Earnings Call Transcript
Braze, Inc. (BRZE)
Earnings Call Transcript - BRZE Q1 2024
Operator, Operator
Welcome to the Braze First Quarter Fiscal Year 2024 Earnings Conference Call. My name is Anne and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speakers' presentations, we will conduct a question-and-answer session. I will 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 first quarter 2024. I'm joined by our Co-Founder and Chief Executive Officer, Bill Magnusson; 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 for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under the federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the second quarter ended July 31, 2023, for our fiscal year ended January 31, 2024, our planned product and feature development and the benefits to us and our customers thereof, 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 to aid investors in further understanding the company's fiscal first 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 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're very pleased with our first quarter performance, which again demonstrated the power of the Braze customer engagement platform, even against the challenging macroeconomic backdrop. We got off to a great start to the year, generating $101.8 million in revenue, up 31% versus the prior year, while driving operating efficiency in the business. Non-GAAP gross margins increased 100 basis points year-over-year and we demonstrated strong leverage with non-GAAP operating margins improving by over 700 basis points compared to the first quarter of last year. We also generated record free cash flow of $21.7 million, driven in part by solid fourth quarter bookings. As we progress through fiscal 2024, we plan to continue driving strong top-line growth while maintaining cost discipline and believe we are well on our way to achieving the near and long-term profitability goals outlined on our fourth quarter call in March. Brands continue to recognize the high ROI that can be achieved through personalized cross-channel customer engagement enabled by the Braze platform. In the first quarter, we increased our total customer count by 96 sequentially to a total of 1,866, continuing to win against both legacy Marketing Clouds and Point Solutions with our best-in-class customer engagement platform. Recent new business wins and upsells included Procore Technologies, Sonos, Sweetgreen, and Swimply, among many others. We continue to realize strong growth across multiple customer classes, geographies, and verticals, with both retail e-commerce and media and entertainment showing particularly strong year-over-year growth during the period. Braze again benefited from vendor consolidation this quarter and we believe this trend will continue as enterprises with ambition and sophistication consolidate their technology ecosystem with modern omnichannel customer engagement solutions like Braze. We further believe that both the legacy replacement cycle and this vendor consolidation trend will accelerate as customers look to capitalize on new AI-driven advancements in customer engagement, an area of innovation which benefits tremendously from the breadth of Braze's data footprint and messaging flexibility, as well as our real-time stream processing architecture. As I mentioned on our fourth quarter earnings call, existing at the leading edge of technology is in our DNA and at the core of our innovation roadmap. Braze is a company that perceives the opportunity presented by the coming wide-scale adoption of mobile more than a decade ago. And since then, we've worked relentlessly to seize that opportunity through the use of sophisticated technology. For years Braze's had dedicated teams of data engineers and data scientists focused on using machine learning to build AI into our product, with the goal of making marketers more effective and engaging their end users by optimizing customer journeys, generating more relevant content, and enhancing targeting strategies. Even more importantly, we believe that the ability to use machine learning and generative AI are as fundamental to being a software engineer as using databases and writing secure code. As new technologies emerge, including but not limited to breakthroughs in artificial intelligence, our forward-looking R&D posture and highly extensible foundations allow us to quickly deliver innovation to our customers. You can see this track record in not only our long history of activating real-time first-party data through stream processing but also with AI, including generative AI more recently. Braze debuted a GPT integration for email subject line generation over a year ago and we were early to integrate generative AI for images into the message composition experience, launching a dashboard integration with Dolly last December. More recently, we launched a message content checking tool, built on top of GPT-4, helping marketers to avoid copyrighting mistakes, the accidental sending of text messages, or sending culturally insensitive content. We're also testing a wide array of new capabilities including generating SQL for advanced segmentation and reporting use cases, automatically suggesting improvements to message copy during composition and even an adversarial AB testing simulator that we believe may be able to generate and predict winning message variants for populations before a campaign is even launched. Customers have been successfully using both our AI copyrighting assistant and automatic image generation for months to generate message content and inspire new engagement strategies. Lowering the burden of content creation while also serving as a in-dashboard news encourages customers to bring new use cases into Braze more quickly while also expanding their usage of the powerful experimentation features native to Canvas, our proprietary, no-code visual development environment. We believe this enhanced agility and reduced burden to test new ideas, further combines with our other machine learning driven experiment optimization capabilities, further compounding the ROI we deliver to our customers. We know from our customer base that even small or one-person teams can still accomplish a lot with Braze and as a company that has never charged for seats, we expect to see generative AI-driven productivity enhancements for individual marketers translate into even more Braze usage over time. We believe this will further cement our stickiness and promote expansion into new user populations, driving higher message volumes and the adoption of more channels. Internally, we talk a lot about smoothing the on-ramp into Braze as a key part of ensuring that the differentiation presented by Braze's sophisticated capabilities remains broadly accessible to our ever-growing market, even to those who are early in their journey of adopting the modern practice of customer engagement. Over the last five years, we've seen an acceleration of two trends that highlight the importance of tackling this challenge, which also translates into a deeper moat for Braze's technology and our customer community. First is the rising imperative of collecting first-party data and making it available in real-time to engagement systems. And second is the increased ROI of tightly coordinating customer engagement with the product journey, often including the delivery of messaging directly inside the product experience. Both of these trends mean that the customer engagement professional who expands their traditional marketing skill set to include a deeper understanding of data analysis, product design, and basic coding will find themselves generating higher ROI for their brand and advancing more quickly in their career. Braze's customer education and community investments are designed to help more marketers make this transition and we believe that the integration of generative AI into our platform and the pairing of AI with our