Braze, Inc. Q2 FY2024 Earnings Call

Welcome to the Braze Fiscal Second Quarter 2024 Earnings Conference Call. My name is Christine, and I will be your operator for today's call. I will 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 second quarter 2024. 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 the Investor Relations section of our 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 federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the third quarter ended October 31, 2023, and for our fiscal year ended January 31, 2024, our planned product and feature development, and the benefits to us and our customers therefrom, including our AI features, the potential impact and duration of current macroeconomic trends, our anticipated customer behaviors, including vendor consolidation trends and their impact on Braze and our long-term financial targets and goals, including the anticipated period in which we may generate positive non-GAAP operating income and positive free cash flow. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investor Relations 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 aid investors in further understanding the company's fiscal second quarter 2024 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 section 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 delivered a strong second quarter, generating $115.1 million in revenue, up 34% versus the prior year while continuing to drive operating efficiency in the business. Non-GAAP gross margin increased 70 basis points year-over-year. And we again demonstrated strong leverage with non-GAAP operating margin improving by over 1,300 basis points compared to the second quarter of last year. We were encouraged by the new business we won in the quarter, sales strength in the commercial and enterprise businesses, the progress of our product initiatives and AI development efforts and the adoption of our newest channel, WhatsApp. While the macro environment still presents challenges, we are effectively navigating them and remain confident in our ability to drive top line growth while maintaining cost discipline and delivering on the financial targets that we have set. Brands continue to recognize the high ROI that can be achieved through personalized cross-channel customer engagement delivered by the Braze platform. Customer growth was solid with our total customer count reaching 1,958, an increase of 92 during the quarter. New business wins and upsells included Miro, the National Basketball Association, Rappi and Stori, among many others. The diversification of new customer wins was also impressive, with the top five new business deals all originating from entirely different types of businesses. A quick service restaurant chain, an e-commerce platform, a provider of coupons and discounts, a digital collaboration platform and a company that connects homeowners to tradespeople. As those of you who have followed us closely are aware, Braze's business is highly diversified, with no single vertical contributing more than a quarter of our ARR and many others where we have not only a significant presence but also opportunity for growth. The versatility and adaptability of the Braze platform enables its adoption by any business that prioritizes investments in first-party data and customer relationships, regardless of size, vertical, or geography. As the field of customer engagement matures, we continue to win against point solutions that have limited channel offerings, are not real-time, or simply don't scale. We are similarly making progress against legacy marketing clouds as marketers find their fragmented solutions increasingly unfit for modern customer engagement use cases. This quarter, we displaced legacy marketing clouds at numerous enterprises, including a top quick service restaurant chain, a large consumer discounter, and a well-known travel company. In the case of the restaurant chain, a global systems integrator partner was instrumental in the sales cycle and will be working with the customer to complete onboarding and provide ongoing marketing and data services. As we continue to expand our product surface area and enhance its capabilities by infusing AI throughout our stack, we're helping brands create personalized, cross-channel solutions faster than ever before, speeding the rotation of the Imagine, Create and Evolve loop that lets them compound learnings and increase their ROI over time. Meanwhile, the legacy clouds continue to be held back by antiquated data foundations and complex siloed architectures, limiting their innovation and causing them to fall further behind. We believe our product innovation and R&D focus, coupled with their relative stasis, will accelerate the legacy replacement cycle and compel more enterprises to upgrade to the personalized cross-channel customer engagement enabled by the Braze platform. We also continue to benefit from the vendor consolidation trend we've called out in the last couple of quarters as brands look to an all-in-one platform to coordinate messaging across the growing array of B2C channels and accelerate their investments into first-party data. In the case of an accessories retailer, we replaced four separate vendors, providing a great example of how Braze wins on technical integration capabilities, aligning with the customer's vision of working with a comprehensive, best-in-class customer engagement platform. We believe this trend will continue as customers look to capitalize on new AI-driven advancements in customer engagement, an area of innovation that benefits tremendously from the breadth of Braze's data footprint and messaging flexibility, as well as our real-time stream processing architecture. At Braze, we are constantly evaluating new ways for brands to communicate directly with their customers by delivering more relevant content and engaging experiences in the channels that resonate most. In March of this year, we launched a native WhatsApp integration that enables marketers to create, orchestrate and send WhatsApp campaigns directly from the Braze platform. With more than 2 billion active users in 2022, broad international penetration and the ability to engage in content-rich conversations that build retention and loyalty, WhatsApp is a highly valuable addition to our cross-channel