Earnings Call Transcript
Braze, Inc. (BRZE)
Earnings Call Transcript - BRZE Q2 2023
Operator, Operator
Welcome to the Braze Fiscal Second Quarter Results 2023 Earnings Conference Call. My name is Luke and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, we will conclude with a question-and-answer session. I’ll now turn the call over to Christopher Ferris, Head of Braze Investor Relations.
Christopher Ferris, Head of Investor Relations
Thank you, operator. Good afternoon and thank you for joining us today to review Braze’s results for the fiscal second 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 third quarter and full fiscal year ended January 31, 2023; 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 second quarter 2023 performance in addition to the impact these items have on the financial results. Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations portion of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now, I’d like to turn the call over to Bill.
Bill Magnuson, CEO
Thank you, Chris, and good afternoon, everyone. We delivered a strong second quarter, generating $86.1 million in revenue, up 55% versus the prior year and 11% compared to the prior quarter. For the first six months of this fiscal year, we’ve grown revenue 58%, a testament to the power and scale of the Braze customer engagement platform. We also continued to demonstrate the ROI and stickiness of the Braze solution through an exceptional renewals performance, even during turbulent macroeconomic conditions. Further, we achieved solid customer growth, increasing our total customer count by 96 sequentially or 43% in the last 12 months, while our number of large customers, which is defined as those generating over $500,000 annually, increased 70% year-over-year. Notable recent new business wins and upsells include Roku, TelevisaUnivision, IBM, and Pizza Hut Australia, among others. I want to particularly highlight Roku, one of the most widely used streaming platforms in the world with 63 million monthly active users. We’ll be powering critical holiday email efforts, integrating our iOS and Android SDKs to extend their customer reach and partnering with them to expand their messaging across multiple channels. We believe this speaks to our ability to land large global enterprises even in an uncertain environment, and I’m proud of the efforts made across our organization to deliver these strong results. However, the quarter was not without its challenges. Like many of our software peers, we saw elongated deal cycles and greater scrutiny on customer spending as some prospective and existing customers took a wait-and-see approach to the economy before committing to new investments. This effect was most acute as the quarter came to a close in July and affected our new customer ACV in the quarter. Notably, this period of rapid evolution in the sales environment overlapped with the ramp period for a large class of account executives hired earlier this year, resulting in sales productivity landing short of where we expected it to be in the quarter. We are adapting quickly, identifying areas where execution faltered and making appropriate adjustments. In sales, we have returned to in-person training and mentorship while developing skills and presenting new tactics designed to help our account executives better navigate this dynamic environment. Specifically, we have launched new certification programs, engaged in more active competitive training, organized in-person sales boot camps for all new account executives, and are regularly hosting in-person role-playing, demo sessions, and more. These are training opportunities that are far more available to us now that the world has largely reopened, and we are excited to be arming our salespeople with the knowledge required to further differentiate our offerings from those of both our legacy marketing cloud and startup competitors. Over the long term, we believe an enduring focus on customer ROI and product differentiation is the most effective way to beat our competition, but we’re also adapting to short-term changes in buyer behavior by increasing the emphasis of Braze’s rapid time to value and the outsized ROI of investing in first-party data with the goal of driving buyer urgency and materializing the opportunity cost of allowing suboptimal status quo solutions to persist. Supporting this message is our enduring differentiated product offering, including our unmatched ability to deliver omnichannel messaging at scale through real-time stream processing and our ever-expanding reporting and analytics capabilities. We believe that our platform and vision is increasingly defining the customer engagement space that we can become the de facto file format for the space and that our continued robust investment in R&D and our customer community will drive us forward as a generational brand. Despite the challenges we’ve recently encountered, we feel good about our pipeline, and new opportunity generation was strong in the quarter. Pipeline quality is a function of robust discovery and a strict qualification and inspection process. We continue to refine and improve our qualification criteria and are optimizing our middle-of-the-funnel nurture techniques. We also believe continued progress developing our customer and partner community is helping generate high-quality inbound pipeline with increased deal velocity and higher win rates. This bolsters our faith in our full-year outlook, which Isabelle will discuss in more depth later. We also continue to invest heavily in our solutions partner ecosystem, particularly with the marketing agency holding companies and leading global systems integrators. We are deepening these relationships to help us land and expand within enterprises and to better serve our existing customers with complementary strategy, integration, and managed services. As Braze’s presence and importance grow across the ecosystem, the GSIs and agencies are motivated to build Braze practices to serve their existing clients and help them compete for new ones. As those practices mature in scale and sophistication, a self-reinforcing flywheel dynamic can take hold that builds complementary value for Braze, our customers and our partners. This win-win-win speaks volumes about the power of our product, our ability to feed the services ecosystem and the increasing influence we are achieving with large enterprises around the world. Most importantly, we