Welcome to the Braze Fiscal Third Quarter Fiscal 2023 Earnings Conference Call. My name is Laila and I will be your operator for today’s call. At this time, all participants are in listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. I’ll now turn the call over to Christopher Ferris, Head of Braze Investor Relations.

Thank you, operator. Good afternoon and thank you for joining us today to review Braze’s results for the fiscal third quarter 2023. 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 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 fourth quarter and full fiscal year ended January 31, 2023 and for our fiscal year ended January 31, 2024, the impact of our planned sales initiatives; our planned product and feature development; our competitive landscape and the behavior of our competitors; our anticipated market opportunity; the impact of current macroeconomic trends; our anticipated customer behaviors; our growth plan; our vision; 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 third 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 US 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 US GAAP. And now, I’d like to turn the call over to Bill.

Thank you, Chris, and good afternoon, everyone. We delivered a strong third quarter, generating $93.1 million in revenue, up 46% versus the prior year and 8% compared to the prior quarter. For the first nine months of the year, we've grown revenue 53% compared to the same period last year, demonstrating the high ROI and long-term value of the Braze solution. We also realized solid customer growth, increasing our total customer count by 116 sequentially and by 38% in the last 12 months. While our number of large customers, which is defined as those generating at least $500,000 in ARR, increased 53% year-over-year. Notable recent new business wins and upsells include FanDuel, Panera, and Vizio, among others. For Panera Bread, a North American fast casual bakery cafe concept with over 2,100 locations, we will be powering email and mobile campaigns for their award-winning app and industry-leading MyPanera loyalty program that has over 50 million members. Additionally, Panera will be leveraging content cards to build a personalized messaging inbox spanning web, mobile, and in-restaurant kiosks. We also signed a multi-year cross-channel deal with a large global brand in travel and hospitality, again demonstrating our ability to land with some of the largest enterprises in the world and power best-in-class Omni-channel engagement across verticals and geographies. Travel and hospitality is a category where we continue to make great strides and we look forward to updating you on our progress in this important vertical in the coming quarter. I also want to highlight an American multinational fast food chain with tens of thousands of global locations that has renewed and meaningfully grown its seven-figure investment in Braze. We're excited to expand our footprint with this customer across new use cases, channels, and geographies. This recent upsell means Braze will soon be powering marketing, promotional, and loyalty campaigns across email and mobile in all of their lead global markets. Continuing our tour of some of Braze's important verticals, Cyber Week is a critical time of year for many retail and e-commerce brands and this was reflected in our messaging volumes over the period this year. From Black Friday to Cyber Monday, we executed over 31 billion total messages across our many channels, up 43% from the same period last year. More importantly, we again achieved 100% global uptime through this year's Cyber Week, notwithstanding record high volumes. In our view, this robust messaging growth is a proof point that customer engagement remains an imperative for today's businesses. In fact, we continue to see signs that first-party engagement is rising in importance for brands as both rapid time to value and robust return on investment are prioritized during this period of economic uncertainty. That said, we did continue to see some of the macroeconomic headwinds reported by many of our software peers, including elongated deal cycles and increased scrutiny on software investments, particularly with new business. In contrast, upsells were particularly strong, achieving a new high watermark in the quarter, led by success with our global strategic accounts. And despite the challenging environment, our pipeline is robust and demand for customer engagement solutions remained strong. As we continue to experience these successes, both with new and existing customers, we remain relentlessly focused on the continuous improvement of our products and services. At our recent Forge customer conference, we outlined our Start Anywhere, Go Everywhere framework, in which we recognized that Braze customers exist across the full spectrum from small pre-launch startups up to the world's largest multinational enterprises and that we are committed to meeting our next generation of customers wherever they are in the transformation of their customer engagement practice, getting them up and running quickly and helping them rapidly realize high ROI. The brands and teams that use Braze range from ambitious small businesses that may only have a single dashboard user through a diverse array of rapidly scaling companies with agile, interdisciplinary teams, all the way up to complex multinational enterprises with marketing and engagement teams that span across hundreds of people, and they're all leveraging the same Braze software. Some customers even start by simply migrating their existing email or push notification strategies into Braze, but once those early campaigns are live, rapid results build the case for further expansion. Braze is built to help teams quickly leap forward in sophistication while expanding across new channels and use cases, all while enhancing the customer experience of their products and building first-party relationship assets. Meeting the distinct needs of this diverse set of customers requires ongoing innovation and nimble, efficient execution. With the Braze philosophy of Start Anywhere, Go Everywhere, we are committed to ensuring there are accessible starting points into Braze paired with a smooth on-ramp to get up and running quickly while also investing to promote the continued growth and maturation of our customers' usage of Braze over the long-term. The Start Anywhere, Go Everywhere mentality also informs the evolution of our addressable market in tandem with that of the profession of marketing and customer engagement. Many of the job titles and teams that rely on Braze today were not around when we were founded in 2011 and their continued rise in prominence is an important indicator that Braze's moat extends into our customer community and is reinforced by the mutual evolution of our product, along with the maturing skill sets in our space, that continue pushing customer engagement strategies to new heights. As businesses evolve to better serve their customers, who then reward them with stronger first-party data and more valuable relationships, we will continue to see brands progress the maturity and sophistication of their customer engagement practices. We further believe this strategy