portfolio. And I'm happy to report that new and existing customers have responded very favorably to our offering with dozens of customers using the channel and a fast-growing pipeline. One early WhatsApp success story I'd like to highlight is Rappi, one of the most popular and trusted technology companies in Latin America. Rappi has expanded its investment in Braze, specifically adding WhatsApp as an additional channel to its innovative customer engagement strategy that already included email, SMS, push and in-app messaging. Rappi was looking for a more effective out-of-product channel to directly reach their audience and successfully leverage WhatsApp to motivate lapsed users to return to the app to make new purchases and to drive active users to make more purchases over time. Leveraging WhatsApp and Braze's canvas environment, Rappi was able to drive an 80% uplift in purchases versus a control group that received only push notifications and email. Case studies such as these demonstrate how marketers can immediately leverage the flexibility of Canvas and the power of our streaming architecture with new channels like WhatsApp to target personalized and orchestrate sophisticated campaigns that drive high engagement and ROI. Beyond additional channels, we continue to improve and enhance our competitive moat by expanding our product surface area and deepening our existing capabilities, particularly around data management and governance. Yesterday, we announced new data transformation and integration options to enable brands to get data into Braze quickly and easily with less ongoing maintenance burden and lower lift from technical teams. I won't go through all these enhancements in detail, but I'll mention a few key innovations that we believe will be particularly impactful for customers. First is data transformations, a feature that gives brands the ability to easily map incoming data from third-party services onto Braze user profiles. Even more exciting, the code that defines these transformations can be automatically generated using a generative AI capability within our Sage AI suite. Second, we are expanding cloud data ingestion to include an integration with Databricks Lakehouse Platform, while expanding the capabilities of our existing integrations into the Snowflake Data Cloud, Amazon Redshift and Google BigQuery. This flexible data ingestion capability helps customers reduce total cost of ownership in their data ecosystem by eliminating complexities when accessing their first-party data. Third, we infused generative AI into our query builder and SQL segment extension tools to empower teams to easily transform natural language prompts into insightful reports and audience segments. SQL segment extensions itself is a recently released addition to our classification layer that enables comprehensive and flexible targeting on top of a customer's entire Braze data set, enabling marketers to execute on more advanced targeting use cases completely within Braze instead of relying on their in-house data teams or third-party tools. Leveraging these advancements, brands will be able to easily access and activate their valuable first-party data to power personalized customer engagement strategies that enhance loyalty, retention, and revenue. We also recently launched Braze Instant Insights, a Snowflake native app that provides turnkey visualizations for analysis use cases like attribution, high-value actions, retention, and investigating monetary value across cohorts. In the same way that we built Snowflake data sharing to reduce the effort and time to value for customers building outgoing data pipelines from Braze, Instant Insights reduces the effort to go from data in the warehouse to sophisticated reporting. And in June, we announced Sage AI, a set of advanced AI and ML capabilities integrated into the Braze platform. Sage AI is designed to enhance marketer productivity while powering better and more effective customer engagement results. The most recent additions to Sage included three main innovations. First, an AI recommendation engine that utilizes a custom-trained transformer model to match items for Braze catalogs with customers most likely to buy them, providing content personalization that outperforms competing techniques in our tests. We believe this feature, which will become a separate SKU, will boost campaign revenue and improve customer loyalty for the brands that use it. Second, our AI content QA tool that leverages OpenAI's GPT-4 to check messages for tone, structure, grammar, and appropriate language was promoted into general availability and has now been used by hundreds of brands. We're seeing the advantage of being early movers in generative AI as we're quickly expanding beyond obvious use cases and integrating capabilities that are finally tuned to marketer workflows. Third, we added winning path to Canvas, our visual development environment, which marketers use as a no-code journey orchestration tool. This feature automatically optimizes how customers flow through paths in a Canvas, allowing brands to boost conversions with a single click. Finally, we were refining an A/B test prediction feature designed to use a combination of large language models and other neural network architectures to automatically predict the winner of an A/B test without a pilot send, helping marketers execute on new experiments more efficiently and improving their overall performance. Finally, I wanted to update you on our social impact initiatives. In July, Braze published its second annual ESG report. This report included our FY '23 greenhouse gas emissions audit, an overview of our diversity, equity, and inclusion activities and details on our grant-making efforts as part of our Pledge 1% equity donation program. Our social impact mission is to amplify employee impact to create opportunities for underserved groups within our communities and to accelerate science-based climate solutions. We look forward to growing these efforts through continued employee advocacy and participation over time. Thank you to our customers, team members, and shareholders for your continued support of Braze. We're excited about our path ahead and believe the investments in our product, people, and ecosystem, combined with strong secular tailwinds, position Braze to become the industry standard for customer engagement. 