Canvas environment more broadly will compound these efforts by further smoothing the on-ramp into Braze for our new customers, while encouraging the use of our advanced targeting personalization, and experimentation capabilities for those that are already familiar with Braze. All of this is a continuation of a central principle of our product strategy, which is that immense value can be created when you place the power of programmability and data directly into the hands of those who are closest to the customer journey and brand promise. It's why we built Canvas and it's why we continue to view it with not only additional power and flexibility but also with enhanced usability and collaboration tools. And of course, generative AI isn't the whole story. Preceding these features has been a robust collection of automated decision-making techniques, using both machine learning and advanced statistical methods, including our Predictive Suite, Intelligence suite, and a personalized varying capability integrated into the Canvas. Some of these features are already monetized directly through premium add-ons, while others are provided as part of our standard offering, a blended approach that we anticipate continuing as we release more AI features over time. All of these capabilities are integrated deeply into Braze's data flow and execution SAC and represent early examples of what we believe will be an area of enduring differentiation for Braze. Underlying them is our differentiated architecture which distinguishes Braze from our competitors in three key ways. First is our comprehensive data flow and messaging capabilities. Last fiscal year, Braze processed over 13 trillion data points and sent over 2 trillion messages, all with our real-time stream processor. Customer data flows into Braze across our customers' data ecosystems, inclusive of direct integrations into their products and their data warehouses. We are also integrated into a wide array of consumer touchpoints and end-user product interfaces, which enables us to take action across many channels. The inputs of AI and the direct outputs from its decisions are both more flexible and comprehensive with Braze and the added value this represents is a key component of our ongoing success with vendor consolidation. Next is real-time execution. Our ability to ingest and act on newly generated data in real-time means that AI and Braze are able to make better decisions faster. Braze already employs multiple machine learning and statistical methods to enable automated decision-making in real-time within Canvas and we're experimenting with custom transformers for automated product recommendations that will be able to inject the outputs of generative AI into message content on a per-user basis. Third is our focus on experimentation and programmability. Building on Canvas's flexibility and strengthening experimentation, we'll continue injecting both AI/ML and statistical techniques for automated decision-making into an increasing number of decision points throughout the user journey, enabling new AI techniques to be tested against existing manual strategies and again subsequent enhancements to our AI-driven methods. It's an incredibly exciting time to be leading a team as innovative as Braze in a market with as much potential as customer engagement. And even as we approach our 12-year anniversary this summer, it still feels like we're just getting started. Before I turn it over to Isabelle, I'd like to note that on June 1, we closed the acquisition of North Star, our exclusive reseller of Braze technology in Australia and New Zealand. We are thrilled to have brought their team fully in-house and look forward to expanding in the Australia and New Zealand markets in the coming months and years. We look forward to updating you on our progress in that dynamic market. Despite macro challenges, we are confident in our ability to execute on our growth plan while remaining disciplined and on a path to profitability. Further, we believe the investments in our products, including generative AI in addition to the strong secular customer engagement wins at our backs positions Braze to become the industry standard for customer engagement in the coming years. And now, I will turn the call over to Isabelle.
Isabelle Winkles, CFO
Thank you, Bill, and thank you, everyone, for joining us today. As Bill mentioned, we reported a strong first quarter with revenue up 31% year-over-year to $101.8 million. This was driven by a combination of existing customer contract expansion, renewals, and new business. Our subscription revenue remains the primary component of our total top-line, contributing 95% of our first quarter revenue. The remaining 5% represents a combination of one-time configuration and onboarding fees as well as other recurring professional services. Total customer count increased 24% year-over-year to 1,866 customers as of April 30, up 363 from the same period last year and up 96 from the prior quarter. Our total number of large customers, which we define as those spending at least $500,000 annually, grew 27% year-over-year to 164 and as of April 30, contributed 57% to our total ARR compared to a 54% contribution as of the same quarter last year. Compared to last quarter, this reflects a 5% increase from 156 large customers that contributed 57% of our total ARR as of January 31. Measured across all customers, dollar-based net retention was 122%, while dollar-based net retention for large customers was 124%. Expansion was broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 43% of our total revenue in the first quarter, in line with the prior quarter. In the first quarter, our total remaining performance obligation was $478 million, up 22% year-over-year and up 5% sequentially. Current RPO was $325 million, up 28% year-over-year and up 4% sequentially. The year-over-year increases were driven by contract renewals, upsells, and the signing of new customer contracts. Overall dollar-weighted contract length remains at approximately two years. Non-GAAP gross profit in the quarter was $70 million, representing a non-GAAP gross margin of 68.8%. This compares to a non-GAAP gross profit of $52.5 million and non-GAAP gross margin of 67.8% in the first quarter of last year. The 100 basis point 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 $49.3 million or 48% of revenue compared to $40.2 million or 52% 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, the improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $19.6 million or 19% of revenue compared to $15.3 million or 20% 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 $17.1 million or 17% of revenue compared to $15 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 subscription and licenses. Non-GAAP operating loss was $16 million compared to a non-GAAP operating loss of $18 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $12.6 million or a loss of $0.13 per share compared to a loss of $17.7 million or a loss of $0.19 per share in the prior year quarter. Now, turning to the balance sheet and cash flow statement. We ended the quarter with $507.4 million in cash, cash equivalents, restricted cash, and marketable securities. Cash provided by operations during the quarter was $22.5 million compared to $17.9 million in the prior year quarter, driven by improved operating efficiencies, including improved spend management. While we reiterate that we expect our cash flow to fluctuate from quarter to quarter given the timing of customer and vendor payments, we note that this was the first period in which we delivered two consecutive quarters of positive operating cash flow, reflecting continued improvements in operating efficiency. Taking into consideration the cash impact of capitalized costs, we generated $21.7 million of positive free cash flow compared to $15.7 million generated in the year-ago quarter. Before I turn to the forecast, I'd like to