have continued investing in the evolution of our product to deliver on the promise of world-class customer engagement. This quarter, we launched a major leap forward in the power, usability and performance of Braze’s orchestration capabilities through the release of Canvas Flow. Canvas Flow is the latest generation of our visual programming environment and has been met with positive feedback and rapid adoption by our customer base. With Canvas Flow, even non-technical customer engagement practitioners are able to build incredible experiences for their customers and easily experiment with them over time. We’re extremely proud of our track record of simultaneously improving both the usability and power of Canvas through environment upgrades and are excited to see our passionate customer base unleash their creativity and innovative spirit with the new capabilities that Canvas Flow provides. To provide just one example, EverWash, a mobile app that connects drivers with car washes, wanted to create a more valuable onboarding experience in order to maximize customer retention. Prior to Braze, EverWash employed an in-house tool that only supported email. By implementing Braze, they were able to get their data organized and streamed directly into the platform, set up push notifications, developed an SMS strategy, and quickly began creating dynamic customer journeys via Canvas Flow. In addition, they use the Braze intelligent timing solution to optimize messaging for when a user is most likely to engage, and they use Liquid personalization in most of their campaigns, driving further customization based on each consumer’s revealed preferences. In the case of a holiday car wash, multichannel push and email campaign, EverWash experienced an impressive 37% conversion rate. Braze technology is also helping customers drive efficiency and reduce costs in the increasingly scrutinized ad buying ecosystem through our Audience Sync features, which are integrated with Facebook and Google’s advertising tools. These integrations allow our customers to leverage the real-time first-party data flow managed by Braze to optimize their usage of expensive advertising channels by targeting high-value users via multiple channels, populating real-time suppression lists and building finely-tuned lookalike audiences. One customer, a European travel and tourism company, has used these Facebook and Google integrations for suppression and look-alike audiences and has seen strong positive results, reducing their typical cost per acquisition by up to 40%. Canvas Flow is just one of the many new product updates and features we recently introduced. Often, R&D organizations succumb to tech debt and experience growing pains as they scale, resulting in slower product velocity and reduced agility over time. In contrast, Braze product development has only accelerated over the past few years through foundational infrastructure investments and nimble organizational design. Transformative features like Canvas Flow are critical to generating differentiated value for our customers and building a moat against competitors while we work to cement Braze’s position as the industry’s file format for customer engagement. Look for us to debut new features and continued enhancements to our vertically integrated data flow and stream processing system in the coming months, particularly at our Forge Customer Conferences in New York in October and London in November. Before turning it over to Isabelle, let me just reiterate how confident I am in the long-term trajectory of Braze. When we started this company over 11 years ago, my co-founders and I shared a dual conviction about the change that mobile was catalyzing: first, that fast-growing new businesses reborn and built to be mobile first; and second, the generations old would be driven by changing consumer behavior to transform the way they deliver products and services. In the ensuing decade, our opportunity has only grown larger as the field of customer engagement and the Braze platform have evolved in complementary support of each other. Recent challenges have not altered that vision, and we remain committed to delivering industry-leading customer engagement solutions for customers and high growth at scale for our shareholders. And with that, I’ll turn the call over to Isabelle.
Isabelle Winkles, CFO
Thank you, Bill, and thank you, everyone, for joining us today. We reported a strong quarter, with revenue up 55% year-over-year to $86.1 million. This was driven by a combination of new business sales, expansion of existing customer contracts, and renewals. Our subscription revenue remains the primary component of our total top line, contributing 95% of our second quarter revenue. The remaining 5% represents the combination of one-time configuration and onboarding fees as well as other professional services that are subject to similar annual contract terms as our subscription-based revenues. Total customer count increased 43% year-over-year to 1,599 customers as of July 31, up 96 from the prior quarter and up 480 from the same period last year. Our total number of large customers, which we define as those spending at least $500,000 annually, grew 70% year-over-year to 139, and as of July 31, contributed 55% to our total ARR compared to a 50% contribution as of the same time last year. Sequentially, this reflects an 8% increase from 129 large customers, contributing 54% of our total ARR as of April 30. 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 increases to pre-committed volumes of monthly active users and messaging entitlements, signing new business units as we continue to further penetrate our existing customer base through both geographic and brand expansion, and the addition of add-on features and recurring professional services. Our renewal rate, combined with 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 130%. Expansion was broadly distributed across industries and geographic regions. Our global footprint continued to expand through Q2, and revenue outside the U.S. contributed 42% of our total revenue in the second quarter, up from 41% in the prior quarter and 40% at the end of fiscal year 2022. Moving to our remaining performance obligation. In the second quarter, our total remaining performance obligation rose 53% year-over-year and 5% sequentially to $411 million. Current RPO rose 52% year-over-year and 7% sequentially to $255 million. These increases were driven by contract renewals and upsells, term extensions, and signing of new customer contracts. 