Earnings Call Transcript - BRZE Q3 2022

Operator, Moderator

Good afternoon. Thank you for attending today's Braze Third Quarter Fiscal 2022 Earnings Call. My name is Tania and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Chris Ferris, Head of Investor Relations. Please go ahead.

Chris 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 third quarter 2022. 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 the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These may include but are not limited to, statements regarding our financial outlook for the fourth quarter and full fiscal year ended January 31, 2022, the size of our market opportunity, continued momentum on our ESG and DEI initiatives and our expectations regarding our renewal rate, near- and long-term gross margin and 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 Investors section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding the company's fiscal third quarter 2022 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

Thanks, Chris and good afternoon, everyone. Welcome to our first earnings call as a public company. Today, I'll start by highlighting our third quarter results then review our business, the customer engagement ecosystem, discuss our market opportunity and then detail some exciting product use cases and recent announcements before turning it over to Isabelle to provide more detail on our financial performance. We are very pleased with our third quarter performance which we believe demonstrated our ability to deliver high growth at scale. In the third quarter, we generated revenue of $64 million, up 63% compared to the same period last year and 15% sequentially. We saw increased traction with our customer base as dollar-based net retention rose to 126% in the third quarter, reflecting strong renewals and upsells. For customers with $500,000 or more in ARR, dollar-based retention increased to 136%, demonstrating our ability to land and expand with traditional enterprises and emerging disruptors across many verticals globally. We continue to expand across numerous growth vectors with our customers as they realize the positive business outcomes that can be achieved through coordinated, personalized, cross-channel customer engagement strategies enabled by the Braze platform. These strong results are a testament to the tireless efforts and dedication of the entire Braze team, our business momentum, recent product releases and upgrades across our software systems and data infrastructure as well as rising awareness of Braze and our leadership in the customer engagement category. At Braze, our mission is to forge human connections between consumers and the brands they love through relevant and memorable experiences. We were founded 10 years ago at the dawn of the modern smartphone era with a dual conviction: first, that the best-growing businesses will be born and built to be mobile-first; and second, that generation-old companies would be driven by changing consumer behavior to transform the way they deliver products and services. Braze's momentum has accelerated as each of these beliefs prove true. The resulting evolution has provided brands with greater access to their consumers in a world that is always on but that opportunity also creates obligation. Consumers expect real-time, personalized communication seamlessly choreographed across the channels and platforms they prefer in a way that feels relevant and human. To be successful, brand strategy must be focused on establishing that personal connection through customer engagement and seamlessly integrating both product and marketing experiences into people's lives. We believe that great relationships are built on a foundation of shared experience and meaningful exchange. Guided by that human lens, we believe that top-performing companies must strive to listen to their consumers, understand them deeply and then act by communicating in a way that is human, relevant and personal. We further believe that the best results are achieved through an iterative process of creative evolution guided by data, an imagine, create and evolve loop throughout which we support our clients with Braze's products and strategic services. For those of you who are being introduced to Braze's technology differentiation, I will take a moment to briefly explain our vertically integrated software stack. It begins with the ingestion layer. Our SDKs are directly integrated into our customers' native applications and websites. As a trusted party, we become part of our customers' native product experience. Our SDKs serve to both stream new user activity into our data ingestion layer as well as deliver in-product messaging such as Braze Content Cards, our flexible in-app message products, or surveys directly to the end user. Once new data is ingested, it is interpreted and acted upon as it flows through the four remaining layers: classification, orchestration, personalization and action. This vertically integrated engagement stack built on stream processing technology leverages first-party data to enable interactive delivery of personalized messaging in a customer-centric manner, seamlessly transitioning across channels as is appropriate for the use case and the individual. And any action taken by a consumer in response to a message immediately flows back into our system, creating a real-time interactive feedback loop of first-party data powering the brand's engagement strategy. And our technology infrastructure can deliver real-time messaging across channels at incredible scale. The Braze customer base spans across many verticals and Cyber Week is increasingly an important time of the year for nearly all brands and we saw that in our processing volumes just a few weeks ago. From Black Friday to Cyber Monday, we executed over 21 billion messages, including 3.7 billion emails, over 3 billion webhooks, over 2 billion Content Card impressions, nearly 370 million in-app and in-browser messages and nearly 12 billion push notifications across iOS, Android and web. More importantly, despite record-high daily volumes, we achieved 100% global uptime through all of Black Friday and Cyber Monday. These are impressive totals that represent quantitative proof points of our reliability and our ability to deliver personalized, targeted customer engagement at scale. And the global market opportunity is substantial. With the ability for consumers to transact anywhere at any time, customer engagement is the new battleground for brands. Based on our calculations, our total addressable market is at least $16 billion annually in the U.S. alone. And given our existing footprint outside the United States which comprise roughly 40% of our revenue year-to-date, we feel well positioned to capitalize on the expansive international market as well. Given the strength of our platform and the opportunity, we are investing to build momentum with brands of all sizes, inclusive of both traditional enterprises and emerging disruptors. Our total customer count at the end of the quarter marked a 48% year-over-year increase with particular strength across large enterprises and in the disruptor category as savvy, mobile-first start-ups recognize the imperative of strong customer engagement as a pillar for successful