make a few brief comments regarding Braze's application of AI and ML capabilities to internal productivity and efficiency. Beyond product use cases, Braze is rapidly experimenting with AI and ML capabilities throughout the organization via projects designed to shorten ramp times, improve productivity, and streamline processes. Projects are in flight using both custom large language models and GPT-4 via OpenAI's APIs to serve as co-pilots to our sales, solution consulting, and post-sales teams, including an exciting project focused on customer support, which we believe will increase productivity and decrease enablement needs by improving discovery and automating research across our comprehensive public-facing documentation and internal knowledge base. Across G&A functions, we believe there is a significant opportunity to use intelligent automation with machine learning in areas such as forecasting, human resources, accounting operations, and internal audit. We will continue to implement and explore automation and AI/ML capabilities to complement decision-making and drive operational efficiencies. And now turning to our forecast. We are off to a strong start in fiscal 2024 and interest in high-quality customer engagement solutions remained strong. However, the broader macroeconomic environment remains challenging and as such, our guidance continues to assume the current macro environment persists through fiscal 2024. We intend to maintain cost discipline and reiterate comments made during our Q4 earnings call that we believe we are well positioned to achieve a non-GAAP operating margin of better than negative 7% in Q4 of this year. For the second quarter, we expect revenue to be in the range of $108 million to $109 million, which represents a year-over-year growth rate of approximately 26% at the midpoint. This includes a $1 million contribution from our acquisition of North Star which closed on June 1. For the second quarter, non-GAAP operating loss is expected to be in the range of $15 million to $16 million. Second quarter non-GAAP net loss is expected to be $13 million to $14 million. And second quarter non-GAAP net loss per share in the range of $0.13 to $0.14 per share, based on approximately 97.4 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 $442.5 million to $446.5 million, which represents a year-over-year growth rate of approximately 25% at the midpoint. As a reminder, we expect our North Star acquisition to add less than 2% to fiscal year '24 revenue and our updated full-year guidance includes a $4 million contribution from North Star. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $54 million to $58 million. Non-GAAP net loss for the same period is expected to be in the range of $50 million to $54 million. Fiscal year 2024 non-GAAP net loss per share is expected to be $0.51 to $0.55 per share based on a full year weighted average basic share count of approximately 97.8 million shares. Our commitment to growing the top line while improving operating income and free cash flow margins remains unchanged. We reiterate that we expect Braze will achieve positive quarterly non-GAAP operating income and positive quarterly free cash flow by the end of fiscal year ended January 31, 2025. We are very excited about Braze's future. We're focused on growing our business and delivering best-in-class customer engagement at scale while effectively managing costs to achieve our long-term financial targets. And with that, we'll now open the call for questions. Operator, please begin the Q&A.
Operator, Operator
Our first question comes from Ryan MacWilliams from Barclays. Please unmute your audio and ask your question.
Ryan MacWilliams, Analyst
Thanks for taking the question. Bill, how do you think generative AI and real-time streaming processing are more important in marketing campaigns? And any early signs on how generative AI could impact the number of interactions on your platform? Thank you.
Bill Magnuson, CEO
Yes, absolutely. And I spoke about this last quarter and it's one of the areas that I'm most excited about because of the way that it lowers the creative and content production burden and allows for more and more people to take advantage of the differentiated capabilities that we bring to bear through Canvas. And it's just generally pushing people in the direction toward more modern customer engagement. So we've been really excited to see the early adoption of generative AI features that we've had in the product for a while. We're seeing more and more customers discover these products, try them out, and when they try them, they're using them. They're moving content suggestions, textual, and image-based directly into production campaigns. We are also receiving feedback from our GPT-4 driven content checking tool, including a marketer sharing with us that it gave them the confidence to move faster because it provides a robust copyrighting capability without having an individual that would actually provide that on their team. And with respect to pre-existing AI/ML features, these are widely used across our customer base, including through our Canvas. And I would wager that many of our customers using them don't know that there's machine learning going on under the hood for some of them, and I think that's a great thing. We only call things AI until they fade into the background. We're going to stay focused on the job that our customers have to do, deploying AI where it's most relevant, and making sure that we're going to hold our product innovation to a high standard by rigorously field testing new techniques as we conceptualize them. We're also really excited about some of the second-order effects that this is going to cause and I can dig into those as people ask additional questions. But I think, when you look at it with respect to competition, when you look at the point I've made about Braze having a broad spectrum of both inputs and a flexible set of outputs, and I think if you think about what it takes to really fully leverage the automated decision-making capabilities, you need to have a full data picture that needs to be inclusive of the user's historical behavior, their attributes, and the evolving context around them as they either move through their own lives or the product journey they're having with your brand. You need to have the ability to quickly take action when the insights that are generated from that data point you in a new direction. You want to nudge them toward taking a new high-value action. You want to try to avoid a bad outcome like churn or them drifting away. You want to move them to the next stage of their user journey or have them discover some new feature that's going to improve their stickiness. And you need to be able to process and understand those moments that matter and then immediately capitalize on them by taking the right action. I think when you look at whether it's a point solution competitor that's simply not there and all the moments that matter and has a disrupted look at the data picture or you look at the legacy marketing clouds who suffer from disjointed channel-by-channel architectures which inhibit cross-channel use cases even today. We know that their batch-oriented data architectures limit their ability to deliver real-time experiences. That new reality is creating an even higher opportunity cost for companies who are remaining either on the legacy marketing clouds or continuing to use siloed point solutions. We believe that in order to take full advantage of what AI has to offer, you need to be comprehensively integrated into the user journey and executing in real-time at scale and that's just where Braze has been all along. We're really excited to see the market moving toward us. The external community is really picking up on this. We're seeing adoption and repeat adoption of the newest generative AI features and we're just really excited to continue to see that momentum build.