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. And 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 $59.7 million, representing a non-GAAP gross margin of 69.3%. This compares to a non-GAAP gross profit of $37.2 million and non-GAAP gross margin of 66.7% in the second quarter of last year and 67.8% in the first quarter of this year. Gross margin percent improved 260 basis points year-over-year due to continued economies of scale in our core technology expenses and ongoing efficiencies related to our customer support functions. Turning to operating expenses. Non-GAAP sales and marketing expense was $44.3 million or 51% of revenue compared to $25.5 million or 46% of revenue in the prior year quarter. This reflects our continued investment in headcount to support our strong growth and global expansion as well as increased travel and entertainment expenses as COVID-related travel and event restrictions have eased. Non-GAAP R&D expense was $16.3 million or 19% of revenue compared to $10 million or 18% of revenue in the prior year quarter. The dollar increase was primarily driven by headcount 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 $16.5 million or 19% of revenue compared to $8.1 million or 15% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public company expenses. Non-GAAP operating loss was $17.5 million compared to a non-GAAP operating loss of $6.5 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $15.2 million or a loss of $0.16 per share based on 94.1 million weighted average basic shares outstanding during the period. This compares to a loss of $6.6 million or a loss of $0.32 per share based on 20.3 million weighted average basic shares outstanding in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $510.7 million in cash, cash equivalents, restricted cash, and marketable securities. Cash used in operations during the quarter was $16.3 million compared to a use of approximately $4.6 million in the year-ago quarter, driven by higher net loss and increased cash used in working capital. Combined with higher capital expenses, free cash flow was negative $24.7 million during 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 I turn to guidance, I would like to outline our long-term approach to managing our cost structure, realizing operating leverage, and ultimately achieving profitability. Over the past several years, we have been successful in improving our gross margins by realizing efficiencies in our core expenses. Specifically, we expect to continue realizing economies of scale in our technology infrastructure costs as well as personnel efficiencies related to customer support functions. Therefore, we are raising our non-GAAP long-term gross margin target range from 65% to 70% to 67% to 72%. Within our operating expenses, we expect to realize incremental cost efficiencies as we execute on our cost-optimized location strategy and achieve scale across our existing global office footprint. In addition, we are seeing the early signs of success across more efficient go-to-market motions, which should specifically drive greater efficiencies in our sales and marketing expenses. These include the expansion of our reseller programs, new OEM and co-sell arrangements, and expanding GSI partnerships, all of which should enable us to realize strong top-line growth while driving efficiencies in our sales and customer success headcount over time. As a result, we reiterate our long-term operating margin target of approximately 20%. I’ll note that over our history, we have consistently improved our operating leverage while growing revenue until fiscal 2023, which, as we have indicated since our IPO, represents an investment year. Moving to guidance for Q3 and fiscal 2023. As Bill discussed, our pipeline remains strong, and we continue to see solid demand for customer engagement solutions. We’re mindful of a more uncertain macro environment and have embedded appropriate risk adjustment into our guidance. For the third quarter, we expect revenue to be in the range of $90 million to $91 million, which represents a year-over-year growth rate of approximately 41% at the midpoint. Third-quarter non-GAAP operating loss is expected to be in the range of $23 million to $24 million. Third-quarter non-GAAP net loss is expected to be $21 million to $22 million, with third-quarter non-GAAP net loss per share in the range of $0.22 to $0.23 per share based on approximately 97.4 million weighted average basic shares outstanding during the period. Our Q3 operating expense forecast includes the impact of the Company’s upcoming Forge event in New York scheduled for October 12th through 14th. This event also includes Braze’s first Analyst Day scheduled for October 13. Total expenses for the event are expected to be in the range of $4 million to $5 million. For the full fiscal year 2023, we expect total revenue to be in the range of $347 million to $350 million, which represents a growth rate of approximately 46% year-over-year at the midpoint. We’re pleased that we are in a position 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 $76 million to $78 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $74 million to $76 million. Fiscal year 2023 non-GAAP net loss per share is expected to be a loss in the range of $0.77 to $0.79 per share based on a full-year weighted average share count of approximately 96.4 million shares. In summary, we remain excited about our long-term opportunity to deliver best-in-class customer engagement, and we remain focused and committed to delivering revenue growth at scale. And with that, we’ll now open the call for questions. Operator, please begin the Q&A.
Operator, Operator
Our first question will come from Brent Bracelin with Piper Sandler.
Brent Bracelin, Analyst
Hello. Good afternoon. Can you hear me?
Operator, Operator
Yes, we can hear you, Brent.
Brent Bracelin, Analyst
Thank you for the call and the update today. It seems that your large customers are continuing to expand aggressively. However, it appears that acquiring larger customers is taking longer than expected. Could you discuss the pace of expansion among your large customers, especially since there has been over 70% growth? Are you noticing any slowdown with existing customers due to macro factors, or is the issue primarily related to longer sales cycles? Thank you.