long-term growth. I'd like to briefly walk you through a few third quarter customer use cases, demonstrating how Braze delivers meaningful ROI for customers. The first is a leading quick-service restaurant brand which used Braze multichannel capabilities to promote and educate its users on a promotion tied to their loyalty program. The brand partnered with a leading financial investment platform to reward customers with cryptocurrency after they completed a purchase of $5 or more as a loyalty member. By combining the powers of email, SMS, push and in-app messaging, they effectively reached users across their preferred mediums, driving a substantial increase in app downloads and digital sales as well as boosting acquisition on their newly launched rewards program. One of the major keys to success was connecting the push-based channels that drive people into the app with follow-on messaging to guide them further down the activation funnel. Once in the mobile app, Braze serves as an interactive message experience, highlighting the details of the full promotion, reward redemption and other high-value consumer actions that can be used to drive future retargeting campaigns and inform experimentation. A second example I'd like to highlight is a wellness brand that effectively promoted their new streaming series via multichannel Canvas journeys. The customer needed a way to educate its customers about the program, leveraging the cross-channel power of Braze to optimize awareness and drive engagement. By orchestrating multiple campuses to target unique user cohorts across push, email and in-app, they successfully tailored their messaging strategy to engage users on the launch of the new series. As a result, the brand experienced a significant conversion rate with its targeted subscription users. The third is a leading European delivery platform providing takeout and groceries to millions of users who combines several Braze intelligence and customization features to turn their previously static campaigns into personalized experiences for their customers. First, by employing Audience Paths, a product launched earlier this year inside our campus environment, the company designed a messaging strategy personalized by combining the users' revealed preferences and recent behaviors across multiple channels without incurring the operational complexity that is all too common in competitive tools. As each of their customers navigated those paths and triggered new message actions, the brand then used Connected Content, our dynamic personalization tool, to layer in additional customization based on the specific path the user had previously entered, including details like their favorite store or recent food purchases. From there, the Braze Intelligent Channel feature targeted the individual users through their highest activation probability channel mix. The company realized immediate results, boosting impressions and driving higher orders by sending highly personalized messages. Throughout these customer examples, you have now heard of many of the great features that combine together into the rapidly evolving Braze products. To underscore that pace of evolution, I'd like to highlight a few innovations from the third quarter. We launched new product solutions, including updates to Canvas. With Action Paths, our newest Canvas component, customers can dynamically send users down different paths based on their behaviors. This new feature allows customers to automatically segment their users based on the actions they have taken in a given time frame, funnel those users into a variety of custom paths and deliver personalized messages for users within each path at scale. Our customers are already seeing great results with this product, including a financial services company that has driven a 14% conversion rate by personalizing onboarding journeys for new members; and an on-demand streaming service that saw a 61% conversion rate by sending users some custom paths based on their engagement with emails and livestreams. This quarter, we also added four new partners to Currents, our continuous customer engagement data streaming product, Amazon EventBridge, RudderStack, Tealium and Treasure Data. By tapping into one of our new real-time Currents connections, customers can break down data silos by streaming granular customer engagement and behavior data to even more technology partners within their data analytics ecosystem. We also enabled brands to build direct integrations themselves with custom Currents connectors, giving customers the ability to send Braze data to more custom destinations like an in-house CDP or other data store. Alongside its launch, we also rolled out new iOS 15 push notification settings, enabling customers to designate the urgency and relevancy of each push notification, ensuring that users receive relevant notifications at the right time. Finally, I'll mention MMS Contact Card creator which allows brands to easily create a contact card in Braze to deploy MMS campaigns, building brand recognition. Message recipients can quickly save a brand's number to their contact list to distinguish who is texting them. Of course, building all these amazing products can't be achieved without talented people. Globally, we've increased headcount by more than 300 this fiscal year across all functions to support our growth, bringing our global headcount to over 1,000 as of the end of the third quarter. As we continue building a best-of-breed customer engagement platform and capitalize on our substantial market opportunity, it will be essential to acquire talent who can fuel our success and live our values. And as we deepen our engagements around the world, we hold ourselves to a high cultural standard. We've recently created a new social impact department, inclusive of our diversity, equity and inclusion program and our corporate social responsibility initiatives. One such initiative that we're very proud of is Tech for Black Founders which is focused on providing resources and technology for black-empowered businesses like Plain Sight, a new social platform facilitating virtual networking. Braze helps Plain Sight consolidate its personalized communications within one comprehensive platform, allowing them to optimize customer experiences and increase retention. We are also joining the Pledge 1% movement, committing to donating a portion of our Class A common stock over the next 10 years to fund our social impact and ESG initiatives. These efforts are reflections of our core values and you should expect further momentum on ESG and DEI initiatives as we continue on our public company journey. I'll wrap my remarks by stating that we are committed to our long-term mission to build strong and lasting customer relationships through great customer engagement. With billions of these relationships under our stewardship, our progress towards realizing this mission reaches consumers in nearly every country around the world. It's humbling and exciting to be working on this goal with all of our employees, partners and shareholders. We look forward to continuing on this journey with you and updating you on our progress in the coming quarters. And with that, I'll hand the call over to our Chief Financial Officer, Isabelle Winkles. Isabelle?