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 second quarter with revenue up 34% year-over-year to $115.1 million. This was driven by a combination of existing customer contract expansion, renewals, and new business. Our acquisition of North Star closed on June 1 and contributed nearly $2 million of revenue in the quarter. Our subscription revenue remains the primary component of our total top line, contributing 95% of our second quarter revenue. The remaining 5% represents a combination of recurring professional services and one-time configuration and onboarding fees. Total customer count increased 22% year-over-year to 1,958 customers as of July 31, up 359 from the same period last year and up 92 from the prior quarter. Our total number of large customers, which we define as those spending at least $500,000 annually grew 24% year-over-year to 173, and as of July 31, contributed 57% to our total ARR. This compares to a 55% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 120%, while dollar-based net retention for our large customers was 123%. Expansion was again broadly distributed across industries and geographic regions. Consistent with the prior quarter, revenue outside the U.S. contributed 43% of our total revenue in the second quarter. In the second quarter, our total remaining performance obligation was $524 million, up 28% year-over-year and up 10% sequentially. Current RPO was $353 million, up 29% year-over-year and up 9% sequentially. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Overall, dollar-weighted contract length remains at approximately 2 years. Non-GAAP gross profit in the quarter was $80.6 million, representing a non-GAAP gross margin of 70%. This compares to a non-GAAP gross profit of $59.7 million and non-GAAP gross margin of 69.3% in the second quarter of last year. The 70 basis points year-over-year margin improvement was driven by ongoing efficiencies related to personnel costs and continued economies of scale in our core technology expenses. Non-GAAP sales and marketing expense was $51.8 million or 45% of revenue compared to $44.3 million or 51% of revenue in the prior year quarter. While the dollar increase reflects our year-over-year investments in headcount costs to support our ongoing growth and global expansion, improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $18.9 million or 16% of revenue compared to $16.3 million or 19% of revenue in the prior year quarter. The dollar increase was primarily driven by increased headcount costs to support the expansion of our existing offerings as well as to develop new products and features to drive growth. Non-GAAP G&A expense was $17.4 million or 15% of revenue compared to $16.5 million or 19% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth, including headcount costs and increases in software subscriptions and licenses. Non-GAAP operating loss was $7.6 million compared to a non-GAAP operating loss of $17.5 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $3.9 million or a loss of $0.04 per share compared to a loss of $15.2 million or a loss of $0.16 per share in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $476.2 million in cash, cash equivalents, restricted cash, and marketable securities. Cash used in operations during the quarter was $17.5 million compared to $16.3 million in the prior year quarter. Taking into consideration the cash impact of capitalized costs, free cash flow was negative $18.7 million compared to negative free cash flow of $24.7 million in the prior year quarter. The improvement in free cash flow is primarily due to lower capital expenditures compared to the prior year quarter which included CapEx for our London office expansion. Now turning to our forecast. We're encouraged by the strong first half of the fiscal year. Demand for high-quality customer engagement solutions remain solid, and we're optimistic in our ability to execute against our long-term financial targets. We intend to maintain cost discipline and reiterate that we believe that we are well positioned to achieve a non-GAAP operating margin of better than negative 7% in Q4 of this year. For the third quarter, we expect revenue to be in the range of $116.5 million to $117.5 million, which represents a year-over-year growth rate of approximately 26% at the midpoint. For the third quarter, non-GAAP operating loss is expected to be in the range of $15.5 million to $16.5 million. At the midpoint, this implies an operating margin of negative 13.7%. The sequential reduction in non-GAAP operating margin relative to Q2 is driven by one-time expenses related to the company's annual customer conference, Forge, as well as other sales and marketing expenses related to sales enablement, which will be concentrated in Q3 and are not projected to materially impact Q4. Third quarter non-GAAP net loss is expected to be $13 million to $14 million and third quarter non-GAAP net loss per share in the range of $0.13 to $0.14 per share, based on approximately 100.2 million weighted average basic shares outstanding during the period. For the full fiscal year 2024, we expect total revenue to be in the range of $451.5 million to $454.5 million, which represents a year-over-year growth rate of approximately 27% at the midpoint. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $47 million to $49 million. Non-GAAP net loss for the same period is expected to be in the range of $37 million to $39 million. Fiscal year 2024 non-GAAP net loss per share is expected to be $0.37 to $0.39 per share based on a full year weighted average basic share count of approximately 98.8 million shares. We remain committed to driving revenue growth while improving operating income and free cash flow margins in the coming quarters. We reiterate that we expect Braze will achieve positive quarterly non-GAAP operating income and positive quarterly free cash flow by the end of the fiscal year ended January 31, 2025. I'll conclude my remarks by reiterating our excitement in Braze's future. We remain focused on partnering with our customers to deliver best-in-class customer engagement and growing our top line while maintaining cost discipline to achieve our long-term financial targets. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