Ryan MacWilliams, Analyst
Yes, I agree, I think this definitely benefits those that have shown product velocity over time. And for Isabelle, solid RPO performance in the quarter. Were there any deals or push out of 4Q into 1Q? And for new bookings, have you seen any signs of stabilization or improvement since the end of the quarter?
Isabelle Winkles, CFO
Yes, thanks for the question. So look, I think the overall evolution of the macro has not really changed. What we're seeing in terms of elevated deal scrutiny and those elongated deal cycles is persisting. We started talking about this last quarter and we continue to see that evolve. There are deals from Q3 that pushed into Q4, deals from Q4 that pushed into Q1, and there were deals from Q1 that are pushing into Q2. So I think we're seeing some of that persist. But I do want to be clear that, that is embedded in our guidance philosophy and that scenario is taken into consideration. And then, sorry, your second question?
Ryan MacWilliams, Analyst
Just to say, in the quarter, have you seen any stabilization or improvement on new bookings?
Isabelle Winkles, CFO
Yes. So we're continuing to approach this with a risk-adjusted view, but we are seeing some of the benefits of the investments that we've made to continue to improve and enhance overall productivity of our sales force. We are definitely seeing stabilization in those numbers. I wouldn't say that we're quite back where we want to be, but we are certainly having more productive conversations and certainly happy about the progress that we've made in the trajectory that we're on.
Operator, Operator
Our next question comes from Gabriela Borges from Goldman Sachs.
Gabriela Borges, Analyst
Good afternoon, and thank you, Bill. I wanted to ask about the longer-term implications of generative AI and what customers are telling you about the way it's going to impact their budget. In other words, what are you hearing in terms of customer spending intentions on marketing technology and software, this marketing spend versus other areas of the budget? And is it actually leading to customers potentially thinking about taking up their budgets for marketing software over the medium term?
Bill Magnuson, CEO
I believe that marketers who are canceling budgets in Braze view it as a necessary investment for achieving customer engagement goals. When considering the total cost of ownership for software like Braze, our goal has always been to enhance the productivity of individual marketers or smaller teams over time. The more we succeed in this, the more teams can transition from basic email marketing strategies or traditional batch-and-blast methods to a more agile approach. Many teams are still using lengthy cycles to refresh content instead of adopting more agile methodologies that involve experimentation. With this shift, they're able to try out various content and strategies, creating more meaningful moments in the user journey rather than relying solely on transactional messages. Brands stand to gain significantly by turning these efforts into growth experiments, though they often hesitate due to the extensive human resources required. We are enthusiastic about the potential benefits of improved productivity for individual marketers. Currently, the number of customer engagement practitioners is still low compared to the opportunities available to brands. We expect that software like Braze will continue to enhance their productivity, improving the return on investment for those teams. Additionally, there are some positive trends in skill development. I've mentioned the increased demand for faster data access to get a comprehensive view. The widespread adoption of tools like ChatGPT will also drive changes in the workforce, leading more individuals to become adept with basic scripting and low-code automation solutions. Some of our current features, such as SQL or HTML templates and data transformation logic, involve technical concepts that not all marketers can access. ChatGPT and similar tools will help demystify these concepts and instill confidence in users to engage with these advanced ideas. This also enhances the ROI for other systems by utilizing first-party and real-time data, which could stimulate additional investments and facilitate the transition from legacy systems. We see a potential for brands to move to cloud-based solutions for better scalability or shift away from outdated marketing tools. Overall, by improving ROI and productivity, we expect both software expenditures and the size and skill level of the customer engagement community to expand.
Gabriela Borges, Analyst
Yes, that makes sense and it ties nicely into a little bit of the longer-term roadmap question. You mentioned the dynamic around consolidation of point products. You talked a little bit about competition. How are you thinking about Braze expanding longer term outside of marketing into perhaps adjacencies and other front office applications?
Bill Magnuson, CEO
When I consider Braze's strong foundation, it supports our ability to take on more enterprise workloads and reach new audiences over time, mirroring the enduring differentiation that will enhance our AI advantage. Braze can be broken down into three main components: our fully integrated real-time data flow, the event-driven stream processor that serves as a real-time execution engine, and the experimentation and programmatic capabilities through Canvas. Recently, we launched a significant productivity enhancement aimed at increasing participation in the Canvas environment, allowing for a broader range of use cases. Looking forward, Braze's future vision offers a real-time computing engine within the data flow generated by customers, utilizing both first-party data and various enterprise workflows. This allows business users to define, optimize, and experiment with their workloads within Braze over time. While I won't specify which markets we plan to enter next, the technical foundations and our early successes in integrating these features into our products indicate that we are well-positioned to bring diverse personas into the Braze environment. We can create a space for them that fosters value and collaboration as they increasingly utilize Canvas for their workloads. As we continue to attract more users, we will achieve greater scale. A central point of gravity will emerge as the data flow consolidates, allowing businesses to integrate more elements of their brand promise and product journeys, including data governance and analysis, while optimizing insights with AI and machine learning over time. This influx of new users will enhance our capabilities and move workloads through our stream processor, governed by the Canvas engine, creating significant potential and opportunities for the future.