Bill Magnuson, CEO
I’m glad to provide that additional context. When we look at our customer base and differentiate between existing customers, we noted exceptional renewal performance during the quarter, showing significant strength. We are witnessing numerous upsells as customers expand into new channels and explore new use cases, likely increasing their data intake to support these initiatives. These types of upsells were particularly strong in the quarter. Additionally, there are upsell opportunities that reach into new lines of business or new geographical areas, which often resemble new business ventures. As we noted, some of these deal cycles began elongating, particularly towards the end of July, as we observed a more pronounced wait-and-see strategy among some customers. We have strong confidence in these deals eventually closing, given our solid relationships with these existing customers. However, there is definitely a sense of scrutiny within enterprises regarding new expenditures, whether with current vendors or new partnerships.
Brent Bracelin, Analyst
Could you explain the factors behind the much stronger growth in CRPO compared to billings? Specifically, why did CRPO exceed 50% growth while billings showed a significant moderation? What accounts for this difference? Thank you.
Isabelle Winkles, CFO
Certainly. I'll focus on the deferred revenue aspect that affects the calculated billings figure. For this quarter, deferred revenue was influenced by several factors: the payment terms we offer our customers, our ability to bill on annual upfront agreements, the timing of contract start dates compared to when they were signed, and the overall bookings made during the period. In Q2, we experienced increased interest in semiannual and quarterly payment arrangements, saw a number of contracts with delayed start dates, and, to a lesser degree, received some requests for extended payment terms. Collectively, these factors compounded the impact of longer sales cycles we observed. As a result, deferred revenue ended up being somewhat lower than our expectations. However, the bookings we secured during the quarter continue to support the growth in remaining performance obligations (RPO) and current remaining performance obligations (CRPO). We were pleased to see steady growth in both RPO and CRPO consistent with last quarter.
Operator, Operator
Our next question will come from Ryan MacWilliams with Barclays.
Ryan MacWilliams, Analyst
Just on the guidance, could you touch on the decision not to pass through the entire revenue beat to the guide? Like were there any considerations that play here like FX? And is this guide as you see things today, or does it factor in macro conditions getting worse?
Isabelle Winkles, CFO
Thank you for that, Ryan. We thought it was wise to approach our guidance with appropriate risk adjustments. Therefore, we decided not to pass the entire revenue beat from Q2 into the latter part of the year. It's important to note that foreign exchange is a minor factor for us since we primarily bill in U.S. dollars, with only a small portion of sales in Japanese yen as our Japanese entity grows. That entity is performing exceptionally well, and we aren't particularly worried about foreign exchange pressures in that area. The main concern is the ongoing uncertainty in the macroeconomic environment, which influenced our decision not to transfer the full amount of the beat into our guidance.
Ryan MacWilliams, Analyst
Excellent. And then you talked about some macro headwinds and pockets of bookings challenges, but anything to call out from a geography standpoint? And also just like kind of housekeeping. Any changes in your monthly active user base at this point?
Bill Magnuson, CEO
Yes. So, we saw largely similar behaviors globally. As Isabelle mentioned, there was particular strength in Japan as one example, but I think it would be hard to discern the difference between just a brand-new market growing into a huge TAM off of a small base, which is the situation going on in Japan as it’s only been open for a little bit under two years now versus the rest of the world. And I think just what we saw broadly was that wait-and-see approach from a number of management and leadership teams, especially in the enterprise around the world.
Operator, Operator
Our next question will come from Arjun Bhatia with William Blair.
Arjun Bhatia, Analyst
I understand you mentioned that renewals are strong, which is fantastic news given your recurring revenue model. However, as customers approach their renewal, I am interested in what trends you are observing regarding the volume of users and messaging they are renewing at. Are you managing to keep the same volumes for existing customers who are renewing? Is there any decline from a cost savings perspective in terms of customer engagement? Any insights on this would be greatly appreciated.