Isabelle Winkles, CFO

Thank you, Bill and thank you, everyone, for joining us today. We reported a strong third quarter and as Bill mentioned, third quarter revenue rose 63% year-over-year to $64 million, driven by a combination of customer expansion, new business sales and a record in-quarter renewal rate. Our subscription revenue remains the primary component of our total top line, contributing nearly 93% of our third quarter revenue. The remaining 7% represents a combination of one-time configuration and onboarding fees as well as other professional services that are subject to similar annual contractual terms as our subscription-based revenues. Customer momentum during the third quarter was solid, with total customer count increasing 48% year-over-year to 1,247 customers as of October 31. Our total number of large customers which we define as those with ARR of $500,000 or more annually, grew 45% year-over-year to 97. We continue to execute on our land-and-expand strategy, improving our dollar-based net retention rate to 126%, up over 200 basis points compared to the prior year and up almost 100 basis points sequentially compared to the second quarter. Dollar-based net retention for our largest customers was 136%, up nearly 200 basis points compared to the third quarter of last year and up over 100 basis points compared to the second quarter. As a reminder, our dollar-based net retention represents a 12-month trailing statistic. Our dollar-based net retention rate reflects strength in our third quarter renewals and upsells to existing customers. Upsells include increases to precommitted volumes across monthly active users, email and SMS entitlements, signing new business units within existing parent companies as we continue to further penetrate our existing customer base through both geographic and brand expansion and the addition of add-on features and professional services. This expansion was strong across industries and geographic regions, with revenue outside the U.S. continuing to contribute 40% of our total revenue in the third quarter. Moving to our remaining performance obligations. As a reminder, the first period in which we began disclosing RPO was the fourth quarter of fiscal 2021 and we will therefore have our first year-over-year RPO comparison when we announce our fourth quarter and full year fiscal 2022 results in a few months. Therefore, my comments on RPO will address only the sequential evolution. Our total remaining performance obligation rose 13% sequentially to $304 million in the third quarter and current RPO rose 10% sequentially to $199 million. These increases were driven by solid business momentum that included new contracts, contract renewals and term extensions. While our overall dollar-weighted contract length increased versus the end of the second quarter, we still remain in the range of approximately 24 months. Now, I'd like to review the income statement in more detail. As a reminder, some of the metrics I will discuss are non-GAAP. We have provided a reconciliation of GAAP to non-GAAP financials in our earnings release and accompanying earnings presentation. Non-GAAP gross profit in the quarter was $45 million, representing a non-GAAP gross margin of 70.3%. This compares to a non-GAAP gross profit of $25.1 million and non-GAAP gross margin of 63.8% in the third quarter of last year and 66.7% in the second quarter of this year. Gross margin improved year-over-year due to several factors: first, efficiencies realized in our personnel expense as we better aligned management structures as well as the roles and responsibilities to cost of revenue action items; second, we continue to achieve economies of scale in our core technology expenses, most notably across our database, hosting and email vendors through volume discounts and precommits. And we note that these benefits have contributed to the improvements in gross margin percent over the last several quarters. Sequentially, gross margin percent increased 360 basis points which includes a degree of seasonality with respect to cost of revenue. As a reminder, the third quarter typically experiences lower levels of activity for many of our customers and we have already seen an increase in overall activity early in the fourth quarter, as Bill indicated, by our Black Friday to Cyber Monday statistics. Turning to operating expenses; non-GAAP sales and marketing expense was $28 million or 44% of revenue compared to $18.2 million or 46% of revenue in the prior year quarter. This reflects our continued investments in sales and marketing headcount to support our solid growth and global expansion against our strong revenue this quarter. Non-GAAP R&D expense was $11.1 million or 17% of revenue compared to $6.8 million or 17% of revenue in the prior year quarter as we continue to invest in R&D to develop new products and features to fuel future growth. Non-GAAP G&A expense was $10.9 million or 17% of revenue compared to $6.6 million or 17% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public market readiness. Non-GAAP net loss attributable to Braze shareholders in the quarter was $3.3 million or a loss of $0.16 per share based on 20.7 million weighted average basic shares outstanding during the period. Now, turning to the balance sheet and cash flow. We ended the quarter with $80.9 million in cash, cash equivalents, restricted cash and marketable securities. Cash used in operations during the quarter was $2.5 million compared to $5.9 million in the year-ago quarter. After taking into consideration capitalized expenditures and capitalized software, free cash flow was a negative $3.5 million, resulting in a free cash flow margin of negative 5.4% in fiscal third quarter of 2022. In the same period last year, our free cash flow and free cash flow margins were a negative $6.8 million and negative 17.3%, respectively. The improvement in our free cash flow margin was driven by the increase in deferred revenue year-over-year as well as improved earnings adjusted for non-cash expenses such as stock-based compensation and amortization of deferred contract costs. Rounding out the cash flow statement with our financing activities, I will note that both the third quarter of this year and third quarter of last year included a $2.5 million cash contribution by our partner, Japan Cloud Computing, to our Japan joint venture. Now, turning to our outlook for the fourth quarter and full fiscal year 2022. We continue to feel highly optimistic about our potential for future revenue growth, as evidenced by our strong pipeline of both new business and upsell opportunities. Our fourth quarter revenue guidance includes appropriate risk adjustments for new business and renewals we have yet to close this quarter. For the fourth quarter, we expect revenue to be in the range of $65 million to $66 million which represents a year-over-year growth rate of approximately 53% at the midpoint. Fourth quarter non-GAAP operating loss is expected to be in the range of $15.5 million to $16.5 million. Fourth quarter non-GAAP net loss is expected to be $15 million to $16 million with fourth quarter non-GAAP net loss per share in the range of $0.19 to $0.20 per share based on approximately 79.8 million weighted average basic shares outstanding during the period. For the full fiscal year 2022, revenues are expected to be in the range of $232.5 million to $233.5 million which represents a growth rate of 55% year-over-year at the midpoint. Fiscal year 2022 non-GAAP operating loss is expected to be in the range of a loss of $33.5 million to $34.5 million. Non-GAAP net loss for the same period is expected to be in the range of a loss of $31.5 million to $32.5 million. Fiscal year 2022 non-GAAP net loss per share is expected to be a loss in the range of $0.90 to $0.93 based on a full-year weighted average share count of approximately 35.1 million shares. A few notes on our guidance. While we are not providing specific gross margin guidance, we expect gross margins will be impacted by seasonally higher activity in the fourth quarter. This will likely result in a fourth quarter non-GAAP gross margin percentage in the mid-60s and we continue to expect our long-term non-GAAP gross margin target to be in the range of 65% to 70%. While we expect to continue to pursue optimizations to achieve scale in both our cost of revenue for personnel and technology costs, we also expect to invest some of these gains back into the business as we find opportunities to enhance our offering that may increase our computational and storage capacity requirements. Finally, I'll note that while we are not providing free cash flow guidance, free cash flow may vary materially from quarter-to-quarter based on the timing of when we receive customer payments and when we make vendor payments. For example, we expect the fourth quarter will include some large vendor payments that will impact cash from operations by up to $15 million to $20 million in the quarter. In summary, we are very pleased with the results of the quarter. New and existing customers are realizing the value of best-in-class customer engagement technology and our execution remains strong. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

