in the range of $345 million to $349 million, which represents a growth rate of approximately 46% year-over-year at the midpoint. Fiscal year 2023 non-GAAP operating loss is expected to be in the range of a loss of $77 million to $81 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $74.5 million to $78.5 million. Fiscal year 2023 non-GAAP net loss per share is expected to be a loss in the range of $0.78 to $0.82 per share, based on a full year weighted average share count of approximately 95.8 million shares. In summary, we are off to a great start in fiscal 2023, as evidenced by our strong execution in the quarter. New and existing customers continue to realize the value of our technology and we remain focused and committed to delivering revenue growth at scale. And with that, we'll now open the call for questions. Operator, please.

Hello, this is Macy, your operator. We will now begin the Q&A session. Our first question comes from Ryan MacWilliams with Barclays. Ryan, please unmute and ask your question.

Thanks for taking the question. Braze has done a lot to accelerate time to ROI and implementation speed over the last few years. So as we potentially enter into a more difficult macro, how are new customers thinking through the cost and implementation process required to move to Braze at this point?

Thanks for the question and thanks for -- thank you to everybody that's going to come up as well. We are really excited to talk about these results, and also give you a better glimpse into the environment that we're operating in. So I think that's a particularly notable way to start to analyze, what we're seeing in sales cycles, what we're seeing in response to customer implementations, customer priorities. I think that one of the great things that you have as the - as a Braze customers that once we get you up and running quickly, and as you're correct, that we've been very focused on time to value over the last few years. We get you up and running in a fashion that is customer centric. So, you're obviously going to start on one or a few channels, you're going to start on one or a handful of platforms, depending on where you either have your current priorities or where your user base is focused. But in implementing Braze, what we always make sure happens is that you're integrated at the platform level, and then the data flow is vertically integrated all the way through to the channel with our orchestration layer, which of course, is customer centric, sitting in the middle. And from a priority perspective, what we're seeing customers do is that, obviously, they want to be able to kind of defend the customer bases that they have, we're seeing an increased focus on getting higher ROI out of your acquisition investment, which means that people are trying to improve their retention rates or trying to improve the pace and the kind of -- the turning a funnel into a pipe, if you will, so that they're not acquiring and having large drop offs at each stage as customers kind of develop habits and become more committed customers over time. But those are generally always on priorities with various customers. So what we're seeing overall, I think, amongst their marketing and their business priorities are going to be a focus toward those things that are ultimately higher ROI focused on first-party audiences going through, things that are going to maximize retention, maximize lifetime value, improve the ROI of their acquisition spend. But we're not seeing necessarily a shift in those priorities with people that are Braze customers. But what we do see in environments like this is a focus from what was traditionally advertising focused acquisition spend toward caring a lot more about retention, activation, and really making sure that those acquisition investments that they've made either ongoing right now or in the past for maximally effective for them and have the maximum ROI.

Appreciate the color. And then Isabelle, just as investors think about the puts and takes that Braze's net retention. How should we think about how MAU growth within Braze’s customers has supported Braze's net retention historically, and as any changes to the monthly active users within your customer base impacted your view going forward? Thanks.

Yes, so the monthly active user continues to be the single largest component of our top line. And we've been talking about that, since a1ctually before the IPO when we were talking to you guys in education sessions. The other components, CPM-based messaging, those are less than the MOU, but also growing fairly quickly. So the MAU will continue to be kind of a large component and will also drive additions to our dollar-based net retention. I think the other components will mix in as well. SMS, for example, is one of the smaller CPM messaging components for us. And obviously, because of the lower the smaller size, you get higher growth rates based on just starting off the smaller data smaller base. So I think the MAU will continue to add and continue to grow, but we're seeing strong additions from other components as well that are seeing strong growth.

Good color. Thanks, guys.

Our next question comes from DJ Hynes at Canaccord. DJ, please unmute and ask your question.

Hey, thanks, guys. Bill, I'm not sure this is a fair question, I'm going to ask it anyways. Is there a way to parse out kind of marketing use cases for Braze versus more customer engagement use cases? And the reason I asked, look, I think some investors look at marketing spend as more of a discretionary category, whereas engaging with your existing customers may be more resilient. Just would love to get some color on kind of where you think you fall in that spectrum.