Gabriela Borges, Analyst
Sounds good. Thanks for the detail.
Bill Magnuson, CEO
Absolutely.
Operator, Operator
And our next question comes from Taylor McGinnis from UBS.
Taylor McGinnis, Analyst
Yes, hi, thanks so much for taking my question. I wanted to touch on the 2Q revenue guidance strength. So if we normalize 1Q and 2Q quarter-over-quarter growth for the two fewer days in the first quarter, as well as North Star, it looks like at the high end of the 2Q organic guide, a sequential growth that is only a point below what we saw in 1Q. So the guide seems to imply some potential reversal of the decelerating sequential growth that we've seen. Can you just touch on what you saw in the quarter as well as what you're seeing in the demand environment today that's driving or giving you comfort in the outlook?
Isabelle Winkles, CFO
Thank you for the question. The second quarter guidance, excluding North Star, suggests a slight sequential reversion. This is largely seasonal, as Q1 actually has three fewer days compared to the typical quarter, which will correct itself in Q2 with a full 92 days versus 89. Therefore, part of this is seasonal. We are not observing a significant business re-acceleration. We will continue to apply the same risk adjustment philosophy moving forward. You can see the seasonal difference between Q2 and Q1.
Taylor McGinnis, Analyst
Awesome. Thanks so much for answering my question.
Operator, Operator
Next question will be from Michael Berg with Wells Fargo.
Michael Berg, Analyst
Hi, congratulations on the quarter, and thank you for taking my question. I'd like to follow up on Gabriela's question regarding consolidation and competition. Could you provide more insight into what is currently driving those factors in the near term? I believe you announced that your resolution features will be released soon, and considering that along with your data cloud ingestion capabilities, it appears that may replace CDP, for instance. Could you explain that dynamic to us? Thank you.
Bill Magnuson, CEO
Yes, I think all these things work together. You continue to see the expansion of our channel options which I've also referred to as the outputs from the decision-making. As we've added WhatsApp in recent quarters, we continued to expand our audience network integrations, as we continue to increase the flexibility of messages to include more robust surveys and other sorts of capture forms. You will see point solutions continue to consolidate in. When you look from a data perspective, I think that what we're trying to really accomplish is to make sure that people can get data into Braze quickly and that over time, the operational burden of keeping that data flowing into the platform is lessened. We're definitely going to continue to stay partnered with CDPs, with Reverse ETL vendors, and with data warehouses, because those are all augmentations on top of the direct integrations into the products that our customers have. But our entire data picture is more than just making sure the inputs are coming in. We're also doing more from a data transformation and a data governance perspective and we're making it so that more of the operational data ingestion pipelines, if you will, is actually inside of Braze. So that when a marketer deploys Braze, they can go to their development team or their data engineering team at the integration point and have them help set up the pipelines, but those data teams then don't have the ongoing operational burden of babysitting them forever. We think that that actually improves the working relationship between marketers and data and engineering teams over time. It creates more organizational desire to move more and more use cases into Braze because it's a place that's delivering, not just the ROI through the capability, but it's doing so in a streamlined and operationally efficient way. As you continue to move more use cases into places like Canvas, I mentioned this in response to Gabriela's more forward-looking question around what do we see in terms of the future workloads and the future personas that Braze can be executing on, we already see in our customer base a lot of people leveraging the flexibility of Canvas to be general-purpose computation and to do things like data transformations inside of Canvas, deliver products and aspects of the product experience through our flexible webhooks and the other logic that exists within it. When you think about the extensibility there, you continue to pull in more use cases over time. We're really thinking about how do we smooth the on-ramp of getting data into Braze, how do we make sure that over time organizations have great perspective on Braze across the entire set of people collaborating, so it's not just a marketing tool that sits inside of their ecosystem, it's really something that everyone can get value out of and that gives them a home within it. We then make it easy for them to bring new use cases in. You let them experiment and drive more value out of moving more and more workloads into Canvas and give them the massive flexibility to deliver outputs, whether those are messages, product delivery, or what have you, through the flexibility of all of our different channels. Those combine together to just continue to push vendor consolidation.
Michael Berg, Analyst
Helpful. Thank you very much.
Operator, Operator
Next question comes from Derrick Wood with TD Cowen.
Derrick Wood, Analyst
Great. Thanks for taking my question. Bill, last quarter you guys talked about kind of relative strength in the enterprise, but seeing more acute headwinds down the market. This quarter you had a stronger net new customer generation. Can you just talk about anything you'd flag and what drove that sequential strength and maybe just comment on what you saw across enterprise versus commercial cohorts?
Bill Magnuson, CEO
Yes. As many know, the fourth quarter usually sees a significant focus on enterprise due to budget cycle patterns, which influences specific behaviors during this time. Moving into the first quarter, we are experiencing similar macro pressures, though there has been an uptick in commercial business, as reflected in our new customer additions. Overall, I would describe the differentiation in customer categories as remaining consistent. A lot of our success can be attributed to enhanced execution, our responses to competitive strategies, and other efforts, which are proving effective. The team at Braze is truly stepping up during this challenging macro environment, allowing us to differentiate from our competitors. While it can be difficult to notice this amidst the macro pressures that affect everyone’s results, we are enthusiastic about the potential this period has to offer, particularly in terms of market momentum and maintaining our focus on research and development. We’re looking forward to seeing improvements, although I won’t speculate on the timing. The environment remains similar to what we've seen in the past few quarters, but we are optimistic and managing what we can effectively.