Our first question comes from Ryan MacWilliams with Barclays.

For Bill, let’s see the improvement in monthly active user growth this quarter. I know that’s not a perfect metric, but would love your thoughts on where your customers' usage and marketing spend currently stand at this point in the year. Like are they becoming more willing to make growth investments at this point? Or is it more stabilization? I'd love your thoughts here.

I think overall throughout the year, we've seen pretty consistent conditions for our customers and just broadly around the macro, and we're seeing that same consistency around the globe. Everyone's experiencing pretty similar interest rate conditions. A lot of marketers are operating with flat or frozen budgets. While we've been really happy with our execution through the environment, we've highlighted the new business growth. We've been really happy with the diversification of new customers that are coming in. I also do think that we've got some gas in the tank from the perspective of a lot of the product expansion that’s happened, including the WhatsApp launch. We've been happy with the traction there. But in an environment where marketers in general are sitting on frozen budgets, with a lot of scrutiny from procurement and CFOs, the opportunity for a new product launch like that or expansion to continue to really see its full potential is going to be more limited. From the beginning of the year, we've seen things continue to be challenging and unpredictable. I’d say that conditions broadly haven't improved, but they also haven't gotten worse. We've been really happy with the execution that we've seen across the company. We’ve strengthened a lot of the foundations, both in our product as well as in our go-to-market strategy and our sales organization. We've been really focused on setting up the organization for our path to 1 billion in ARR, but it is definitely still challenging out there.

Appreciate the color. And then for Isabelle, good to see the continued improvement in gross margin? What were some of the drivers of the gross margin improvement in the quarter? And do you think you can continue to see step-ups in this metric as your customers begin to utilize more large language model capabilities?

Thanks for the question. Yes. I think the trajectory that we're on within our gross margin metric is very consistent with our long-term targets that we've stated. Our long-term target is 67% to 72%. We're operating well within that range and already at 70%, which is great to see. We're kind of just ticking up as we continue to experience and realize cost efficiencies and operations of scale across our technology stack and then, some personnel efficiencies that we have. I think some of the ongoing things that we can look to that I've talked about before regarding our path to profitability are ongoing economies of scale across the tech stack, which we will continue to leverage and continue to improve over time. And then specifically across personnel, we've talked about leveraging cost-optimized locations as we continue to grow that headcount, finding ways to do so in a more optimized fashion. The combination of those two things will continue to lead us to where we are and beyond the range we've stated for the long term.

Our next question comes from Jake Titleman with Goldman Sachs.

Congrats on a great quarter. Bill, you mentioned an AI recommendation engine that will be a separate SKU. Can you talk a little bit more about that, what the plans are to monetize it? And maybe are there some other AI SKUs that are coming down the pipe that you also charge for separately?

Yes. Across our AI and machine learning investments, we expect there to continue to be a mix of ways that we will realize returns on it. Some parts will be monetized independently. Our predictive suite has actually been in the product as a separate SKU for a while. If you look at the transformer-driven recommendation engine, we anticipate that to both be a separate SKU and also to support additional upsells for another product we have called product Catalogs, which could be used with or without the recommendation engine. Those are both great examples of places where we have independent monetization and then, we also have support for other aspects of the product that independently monetize. In addition, I think that a lot of the generative AI investments we're making, which are improving marketer productivity and allowing marketers to bring their ideas to life more quickly, to be able to inspire them more. In the example of the SQL segment extensions or the data transformers I spoke about earlier, we think these are really good places where generative AI is actually helping build confidence for marketers to take on more technical tasks within the platform. All of those lead to faster time to value, more usage, the confidence to deploy more use cases, which usually come with more monthly active users and often come with expansion into new channels or expansion into new data products. They’re all very much self-reinforcing even without independent monetization, and of course, across the board, we make marketers more productive. So the more that we have marketers who are operating with agile team methodologies, that leads to higher levels of experimentation, which compounds ROI and improves customer satisfaction, ultimately leading to better differentiation for Braze. We see this kind of flywheel effect happening where, yes, we are absolutely going to independently monetize, but even if we weren't, we still think there's a lot of monetary benefit. Our community is going to continue to up-level themselves more quickly, enabling Braze to further separate from our competition as we are characterized as the top of the sophistication pyramid in the space.