Bill Magnuson, CEO
Absolutely. When examining these trends, it's beneficial to consider the convergence of all the factors at play. There are indeed instances where some clients fall short of their internal growth targets. This may lead them to reconsider their monthly active user accounts upon renewal because they don’t anticipate achieving their goals. Additionally, there could be circumstances where clients planned to implement new channels like email or SMS but may not advance as quickly as anticipated. Therefore, during renewal periods, we focus on adjusting those allocations. Historically, due to our product's ongoing expansion, when we encounter such situations, there is generally still a strong interest from customers in purchasing new enhancements of the Braze product. This includes our data features, like Currents, or possibly our intelligence features, and experimenting with new channels, such as Content Cards or SMS. At renewal time, even when there has been underconsumption on some aspects, the rapid expansion of our product range often allows us to maintain or even increase contract sizes with current clients. We've also seen improved pricing power as we enhance our market visibility and can demonstrate the significant ROI that a solution like Braze can provide. These elements have continuously opened up opportunities for us to grow our customer base, even when facing challenges such as unmet monthly active user account predictions. Overall, we are experiencing strong growth across all messaging channels, and I'm particularly enthusiastic about the growth in new or deeper channels, such as Content Cards and in-app messages. Last year, we introduced surveys and have been enhancing our editors and usability. The launch of Canvas Flow this quarter, with its improvements, is simplifying the process for customers to expand into other channels. This cross-selling effort remains robust, and underconsumption on one volume-based entitlement often presents an opportunity to introduce those same customers to a different part of our product. As for monthly active user counts, while we do monitor these trends, we don’t fixate on them. This is partly because the overall monthly active user scale of Braze is affected by a concentration of high MAU, particularly in freemium mobile apps and services from our company's earlier years. As the mobile market has changed and we've advanced our enterprise sales, our pricing power for monthly active users, especially at higher volumes, has improved significantly. Today's large-scale customers are equipped with comprehensive data flow and cross-channel messaging strategies that value every customer. For instance, consider the difference between a global freemium game, which may have a vast number of users generating minimal revenue, and a media streaming platform that earns significant subscription or ad revenue from its user base. Moreover, as we broadened our channel offerings and launched additional AI and data-oriented products, our ability to monetize even stable customer bases has consistently grown. Lastly, we should note that seasonal effects also play a role here, as previously discussed regarding our gross margin. Revenue is recognized evenly throughout the year, though there are seasonally driven consumption spikes, particularly noticeable in the fourth quarter, influencing our gross margin. We also see seasonal trends in monthly active users, especially among our high-value customers. For example, retail and eCommerce businesses see increased activity around the holidays, and services linked to league schedules, like fantasy sports and gaming, can substantially impact user numbers.
Arjun Bhatia, Analyst
That's very helpful. One more question, Bill. You mentioned that you are investing significantly in the solution partner ecosystem with the GSIs and marketing agencies. Can you clarify your current progress in developing that partner strategy and how significant it could be for you in the future as a go-to-market approach and revenue generator?
Bill Magnuson, CEO
We are at an exciting point in our development. Over the past couple of years, we have been building momentum and have finally made significant progress. The flywheel I mentioned earlier is starting to really gain speed. We are strengthening our relationships with solution providers like Accenture, Deloitte, and WPP, which helps us expand within large enterprises that are already clients of those partners. In many cases, we're becoming their secret weapon in new customer pitches, allowing them to land new clients with complementary strategies, integrations, and managed services that Braze may not traditionally offer. We are also developing new services, such as data services, that we can present to these partners, who are keen on growing their service ecosystems, while we maintain our focus on scaling as a software company. There is excellent momentum here; large global brands are increasingly seeking professional services from these global system integrators and are specifying that these services should be delivered through Braze. The GSIs are responding and building impressive practices in this area. We believe this could become a significant part of our business and a high-quality revenue pipeline, leading to more efficient customer acquisition and maintenance costs, which are essential for achieving our long-term operating margin goals. Furthermore, with Forge and the upcoming Analyst Day later in October, you can expect several solution providers to participate as sponsors.
Operator, Operator
Our next question will come from Andrew Sherman with Cowen.
Andrew Sherman, Analyst
It’s Andrew on for Derek. Bill, maybe just on the sales productivity. Was this mainly a function of the newer reps just ramping slower, or what were the areas of the weaker execution there? And when do you expect the new training programs to start to kick in? And how is performance on the tenured rep side?
Bill Magnuson, CEO
I believe it was a combination of several factors. Firstly, as demonstrated by our hiring numbers, we have been pleased to report on our expanded sales capacity and our ongoing investment in recruiting new account executives and sales leadership throughout the latter half of last year and into this year. In addition, we faced compounded challenges from shifting customer dynamics and changing macroeconomic conditions, which have made it difficult for many to gain their footing, resulting in some obstacles. Simply put, it’s challenging to teach advanced topics when the fundamentals haven't been fully grasped. This situation has contributed to an elongated ramp-up time, and we are managing through that. Moreover, we've decided to enhance our training by conducting most of it in person, ensuring consistent mentorship within our sales team and across our sales productivity initiatives. We have more leadership involved in this process. While the current macroeconomic conditions are certainly presenting challenges for everyone, we believe that the more we embrace these challenges, the more favorably we will emerge in comparison. We are fully funded and went public ahead of many of our startup peers, allowing us to leverage the benefits of that awareness as well as our capacity for ongoing growth financing. We are enthusiastic about this and committed to ensuring that the additional capacity we are bringing onboard is competitive and effective. As for our more experienced representatives, we did not observe the same fluctuations in deal activity, but the wait-and-see approach we noted, stemming from broader macroeconomic conditions, was evident regardless of an account executive's experience level.
Andrew Sherman, Analyst
And impressive on the Roku win. And as we look into the holiday season, could this kind of be a catalyst for more B2C brands to invest more in customer engagement solutions? And do you see these kinds of deals in the pipeline in the second half?