Yes. Thanks, DJ. I appreciate you bringing up that kind of investor sentiment where they think about marketing use cases and how they respond to economic headwinds and how customer engagement more broadly and a lot of also just transactional messaging use cases or things that are closer to infrastructure or product are obviously going to be more sticky. Now going back to my answer to Ryan's question, though, about how we think about integration, how people get started with Braze and how they grow with them over time. I think it's really important to center your thinking, not necessarily in how those things are split, but rather in how they get implemented, because the key thing is that whether someone starts with either marketing use cases or customer engagement use cases with Braze, the way that they actually are going to integrate Braze and get up and running is going to be the same because when they're going to integrate us into their end user interfaces, into their apps or their websites or into their data warehouses, they're then going to flow all the data that's generated through those to generate those signals in order to inform targeting or orchestration or personalization. And then we're going to deliver those messages. And certainly, message volumes are going to be correlated with the number and the type of use case that you have. But in general, the integration actually is going to enable you to start in either -- in kind of either of those places or any kind of sliver of either of those places and then move more broadly into them over time. And so when we've got customers that are running -- most -- the vast majority of our customers are running both of these things, right? And they're running actually a whole bunch of examples of marketing, promotional, onboarding, activation, retention as well as just much more utilitarian product type use cases. They're all running through the same data flow. They're all addressing the same monthly active user base. So going back to Isabelle's response she just gave you in terms of thinking about how our revenue is structured and then certainly, the CPM sit on top of that. But even within those use cases, a lot of the marketing that we're talking about is I always go back to the high ROI portion of it, this is where you're marketing to your existing customer base, right? You're simulating demand from relationships that you already have, that you've already paid for, that you've already earned the right to communicate with them on a channel that you control. And so what we generally see is that those are the use cases and even though they are marketing by their nature, they are always on because they are so valuable and the ROI function of them versus the marginal cost just makes so much sense. So even if you're trying to think about like, oh, there is some portion of Braze's use cases that will act more like advertising in the sense that someone might not be willing to pay to stimulate the marginal demand because whatever in the spending environment or maybe they don't have the marginal supply due to supply chain issues, things like that, we don't see that type of behavior within our customer base because the types of marketing use cases that we run are much more about life cycle, they're about building that long-term value. And even to the extent that they're promotional, the marginal cost is just the message volume. It's not the same kind of ROI functions you see in the advertising world.

Yes. Super helpful color. I appreciate that. Thank you. Isabelle, maybe a quick follow-up for you. Just look, we heard your comments around kind of continued to press forward with the investment agenda this year. I mean, I think investors have made it pretty clear, they're kind of more interested in balanced growth and profits in a risk off environment. Obviously, I understand kind of you can't sacrifice what's best for the business to appease the capital markets. But I just want to -- any update on kind of how you're thinking about things going forward? I mean, have you raised the return threshold for your investment agenda? Like how are you thinking about kind of balancing -- threading that needle, if you will, what is still a fairly high loss business?

Yes, absolutely. Thanks for the question. So look, I think we have consistently sort of over the last several years, had a very, very disciplined approach to capital deployment and cash deployment, expense deployment, and that continues. And so we are very diligent right now about how we are having folks travel around the world. And we are very, very clear that we want to continue to bring our headcount plans into focus and deploy our headcount as we have expected to do so. And that's where it's important for us to be deploying capital right now is to bring to continue our growth strategy across the world. And so we are -- we have always maintained discipline when it came to our expense strategy, and we're going to continue to do that so that we can continue to deploy it in the most efficient and effective way possible. So there's no pullback on anything. We're continuing to execute on our plan. You're seeing us raise top line guidance, you're also seeing us improve our burn outlook for the year. So that is -- that's very consistent with what we're trying to do here, and we are going to continue to capitalize on the growth opportunity that's ahead of us and do what we said we were going to do.

Yes, and I just want to also kind of restress our track record from that perspective. So if you look at the time of IPO late last year, at that point, we had only burned about $95 million in cash in our entire company's history, which at that point had been more than a decade. And we had a [indiscernible] run rate at that point of over $0.25 billion. So that ratio of greater than 2.5:1 is relatively rare even among start-ups. And I think it's important to keep in mind that we achieved those efficiency metrics at a time when the market wasn't really valuing it or rewarding it. We did it because it's an important part of our culture in terms of how we think about having value orientation in building for efficiency and building for the long-term. We have been anticipating that the market's appetite with respect to profitability, and growth at all costs would shift back to the state that it's in today for years. We're well prepared for it culturally, and we're actually excited that the market is starting to place more scrutiny on the way that people make investment decisions like this because, to a large extent, for a company with a culture and a value set like ours around spend efficiency, it levels the playing field.