That was very helpful. And then I just wanted to follow up on the GSI being instrumental in one of your displacements of the legacy marketing clouds. Can you just talk a little bit about the GSI relationships, the global agency relationships, how those are evolving? And when do you think that could actually be a material driver to revenue growth?

Yes. We're continuing to deepen our relationships with solutions providers, including global systems integrators, the big agency holding companies, and also a vast global network of smaller marketing and growth agencies. The fundamentals of those relationships continue to be really solid. We're investing to allow that mutually beneficial flywheel that I've spoken about in prior quarters to continue to spin up. I'd say we're also advancing at varying speeds depending on the partner, but we're really excited about the overall trend line. We're seeing examples of tremendous success where we're generating really strong services revenue for those partners that are leaned into their Braze practices and our joint go-to-market motions. The characterization of how your really great Braze partner is very different from the way that you may have been a great partner of the legacy marketing clouds. Braze represents easier integration, faster time to value. But on the flip side, it also represents greater opportunities to compound ROI through experimentation, through additional data analysis. The types of services that resonate with the Braze customer base are different from what the GSIs were maybe used to providing for legacy marketing cloud providers. They’re better, and they’re exactly where those partners are trying to evolve, because it represents more ongoing revenue as opposed to being predominantly the upfront integration-oriented revenue. It’s definitely an evolution that our partners want to make, especially at the GSI level. It's one that we're supporting them in making. We're looking forward to seeing the success that we are in all the places where partners are really leaned in, and we're excited about where that's going.

Our next question comes from Michael Berg with Wells Fargo.

Congrats on the quarter. I just have a quick one on the cloud data adjustment progress. You have a number of announcements in and around that space. With the strength you're seeing in the business, maybe you can help us understand how that's helping either drive expansion, stickiness adoption, or how you're thinking about the benefits of that longer term? It certainly seems like it can ease the adoption curve here.

Yes, I think that's exactly right. Broadly, we are focused on ensuring our customers can get their data into Braze quickly, easily, affordably and that they can do so without an ongoing maintenance burden. When you think about the total cost of ownership or just the characterization of how Braze first deploys and then lives within a technology ecosystem, what we're trying to do with things like cloud data ingestion is reduce the activation energy to both get data flowing into Braze in the first place and to add those incremental use cases over time. That ability to onboard a customer more quickly to have them get comfortable in the Braze environment and get their early use cases out the door and then immediately be looking at new opportunities is crucial. We’re committed to giving customers flexible options for our stream processor to ingest either their raw data, the insights that they're generating through additional data science work, and all of the events and other activities that are generated by end-user actions. You should expect to continue to see broad investment by Braze on the data front, so that the Braze data platform continues to allow our customers to get up and running more quickly, get more use cases to us. We don't monetize things like that independently. We have the advantage that new data that flows into Braze drives more use cases, incrementally increasing monthly active users, leading to additional messaging usage and deployment into more parts of their user journey. We look at data as an input and want to make sure that customers can easily access and expand over time. All of that creates a self-reinforcing loop for us.

Very helpful. And then a quick follow-up on the product front. Generative AI, you mentioned you were early to the game. When I think about your data platform, it seems like the products are coming out at a pretty high velocity. Is there anything structural in either your architecture or how you're using generative AI that's helping with your R&D velocity? And do you feel that's a competitive advantage moving forward to help take further share from the legacy players?