Bill Magnuson, CEO
Yes, absolutely. We have a very strong pipeline, as I mentioned in the prepared remarks. We are continuously enhancing our qualification and inspection processes for these opportunities, and there is a lot of enthusiasm surrounding them. I am particularly excited about Roku because not only have they become a client, but we are also investing in our Roku in-app message support for our large group of media and streaming customers. This presents a fantastic opportunity for mutually beneficial collaboration in the future.
Operator, Operator
Our next question will come from Jake Titleman with Goldman Sachs.
Jake Titleman, Analyst
This is Jake on for Gabriela. Bill, a quick one for you. I guess, how is the Braze pitch resonating with new customers in this type of macro environment? What are some of the tangible ROI metrics that your reps can share with prospective customers to help them convince them that Braze is a worthwhile investment in this type of environment?
Bill Magnuson, CEO
Yes. We remain committed to our core vision and the value that Braze can provide. Our approach involves tackling challenges with a sophisticated mindset, prioritizing experimentation, and infusing creativity and innovation into the process. We incorporate data to support our experimentation, which are central to our philosophy and will continue to guide us. In light of current economic challenges and evolving buyer dynamics, we have also been concentrating on instilling a sense of urgency in buyers and providing strong reasons for them to proceed. A significant part of this is emphasizing the real opportunity costs associated with opting for what they might consider a quick, cheaper solution or sticking with an inferior provider. We aim to highlight these costs to drive urgency. With the upcoming holiday season for several major sectors, we plan to create influential events to encourage decision-making. Additionally, we are focused on enhancing our time to value, ensuring new customers can quickly onboard and engage with early Braze use cases, and inspiring them to explore additional applications, as demonstrated by many of our current clients. We believe we are significantly ahead of traditional marketing clouds regarding time to value, and we are investing substantially to further this advantage by improving usability and the onboarding process. The recent launch of Canvas Flow exemplifies this progress. More updates will be shared at our Forge conference as we expand our vertically integrated real-time data flow and enhance our stream processor environment. We are also addressing the services ecosystem issue, which often arises from insufficient internal technical resources for implementations. Everything I mentioned regarding GSIs and major marketing agency holding companies applies at the enterprise level to assist those organizations that might struggle due to resource limitations. Furthermore, we are nurturing a vast community of smaller growth and digital agencies globally, who can effectively complement the strategic guidance that Braze offers with hands-on support and more tailored services, enabling faster and more comprehensive onboarding. The combined strategic and tactical adjustments, along with supporting resources and an R&D focus on usability, are all contributing to improving our overall situation.
Jake Titleman, Analyst
Thank you. And just a quick follow-up on that. Beyond the elongating sales cycles that you talked about, are you seeing any other noticeable shifts in buyer behavior? And maybe are there any industry verticals that you would call out as either weaker or stronger?
Bill Magnuson, CEO
I wouldn't specify any particular sectors. As I mentioned in response to geographical trends, we observed a broad impact. Much of this is related to the uncertainty that pervades the economy, leading to a more cautious approach. Regarding overall market dynamics, I don’t believe we’re witnessing any major changes. The ongoing advantages that have driven Braze’s growth in recent years are still very much in place. The transition from reliance on third-party advertising to developing first-party data, enhancing direct-to-consumer relationships, and continuing to invest in delivering high-quality products, services, and experiences to customers remains essential, particularly as the competitive landscape in digital services grows stronger. There are still significant opportunities for brands that are executing this effectively. When Braze enters a market, we can significantly enhance the agility and speed with which they implement effective customer engagement strategies. The core principles of our approach remain unchanged. We’re excited about the substantial R&D developments on the horizon that will not only facilitate a smoother onboarding experience for new customers but also cater to different types of customers, which we are eager to cultivate in the near future. Expect to hear more about this during Forge. Additionally, we aim to ease the process for our existing clients as they explore new channels and applications, as we believe there is still considerable room for growth in that area. Overall, there’s a lot of enthusiasm for growth opportunities. We recognize that the current challenging macro environment has caused some indecision in certain areas, but we’ve already noticed some improvement in August, as Isabelle pointed out. We are keen to continue investing for growth.
Operator, Operator
Our next question will come from Taylor McGinnis with UBS.
Taylor McGinnis, Analyst
Maybe one on margins. So, you lowered the second half margin guide by 70 basis points. And it looks like most of the impacts in Q3. So can you just provide more color on what are the drivers there? Because I know you talked about a couple of things in your prepared remarks with the event and rep productivity and T&E expense. So, just curious what the incremental area of spend is there. And maybe as a second part to this question, I guess, how do you guys think about balancing growth and margins and hiring and weaker macro and what might be embedded in the guide? Thanks.