Very helpful, guys and congrats for the next quarter.

Thank you.

Our next question comes from Gabriela Borges from Goldman.

Good afternoon. Thanks for taking the question and congrats on the quarter. Bill or Isabelle, I was hoping you could comment a little bit on the pipeline. And any nuance on what you're seeing between mid-market enterprise, U.S. versus rest of world or from an end market standpoint? Thank you.

Yes. So overall, I think we -- our continued outlook continues to be strong, and we are really excited about the rest of the year. Pipeline, geographically, remains diverse. It remains diverse across industries. And so what we've seen over the last several quarters is continued strength in kind of our top five verticals, continued growth in some of the smaller verticals, and we're kind of continuing to see that evolution. Geographically, we've had some folks travel over to Europe and get some face-to-face time with over there. Some of our leadership has gone over there, and they came back really enthusiastic. So look, we're mindful of the risks and how things are going economically around the world. The war in Eastern Europe is certainly not over. We have our eye on all of this, but the sentiment that we are seeing from our existing customers and then potential new customers continues to be strong and enthusiastic.

Great. And the follow-up is on unit economics. And your commentary just now on focusing on LTV to CAC and unit economics for the business. What we are noticing is that even with the acceleration in sales and marketing spending over the last year, your LTV to CAC by calculation is holding pretty steady. So Isabelle, maybe you can comment a little bit on the productivity that you're seeing in the sales force? Any nuance between folks who have been with Braze longer versus folks that are ramping?

Yes. Yes, absolutely. So I think some of that speaks to a lot of the sort of automation and things that we've put into place to kind of accelerate the go-to-market strategy, particularly for our SMB area. We've done a lot of investments in that area to really just make things more efficient, more effective and get more leverage out of existing tools. And the beauty of that is, as we develop those really for the SMB, we can actually use them across other parts of the business. And so SMB is a great place to develop this and test it and hone it and refine it. And then when it's ready, and it can be scaled up for mid-market or enterprise customers, we can do that. And so I think some of what you're seeing is some of that efficiency at play. And again, really have a strong discipline as it comes -- as it relates to capital deployment.

Sounds good. Thanks for the color.

Yes, thank you.

Your next question comes from Brent Bracelin from Piper Sandler. Brent, you may unmute yourself.

Thank you and good afternoon. Bill, I wanted to kind of go back to this current environment, where we are fielding lots of questions, lots of unknowns out there. How durable are these direct-to-consumer tailwinds and this investment wave into first-party stacks? You have a lot of large B2C brands, but what are those B2C brands telling you at this point? Are they leaning more in? Are they pausing some investments on the consumer engagement side? Just trying to think through how some of these B2C brands respond and how durable those D2C and first party data investment tailwinds are in the current environment? Thanks.

Yes. So I think you're seeing the same things happening as you do any time that there's kind of headwinds that show up, which is that there generally ends up being -- there's going to be trends towards consolidation like the quality, et cetera. And what we are seeing amongst D2C brands that we work with, and I'll provide this with the reminder that Braze's revenue base is extremely diversified. So while certainly, retail and e-commerce is an important, one of our top five verticals, it's right up there with the other four in terms of its percentage contribution to our business. And even within that D2C brands, in general, are a subset of that. And within that, even many of the D2C brands that we work with are those that have a longer-term outlook and are attempting to build a more enduring customer relationship through a multiproduct portfolio. So I think that when you look at a lot of the kind of D2C growth over the last few years, a lot of it was focused on a small number of products in a small product portfolio, many of them were working on the kind of CAC LTV arbitrage that Facebook was affording them in terms of being able to run really good retargeting through platforms like Instagram and other places. And what you have been seeing there and a lot of the headwind being caused by IDFA is they've lost the kind of transparency into those cycles, the marginal dollars not going to Facebook, we see that in their earnings. And that kind of affects a lot of that acquisition. But it's really important to note that Braze in general, the use cases that we work with and the types of brands that we work with are not those that are kind of solely reliant on growth through those tactics. We are working with these brands that have more kind of enduring value. They -- in many cases, they’ve been around longer. They have a more multiproduct portfolio. And in many cases, they're also looking to nurture those relationships over time, even if the customer is maybe not making a purchase today. And so we are certainly seeing amongst that subset of our customer base, a lot of the things that you're probably hearing about in other places. But it, again, is really important to translate those observations back into the use cases that we run and the kind of aspects and then the selection bias that already exists with those types of business that we work with within those categories.