Yes, absolutely. I mean especially when comparing to the legacy players, many of which were assembled through a series of acquisitions and maintain siloed architectures. Braze has always focused on keeping tight vertical integration through all the different layers of our stack while controlling complexity, ensuring we're constantly upgrading our foundations, which keeps our well-honed sharing machine running at high velocity as we continue to scale. When we look at the roadmap velocity, we’ve been really happy with it for years. We’ve continued to add more investment to our R&D teams. Unlike many companies, as they get to a certain scale, you start to see unit productivity slowdown out of R&D. In many ways, because of the strengthening of Braze's foundations, we've sped up our unit productivity in the past few years. You’re seeing this reflected in the rapid injection of AI into our platform, channel expansion, and the Braze data platform deepening its capabilities. We're trying to support the leading edge of modern customer engagement teams who are increasingly responsible for the customer journey, the delivery of marketing messages, and aspects of the product experience.

Our next question comes from David Hynes with Canaccord.

I'll echo others' comments on the quarter. It was nice to see the sequential growth in cRPO. Isabelle, the last time we spoke, I think the message from you was kind of like signs of stability are forming in the business. To that end, can you talk at all about the linearity of bookings in the quarter? Any observations on kind of intra-quarter NRR? Any of that sort of stuff would be interesting to hear.

Yes, we are very pleased with the execution this quarter. While one quarter does not establish a trend, we are happy with our linearity results. Some of the over-performance relative to consensus numbers contributed significantly to that. However, we are not factoring such expectations into our future guidance. I do not anticipate that the overperformance observed here will be a recurring pattern, but it was encouraging to see the linearity we achieved this quarter. We're back to a situation where about 50% of our bookings occurred in the first two months of the quarter, which is an improvement compared to the back-end distribution we have seen in recent quarters.

And then a quick follow-up for you. Is that WhatsApp channel kind of gets into the market and continues to scale? Any comments you make around kind of contribution margin of that channel, like does it look more like SMS, does it look more like higher-margin channels? How should we think about things?

We don't speak specifically to that. I think we've made comments around this regarding where it lives in the sequence; it’s going to be somewhere between email and SMS. So think of it as kind of there in the pecking order, but that's all I'll say. I'm not concerned. In fact, as SMS has grown as a proportion of our total top line, we've continued to find ways to expand our margin, and you've seen that fairly meaningfully. So I would not look at the growth of WhatsApp as a concern towards gross margin compression.

Our next question comes from Derrick Wood with Cowen.

Congrats on a solid quarter. Following on that same topic, just curious, Bill or Isabelle, what you're seeing in terms of cross-sell activity across channels including email, SMS, in-app WhatsApp. Just wondering how you’re pushing where you’re seeing the most traction and whether there’s any change in what channels you’re landing with for new customers.

Yes. I'll call it two things. One is that we've been excited to see that as we add new channels and grown the sophistication of those channels, even with the channels that have been in the product for a long time, we continue to find the ability to start new contracts across any subset of channels. We have customers that are starting with just SMS, content cards, email, and obviously, just mobile, which is a big part of our heritage. As we continue to build out these new channels, we're looking for them to both provide upsell and cross-sell opportunities, along with a new way to introduce people into the Braze ecosystem. Our goal with all of these comes under the umbrella of start anywhere, go everywhere that we've been talking about. When we get a customer into Braze on any given channel, we introduce them to Canvas and they also set up a data flow that flows through every layer of our stack. Once they do that, it's incrementally very easy for them to expand across to other channels. The feature sets for targeting and personalization concepts around reporting are all the same. In many cases, the data flow can be augmented.

Great. Maybe one for Isabelle. Just on the guidance. Going into Q2, you had guided for 7% sequential growth. You ended up with 13%, very strong quarter. Going into Q3, you're guiding for 2% growth. It sounds like maybe that upside in Q2 was linearity, and you're not assuming that in Q3. But anything else to call out in terms of potential maybe some pull forward, or how to think about extra seasonality around the Q3?

Thanks for the question. I think one other thing to call out, so the linearity is certainly at play, and we did have a very strong execution quarter. I think one quarter does not a pattern make. So the combination of this strong execution with the linearity. Those two together drove some higher-than-anticipated results, which I wouldn't expect to repeat and are not embedded in the guide in the back half of the year. Also, remember that Q1 to Q2 has a different day count. Q1 only has 89 days. All the other quarters have 92. From a sequential perspective, you end up with a very strong sequential growth between Q1 and Q2 that does not repeat in any other quarter.

Our next question comes from Arjun Bhatia with William Blair.

Bill, maybe one for you. It seems like ease of use and reconfigured data marketing is a big part of the investments that you're making. How much of a sticking factor, gating factor was that with customers for growth? As you make these investments, is the goal to expand the customer segment that you didn't have access to, or maybe just increase the intensity with which customers are even using the data that you're putting in the platform?