Operator, Moderator

The first question is from Gabriela Borges with Goldman Sachs. Your line is open.

Gabriela Borges, Analyst

Hi, good afternoon. Congrats on the quarter and the IPO. Bill, I'm hoping you can help us talk through some of the competitive noise on other companies that make claims on real-time marketing. We'd love to hear a little bit on what feedback you get on where Braze stands out when you can compete on bake-offs and when maybe the competitors fall short? And then vice versa, in any scenario where you don't want a bake-off, curious what that feedback looks like.

Bill Magnuson, CEO

Absolutely. Our competitive environment has always been diverse. Braze has been designed to provide value to sophisticated, ambitious marketers. We aim to create a platform that users transition to and continue using indefinitely. This has involved many differentiators, particularly in our vertically integrated product and our streaming architecture, which supports not only quick but truly interactive real-time use cases. During competitive sales cycles, when working with clients at various stages in their journey, those who recognize the interdisciplinary nature of modern customer engagement—where creativity from marketing and growth teams collaborates swiftly with product engineering, and results are analyzed to guide further experimentation with data science—these groups can appreciate what Braze offers. They see the differentiation through our vertical integration and real-time capabilities and can clearly understand the ROI it brings. However, the overall addressable market is at different points in this journey. In our go-to-market process, we often adopt a challenger approach when encountering clients who prefer older methods for customer communication, such as batch-and-blast techniques. We take a consultative role, challenging their assumptions about customer engagement. In cases where they align with us and progress to think similarly about these issues, we can maintain our premium pricing and achieve high win rates against competitors. On the other hand, some customers still adopt a single-channel mindset, or their systems may not be ready to embrace the new data streaming paradigm, which can make it seem too daunting for them. In those situations, products targeting a less sophisticated audience might present a more attractive price point, even if the clients do not fully recognize the ROI. In these cases, we choose to be patient in our sales processes and continue supporting those customers over time. We often say that they always come back, and this has proven true on numerous occasions.

Gabriela Borges, Analyst

I appreciate that color. One follow-up for Isabelle. Would love to get a little bit of color on your priorities for sales and marketing investment as we go into the new year and maybe a little bit of commentary on how we should typically expect new productivity to ramp and what that ramp typically looks like for new folks that join the team.

Isabelle Winkles, CFO

I'll address the last question first. We generally anticipate our productivity to reach full ramp within a year, which applies across the board. The ramp-up tends to be quicker at the SMB level but may take the full year for more strategic and enterprise segments. Overall, we do expect our ramps to happen within a year. Regarding our investments, we plan to increase headcount in our major locations globally, and we are aiming to establish a presence in two new markets next year. Last year, we entered the DACH region with teams in Germany and began our joint venture in Japan to enhance our footprint there. Next year, we are considering Toronto and Paris, France, which will require additional investment to ramp up headcount in those areas. In addition to that, we will continue to invest in our key regions on both the East and West Coasts of the U.S., as well as in London and Singapore. Our investment strategy will focus not only on these regions but also on the various customer segments we are targeting, which include SMB, commercial, and enterprise or strategic accounts.

Operator, Moderator

Thank you, Ms. Borges. The next question is from Mark Murphy with JPMorgan. Your line is open.

Mark Murphy, Analyst

Yes, thank you very much. So Bill, when we see the top line acceleration that you're reporting here in this quarter, I guess I'm curious whether you're seeing any extra type of tailwind from some of the large brands that they could be just fundamentally rethinking their whole stance on first-party relationships and maybe pivoting in that direction kind of in the wake of Apple's changes to IDFA. Just wondering if that is something that's tangible to you. Is it driving business your way? Perhaps more brands seeing Braze as kind of the high ROI solution for living in this first-party world.