Derrick Wood, Analyst
Got it. Isabelle, one for you. Very strong free cash flow in the quarter. I know, as you commented, there tends to be volatility quarter-to-quarter, but any goalposts we should think about keeping in mind for free cash flow for the year versus how you're guiding operating income?
Isabelle Winkles, CFO
Yes. I'm going to come back to the point that I've made over the last couple of quarters that free cash flow is going to continue to be volatile quarter-in and quarter-out. So we advise folks to look at it on more of a four-quarter trailing basis. I'll reiterate the longer-term guide by the end of next year being both operating income positive by the fourth quarter of next year, as well as free cash flow positive in that fourth quarter of next year. So look at that, look for that trajectory. I don't think it'll be linear, so I would definitely expect some ebbs and flows there, which is part of the reason why we don't provide specific guidance on that metric.
Derrick Wood, Analyst
Got it. Well done. Thank you.
Operator, Operator
Next question is from Brent Bracelin with Piper Sandler.
Brent Bracelin, Analyst
Good Afternoon. I wanted to go back to the macro-demand environment. Totally understand the environment is still challenging. Sales cycles remain challenging. But you did flag retail and media entertainment as one area of strength you saw in the quarter. I was hoping you could double-click into the drivers of that improvement. Is there something specific to those verticals that's resonating around first-party data, is it omnichannel? Just walk us through maybe a challenge macro in those environments, but Braze's ability to do a bit better. Thanks.
Bill Magnuson, CEO
Yes, I believe it involves both aspects. Braze has consistently demonstrated a strong capability over the years to secure significant reference and landmark accounts in various categories, leveraging our accumulated know-how and customer examples to expand within these sectors. In retail and e-commerce specifically, we've made considerable advancements on the product side, including enhancing our Shopify integration and developing e-commerce specific features. The product catalog we launched last year continues to evolve, and we are excited about the future of our data storage alongside Canvas. Over time, Braze has shown a capacity to build on existing momentum across different categories. We also strategically diversify our investments to ensure we penetrate new categories for future growth, thereby maintaining robust and varied growth even when the macro environment or competition impacts a specific vertical. This diversification has provided durability and predictability to our results, a trend we are still observing. In terms of first-party data, we are noticing significant investments and ongoing momentum as brands reassess their approach to first-party data. Recently, much of the dialogue surrounding first-party data has been defensive, focusing on avoiding loss as brands seek to build up their first-party datasets due to the invalidation, incompleteness, or illegality of third-party data. The next phase, which our customers are beginning to experience, is recognizing that first-party data plays a critical role in defining and understanding their relationships with customers. Once this understanding is achieved, paired with customer engagement, brands can take actionable steps to optimize those relationships. This shifts customer relationships from a mere influence to one that can be actively managed and enhanced. We are eager to witness this next phase, where brands see their first-party relationships as valuable assets that provide business model flexibility, allowing them to broaden their offerings and extend customer lifetimes, all supported by customer engagement. Generally, there is a noticeable shift as organizations start to realize the value of first-party data, collecting it initially and then recognizing its potential for actionable insights that can drive innovative business strategies. We observe this progression across both our potential and existing customers, and it reflects a collective movement towards greater future success for us.
Brent Bracelin, Analyst
Sounds good. It's great to see the soft execution. Thank you.
Bill Magnuson, CEO
Thank you.
Operator, Operator
And our next question comes from Brian Peterson with Raymond James.
Brian Peterson, Analyst
Hi, thanks for taking the question. Just one from me. I wanted to double-click on the vendor consolidation point. I know it's come up with other questions. But, Bill, you mentioned that as a benefit this quarter. Would you characterize that as something that's really reflecting this year or is that more of a continuation of the norm? How do we think about the balance of cross-sell versus upsell in that aspect this year? Thanks, guys.
Bill Magnuson, CEO
Yes. I think we are seeing a bit of an inflection, obviously, as I mentioned before with the macro where it’s hard to compare to historical data because there are some other confounding factors that are out there. When you think through what's going on with enterprise software buying right now, there's a lot more scrutiny on the budgets and the stacks, and there has been a lot of categories where you've seen people moving from either a point solution, or maybe someone bought a suite before, but they were using it for a single thing, and starting to really rationalize all of that spending. I think when you look across all the different marketing communication software that's out there, Braze really stands head and shoulders above the rest of the competitive set in terms of being comprehensive from a cross-channel perspective and really being able to execute on all these use cases. I've spoken in the past about the importance of Braze's vertical stack design where, because we put such a strong abstraction layer over the channels, the feature set that you have within Braze for any given channel has a lot of consistency across it. That means that when we add a new channel like we just launched WhatsApp recently, our marketers are able to utilize all of the advanced capabilities that exist for targeting, personalization, and orchestration with that brand new channel right out of the box. Braze is quickly competitive with even single-channel-focused software as we add new channels. Similarly, not just from a feature set perspective, but also from a familiarity perspective, because we've been designed to have all of these integrated together, which is very different from how the legacy marketing clouds were assembled; mostly through inorganic expansion where all the channels work differently. Within Braze, you have this consistent user experience. Marketers are able to confidently say like, oh, yes, I know how to send push notifications in Braze. I can also send SMS. I can also send WhatsApp. I know how to deliver in-app messages within Braze. I can expand that on my website. I can add it to my inbox. I can start to run surveys. We have done a lot to smooth the on-ramp and that expansion ramp both for new customers to come in and feel confident that they can pull together multiple prior vendors and run all those use cases through Braze, as well as for someone that only started with one or two channels in Braze, systematically going through the rest of their ecosystem and feeling that Braze is the center of gravity around all of their customer engagement use cases. We continue to see that happening over time and that has been the consistent pressure. I think the macro has probably caused people to really scrutinize some of the decisions they made in the past to really expand their number of different point solutions when they may not have had much scrutiny on purchasing.