Yes. It’s definitely both, but they really go hand in hand. For instance, in consumables or CPG, many of those brands don’t have large mobile app audiences. The historical way, which was very SDK-centric, of getting data into Braze is not as applicable to many of their use cases. When you look at their paid ad spend combined with pulling first-party data sets out of data warehouses through cloud data ingestion or a partner like a CDP, they can use our audience sync capability. This type of orchestration of data being generated to direct marketing actions presents a tremendous ROI. So it's a combination of both expanding into new verticals and use cases while we're expanding our channel and product breadth. As Braze has more places to interact with customers and collect data, we can execute on more use cases. Canvas has been architected to be incredibly flexible to enable customers to take action across different places.

Got it. Super helpful. And for Isabelle, I know you have a free cash flow breakeven timeline out there. As we navigate through the next few quarters of continued macro, what would be some factors that might get you to push or pull that timeline and some of the investments that you're making in the business?

Yes. Thanks for the question. I want to reiterate some comments we’ve been making regarding this path to profitability. Don’t expect us to overachieve on this because, to the extent we generate extra capacity, we are going to look to prudently reinvest that into the business in order to foster overall growth. We’re sticking to the timeline we’ve articulated, both for free cash flow and operating income. We were pleased with our performance this quarter. We are taking some of the savings we've realized on a year-to-date basis and enabling certain parts of the business to redeploy some of those savings through the back half of the year while maintaining a laser focus on our guidance for Q4.

Our next question comes from Nick Altmann with Scotiabank.

Just a quick one for me. As we entered the year, there was sort of this notion that COVID perhaps had a little bit of front office pull forward and then the turbulent macro front office, MarTech initiatives maybe get put on the back burner. Just given the booking strength in Q1 and 2Q here, is there any way to sort of parse out the strength between the end market holding up better than maybe you guys had expected versus you executing much better? I know, Isabelle, you had called out execution was strong in 2Q, so just wondering if you could kind of highlight those two factors?

Yes. I said this at the top, which is that I think the broad macro that we're experiencing, and that everyone is experiencing together has been pretty consistent throughout the year so far. I’ve also been speaking for quarters about how I think a lot of the narratives about the front office, about concepts like optimizing spend don’t apply to customer engagement in the same way, because the marginal ROI of customer engagement activities by customers is much higher than a lot of other marketing spend. We’re not a seat-based model; we're tied to activity of the customers. You really can’t go through a lot of optimization strategies used for data warehouses or analysis where you do things like sampling that just simply don’t apply when you need to communicate with your customers. It’s a responsibility for brands. I would say that we think we're seeing pretty consistent buyer behavior throughout these periods. I do think we've been happy with execution. We highlighted struggles in our salesforce productivity perspective. We’ve done a tremendous amount of work on that topic over the last four quarters, including some organizational structure and leadership changes in both sales and go-to-market strategy, enhanced training, in-person onboarding, and tighter performance management.

Great. Maybe one for Isabelle. Just on the continued growth in the $500,000-plus net revenue retention rate, are you seeing more cross-sell and new channel adoption there? Or is this the natural expansion of large customers landing and already being at that size? Any additional color you can provide, particularly at the larger customers where you're clearly gaining market share?

Yes. It's really just a combination of existing large customers that are continuing to grow, adopting more channels, and more use cases while further penetrating organizations into new geographies and business units. We’re also doing well in terms of large net new customers. I think you see needs across enterprises for the highest-level sophistication customer engagement platforms. As we continue to improve the product and increase our breadth of channels, we’re continuing to further penetrate these organizations. Additionally, 43% of our revenue comes from outside the U.S., which means we already have a solid global presence. Large multinationals can continue to support them and increase our exposure across the globe.

Our next question comes from Taylor McGinnis with UBS.

Isabelle, just one for you. The sequential cRPO growth was really solid. Aside from strong execution on linearity, was there any impact from North Star or something onetime in the renewal base to keep in mind? If the environment is stabilizing, could we start to see stronger growth quarter-over-quarter adjusting for seasonality throughout the year versus what we saw last year?

Yes. North Star did have an impact. If you remove the impact of North Star, Q2 of this year looks a little bit more like Q2 of last year. If you look at sequential percentage growth in RPO, cRPO, it looks a little bit closer to that. That’s one way to think about the impact of North Star.

Our next question comes from Brent Bracelin with Piper Sandler.