Super helpful. And then a quick follow-up for Isabelle here, extremely surprised to see 20% free cash flow margins in the quarter. How much operating flexibility do you have in this model as you think about the changing macro? I mean you talked about improving the burn outlook for the year. But how much operating flexibility do you have to respond quickly if things do turn a little bit worse than what you're expecting at this point?

Yes. So certainly, not expecting to have to turn on a dime and to anything, as I will reiterate, we are executing on our plan. I would make the comment about the free cash flow that this is -- we don't -- obviously, we don't guide on free cash flow. I always tell people to look at free cash flow to four quarter trailing. You obviously saw a big cash outflow from a free cash flow perspective in Q4. Some of that is a little bit of a snapback from that. So we're very comfortable with where we are landing on a four quarter trailing statistic. And I think should we need to make changes, we have all of the data and infrastructure and sort of communication channels in place and ready to go should we need to do that. But we have no expectation at this point that we would have to do that anytime soon.

Great to hear. Thank you so much.

Our next question comes from Brian Peterson with Raymond James.

Thanks for taking the question. So just one for me. So it's interesting to see the user conference, I know it's going to be in-person, both in North America and London. I'm curious, what is that historically driven in terms of net new business or expansion with existing customers? And should we think about that as a catalyst as we head into next year?

Yes, so thanks for the great question. We are super excited to be back in-person as well. We also increasingly are leaning into bringing our event production and our community growth efforts closer to where our customers are, so we are excited to do this on both sides of the Atlantic this year, and we will have a number of regional activations around the world, including in Japan and Singapore throughout the year. So watch out for a lot more to come from that perspective. Now with respect to your question around how this drives new business versus upsell, we -- historically, it certainly has been a driver for business, but it's also one that we've had, multiple years in the past, COVID in the last 2 years have obviously changed the nature of the event quite a bit. But we assume that we are going to run a customer event. And so we are excited about the potential that, that will have for us from a pipeline generation perspective, but I'm not going to speculate on exactly how that would feed into end of year plan with respect to surprising us in any way as we've done this year-over-year.

Understood. Thanks, Bill.

Yes.

The next question comes from Pinjalim Bora with JPMorgan.

Great. Hey, thanks for taking the question and congrats on a very strong quarter. I wanted to ask you a high-level question, Bill. On community, I’m starting to see people flaunt Braze certified marketer badges on LinkedIn. It seems like you are doubling down on the community with Braze for Success with the learning portal. What remains to be done at this point in time to kind of make the path of people starting to build careers on Braze as the default platform for customer engagement? And in the last year, are you kind of starting to hear a bigger drumbeat of people starting to do so kind of spreading the brand recognition more broadly?

Yes, I mean absolutely, and thanks for noticing. We think we are still definitely early in the progression of supporting our customers through traditional education, supporting and building the community of those practitioners that come together, augmenting it with additional trained ventures from the GSIs and from the rest of the agency community, the kind of growth. Marketing community has obviously been an important part of our timeline from its advent in our early years and how that's grown up into growth agencies all over the world, many of which we work with and are helping with our partner-led onboarding, our PLO initiatives that we've been driving. That's one of those things that Isabelle referenced a little bit ago in terms of our higher efficiency investments into our SMB sector that will then later help us improve the economics elsewhere. So there's a lot there. I think when we think about the investments, it has a few different dimensions to it. One of them is that improves time to value because if we can have customers get up and running more quickly, get up and running more expansively and make that early education and onboarding more efficient and have them retain more. All of those things obviously help them get up and running. We also know that the quicker people get up and running, the quicker they move on to new use cases, the quicker they expand to more platforms and more channels and that leads to the strong dollar-based net retention that you see. It also means that as people become more advanced in their usage of Braze, we frankly have fewer and fewer competitors that can deliver on the same types of things. There certainly are people out there that can deliver and compete with us on the most basic parts of Braze, but we feel very confident that as a customer becomes more sophisticated and advanced in their Braze usage over time that we really truly rise above the rest in a way that is differentiated really large across the entire market. And so we have a strong motivation to make sure that our customers are getting to that point as well. They obviously are showing this willingness and this desire to build their careers around those skills. And ultimately, we want to continue to also push the state-of-the-art in terms of thinking around customer engagement and marketing. We are really excited about where that goes over the next few years. I think that Braze has been super focused over the last few on making sure that we are getting data flowing through the system, that we are investing in things like Canvas to make it more and more usable over time and enable more of our business experts, the people that are really close to the problems in the day-to-day and understand them intuitively and are kind of constantly in the flow of those things. We want them to be able to express their strategy and their creativity directly through the Braze tool without needing to kind of deal with the -- going over to an engineering team, explaining it all over there or with the data science teams that maybe are not in it day to day, we really want to empower that marketer to fully bring programs to life and we are seeing that happening more and more. And that's a combination of product investment, along with education and the building of the community. We think that, that leads to these really amazing feedback loops and the flywheel is only just beginning to spin up.