Bill Magnuson, CEO

Yes. I think we are absolutely seeing that, but I wouldn't say that, that trend is isolated to this kind of post the most recent IDFA change. This shift to first-party data is something that has been ongoing for several years and it's not just platform changes like we see in Apple, although this is probably the fourth or fifth generation of changes to the advertising identifiers and other sorts of rules if you look across both Apple and Google. It's also things like GDPR, changes to other sorts of permissions and platform sentiment and then also just broadly customer sentiment around these. And so when we look at that investment in first-party data, Braze decided to focus in on being a good listener as opposed to kind of being a creepy detective and have that really be the basis of how we think about understanding a customer in a deep way in order to personalize and tailor the engagement journey that they're on with you as a brand. And so that's been part of our ethos and our product focus for our entire lives. Now obviously, we benefited from being on the right side of history with respect to first-party data, but by no means think that that's a recent mindset shift. You're hearing about it a little bit more in the public markets because it visibly hit people like Snap earnings and some of these other places where you've heard warnings like that from the big advertising platforms, but we've been seeing it for the last several years. And it's just one of many secular trends that I think have been supportive of Braze's growth: that focus on first-party data, the continued drive to mobile, the ongoing transformation and marketing and growth teams to embrace interdisciplinary collaboration, as I mentioned on the previous answer, and then the digital transformation tailwinds that you see from COVID. These are all kind of in a big basket and they're all pushing Braze to have increased momentum and we think that we're still in the early innings of a lot of them.

Operator, Moderator

Thank you, Mr. Murphy. The next question is from the line of Raimo Lenschow with Barclays. Your line is now open.

Raimo Lenschow, Analyst

Thank you, and congratulations to you as well. Bill, can I return to the differentiation point you mentioned earlier and address the first question? Regarding the architecture message you have, how challenging is it to replicate or develop? From what I've observed, most of your competitors are still utilizing legacy systems, while you have completely rebuilt your stack. Can you elaborate on this? We see public companies like Confluent and Snowflake operating in this new environment, but I’m curious about how long it takes for others to adapt to this new landscape. I have a follow-up question for Isabelle.

Bill Magnuson, CEO

Yes. There are two main components to this. The first is vertical integration, including in-product integrations. When you examine the integration of our SDKs and libraries into our customers' products, it's not just about them operating in the background; they are actually part of the user experience and the overall design of those products. It has required us to develop a high level of technical sophistication to be effective within major mobile applications across various platforms and the web, allowing us to deliver messaging interactively across all these platforms. This is an area where many multichannel vendors struggle, as very few have successfully managed to provide interactive experiences both within and outside their products. The second key aspect is our proprietary stream processing architecture that supports our customer engagement system. This technology has been developed over the past decade to handle high-volume scenarios, such as breaking news alerts, while also managing interactive in-product messages on a real-time data platform. This is a complex challenge to solve at scale, and it cannot simply be built using standard software solutions like Snowflake or Confluent, although we do leverage these for other system components. The customer engagement engine is entirely proprietary and has required significant investment to ensure stability and performance. Beyond this infrastructure, there’s also the differentiation found in tools like our Canvas environment, which enables business users to creatively express sophisticated strategies that can be executed through our stream processing engine. These various aspects work together, and I've emphasized that modern customer engagement is most effectively handled by interdisciplinary teams, which promotes collaboration and reduces friction, enhancing operational efficiency. This is where we see substantial ROI. While I initially highlighted two main factors, there's indeed much more to it. We believe our design and technology have been meticulously developed over the last decade to meet the demands of modern customer engagement, establishing a lasting distinction in the market.

Raimo Lenschow, Analyst

Yes, that's very helpful and clear. Isabelle, I have a question regarding companies going public with their IPOs. There's a branding aspect tied to this, and as a CFO, you might have fewer inquiries from potential customers about financial stability since your numbers are publicly available. This can also affect how attractive the company is to new employees, as we've seen with the significant hiring figures. Are you noticing any of these effects already, or what has been your initial experience, considering it's only been a couple of days?

Isabelle Winkles, CFO

Yes. Thanks, Raimo. We're really excited about what this will bring us in the coming weeks and months. It is still early days. This is happening alongside the holiday period. For my group, I've had to postpone a few calls regarding hiring the next person due to holidays, including Thanksgiving. We have discussed this internally and are very enthusiastic; our pipeline of new business remains strong, with promising candidates both in the U.S. and internationally. This is definitely a multifaceted opportunity, and since this is our very first earnings call, we're eager to maintain that momentum and take advantage of the benefits of the IPO in various ways for the company's growth.

Operator, Moderator

Thank you, Mr. Lenschow. The next question is from Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia, Analyst

Thank you for the congratulations on a strong quarter. I've noticed something impressive in the metrics: new customer growth has been exceptional this year, with another record number of net new customers this quarter. I'm curious about where these customers are coming from. Are many of them transitioning from legacy vendors, batch processing, or marketing clouds? Would you say this growth is due to your execution, or is it more about the market shifting in your favor with advancements in data capabilities and mobile technology that we’ve discussed?