It's great to witness the positive changes in the business. Even if I exclude North Star, it appears to be the largest increase in subscription revenue and overall revenue we've seen. There's acceleration in the U.S., growth is picking up internationally, and RPO growth is also accelerating. It feels like there's been a significant shift. Is this strength concentrated in one area, or is it more widespread? Do you think the year-end environment or your execution ability has improved in this context? I understand that one quarter doesn’t establish a trend, but it certainly seems like something has changed that I might not have recognized before the quarter, and I'm trying to grasp that.

I'm very pleased with our execution results in the context of the macro that we continue to live in. We've been discussing investments across our sales organization over the last several quarters, and Bill has discussed some that continue today. We're pleased to see some of the results of that in Q2. However, the environment continues to be challenged. While we will continue to invest in this improved execution across our sales organization, I think it is too soon to declare that we feel like things are different on a persistent basis.

Our next question comes from Brian Schwartz with Oppenheimer.

Following up on that last question, for you, Bill. The commentary is that the macro is unchanged and still challenging out there. What are you looking for to help you decide when to underwrite a higher level of new investments for the business once the macro does turn?

First of all, we are carrying some excess sales capacity, and we've spoken about this in the past as well as we think we have the ability to grow into. We're also investing on the demand generation side to ensure our salesforce is as productive as possible. All of this is about remaining in a forward posture so that as things start to improve, we can pick them up immediately. We believe we have a right to win across this market. There's a lot of exciting product innovation that we have yet to see the full potential of from a revenue generation perspective due to frozen or declining budgets that marketers have experienced this year. Some of the things we will look for include conditions improving and confidence returning, which we think may occur as brands extend their planning horizons.

Our next question comes from Rob Morelli with Needham.

Congrats on the quarter. As customers look to expand on the platform in the current macro, can you touch on where they're expanding now compared to 1 year or 2 ago? Is it in different channels or capabilities? I'm just trying to understand where the incremental expansion dollar is going.

I would broadly characterize it as being consistent, with the caveat that it's conceptually consistent, as the product continues to expand in new ways; we’re seeing customers continue to adopt those capabilities as they exist. For instance, data sharing has gotten more capability, and we're seeing more customers adopt that. We also see people add incremental capability through products like Catalogs or Audience Sync, which are net new but align with this trend line of continuing to deploy new use cases on Braze. The drivers of it, which are how to expand into new use cases, and how to oversee channels currently being run by other vendors, do exist for new business as they pertain to vendor consolidation. This consolidation trend exists for existing customers as well as we start to develop customers and supplant other vendors in their ecosystem after starting to work with them. New channels like WhatsApp are net new and provide greenfield opportunities; we don’t need to replace a legacy vendor. Early proof points like the Rappi case study enable us to demonstrate the resulting ROI and business case for more customers to expand into those resources.

We have time for one more question. The final question will come from Yun Kim with Loop Capital.

I'll make just a quick one, Bill. As you roll out more generative AI-based products and solutions, how are you thinking about pricing model around those products? We can see a few large high-profile vendors putting a premium on their generative AI products. And maybe Isabelle can talk about the cost side of the equation on these products?

I believe much of the generative AI work we're doing aims to boost productivity for customers and marketers. We're not trying to withhold valuable tools from marketers, as we understand that these tools lead to increased usage of Braze, which we can monetize. When we assist marketers in deploying more variants quickly, checking copy, or generating content strategies, we're enhancing their capabilities through code generation. All of these efforts encourage the use of Braze, which we've already monetized. However, certain features that involve larger models will be offered as separate SKUs, such as the recommendation engine mentioned earlier, and we expect additional monetization from these. We continue to provide value by improving ROI and results for marketers. Our approach will be hybrid, ensuring all models support one another. We have the advantage of a pricing model based on monthly active users, reflecting the continuous value we add to each user. For some time, our revenue growth rate has exceeded our growth in monthly active users. This is largely due to our productivity enhancements, which enable improved ROI for marketers.

The only thing I would mention regarding costs is that I do not anticipate the impact of AI to negatively affect our margins. We continue to stay within our long-term margin targets of 67% to 72%. Integrating AI functionality into our cost structure does not allow us to break out individual components, but we do not foresee any margin dilution.

This concludes the Q&A. I will now pass the call back to Bill for closing remarks.

I just want to thank everybody for joining the call today. We appreciate your continued support and look forward to seeing you at a conference or on the road soon or for the next earnings call in about three months.