Brian Peterson, Analyst
Thanks, Bill.
Operator, Operator
Our next question will come from D.J. Hynes with Canaccord.
D.J. Hynes, Analyst
Hi, guys. Bill, maybe you could talk a little bit about what you're seeing in terms of adoption of cloud data ingestion. And then, for the customers that turn that capability on, what are you seeing in terms of signs that maybe A, they're spending more with Braze or B, yielding better results? Any color there would be helpful.
Bill Magnuson, CEO
Yes, absolutely. When we look at cloud data ingestion and the impact on revenue and adoption, it breaks down in a few ways. One of them is just more time to value, faster time to value, being able to get people up and running more quickly, and therefore get more datasets. A lot of times, those data sources are describing users that previously had not appeared in wherever we were integrated before. You might have had your mobile audience and maybe there was a customer loyalty program database that was living in the data warehouse, and you wanted to get those users into Braze to start orchestrating either emails or SMS or whatever it is, but you were stuck on an engineering roadmap, and it would take months to get the integration. By us drastically reducing the amount of effort required to get those new datasets into Braze, we take on more use cases that bring in more monthly active users, and it adds more message volumes. As I’ve spoken about a lot in the past, we want to make sure that when we value sell, we do so in a way where we’re enhancing the value of the monthly active user and collecting the value of a contract primarily in the middle of the SAC. We’re trying to make sure that when data flows into Braze that we’re always working to lower the cost of getting data into Braze, both in the near and long term. We're seeing great adoption of that by new customers and existing customers as they want to bring in datasets that were previously stuck in data warehouses. We’ve also been looking at things like expanding the cloud data ingestion concepts into product catalogs, which I mentioned previously has been a driver of the e-commerce business. That gives you the ability to bring in not just data about users but also products that come from a product catalog, franchise data, or translations. There's a whole bunch of other datasets that can come in that aren't centered on the user, and we are making it easier and easier to get into Braze so that it can sit alongside the stream processor.
D.J. Hynes, Analyst
Makes sense. Thank you very much.
Operator, Operator
Our next question comes from Arjun Bhatia with William Blair.
Arjun Bhatia, Analyst
Perfect. Thank you. Bill, I wanted to touch on the legacy marketing cloud refresh cycle that we've been talking about. Can you just help us understand why this is happening now? It's certainly a positive for someone with a more modern stack. Why is this taking place now and what have you noticed about the customers that have come from legacy marketing clouds to Braze in terms of their sophistication, their usage, their scale, et cetera?
Bill Magnuson, CEO
Yes. First, I point out that we think the legacy replacement cycle is broader than just people moving from the legacy marketing clouds into more advanced platforms like Braze. There's also a lot of legacy point solutions that are out there in the email marketing space and there is a kind of a broad array of tools that have been deployed over the last 10 to 15 years that are not just the usual suspects of Salesforce Marketing Cloud, Adobe Experience Cloud, or Oracle Marketing Cloud. We spoke about this last quarter, I think we continue to see it, which is that when you look across the rest of that legacy landscape, I think those aforementioned legacy marketing clouds were actually hovering up a good portion of the legacy replacement cycle across those other tools before. I mean, Braze didn't have as much mindshare or market share awareness amongst those buyers. I think that's fundamentally changed over the last 12 to 18 months. Certainly, the notoriety of having gone public helped with that; a lot of the work we’ve done in our ecosystem strategy with our partners, looking at the GSIs and our partnership with WPP, continuing to expand and get the Braze brand and product awareness into more corners. I think we've also seen some of the shine come off those legacy marketing clouds as buyers have started to understand that they are antiquated data processing architectures, and their destroyed capabilities across their multiple channels are not coordinated seamlessly across channels. Those are differences that really matter. I think that is helping, and we also continue to have inflow from the legacy marketing clouds as marketers and product teams are trying to be able to act on data more real-time, bring together more of these channels and more of the use cases. One thing that always helps is that when we continue to add net new channels very quickly, if you want to send WhatsApp, if you want to do the Audience Network integrations, coordinate those things in real-time and have them be triggered by not just actions within their silo, but have real-time collaboration then that creates a reason for more teams to collaborate with each other within the Braze environment, it continues to support the vendor consolidation drive.
Arjun Bhatia, Analyst
That's very helpful. Thank you, Bill.
Operator, Operator
And our next question comes from Brian Schwartz with Oppenheimer. Brian, you may unmute and ask your question.
Pat Walravens, Analyst
Great. Thank you and let me add my congratulations. So Bill, when you look at sort of your partnership opportunities, what are you most excited about, and what's out there that you guys don't have yet that you'd like to get?
Bill Magnuson, CEO
Yes. We've been really excited about the momentum that we've seen across the GSIs and across the big marketing agencies, specifically, we talked a lot about WPP last quarter. We're continuing to deepen our coordination with those partners and also seeing them build their bench of certified people within their teams that are ready to integrate Braze, ready to help our customers run campaigns and evolve them over time. That's been really good to see that flywheel that I've spoken about over the last couple of quarters spinning. Within the technology partner landscape, we’ve been continuing to partner closely up and down the stack, looking at data warehouse providers, looking at data transformation players, and continuing to have channel partnerships to expand out there. I spoke about the Audience Network generation and expansions as we've gone into more ad network targeting as well as the partnership with Meta as we've expanded into WhatsApp. There's a lot we've been doing across the partnership landscape, and we’re continuing to invest in those. I'd also go back to some of the ecosystem-wide effects we think we're going to see as a lot of the decision-making at the corporate level that's trying to optimize for getting more value out of AI. I think that these are also pressures that are going to motivate more brands to move to real-time, embrace data streaming, continue to ramp up their investments in first-party data, all of which are catalysts that will help drive that legacy replacement cycle.