Bill Magnuson, CEO

I think several factors are influencing this situation. We have the various long-term trends I mentioned previously. We're observing a shift from legacy cloud services and many point solutions we've discussed regarding the competitive landscape. Additionally, there are many new greenfield use cases emerging. For example, the recent streaming platforms were previously associated with legacy providers for messaging but have since shifted towards direct-to-consumer strategies, resulting in a significant increase in their customer engagement needs. The migration away from legacy clouds is evident in the enterprise sector, and it's crucial to recognize that customer engagement is not just strategically vital; it also has a much broader scope than before. This is further enhanced by the new channels Braze has opened up, such as Content Cards and messages, allowing brands to communicate seamlessly across various platforms without having to manage disparate systems for their web presence, email loyalty programs, and in-person experiences. By integrating these channels, brands can engage with customers confidently, leveraging real-time data. Each initiative contributes to expanding the number of use cases they utilize, creating new growth opportunities for Braze. Internally, we've been focusing on our SMB segment, which includes companies with zero to 200 employees. We're witnessing substantial growth in this area too. From our go-to-market strategy perspective, we maintain a $30,000 annual minimum for these customers. These brands, despite their smaller size, are eager to invest in sophisticated customer engagement, and we're optimistic about the long-term expansion possibilities in this sector.

Arjun Bhatia, Analyst

Perfect, that's very helpful. And then Isabelle, one more on gross margins, if I can. I know you mentioned a handful of items that drove gross margins up this quarter. But as we look into next year and beyond, how should we think about maybe just the benefit that is long-lasting from some of the efficiencies and scale improvements that you mentioned versus those that may be fluctuating from quarter-to-quarter like volume and seasonality?

Isabelle Winkles, CFO

Yes. I believe that the volume and seasonality are the main factors influencing quarter-over-quarter fluctuations. Our revenue is recorded evenly throughout a contract, while expenses depend on usage, which creates that variability. We expect the benefits from our recent management realignment to continue as these changes are permanent. Similarly, we will maintain the efficiencies we've gained in technology costs, whether through prepayments or other optimizations. However, we will keep investing in our technology and capabilities to enhance our offerings, which will incur costs. We have set a long-term target of 65% to 70% gross margin, and we remain committed to that. We are proud of our progress over the past few quarters and stand by our long-term margin range.

Operator, Moderator

Thank you, Mr. Bhatia. The next question is from Brent Bracelin with Piper Sandler. Your line is open.

Brent Bracelin, Analyst

Thanks for taking the question here. Super impressed by the fourth straight quarter of accelerated top-line growth. I guess, Bill, for you, one thing that stood out this quarter was the large customer cohort. $500,000-plus customers, I think, jumped to 97 from 82 last quarter. What's resonating most here with these early adopters? Do you think we're seeing a tailwind to net retention from a higher velocity of mobile campaigns and personalization and higher ROI, such as driving higher velocity of marketing campaigns versus, let's say, email campaigns? Or are there other factors, maybe new products that are contributing to the strong expansion of some of those large early adopter customers?

Bill Magnuson, CEO

Yes. I believe there are several factors at play. Many of them relate to the expanded use cases I mentioned earlier, especially in a competitive context. When we examine growth among our larger customers, it's driven by a combination of factors. Firstly, these customers are experiencing growth. Our pricing strategy is largely based on the number of monthly active users. As our customers increase their engaged user base, which we support, that pricing component also rises. Over the past few years, we have seen significant product expansion, offering more channels and premium features for our customers to buy and enhance their use of Braze. Additionally, the teams using Braze are growing as well. This includes cross-expansion within large parent companies to other brands, starting with a mobile team and gradually incorporating a web team and a loyalty team, broadening their use cases, or beginning with recurring promotions and evolving into lifecycle messaging and transactional communications. There are numerous ways Braze customers can expand their usage. Regarding your point about velocity, while we are primarily linked to monthly active users, higher message volumes can eventually lead to increased revenue. However, it's essential not to view it like a strictly usage-based pricing model where velocity directly correlates to growth. It's more about sustainable use case expansion, enhanced returns on investment, increased team engagement, corporate initiatives, and incorporating more brands.

Isabelle Winkles, CFO

So, in response to kind of consumer constraints and headwinds to the business, Omicron variant starting to become a more meaningful headline risk, supply chain constraints in the marketplace. How does that impact demand for direct-to-consumer? Is there limited impact to activity around mobile campaigns? Is there a stimulation of need to go direct-to-consumer versus in-person? Just trying to think through some of the headline risks out there and how we should think about it or how that potentially could impact your business would be helpful. Yes. There are several ongoing trends that have positively influenced us rather than hindered our progress. The rising significance of first-party data and the shift towards customer-centric engagement strategies have been notable. Over the past 22 months during the COVID era, these trends have accelerated, reinforcing the need to maintain a direct-to-consumer approach. We view this as a permanent shift rather than a temporary change, and we don't see COVID as a significant challenge, but rather another factor in the overall landscape affecting our business. Recently, with the emergence of the Omicron variant, we have not observed any changes in consumer or customer trends. Therefore, it contributes to the overall picture without representing a notable obstacle.

Brent Bracelin, Analyst

Very clear, that's all I had. And have a safe and happy holidays.

Isabelle Winkles, CFO

Thank you.

Operator, Moderator

Thank you, Mr. Bracelin. Our next question is from DJ Hynes with Canaccord. Your line is open.