That's great to hear. One follow-up, Isabelle. I was looking at the billings growth, which is super strong. And then I'm looking at the RPO growth, which kind of a little bit decelerated. I wanted to clarify, I think you said contract lengths were approximately 24 months. I think last quarter, you said it was slightly above 24 months. Was contract length, was that a slight headwind to RPO in Q1?

So I mean it was still in the sort of 24 month range. I think we are going to stop providing sort of the nitty-gritty details of up a month, down a month. It's still in the 2-year range. So we are just going to stick to that as the disclosure. I think from a billings perspective, if you actually look at the components of what drove the calculated billings, the change to deferred revenue was obviously significantly stronger than same period a year ago. So growth, obviously a part of that, but very strong cash collections from customers also fed into that as well. So I wouldn't necessarily read into sort of otherwise weakness in the RPO relative to the billings number.

Got it. Thank you.

The next question will come from Arjun Bhatia with William Blair.

Perfect. Thank you and I will add my congrats on a great quarter. Bill, it seems like, obviously, customers are spending more with Braze, you're seeing larger deal sizes as customers realize the importance of this customer-led growth in first party data. I'm curious, when you see customers spend more with Braze, what are you noticing about where they're reallocating those dollars from? Is that -- are you seeing a consolidation trend where vendors are -- other vendors are maybe getting displaced? Is it advertising dollars? Just curious what dynamics you're seeing in terms of budget reallocations?

Yes. So thanks for that. So the -- we are seeing kind of all of the above, of course, and we haven't for a long time. I think that the -- and that really plays in more at the land stage with new business. So you're going to see money you get moved out of advertising and consolidation happens a lot with respect to us kind of going in and maybe there was previously an e-mail vendor and a mobile push notification vendor, and they're running something else for in product or maybe like a survey vendor or something like that. So we have a long track record of coming in and starting out with either replacing or consolidating other places. We also often are part of net new budgets, especially when there's new initiatives. So if you look at the kind of move toward direct-to-consumer type offerings that are happening in places like sports leagues or in media streaming media and streaming or even in like consumer packaged goods industries or with QSRs like -- all of these are great examples where they've been building more direct-to-consumer digitally enabled offerings. And so those are part of net new budgets because they're brand-new corporate initiatives. The -- I do think that we also see over time a shift or a kind of accumulation from 2 other places. First, of course, it is ROI positive, as we've spoken about before, and often much more so than advertising. So you do see a shift from advertising. I think also one of the things that we bring in to the mindset of organizations to think about not just acquisition and retention, but actually acquisition activation and then retention and Braze really helps with those activation use cases, which are that, okay, I've got my first chance to really communicate with or interact with someone on a first party platform. I need to try to maximize the value of that. Whether that is to deliver an even stickier experience or maybe it's to just get the opportunity or the privilege to communicate with them on a first party channel later on or otherwise kind of optimize that spend. So those are all use cases where we can be seen to be improving the ROI function directly of advertising, and then that helps either allocate net new budget because it's productive or it shows the importance of balancing those in a different way than they were before because we are really super charging a lot of that acquisition spend. The last thing that I would bring up, and we are seeing some really incredible examples of those. We actually have features in Canvas that allow for you to take an individual customer and either add -- either kind of trigger them for suppression list because maybe you were running expensive retargeting campaigns against them, and they've now shown up in your first party properties. And because of the way that Canvas works, we're actually able to, in real time, immediately make those updates out to suppression list in a very easy way and even do that as part of a multichannel Canvas staff, so we could engage them on an own channel of the same exact time that we suppress them on a paid channel. The other is making look like audiences and doing the same thing in the flow of an individual user. And so doing those as part of the life cycle marketing so that when you achieve certain life cycle milestones, those are either going to lead to suppression or creation of look like audiences. And we've been hearing quotes from customers of upwards of 40% decreases in CPAs depending on what industry you're in by utilizing some of those books that we have that bridge that kind of data divide between life cycle and into advertising. Now we are not running those advertising use cases, right? Those are usually hooked into partners like Facebook or Google. But those are places where we're really augmenting that spend and then that, of course, feeds back into budget for things like Braze.