Pat Walravens, Analyst
Awesome. Thank you.
Operator, Operator
Our next question will be from Camden Levy with Oppenheimer.
Camden Levy, Analyst
Good afternoon. this is Camden Levy, sitting in for Brian Schwartz today. Thank you for taking my question. Can you speak about the momentum you've seen with global GSIs and sourcing new business, and if possible any insight you can provide on the percentage of your net new ARR that is currently derived from these growing relationships? Thanks.
Bill Magnuson, CEO
Yes. So we're not disclosing that quantitatively, but I will say that qualitatively, as I just mentioned, we continue to see that flywheel spin up. We've got really great account coordination. We've got all the right communication channels in place. We've got mutual investment on both sides and we're excited to see how those partnerships continue to bear fruit over time. When you look at the broad evolution of where I think the GSIs are trying to move to have more creative services, to be able to work on more of these customer engagement and marketing use cases. When you look at the marketing agencies and the big holding companies, they're trying to evolve to have more data sophistication and be able to help with these ongoing integrations and express our technical chops. Braze exists right at the intersection of where both sides of that landscape want to evolve to. That has been really exciting to be their partner, to help bring them into this new world of modern customer engagement, to do more with first-party data, faster, and bring more value through experimentation and agility. One of the topics that we spoke about at the beginning of this call was just what more you can do when you've got more productivity and more access to hands-on keyboards to have resources to run these strategies and evolve them over time. That's one of the things that's most exciting about our partnerships in that landscape.
Camden Levy, Analyst
Perfect. I appreciate the color. Thanks.
Operator, Operator
And our next question comes from Nick Altmann with Scotiabank.
Nick Altmann, Analyst
Awesome. Thanks, guys. Just given the strength in billings and customer count and the sequential step-up you're guiding to in revenue for 2Q, I know, Isabelle, you talked about deals that slipped out of 4Q into 1Q, but I'm curious just, was there any sort of pull-forward activity of bookings in the 1Q? Thanks.
Isabelle Winkles, CFO
Yes, there is some push out of Q4. If you recall, we mentioned that Q4 was expected to be heavily back-end loaded in terms of bookings. We count customer numbers based on when we start recognizing revenue, which requires the customer start date to have occurred. If a new deal is booked on the last day or last week of the quarter, it will take some time to be recognized as a new customer. Therefore, some of this is due to timing, and we have seen some of this shift from Q1 into Q2. I noted this in a previous response. Regarding our guidance, I will touch on the seasonality aspect. We are not anticipating any improvement in the overall environment. Our guidance philosophy remains largely the same, but we are factoring in the extra three days in Q2 compared to Q1. Q1 is typically our lowest revenue quarter sequentially, and we expect that to begin to change as we move into Q2.
Operator, Operator
Our last question comes from Yun Kim of Loop.
Yun Kim, Analyst
Okay, great. First, Isabelle, can you just talk about how international regions performed in the quarter, especially on the heels of the WhatsApp integration release?
Isabelle Winkles, CFO
Yes. So WhatsApp just released in March of this year. So we're seeing a lot of interest by customers and a lot of good momentum in the pipeline. But we're not meaningfully yet adding to revenue from that channel. We saw the same thing with SMS when we launched this about a little over three years ago. So there's a lot of keen interest, and we look forward to that adding overall. We don't disclose the net contribution from various channels because we'd like to think of the channels as all working together, and that's really just what I would say about the WhatsApp contribution.
Yun Kim, Analyst
Okay, great. And Bill, real quick. Do you expect that generative AI to work better and be more impactful on certain messaging channels that are more real-time driven, for instance?
Bill Magnuson, CEO
I wouldn't call it out across channels. One of the things I'm most excited about with respect to generative AI, especially as we're talking about some of these smaller teams or one-person teams is because of the ubiquitous global adoption of smartphones. More brands than ever before serve global audiences. Yet many of their customer engagement teams are still isolated to just one country or a handful of countries. One of the best features of AI as a co-pilot is their inclusion of a wide array of cultures, human personas, different languages. I spoke about generative AI being a muse earlier. It’s about enabling a marketer, who has lived just one life in one place to connect better with a globally diverse audience. When you combine that with Braze's personalized capabilities and other automated decision-making capabilities that we have in Canvas, what it does is provide just substantially more inputs for us to go and optimize. That's going to move across channels. The key part is that the more the user journey gets into Canvas, the more workloads that are defined there, gives us mapping of all the moments that we have to be able to intervene and we can improve the kind of diversity of different techniques and engagement strategies that an individual marketer is using or generating within Braze and then unleash our AI on it, optimizing the results for them in a way that they just never would have been able to access before.
Yun Kim, Analyst
Great. Thank you so much and congrats on a solid quarter.
Bill Magnuson, CEO
Yes. Thank you.
Operator, Operator
I will now pass the call back to Bill for closing remarks.
Bill Magnuson, CEO
All right. Well, thank you to everybody for joining the call today. We appreciate your continued support and we look forward to seeing you either at a conference or on the road. Thanks a lot.