DJ Hynes, Analyst

Hey guys, thanks for taking the question and congrats on a great start here. I'll keep it to one and actually, I'm going to go to Isabelle. So Isabelle, I'm sure everyone's going to do the calculated billings math and see the really strong results, right? I think it was 70% growth if our math is right. As you know, right or wrong, investors are going to use that as a proxy for bookings growth, right? The other metric they're going to look at is RPO or CRPO. And I know we're going to get a year-over-year growth rate for RPO for the first time next quarter. I just want to get ahead of any surprises with that metric. Is billings growth in the right ballpark range for what RPO growth might look like? Or is there anything we should be thinking about that drives the divergence there?

Isabelle Winkles, CFO

When I consider the growth in billings, it's important to note that the strong revenue this quarter is a significant factor in the 71% or 70% billings growth. Additionally, there has been a change in deferred revenue. We have also made progress in increasing the annual upfront component of our billings, which reflects the cash we collect from customers upfront. The greater the upfront cash collection, the stronger this metric will continue to be on a sequential basis, contributing to the overall strength.

DJ Hynes, Analyst

Okay, got it. So, when we see CRPO growth next quarter, don't be surprised if it's a bit lower because it won't benefit from the invoicing advantage you're seeing now from the upfront. Is that the right way to interpret it?

Isabelle Winkles, CFO

So on a quarterly basis, the fourth quarter will typically show the highest change in deferred revenue. I would advise caution in using the billings number to predict future growth, as it is influenced by the timing of payments we receive. After the fourth quarter is completed, we can discuss how the RPO number will turn out, and I'm happy to go over that then.

Operator, Moderator

Thank you, Mr. Hynes. The next question is from Derrick Wood with Cowen & Company. Your line is open.

Derrick Wood, Analyst

Great, thanks and I'll echo my congratulations. I guess my question for Bill, you mentioned partnering with Snowflake and Confluent. You called out new partnerships with Tealium and EventBridge. I'm just curious, when you look at integrated into the broader data stack landscape, CDPs, cloud data warehouses, your own capabilities with SDKs, are you seeing the makeup of these architectures change much particularly when it comes to new architectures being laid out? And then I'd just be curious about what the demand level is on your Snowflake data-sharing add-on.

Bill Magnuson, CEO

Yes. We are definitely observing a shift towards streaming architectures and, broadly, an inclination towards the cloud and service-oriented architectures. We are closely examining the division of responsibilities between internally developed software and purchased SaaS solutions. Braze is positioned within the cloud services ecosystem to be both a SaaS product that can be easily utilized by business-user teams and to offer a set of APIs that product and engineering teams can build upon. This is the essence of how Braze connects those APIs to the dashboard product. It also facilitates productive collaboration that I mentioned earlier. When viewed in the context of the broader technology ecosystem and the interactions among various data players, we are indeed witnessing a trend towards more expressive data models, higher-performance APIs, streaming interfaces, and interconnects where brands are taking responsibility for maintaining connections with their partners. This is why we see our partner network expanding and why we will continue to establish bidirectional data flows managed for our customers. There are many tools available that allow engineering teams to manage and build these integrations, but we believe that product and engineering teams should focus on engaging creatively with marketing teams rather than handling data transfers or operational tasks. We want them to enjoy their work, create innovative solutions, and drive distinctive ROI through these efforts. We will continue to monitor the evolution of the technology ecosystem from an architectural perspective as it is crucial for our partnership strategy. Ultimately, we consider all this in relation to our objectives regarding customer engagement outcomes across our client base.

Operator, Moderator

Thank you, Mr. Wood. Our next question is from Brian Peterson with Raymond James. Your line is open.

Brian Peterson, Analyst

Thank you for the question, and I also want to extend my congratulations. There were several mentions of strength in the pipeline, and it's clear that there are many emerging tailwinds. I would like to know about the expansion or increase in that pipeline, particularly how much of it comes from the existing customer base compared to new customers. Additionally, has the IPO had any noticeable impact? I'm interested in your thoughts on that.

Isabelle Winkles, CFO

Yes. So the IPO question, I think, somewhat came up in a prior question. I think it's a little bit early days there, whether it's on the customer side or our employee base side, particularly since there were a couple of holidays in the interim. But we are very, very pleased with what we're seeing in the pipeline. It's across the board. It is absolutely across the board from a global perspective. It is across the board in terms of strength across customer types, industry types, customer sizes. Then we continue to be really excited about our new business opportunity, so net new parent companies to bring on board. You're seeing the trends in our dollar-based net retention. That obviously speaks to our ability to continue to further penetrate our existing customer base. We're excited about the strength there and see opportunity for ongoing strength in that area; it's really multidimensional. When you think about the level of revenue that we're currently at relative to this $16 billion market opportunity in the U.S. alone, there is just so much opportunity to expand across so many different vectors and so many different dimensions; so we're seeing strength in a number of areas.

Operator, Moderator

Thank you, Mr. Peterson. The next question is from Scott Berg with Needham. Your line is open.

Scott Berg, Analyst

Hi, Bill and Isabelle. Congratulations on the fantastic quarter. I have a question regarding your net revenue retention rates, which improved significantly this quarter. What about initial land? How are new customer sales performing today compared to a year ago? Are you noticing any differences in how customers are utilizing the product, or has there been a significant change in pricing?

Isabelle Winkles, CFO

I'll start by discussing the size of lands and contracts, and then Bill can elaborate on the use cases. Looking back about a year, we were still deep into COVID, but we have seen significant expansion in our lands. That growth trajectory remains strong. Whether customers are beginning with multichannel strategies or adopting them at the enterprise and strategic levels of our business, we're seeing solid increases in both the size of lands and the initial purchases. There's also considerable potential for growth once we've established a relationship with a new customer. Bill, would you like to address the use cases?