Isabelle Winkles, CFO
So specifically on Q3, that was really related. We never provided Q3 guidance before and hadn't discussed the specific timing and decisions around Forge. The relative point to the guidance or to the consensus number is mainly the additional spending associated with Forge, which we were unsure about earlier in the year regarding the possibility of doing this in person. We’re really excited that we can. We’re returning to our roots of in-person engagement, both in New York and London. The Q3 results are specifically affected by the New York event due to its timing. The London event, scheduled for November, falls in Q4. That’s what is reflected in the below-consensus number for Q3. That’s all you’re seeing there.
Taylor McGinnis, Analyst
Yes, it does. And then just lastly, if we look at the second half guide for revs, it appears that most of the guide down is more in 4Q. So, could you maybe just maybe talk about like the level of conservatism and guidance philosophy assumed in Q3 versus 4Q? And just as we think about new logo adds, dollar-based and expansion rates and the potential for those metrics going forward, anything you would highlight there?
Isabelle Winkles, CFO
We do not provide guidance on dollar-based net retention. However, I can mention that this is a 12-month trailing statistic. Looking at historical data, we have some higher numbers that will be coming off, which we will need to manage. While we don’t provide guidance on that, I recommend considering it. Regarding our guidance, I believe I addressed this in a previous question, but we have included what we feel is a reasonable level of conservatism. We were cautious not to apply the full amount of our earnings from Q2. Therefore, we are confident in our ability to meet the figures we have set for both Q3 and the latter half of the year.
Operator, Operator
Our next question will come from Yun Kim with Loop Capital.
Yun Kim, Analyst
Bill, can you discuss the trends regarding the messaging channels that your customers are currently focusing on? Are they leaning towards lower-cost marketing options like emails and push notifications instead of more expensive ones such as SMS and text messages? If so, how is this affecting the gross margin dynamics?
Bill Magnuson, CEO
I believe the trends we are observing in our customer base, particularly concerning buyer pressure, are not expected to significantly affect our gross margin for a few reasons. Firstly, SMS is still an emerging channel for us, representing a small portion of both our overall volumes and revenue, as well as the types of SMS traffic we handle. We have always prioritized ensuring that the messages we send are valuable and strategically aligned with our gross margin goals, rather than simply focusing on high-volume SMS for basic use cases like sending numerous two-factor authentication codes. We are committed to addressing the right use cases where SMS truly complements a cross-channel strategy. Additionally, there are many single-channel providers in the market. When businesses choose software dedicated to a single channel, it often leads to an overemphasis on that channel. In contrast, with Braze, our customer success and integration teams collaborate closely with clients from the start to ensure their messaging channel mix is aligned with their ROI objectives. Thus, we do not see significant shifts in volume from individual customers. However, as an indication of broader trends, we have noticed increased integration with advertising platforms and rising customer demand for expansion beyond just Apple and Google. While I can't disclose specific partners yet, we look forward to discussing this further at Forge, as improving cost per acquisition by double-digit percentages is crucial, especially in current conditions. Overall, when assessing the ROI of what Braze provides, we can incorporate various elements even before delving into messaging and additional customer engagement activities.
Yun Kim, Analyst
Okay, great. Real quick, Isabelle, is there any change in the initial land and expand dynamics in the current environment? Are you perhaps seeing a smaller land deal size and maybe customers looking to expand more through a higher volume of smaller expansion deals?
Isabelle Winkles, CFO
Not necessarily. There are still opportunities out there, and our pipeline remains very strong. We have some significant new business and expansions on the horizon. We do not believe we are experiencing any major issues. However, there seems to be some hesitation in getting the first deal finalized, which could involve a new client or, in some cases, an existing client looking to penetrate a new brand or region. This can affect both new business and expansions since they are two different categories. Nonetheless, we are not seeing any significant deterioration in that area, especially regarding our pricing or our ability to attract customers with our product.
Operator, Operator
Our next question will come from Brian Schwartz with Oppenheimer.
Brian Schwartz, Analyst
Bill, did you see any changes to the win rates during the quarter?
Bill Magnuson, CEO
We observed some shifts in the overall win rates we monitor in the pipeline. When we extend timelines, it’s crucial to have compelling events that justify why we should continue investing our time. We noticed an increase in scenarios where clients are taking a wait-and-see approach. If a wait-and-see situation extends beyond three months, we prefer to remove it from the pipeline and regenerate it once a compelling event arises. Additionally, we encountered some customers opting to stay with their current providers or consider lower-cost solutions due to budget constraints. We've experienced similar competitive scenarios in the past, particularly in sensitive price markets. However, we've noted that as companies and industries evolve, these customers eventually return, often ready to choose premium options and invest more. We did observe a few such instances this quarter, but nothing out of the ordinary compared to our historical experiences in similar situations.
Brian Schwartz, Analyst
Thank you, Bill. Isabelle, I have a question for you. You mentioned earlier that the pipeline remains strong. Can we assume that the trends at the top of the funnel and in the pipeline have stayed consistent since the last quarterly update?