could expand our total addressable market in the long-term through adoption among data engineers, product teams, and creative groups, and we are investing in R&D accordingly. To illustrate the impact of our R&D, I'd like to briefly highlight recent product innovations and integrations that we announced at our Forge events in New York and London in October and November, respectively. We introduced a number of updates to help customers more quickly bring new data sources into Braze and efficiently use them over time. A great example is cloud data ingestion, which allows customers to directly connect their data warehouse into Braze, quickly importing and activating customer data with just a few clicks. Customers are already unlocking new use cases and solving difficult problems like identity resolution by syncing audiences into Braze that are created from queries in their data warehouse. For example, a quick service restaurant might want to message all users who ordered special menu items in a promotion from a previous year, but haven't sent that data to Braze or a financial services company might want to message users with low account balances but need sensitive account balance details to stay on-prem. Early access customers report significant weekly reductions of developer hours, which can now be redirected to product improvements. By greatly reducing the operational requirements of managing data pipelines, these efficiencies can also improve relationships between the marketing teams that use Braze and the engineering teams they often rely on to help bring new ideas to life. Early examples of customer case studies include a streaming service running a multitude of data syncs for everything from account updates originating in their back end to targeting based on sensitive information such as credit cards. And a gaming company that is aggregating all of their purchase data from different channels, in-store, online, and platform marketplaces, and syncing it with Braze via cloud data injection for targeted messaging to recent purchasers and their biggest spenders. Snowflake is our first partner for this turnkey integration, and we plan to expand to the other major data warehouse partners, Redshift and BigQuery, enhancing the data flexibility of Braze for our customers. Just as we are working to improve the ease with which data and engineering team members interact with Braze on behalf of their marketing teams, we are also building features and interfaces for them to use directly. One recent example is the introduction of feature flags, which enable customers to easily launch and test new features with limited audiences or within targeted geographies before committing to a broader rollout. We also launched a programmatic API for our existing data feature catalogs, which enables our customers to co-locate new data sets within the Braze infrastructure, making it easily available for real-time personalization use cases within Canvas. By leveraging a broader data architecture built on Snowflake, MongoDB, Kafka, and others, Braze provides businesses with the most flexible customer engagement platform for data activation. We believe these product innovations help build on the value generated by the ever closer collaboration between product developers and marketing experts in service of a better customer experience. A central tenet of our product vision at Braze is that we help our customers reach their users on the channels that they care about most. This is why we built our product to be omnichannel, and as customer behavior evolves, we continue to expand the breadth of Braze's vertically integrated channel set. As such, we also recently announced native channel support for WhatsApp, a platform used by over two billion users in 180 countries, which is currently in early access with a handful of customers. Once early access is concluded in early 2023, marketers around the world will be able to create, orchestrate and send WhatsApp campaigns directly from the Braze dashboard to strengthen customer relationships with content-rich messaging. Braze is directly integrated with the latest version of Meta's recently overhauled WhatsApp cloud APIs, and our solution is designed to be marketer friendly, allowing customers to build WhatsApp campaigns in a native composer and manage the channel similarly to how they use SMS. In addition to the usability benefits afforded by our direct integration, our WhatsApp offering is further differentiated by its seamless integration into the Braze platform's orchestration capabilities. With Canvas Flow, our visual development environment for customer engagement programs, customers can harness all of the power and sophistication of Braze to seamlessly incorporate WhatsApp messaging into their marketing mix and easily orchestrate two-way WhatsApp conversations with end users. For another example of channel expansion, we look to Braze Audience Sync, which helps customers drive efficiency and reduce costs in the ad buying ecosystem by allowing them to leverage the real-time first-party data flow managed by Braze to optimize their usage of expensive advertising channels through enhanced targeting, suppression, and look-alike audience development. Customers have historically seen strong success with Audience Sync integrations through Facebook and Google. So at our forge event in London last month, we were excited to announce early access for Audience Sync with TikTok. This integration will enable brands to set dynamically and securely sync first-party user data from Braze directly to TikTok for audience classification. Brands can send custom audiences to TikTok for fine-grained ad targeting alongside first-party messaging as well as optimize their ad spend through precise real-time suppression and versatile look-like audience creation. Lifesum, a digital health company in EMEA, is currently using the beta version of TikTok Sync to target TikTok ads to users and convert them into paying members while suppressing ads to active premium users. It took them just one day to get up and running, and the integration has proven very valuable in extending their paid social reach while improving cost efficiencies. Before turning the call over to Isabelle, I'd like to take a few moments to highlight our inaugural environmental, social and governance report published last month. As I've stressed on past earnings calls, Braze believes its responsibility as global citizens and technology leaders is to be a positive force for our employees, communities, and shareholders. This report was the product of our social impact department and includes our first greenhouse emissions audit, first materiality assessment, and it outlines our inclusion-first approach to diversity, equity, and inclusion. The report can be found under the governance section of our investor website. Thank you again for your continued interest in and support of Braze. We remain committed to delivering industry-leading engagement solutions for our customers and efficient growth at scale for our shareholders and we look forward to continuing this journey to become the de facto standard for customer engagement with you over the coming months and years. And now I'll turn the call over to Isabelle.

