Earnings Call Transcript - BRZE Q3 2025

Operator, Operator

Welcome to the Braze Fiscal Third Quarter 2025 Earnings Conference Call. My name is Megan, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. After the speakers' presentation, we will conduct a question-and-answer session. I'll now turn the call over to Christopher Ferris, Head of Braze Investor Relations.

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 third quarter 2025. 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 our press release issued after the market closed today. Please refer to the Investor Relations section of our website at investors.braze.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the fourth quarter and the fiscal year ending January 31, 2025, the anticipated development, release timing, performance, and benefits of our existing and upcoming products and features, as well as the potential impact of current macroeconomic trends. We assume no obligation to update any such forward-looking statements. Please refer to today's press release and our SEC filings for more information about the material risks and uncertainties that may affect our actual results. 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. Please refer to the reconciliation 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. The non-GAAP financial measures provided should not be considered as a substitute for or superior to GAAP measures. And now, I'd like to turn the call over to Bill.

William Magnuson, CEO

Thank you, Chris, and good afternoon, everyone. We are pleased with our third quarter results, which again proved the high ROI and long-term value of the Braze customer engagement platform. We generated $152.1 million in revenue, up 23% year-over-year, while driving continued efficiency across our business and improving non-GAAP operating margins by 580 basis points year-over-year. I'm also proud to announce that we passed $600 million in committed annual recurring revenue during the quarter, another testament to the strong demand for the ROI delivered by the Braze customer engagement platform. For the second quarter in a row, we achieved positive non-GAAP net income and expect to maintain positive quarterly net income moving forward. As planned, non-GAAP operating income took a slight step back this quarter due to seasonal investments in marketing, and we remain on track to deliver positive non-GAAP operating income and free cash flow in the fourth quarter, sustaining both on a go-forward basis. This is an exciting set of financial milestones on our way to becoming the leading customer engagement platform globally. During the third quarter, we capitalized on the legacy vendor replacement cycle, securing a diverse set of new business wins where Braze is replacing legacy marketing clouds, including at a gaming company in North America, an airline, a financial planning company in APAC, and a fashion brand in EMEA. We grew our customer count by 48 during the quarter to 2,211, up 200 year-over-year. Enterprise customers were again a strength, with our $500,000-plus ARR customers increasing to 234, up 24% year-over-year, evidence of how customers continue to leverage rich first-party data and advanced artificial intelligence to drive sophisticated cross-channel customer engagement at scale. While we haven't seen a meaningful improvement to the demand environment quarter-over-quarter, we remain focused on executing against our long-term product and financial goals while positioning Braze for long-term category leadership. Our path requires a range of complementary investments, including the continued elevation of our brand, strengthening our partner ecosystem globally, enhancing our product offerings, and improving system performance. Through the growth of our customer community and the successful execution of our product roadmap, Braze can position itself as a global category leader in customer engagement. We witnessed increased messaging volumes during the peak retail season, delivering over 50 billion messages, up 35% year-over-year with 100% uptime. The period for Black Friday to Cyber Monday is crucial for many retail brands. We also saw a 46% increase in the messaging volume orchestrated by cross-channel campuses. Existing at the leading edge of technology is in our DNA. We foresaw the opportunity presented by the coming wide-scale adoption of mobile and have worked relentlessly to seize the opportunity through sophisticated technology. At our Forge customer conference, we unveiled new low-code and AI-driven product innovations designed to personalize brands' customer engagement efforts and drive agile marketing teams. I'm excited to share that our commitment to innovation was recognized by being named a leader in the Gartner Magic Quadrant for multichannel marketing hubs for the second consecutive year. We expect to maintain our long-term growth story and drive durable revenue growth. Thank you for your interest and support in Braze. Now I'll turn the call over to Isabelle.