Isabelle Winkles, CFO
Yes, I think that’s fair that those dynamics are generally in line. We haven’t seen huge changes at that level. We're observing the same trends, including elongated deal cycles and some hesitance in certain areas, which I believe will continue for a bit. This is partly why we've provided our guidance as we have. However, the top of the funnel continues to show strength.
Operator, Operator
Next question will come from Pinjalim Bora with JPMorgan.
Pinjalim Bora, Analyst
Isabelle, I wanted to ask you about the linearity of the quarter across the three months, and trying to understand the billings difference, which I understand the deferred revenue puts and takes. But RPO still seems pretty strong. I’m trying to think how your bookings might have worked out versus you’re expecting for the quarter.
Isabelle Winkles, CFO
Yes. Looking back at Q4, it was more back-end loaded than we typically see. Q1 and Q2 also followed this trend. We usually generate just over 50% of our business in the last month of the quarter, and most of that occurs at the very end of that month. This pattern was evident in the most recent quarter as well, with a significant portion of the business occurring at the end of the last month. This trend also played a role in our results.
Pinjalim Bora, Analyst
Understood. Bill, I recall you sharing a distinct perspective on the CDP space. You mentioned that a standalone CDP tends to add another layer of latency, and that Braze, in conjunction with cloud data warehousing solutions like Snowflake, can effectively deliver the CDP effect with significantly improved latency. Are you finding that this perspective is resonating with customers right now? Could the current macro environment actually support this narrative rather than pushing customers to seek a standalone CDP?
Bill Magnuson, CEO
Yes. I believe there will still be a significant role for Customer Data Platforms as standalone solutions, particularly in situations where they help to manage the complexity of diverse data ecosystems that different customers have. At Braze, our focus is on a few key areas that I've mentioned several times during this call: the speed to deliver value, our capability to provide unique functions with our real-time stream processor, and allowing our customers to continue experimenting to improve our return on investment over time. To achieve this, we need to carefully consider the entire lifecycle of any data point right from its generation or as soon as it's recognizable by the customer. This means we'll keep investing to ensure we can integrate data sources effectively, so our customers can get started faster and can incorporate more comprehensive data sets into Braze to manage a wider variety of customer use cases. We're committed to ensuring we have a solid capability to access, process, and store the real-time flow of all the first-party data that comes in. You'll hear more at Forge about our ongoing work in data integration at Braze. Our main motivation is to ensure our customers can access the necessary data in the Canvas environment promptly, allowing our stream processor to use it as soon as it's generated. We understand that the value of data to an organization starts to decline immediately after it's created, and we want to be right at the moment of understanding and generation. This includes examining all the different environments where data exists, is processed, and generated. Traditionally, Braze has been integrated directly into our customers’ end products, which is where much of that data originates. We have also been expanding into the data science ecosystem in various ways, which involves further processing data and using AI/ML models to produce specialized insights from proprietary customer data sets. We want to ensure we continue to move closer to these processes to provide unique value to our customers.
Operator, Operator
Our next question will come from Brian Peterson with Raymond James.
Brian Peterson, Analyst
It's great to see that the gross margin outlook long-term is improving. I often receive questions from investors about the main components of COGS and where you expect to see more long-term leverage. Can you explain how we should view the rising gross margin target alongside the stable operating margin target? Thank you.
Isabelle Winkles, CFO
Yes, thank you. The core components can be broadly categorized into two areas: the technology stack, which constitutes the largest segment comprising about 70% to 75% of the total, and the personnel costs. We have been diligently working on achieving scale within the technology segment, as reflected in our numbers, and we will maintain this focus. Regarding personnel costs, we are optimizing that area as well. As I mentioned earlier in my remarks, another opportunity for leverage is our strategy focused on cost-optimized locations. As the organization expands, we will identify roles within our core segment where we can transition to these cost-efficient locations. Together, these strategies will enhance both our technology stack optimization and personnel efficiency. Currently, we are operating well above the lower end of our target range, and we felt it was important to recalibrate this to reinforce our internal accountability moving forward. On the topic of overall margins, I have not provided additional guidance regarding the specific details of operating expenses beyond the core. However, I want to reiterate that we are aiming for approximately 20% profitability in the long term from an operating standpoint.
Operator, Operator
If there are no further questions, the Q&A session has now ended. I will now turn the call back over to Bill for his closing remarks.
Bill Magnuson, CEO
All right. Thank you, everyone. It was a great call. Thank you for all the great questions. In summary, we are extremely excited about the long-term opportunity here. We are overjoyed to be working with our customers, continuing to grow the global Braze footprint and continue to forge ahead to create new opportunities to deliver revenue growth at scale. So, thank you, everyone. We look forward to seeing you at Forge or a number of you at Forge for our Analyst Day, and then we’ll continue on from there with the next earnings call in a few months.