Thank you, Bill, and thank you, everyone, for joining us today. As Bill mentioned, we reported a strong third quarter with revenue up 46% year-over-year to $93.1 million. This was driven by a combination of existing customer contract expansions, renewals, and new business. Our subscription revenue remains the primary component of our total top line, contributing 96% of our third-quarter revenue. The remaining 4% represents a combination of onetime configuration and onboarding fees as well as other professional services, which are subject to similar annual contract terms as our subscription-based revenues. Our customer count increased 38% year-over-year to 1,715 customers as of October 31, up 116 from the prior quarter and up 468 from the same period last year. Our total number of large customers, which we define as those spending at least $500,000 annually grew 53% year-over-year to 148 and as of October 31, contributed 56% to our total ARR. This compares to 97 large customers contributing 51% to our ARR as of the same time last year. Compared to last quarter, this reflects an increase of 9 from 139 large customers that contributed 55% to total ARR as of July 31. Turning to dollar-based net retention. As a reminder, our dollar-based net retention represents a 12-month trailing statistic and sources of upsell dollars include growth to existing contracts through increases in pre-committed volumes of monthly active users and messaging entitlements and the addition of add-on features and recurring professional services as well as signing new business units as we continue to further penetrate our existing customer base through both geographic and brand expansion. Our renewal rate, combined with upsells from our successful land and expand motion drove strength in our dollar-based net retention statistics. Measured across all customers, dollar-based net retention was 126%. Dollar-based net retention for our large customers, those spending at least $500,000 annually was 129%. Expansion was again broadly distributed across industries and geographic regions. Our global footprint continued to expand in Q3 and revenue outside the U.S. contributed 43% of our total revenue in the third quarter, up from 42% in the prior quarter and 40% in fiscal 2022. Moving to our remaining performance obligation. In the third quarter, our total remaining performance obligation was $409 million, up 34% year-over-year and generally flat sequentially. Current RPO was $283 million, up 42% year-over-year and up 3% sequentially. The year-over-year increase was driven by contract renewals and upsells and the signing of new customer contracts. While total RPO was generally flat compared to last quarter, we did experience a modest decline in the RPO value beyond one year. This is attributable to slower new business growth, a higher percentage of shorter duration contracts than in the prior periods, and fewer renewable dollars available in the quarter. Overall, dollar-weighted contract length remains at approximately two 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 $64.9 million, representing a non-GAAP gross margin of 69.7%. This compares to a non-GAAP gross profit of $45 million and non-GAAP gross margin of 70.3% in the third quarter of last year and 69.3% in the second quarter of this year. Non-GAAP gross margin percent declined 60 basis points year-over-year due to several factors, including higher hosting and infrastructure costs, higher third-party messaging fees, increasing headcount costs as we continue to invest for growth, and one-time hosting migration costs we incurred as we continue to optimize our tech stack. Turning to operating expenses. Non-GAAP sales and marketing expense was $46.2 million or 50% of revenue compared to $28 million or 44% of revenue in the prior year quarter. This reflects our investment in headcount and increased travel and entertainment expenses as the easing of COVID-related travel restrictions allowed for more in-person events including our New York forge customer event, in-person employee training, and customer meetings. Non-GAAP R&D expense was $17.5 million, or 19% of revenue compared to $11.1 million or 17% 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 $18.6 million or 20% of revenue compared to $10.9 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 company expenses. Non-GAAP operating loss was $17.3 million compared to a non-GAAP operating loss of $5 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $13.8 million or a loss of $0.15 per share based on 94.5 million weighted average basic shares outstanding during the period. This compares to a loss of $3.3 million or a loss of $0.16 per share based on 20.7 million weighted average basic shares outstanding in the prior year quarter. Although the global macroeconomic environment has been challenging over the last two quarters, this environment has also presented a unique opportunity to execute on our post-IPO investment plan. In the four quarters since our IPO, we have successfully built out teams across functions and geographies in order to capitalize on the significant market opportunity ahead of us and the unique hiring environment over the last several months, particularly in R&D. At this time, we feel the investments we have made to date position us well to continue to drive sustainable growth while delivering on our commitment at our Analyst Day in October to focus on our path towards profitability. While headcount will continue to increase moderately as we close out FY '23 and look ahead into next year, we have recently chosen to slow our recruitment activity for net new hiring. Therefore, while this investment momentum will continue into the beginning of next year, you should expect the rate of OpEx growth to moderate as we increase our focus on driving operating leverage across the business. Now turning to the balance sheet and cash flow statement. We ended the quarter with $477.6 million in cash, cash equivalents, restricted cash, and marketable securities. Cash used in operations during the quarter was $23.9 million compared to a use of approximately $2.5 million in the prior year quarter, driven by higher net loss and increased cash used in working capital. Combined with higher capital expenditures, free cash flow was negative $28.1 million in the quarter. As we have stated in previous quarters, we expect our free cash flow to fluctuate from quarter-to-quarter given the timing of customer and vendor payments. Before we turn to our forecast, I'd like to take a few moments to discuss what we are seeing in the marketplace. As Bill remarked, our pipeline remains strong, and we continue to see solid demand for customer engagement solutions. However, like many of our peers, we continue to experience macroeconomic headwinds across geographies and industry verticals. These challenges manifest in elongated sales cycles, slower new business growth, and fewer multi-year contracts. As such, we are continuing to approach our forecast prudently and guide on a risk-adjusted basis. For the fourth quarter, we expect revenue to be in the range of $95 million to $96 million, which represents a year-over-year growth rate of approximately 36% at the midpoint. While we're not providing specific gross margin guidance, we expect gross margins will be impacted by seasonally higher activity during the fourth quarter. Fourth-quarter non-GAAP operating loss is expected to be in the range of $18.5 million to $19.5 million. Fourth-quarter non-GAAP net loss is expected to be $17.5 million to $18.5 million with fourth-quarter non-GAAP net loss per share in the range of $0.18 to $0.19 per share based on approximately 97.5 million weighted average basic shares outstanding during the period. For the full year 2023, we expect total revenue to be in the range of $352 million to $353 million, which represents a growth rate of approximately 48% year-over-year at the midpoint. We're pleased to be able to raise our full-year revenue outlook. But given the dynamics I discussed, we believe it's prudent to do so only modestly. Fiscal year 2023 non-GAAP operating loss is expected to be in the range of a loss of $71.5 million to $72.5 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $64.5 million to $65.5 million. Fiscal year 2023 non-GAAP net loss per share is expected to be a loss in the range of $0.68 to $0.69 per share based on a full year share count of approximately 94.8 million weighted average basic shares outstanding during the period. In summary, we are very excited about the future of Braze. We are focused on growing our business, meeting customers where they are on their journey, and empowering them to realize world-class customer engagement. Our priority remains capitalizing on our long-term market opportunity, delivering revenue growth at scale and realizing our long-term margin targets in the coming years. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