Bill Magnuson, CEO

Yes. I mean from a use case perspective, I think that there's a good combination of a lot of the tried and true strategies that we enable because the technology shows up and it's differentiated from what people were doing before. We definitely work with our customers to map out the entirety of their, well, crawl-walk-run journey over time. We encourage them to set it up in a way that enables experimentation. I don't think there's been a kind of meaningful shift in the starting use cases that you see as many of these are straightforward customer engagement use cases. Over time, we build them into more and more advanced strategies especially as we start to incorporate more data inputs and signals and as customers continue to advance their integrations over time.

Operator, Moderator

Thank you, Mr. Berg. The next question is from Yun Kim with Loop Capital. Your line is open.

Yun Kim, Analyst

Thank you. So, my congrats as well to Bill and Isabelle. So in the prepared remarks, you talked about renewals as one of the key drivers behind the strength in the quarter. And obviously, that's reflected in the net expansion rate. Can you just talk about the dynamics around renewals, especially for large customers? For instance, how much of it is driven by expanding deployment to more channels versus just simply increasing more volume of the existing channels? And also, are you seeing customers upsizing their deals well before the contract expires, especially those on multiyear contracts?

Isabelle Winkles, CFO

Yes. Sure. So on the last question, yes, we definitely see customers of all sizes engage in what we call early renewals or upsells and increase the volume, either the volume of things they've already purchased such as email, SMS, monthly active users or simply decide to purchase additional features or channels that they hadn't yet unlocked in the original contract. So we definitely see midterm upsells and early renewals at larger sizes. Then, on renewals, yes, that was strong across the board. We've made a number of investments over time to really improve that renewal rate, not the least of which is the investments we've made in our SMB sector that historically has had a lower renewal rate relative to company average. We've really been able to improve that over the last few quarters. So we're definitely seeing strength there. And then in terms of the larger customers, it's a mix. They're increasing their volumes of what they've already purchased and expanding into new products and features. So it's definitely a mix in terms of what is adding to the dollar-based net retention.

Bill Magnuson, CEO

Yes. And I think what we're continuing to see is that there are just so many different dimensions by which people increase their usage of Braze that the answer to some of these questions has been all of the above because there's just engagement across multiple teams, multiple use cases, multiple channels, multiple platforms, and multiple geographies. When you combine them together, you have a lot of different ways to expand use cases. You've got a lot of ways to drive ROI. As you combine them together, it gets very differentiated. We certainly benefit from that in terms of the accelerating growth rate and the predictability of it.

Operator, Moderator

Thank you, Mr. Kim. The last question is from Pat Walravens with JMP Securities. Your line is open.

Unidentified Analyst, Analyst

Hi Team, it's Jeremy on for Pat. Thank you so much for the question. Can you talk about your relationship with Twilio? And then just give us some more color about how you work with CDPs like Segment.

Bill Magnuson, CEO

Yes, for sure. So Braze, obviously, we've spoken a lot about our vertical integration and the importance of differentiation there. We will continue to invest heavily in that vision to conquer the modern problem of customer engagement and maintain our leadership in the space. I've spoken a lot about the interdisciplinary lens that we think drives a lot of that. And so when you look at our relationship with Twilio, I think they've always done a great job of building tools for developers. That's why we're going to continue to have a strong partnership with them both through go-to-market collaboration as we work on certain deals together, and they're also a CPaaS vendor for us for certain Braze channels, including SMS and email. When you look kind of more broadly across the CDPs and the product analytics companies, these are all places where the smooth flow of data certainly benefits people being able to do more advanced use cases over time. We remain committed to our customer-centric vision. We're going to continue to partner with companies that share our vision for how best-of-breed technology should interact with each other in order to assemble world-class technology ecosystems for our mutual customers. We know that customers want to build and buy in ways that are going to vary from place to place which is why if you go back to the dual purpose that we try to serve with Braze: we are both going to be that turnkey SaaS solution and be a collection of powerful robust APIs that product engineering teams can build on top of. All of those are conducive to our engagement with the rest of the partnership ecosystem as well. Over time, we expect that certain partners that we have today will start to move into the customer engagement space, as they have over our history. Similarly, we will continue to expand our own product, and we will continue to work with the partnership ecosystem in a way that is transparent in places where we think that there are mutually beneficial interconnections and integrations that can be built out. We really believe that having best-of-breed focused technology delivers differentiated ROI. We want to stay focused on our customer-centric view for how customer engagement should be done and do that in a way that's vertically integrated. That's going to have implications for our own R&D investment and our partnership strategy, and we'll be paying a lot of attention to how that evolves elsewhere in the ecosystem.

Operator, Moderator

Thank you, Mr. Walravens. I will now turn the conference over to Bill Magnuson, CEO, for closing remarks.

Bill Magnuson, CEO

Absolutely. So thank you, everybody, for joining us today. We're super excited to close out our first-ever earnings call as a public company. We're looking forward to having a regular cadence with all of you. Thank you for all the insightful questions that we were able to answer today, and I hope that they gave you a good lens into the opportunity that's ahead of Braze and we're going to continue to build into. And with that, I think we'll close it out.

Operator, Moderator

That concludes the conference call. Enjoy the rest of your day. You may now disconnect your lines.