Perfect. That’s very helpful color. I will leave it there and then thank you.

Thank you.

[Operator Instructions] Our next question comes from Derrick Wood with Cowen. Derrick, you may unmute and ask your question.

Sorry. I found the mute -- unmute button. Thanks and congrats from my end as well. I guess then, Isabelle, I will just throw one out to you on the dollar based net expansion rate, remains healthy. It was down sequentially. Now you've seen that trend from many others, given the anniversary-ing kind of the catch-up benefits and post-COVID. Is that the main factor here or anything else to call out? And should we expect this number to kind of continue to moderate through the year, just given the tougher comps?

Yes. I mean, look, I think we are already operating at a great level for these metrics. I think company-wide, the number went up year-over-year, and we're pretty excited about that. So I think we are already operating for a best-in-class area. I think they're going to bounce around, and we are going to keep executing on our land and expand strategy. And so in some quarters, you're going to get some great lands and in some quarters you're going to get some great expands and on the whole -- over the course of the years, it will kind of drive the overall growth of the organization.

Okay. Thank you.

Our next question comes from Pat Walravens with [ JPM ] (sic) [ JMP ].

It's JMP Securities, but thank you. Hey, Bill, so are you seeing any impact from the tougher venture financing environment on the positive side? Like are you seeing any of your competitors pull back or maybe interesting companies reaching out because they're running out of money and want to get bought?

So headwinds like this definitely lead to consolidation in markets, and we’ve seen some smoke rising in various areas, but I wouldn't -- I'm not going to kind of speculate more deeply on behalf of any of our competitors amongst the broader landscape. What I will say from our perspective on all of this, though, is that we feel really fortunate to be fully funded, as Isabelle mentioned. We see a tremendous opportunity to go and not only gain great market share during this time period, but bring in fantastic talent. We are starting to see a little bit of a thaw in the job market, which for those of us that are still hiring, is a really fantastic thing because we can find a lot of people that probably haven't been on the market for a long time as we go through this next critical stage of growth. And we are well aware that a lot of our -- the competitive progress that we make over the next couple of years is going to be higher leverage than it is an environment where money is easy. And so we are laser-focused on that as an opportunity right now. And we are -- if you go back to my point from earlier that we've been ready and are excited to embrace this environment where there's more scrutiny on efficiency because we think it's a cultural advantage of ours.

Great. Thank you.

Okay. Our final question comes from Brian Schwartz. Brian, please ask your question.

Thank you very much. One for Isabelle. I know you don't give the granularity on the gross margin by geographies, but it looks like you had a very strong international quarter. So I was wondering if there was any changes in the gross margin that you're seeing between your business in the U.S. versus international? Thank you.

Yes. No, there's really no material difference if you think about kind of APAC overall, EMEA overall and the Americas overall. There's kind of no real distinction there. We really think about the products that we sell as kind of the comprehensive customer engagement platform, we look to service the customers in the best way possible for them to engage with their end user community. And so we've talked about this in the past, different products mix in with different levels of margin. But there's no sort of direct trend with the broader regions against each other. And even to a certain degree across the industries, there's higher margin and lower margin customers across the various regions, and there's higher margin and lower margin customers across the various segments, so -- and industries. So it's -- there's not really a story or a theme there.

Yes, and I think that just to kind of hit that a little bit more directly, I wouldn't expect there to really, at any point in our future, either be like a read-through in terms of what you might be seeing in SMS oriented businesses and the international versus domestic margin situations. We really -- when we pursue business like SMS, we ensure that it fits the margin profile that we expect. And if it doesn't make sense in international market, we are not prioritizing that business. We know that the use cases that we run are ones that are high-value, high ROI as I go back to a lot, the sophistication of the platform is in the customer centricity of it, and that's where we are looking for our pricing power. So we are not chasing high-volume, low-margin business anywhere in the world. And so you should expect that to kind of continue to be our [technical difficulty]

[Technical difficulty] all of the questions. I will now turn it over to Bill.

All right. Thank you everyone. We were excited to share all this information with all of you. We are looking forward to doing it again in about 3 months.