Our first question comes from Ryan McWilliams from Barclays. Please go ahead.

So Bill, what have renewal conversations been like at this point? Glad to hear upsells are strong, but are you experiencing the usual contract increases that Braze historically received at renewal? Thanks.

Thanks for the question. We are progressing through renewal discussions at a consistent pace, particularly in Q4. In Q3, we encountered our lowest level of available renewable dollars. However, these renewal discussions have shown consistency throughout the year and are reflecting similar patterns to Q2, which continues into Q4. Additionally, we achieved a new record for upsells this quarter. There has been a significant increase in new use cases, expansion into new regions, and growth into new brands. The strategies for cross-selling and upselling that we are accustomed to remain effective. On the downside, one factor impacting these processes is the significant turnover occurring within teams due to layoffs in other sectors, as well as disruptions related to mergers and acquisitions.

Appreciate the color there. And for Isabelle, we're seeking questions about the sequential step down in RPO in the quarter. Should we think about a mix higher of percentage of shorter contracts to continue? And how could RPO will fluctuate with more seasonal dollars available for renewal in 4Q?

Great. Thanks for the question. Yes, there are more available renewal dollars in Q4. Although some early renewals have already been pulled forward, there are still more available in Q4 than in previous quarters. This will be beneficial. We don't provide specific guidance for RPO on a quarterly basis, but it is true that there will be more.

Should the mix of shorter contracts like contract duration, new bookings continue?

Yes, we do absolutely expect this trend to generally continue. We think it is part of the dynamic that we are seeing in the context of the macroeconomic environment around us. And we believe it's prudent to expect all of these dynamics that are related to the macro to continue to persist.

As Braze has continued to grow in prominence in the market, we have successfully transitioned a greater portion of our existing customer base from one-year contracts to multi-year agreements upon renewal. This is a priority for us moving forward. We are observing that customers who had multi-year contracts previously are generally renewing with the same commitment. However, in the second and third quarters, we have seen fewer customers who initially signed 12-month contracts opting for the same duration again, likely due to the current environment. We anticipate, similar to what we experienced during the uncertainties of the COVID period, that buyer sentiment is shifting towards shorter contracts. However, as we move beyond the peak of the COVID crisis in 2020, we expect to see a return to more customers feeling secure about committing to longer-term contracts. We are not overly worried about the long-term viability of these customer contracts, though there is a noticeable effect on remaining performance obligations.

Our next question comes from Derrick Wood from Cowen. Please go ahead.

Hi, can you hear me?

Yes, we hear you.

I wanted to ask about greenfield versus displacement activity in kind of this market environment. I think we think of mobile and push being very kind of greenfield use cases while e-mail is often a displacement and often could be even a vendor consolidation message. Can you just talk about where you're seeing greater demand or greater success across these different go-to-market motions in the market right now?

Yes. I would consider the distinction between established businesses and emerging businesses. This doesn't refer specifically to young versus older companies but rather to new lines of business and focuses. For example, streaming companies are displacing vendors that previously handled email for them, but their use cases are new due to the direct-to-consumer investment being entirely new within the business. They function more like greenfield projects. Overall, if you examine our customer base, it's generally true that mobile and push are often seen as more greenfield compared to email. At this stage in the evolution of mobile, most businesses have implemented something operational. I believe our teams are skilled at navigating displacement. Historically, we've always functioned in a competitive market and have been replacing mobile push vendors since 2013. Moving forward, I expect a combination of both new ventures and replacements, as our vision for Braze and our customer engagement platform focuses on addressing challenges in a customer-centric manner that is not confined to specific channels. This approach means we will frequently encounter diverse environments.

Great. And maybe just another go-to-market follow-up question. It sounds like you guys have a new initiative, maybe I got this wrong Start Anywhere, Go Anywhere, and it's maybe a go-to-market tactic.

Yes, of course, and they are definitely related. Start Anywhere, Go Everywhere is something that I referenced in my keynote at Forge in New York. And for our customers, it's a commitment that wherever they are in their journey, whether they're a one-person team at a prelaunch startup who is ambitious but maybe not yet sophisticated in modern customer engagement, all the way up to fast scaling start-ups with agile and interdisciplinary teams and spreading across the large enterprise where you've got big global teams spreading across functions and maybe reporting to different places, different brands and geographies. Regardless of the complexity of the team structures we have amazing proof points throughout the entire Braze customer base that the same software platform can come into those organizations. It can empower those teams to drive really great results and really deliver ROI to those customers across the board. And one of the aspects of that is making really a commitment to the customer base that wherever you live in that spectrum, we're going to meet you where you are. We're going to make sure that you get up and running quickly and that we're going to bring you up this on-ramp toward more mature and more advanced customer engagement strategies over the lifetime of your engagement with Braze. And that is also then reflected back internally because from a sales perspective, it means that I have the confidence to sell to a really wide array of customers. Indeed, we already have examples throughout our customer base, all up and down both the present-day sophistication curve as well as the kind of team size and brand size spectrum. Any company that really wants to take customer engagement seriously and invest in it is a great customer to take on Braze and to bring it into their environment and have it drive additional ROI.

Our next question comes from Brian Peterson from Raymond James. Please go ahead.

So first off, I know you guys, during the course of the year, mentioned some sales productivity to efforts that you guys are trying to undertake. I know that's kind of hard to unpack that with the macro and everything going on. But I'd be curious to get an update on how those efforts have gone so far.

Yes, absolutely. So we've been happy with the impact of the changes that we've been making over the last six months. We've really looked at the entire lifecycle of a salesperson here at Braze. So I rolled out a new six-week intensive boot camp inclusive of in-training and doing role-playing with managers, new certifications, and a number of other initiatives that have been really impactful in terms of bringing our new account executives up to speed more quickly. We measure that through time to first deal that they're closing and then continuing to look at the existing sales team, maybe even those that were fully ramped, but recognizing that with the macro environment shifting, that buyer priorities have shifted with our product continuing to expand that the surface area that they need to understand is greater and also that we are forging into new areas of our addressable market, which means that we're engaging with new competitors that maybe they would have been unfamiliar with in the past and that the nature of those competitive dynamics certainly change along with the impacts on buyer sentiment that comes with the macro.

Great. I appreciate the color, Bill. And maybe just a follow-up. I know on the hiring going forward is simply that's going to slow down a bit. Or areas maybe where you're still going to be hiring more aggressively? Or is it just kind of a broad-based slowdown? Any way to kind of unpack that a little bit.

Yes. So I'll break that into the hiring over the last few months and then what we're looking at going forward. So we've experienced one of the most robust R&D hiring environments that we've ever seen in our history. And so that's an area where we've been very excited to continue to build out the R&D teams, and we actually have our kind of new hires and our hiring budget for R&D already signed up good for us going into the next year looking kind of further into the future than we're used to from an R&D perspective. And so that's been awesome to see. We are continuing to hire for several new functional leaders across the business, particularly in a newly centralized team focused on go-to-market strategy and operations. Our sales productivity team is part of this centralized group as well. We have organized teams around market strategy, territory planning, pricing, and packaging to ensure they are all co-located. We are enthusiastic about this approach, as it will enhance alignment among these teams, accelerate their operational processes, and ultimately lead to better results through a more unified strategy. And then there's going to be a number of other places where we're still looking to selectively take advantage of this great hiring market to bring in really good talent into the company. All that being said, we're definitely making sure that we prepared for whatever the macro throws at us. We've had great robust hiring results over the last few months. And so we are lowering the level of recruitment activity that we have on a number of other roles just to make sure that we've got better line of sight through the fog that's ahead of us before we start to really step on the gas again.

Our next question comes from Jake Titeleman with Goldman Sachs. Please go ahead.

I'm on for Gabriela. When investors hear about there being a general slowdown in marketing spend and ad spend that obviously makes folks nervous about Braze. So why are you confident that Braze won't be impacted to the same extent as some of the more traditional players in the space?

There are various reasons, primarily related to the types of workloads and use cases that Braze supports for our customers, as well as the associated return on investment. When examining the Braze customer base, you'll notice a wide range of diversity that I've previously mentioned, including differences in company size, geographic locations, verticals, and use cases. Many of these use cases are not discretionary marketing but rather essential customer communications necessary for running businesses. And even when those customer communications could be purely promotional by their nature, which is certainly the case for a lot of the Black Friday and Cyber Monday message volumes that we mentioned. Even within those buckets, which you might be able to call discretionary marketing, those are in almost all cases, the highest ROI marketing that a brand that works with Braze can do. Because the investment that they've made that they're capitalizing on is in building up the first-party audiences that they already have. If you consider Braze as an investment in activation that complements a larger investment in developing first-party audiences and data sets, you will clearly see the difference in ROI compared to digital advertising. In digital advertising, you not only pay for activation but also rent the relationship from the ad marketplace. The key distinction in ROI lies in activating your first-party audiences rather than renting a third-party audience and trying to engage it. This makes Braze's ROI notably strong, even under intense scrutiny. When examining Braze's role in activation, it's evident that it enhances the return on investment people achieve from their advertising expenditures. Additionally, it boosts the benefits gained through organic growth, even if all digital advertising is halted. Much of the analysis in our industry categorizes marketing into two main areas: acquisition, typically linked to digital advertising, and retention, which is more closely tied to platforms like Braze. Activation plays a crucial role as you transition from acquisition to activation. It's important to establish good habits and maintain high retention rates at the seven-day and fourteen-day marks to prevent users from abandoning a product after significant investment in acquiring them. And Braze's role to play in that aligns perfectly with the priorities that so many brands are focusing on right now, which is how do we make sure that our organic growth is activating at high levels. How do we make sure that the premium acquisition investments that we are making have the maximum ROI that they can and then how are we retaining those people in the long term. And so in many ways, it's exactly when the scrutiny shows up on the digital advertising spend that Braze really starts to shine versus all of those other expenditures?

That is very helpful. And then just for the follow-up, can you talk about the momentum that you're seeing with partners? Are you starting to see meaningful interest and pipeline coming from that channel? And maybe Isabelle can touch on how this can help with S&M leverage over the long term.

Our partner ecosystem is quite extensive. I'll focus specifically on the global systems integrators in response to this question since it's been a significant topic over the last few quarters, and we're genuinely excited about it. This excitement stems from the long-term benefits you mentioned, such as sales and marketing efficiency and pipeline contributions. Additionally, it provides opportunities to collaborate with various brands that work with GSIs. Without these relationships, we previously had limited access to those opportunities. What we've seen over the last 18 months has been an incredible increase in the amount of mind share that we have across the major global systems integrators and the big agency holding companies. The opportunity for Braze to really go into those organizations, establish joint business propositions with them. We're certifying a large number of the consultants and the integrators and the staff that those companies have on hand. And many of them are really looking ahead during this period of macroeconomic uncertainty to really figure out when demand comes roaring back, what are what are the investments they're making today to make sure that they're prepared for tomorrow. I believe that throughout our experience with the GSIs in 2020 and the early part of 2021, they were overwhelmed even with the staffing they had for projects, as they didn't have the capacity to invest in new technologies. This often worked against us since they had established relationships with the legacy marketing clouds. However, over the past year, we have seen a significant shift in sentiment. As brands have taken the lead and Braze has deepened its presence in our global strategic accounts and enterprise customers, it is evident that this next generation needs to be prepared to train in order to serve their current and future customers effectively.

To follow up on your specific question about the impact we are observing, we still believe this will be a key driver for increasing leverage within the sales and marketing organization. However, as Bill mentioned, considering the macro environment and other dynamics, we are still in the early stages of this process. We look forward to providing more updates as it develops. We are genuinely excited about the leverage and opportunity this presents, but given the current macroeconomic environment, I wouldn't expect any specific direct financial impact in the near term.

Our next question comes from Taylor McGinnis from UBS. Please go ahead.

The revenue upside compared to our guidance this quarter was less than what we've experienced in the past. Looking at the fourth quarter revenue guidance at the high end, it suggests a sequential growth of 3%, which is slightly below the mid-single digits we've seen over the last few quarters. Can you discuss the macro environment reflected in this guidance and whether there have been any changes in your guidance methodology?

Great. Thanks, Taylor. So first, I'll just talk about the guidance for Q4. So no material change to how we think about sort of the prudent risk adjustment associated with our guide. So the macro continues to provide a certain level of uncertainty and challenge, and we think that like many of our peers, this is likely to persist. And so we think it's prudent to continue to include that backdrop as we think about the guide. I won't go into any kind of detail for next year. We'll get back to everybody when we have more visibility as to how Q4 is actually going to land and we'll be part way through Q1. So we'll see everybody back here in March for that announcement. We believe that this macroeconomic environment will continue to persist, which will impact the dynamics related to new business. We're very encouraged by how upsells are performing, and our dollar-based net retention remains stable. However, there is significant uncertainty present. Therefore, we feel it's sensible to take all of this into account as we plan for the upcoming year.

Our next question comes from Brian Schwartz from Oppenheimer. Please go ahead.

I've got one for Bill, and then I'll follow up for Isabelle. Bill, in terms of the expansion activity that's happening, can you talk about the cadence of the upselling that you're seeing after you land a customer, if that's changed at all compared to previous quarters versus the expansion and the upselling activity that's happening with your longer-term customers?

Directionally, I think we have been seeing newer customer cohorts do expand more quickly. There's a variety of reasons for that. One of them was a sales organization, structural change that we made a couple of years ago where we switched from the traditional hunter-farmer model across all of our account territories. We actually shifted more of them over to the named account territories because of the confidence that we have in our ability to land and expand. And so there were more cases prior to that, where the hunters were incentivized to land a bigger deal. Now we've made sure that our sales team is incentivized just to get started because we know that we can grow customers more effectively over time. Another thing that drives upside is there's just more options in terms of how you can expand your Braze now. We have more channels. We have more interesting ways to bring in new data sources got really robust APIs that bring more engineers into the fold and move other sorts of things like transactional use cases on the Braze faster. Another aspect of that has just been our internal focus on making sure that we're driving time to value results, making sure that customers are getting up and running, that they're sending their first campaigns that they're sending their first campuses quickly. All the investments that we put into usability as well as the just kind of operational rigor and excellence that we've built out in our integration and onboarding teams over the course of the last couple of years have all sped up those things. And so I think there's a bunch of structural changes that we've made that really support that in general, new customer cohorts are upselling and expanding faster than prior customer cohorts did. There are obviously some headwinds on that as well in some cases, especially in the enterprise and especially given Braze's increased prominence and our track record and the customer reference we have. We do move in and we take out whole opportunities where we'll be cross-channel across a bunch of brands and across a bunch of geographies all at the same time. And as you kind of deploy across multiple geographies in enterprise, that can take a long time.

Thank you, Bill. And then the follow-up I have for Isabelle. Thank you very much for the transparency on what you're seeing in terms of contract durations. I wanted to ask about pricing and discounting in the current macro environment, if that's changing at all compared to recent quarters? And maybe your comments on what you're seeing, if you're seeing anything in terms of how your competitors are behaving in terms of pricing if they try to navigate these macro headwinds?

Yes, absolutely. So we're continuing to maintain our discipline around discounting. We continue to see ourselves as a premium product, high ROI, and that is reflected in our pricing. So do we see the pricing sensitivity out there in the market? Absolutely. But we continue to work with the salespeople and continue to train them to talk about the high ROI that the product delivers and the value sell into the customer. So that is incredibly important for us and it has been a discipline that we have implemented over the last several quarters and years, and will absolutely continue. From a competitive standpoint, I won't claim to know exactly what's going on behind the scenes at all of our competitors. But there is likely more pricing pressure on them. And certainly, for those that are kind of the pre-IPO guys, they are likely looking to kind of build their books right now and they can likely as a nonpublic company is they're potentially trying to win on price. It's probably not the right strategy for the long term, but we're going to continue to be disciplined.

Our next question comes from DJ Hynes from Canaccord. Please go ahead.

I'll ask just one, just given the time, I see a bunch of hands still up. Bill if a customer comes to you and says, "I need to cut costs, which I guess could mean lean out MAUs, narrowing channels, sending fewer messages. What are the levers you can pull to try and preserve contract value? Like what's the playbook in that scenario?

Yes. This situation arises not only when a customer wants to reduce expenses but also when their expectations for volume growth during a contract term may be overly optimistic. Consequently, we find customers during renewals not utilizing their resources fully. This is familiar territory for our sales team and is definitely a key factor in how we manage contracts and sell entitlements. There are various strategies we can employ throughout a contract term. Over the past several years, we have consistently introduced one or two new channels annually, added new data connectors, and enhanced our predictive capabilities. The ways in which our product offerings have expanded over time are numerous. There's usually an expectation for growth in the following year, even if a customer doesn't meet their growth targets in a given year. We aim to ensure they have predictable costs for the duration of their contract. Additionally, there are new use cases and increased engagement with different teams. Often, when we establish a relationship with a customer, they may not transition all email or SMS communications to us at once. They might start with a specific use case but later recognize the value in other areas. And so we find ourselves consolidating other vendors quite a bit when we go into that conversation. And so they're looking to decrease their spend overall across their basket of marketing technologies, but Braze, because of the gravity that our platform has to pull in new use cases and new channels over time. Often, we can consolidate out other vendors as they're working to find spend efficiency. Another area that we see people finding spend efficiencies as they lean into their usage with Braze more is through the Audience Sync products that I mentioned during the prepared remarks, where we help them optimize the digital advertising and acquisition spend and our customers have seen tremendous results there. I think there's a lot of low-hanging fruit just because a lot of low-hanging fruit in that entire category because first-party data has historically not been activated to the level that it can or should be for a lot of digital advertising and acquisition strategies. And so well, in addition to the kind of internal to Braze contract levers that I mentioned before, there's also an entire category of just taking a step back, looking at their entire marketing spend and helping them optimize that in order for them to be able to maintain or, in many cases, in those situations still increase their Braze investment.

Our next question comes from Brent Bracelin from Piper Sandler. Please go ahead.

I'll keep it one as well for the sake of time. I wanted to follow up and double click into the upsell momentum this quarter. Given increasing macro pressure on marketing budgets, what is driving the upsell momentum? How sustainable is it? Is it a function of how the product is priced by an MAU basis? Is it vendor consolidation? Is it this first-party data category just being less sensitive to budget cuts? Just trying to double-click into what is actually driving that upsell momentum? Any color there would be helpful.

Yes. I believe your list of options is accurate. I will try to organize them by their impact. Firstly, if you rank the return on investment from the investments made in any marketing organization, those relying on first-party data and relationships will consistently outperform those based on third-party audiences. I previously mentioned some reasons for this, but in summary, those first-party relationships are a significant asset. The only cost associated is the ability to leverage that asset, as the investment has often already been made. Therefore, when aiming to optimize ROI, this is a straightforward area to focus on. Additionally, vendor consolidation is another key factor, which I discussed regarding how renewals typically occur and the ongoing expansion of use cases. And then there are a lot of businesses out there that are also still growing. You'll we actually had in this quarter the sequential messaging and MAU growth from the prior quarter to this one, were both higher this year than they were last year. And so we are seeing robust growth in terms of the amount of just digital activity happening out there amongst our customer base. And so even though there is pressure on spend, and we are seeing certain areas where there are headwinds and growth for certain categories. Remember that Braze is a highly diversified product that sells across all different verticals, all different company sizes, and all the geographies around the world, and there are a lot of areas where growth is still robust, and we're seeing great upsell motions through those.

Next question comes from Pinjalim Bora from JPMorgan. Please go ahead.

Congrats on the quarter. One quick one for you, Bill. What are you hearing from customers when you're talking about marketing budgets and customer engagement budgets for next year? What are you hearing? Are they thinking about resetting them lower? Does it seem to be more resilient from their point of view? Any color would be helpful.

Yes, I believe we're observing a widespread trend where businesses are aiming to be more efficient with their spending. Technology leaders are becoming involved in many marketing decisions and are helping to streamline the various products available. Over the past few years, many products have been acquired but possibly not utilized fully. This is one of the reasons we have always prioritized time to value, ensuring that no integration is overlooked and that we enable all of our customers to start benefiting early in their annual contract terms. But we're definitely hearing from a lot of brands that they're kind of cleaning out the craft, if you will, from a lot of their software spend. We also are seeing that sentiment obviously shift or varying a lot by market, by industry, and by geography. And I don't think that I could say that there's a broad-based like we want this to be higher or lower or the same as last year. It's really a focus on efficiency and making sure that when they're making new investments that those are delivering value to them quickly.

Our next question comes from Pat Walravens from JMP. Please go ahead.

Great. Isabelle, can we go back to the earlier question about sequential growth, as you probably followed, investors just went through this with the Zoom Info. So I'm just wondering, is sequential growth that you guided to a good starting point for how to think about next year? And if not, why would sequential growth not be a good indicator?

Thanks for the question. So again, I'm not going to answer specifically how to think about how sequential growth going into Q4 relates to next year. I think there's enough uncertainty out there. We are extremely confident with our long-term prospects. And right now, we are continuing to see the dislocation associated with the challenging and uncertain macroeconomic environment. What I will say about Q4 and the guide is we continue to approach this with a similar methodology to prior quarters and embed an appropriate amount of risk adjustment. And so as we continue to navigate this uncertain environment, that type of risk adjustment is appropriate and necessary. And we look forward to having more clarity coming out of Q4 and being part of the way through Q1 to give more specific guidance for FY '24.

And our final question will come from Rachel from William Blair.

I was curious as to what you're seeing in terms of the competitive landscape? I know Salesforce just recently announced their customer data cloud, Genie and then Twilio Engage is now generally available. So just curious if there's any changes as to who you're running into and if there's been any impact on win rates?

Yes. I think amongst the more established players in the space and the legacy marketing clouds. We haven't seen much difference over the last several quarters, even as they've made new product announcements. And I'm not going to speak too much to those specific competitors. But I think that when you look at the pace of product innovation in Braze and just the pace of customer pickup of new use cases and how we continue to advance our customer community. Then all those things come together to create a really robust offering that's really current with the skill sets that people have that's allowing them to really take advantage of the new investments that they're making in their data ecosystems and the new skill sets that they're investing in within their own teams. When we look across the legacy marketing cloud space and some of the other fast follower, even start-up competitors that we have. We just don't see the same level product vision. We don't see the same level of R&D investment and they're built on architectures that are antiquated for the environment that we're trying to operate in. And so even as we continue to see like our legacy market cloud competitors try to overlay their older marketing cloud software platforms new shiny things that are meant to be able to more tightly integrate them together or what have you. The foundations of those products are still the same and so they still continue to have the same issues. And as we continue to push forward, we certainly respect a lot of the kind of incumbent and scale advantages that they have within the market, and those are really important for us to navigate.

And our final question will come from Yun Kim from Loop Capital. Please go ahead.

All right. So I'll make a quick last one here. The new customer add in the quarter was much healthier than last quarter. Was there any specific change to the go-to-market to better execute on the new customer acquisition front, maybe anything on the product bundling that you are doing to entice new customers? Just want to get a better understanding of new customer add in the quarter?

Yes, I'll clarify that our new pricing and packaging experiment, part of Start Anywhere, Go Everywhere, did not have a significant impact this quarter. We are piloting it with a small group of account executives and look forward to seeing its broader application next year, but it wasn't reflected in Q3 specifically. Regarding new customer additions, as we've mentioned previously, our pipeline is strong and healthy. We've encountered many promising new opportunities, both inbound and from our outbound efforts, especially with the return of in-person events and other exciting developments. This has resulted in a solid number of new customer additions in Q3. Additionally, our investments in sales productivity have enabled our new account executives to ramp up faster and helped our more experienced account executives navigate the market more effectively, contributing to these new customer additions. However, we are also facing new business challenges, making it difficult to predict with certainty where metrics will land in any given quarter.

This concludes the Q&A. Thank you all for your questions. I'll pass back to Bill for closing remarks.

I just want to thank everyone for your continued support. Thanks for joining us today and for the great questions after the prepared remarks, and we will see you again next quarter.