Isabelle Winkles, CFO

Thank you, Bill, and thank you, everyone, for joining us today. As Bill stated, we reported a solid third quarter with revenue increasing 23% year-over-year to $152.1 million, driven by existing customer contract expansions, renewals, and new business. Subscription revenue contributed 96% of our third quarter revenue. Our total customer count increased 10% year-over-year to 2,211 customers as of October 31. Our total number of large customers grew 24% year-over-year to 234 and contributed 61% to our total ARR. Measured across all customers, dollar-based net retention was 113%. While dollar-based net retention for our large customers was 116%. Expansion was broadly distributed across industries and regions. Revenue outside the U.S. contributed 45% of our total revenue. In the third quarter, our total remaining performance obligation was $717 million, up 28% year-over-year and up 4% sequentially. Non-GAAP gross profit was $107 million, representing a non-GAAP gross margin of 70.5%, compared to a non-GAAP gross profit of $89 million in the third quarter of last year. Non-GAAP sales and marketing expenses were $65 million, or 43% of revenue, compared to $58 million or 47% of revenue in the prior year. Non-GAAP operating loss was $2.2 million, compared to a loss of $8.9 million in the prior year. Non-GAAP net income attributable to Braze shareholders was $2.5 million or $0.02 per share, compared to a loss of $4.5 million in the prior year. We ended the quarter with approximately $493.1 million in cash and cash equivalents. For the fourth quarter of fiscal 2025, we expect revenue to be in the range of $155 million to $156 million, which represents a year-over-year growth rate of approximately 19% at the midpoint. Fourth quarter non-GAAP operating income is expected to be in the range of $2 million to $3 million. We remain excited about Braze's future while executing against our long-term targets. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

Operator, Operator

Our first question will come from Ryan MacWilliams with Barclays.

Ryan MacWilliams, Analyst

Bill, we would like to hear more about Project Catalyst. Will it be included as part of Canvas or will it be a separate add-on? Additionally, if you are not charging for it directly, how do you see this contributing to Braze's results next year?

William Magnuson, CEO

Great question. We're really excited to see Project Catalyst start to get into customers' hands as we release it into beta. We're expecting it to absolutely be a part of Canvas, ushering in a new era of Canvas design. This allows marketers to tell us their goals, and then we optimize that on a personalized basis using generative AI content generation. This new functionality provides greater speed and efficiency in optimizing customer journeys. From a monetization standpoint, it will be a paid feature, offering two different pricing options. We're focused on making its performance and usability optimal before we fully commercialize it.

Ryan MacWilliams, Analyst

Excellent. And then one for Isabelle. How should we think about the dollar-based net retention rate within the third quarter itself? And I know we're still going through some of the renewals, but any update on how we should think about the dollar-based net retention rate from here?

Isabelle Winkles, CFO

We indicated back in September that we thought the year would land around 110%. In Q3, it's at 113%, rounding up slightly. We're encouraged by the in-quarter stability, but we continue to see some pressure on this metric. We expect to maintain the 110% range for the end of the year.

Gabriela Borges, Analyst

Bill, I wanted to ask about some of the improvements that you've been making with your go-to-market added sales and marketing productivity.

William Magnuson, CEO

Yes, absolutely. We've seen over 450 customers purchase flexible message sending credits across the Braze customer base, which enables exciting opportunities. We think that customers' ability to use these channels more flexibly will also support expansion over time. They enable faster go-to-market strategies, and our sales team continues to see productivity growth, leading to higher win rates.

Gabriela Borges, Analyst

I'll ask one follow-up on the go-to-market, specifically around the Braze for start-ups and the free trial programs for smaller companies. Any updates on the health of that small company ecosystem as a whole?

William Magnuson, CEO

We're continuing to monitor the health metrics around the SMB sector. While our sales team remains productive, we did lower our sales capacity in that category midway through last year. Our free trial program is making good progress, helping with top-of-funnel awareness while evolving our product for future growth.

Tyler Radke, Analyst

Bill, you talked about Project Catalyst. I'm wondering how you see the conversations around agentic AI evolving. What role are customers viewing Braze in this context?

William Magnuson, CEO

There's a lot to unpack there. Customers are excited about the capabilities we've developed, which allow for greater optimization and personalization. Our projects are gaining traction as we continue to advance our technology, especially in the competitive landscape with Salesforce and Adobe stepping back on their marketing considerations. Braze is well-positioned to capitalize on these shifts.

Isabelle Winkles, CFO

In terms of bookings and billings for the fourth quarter, we expect a continuation of linearity common in previous years, where we typically see significant bookings occur in the final month of the quarter.

Scott Berg, Analyst

Bill, do you see any differences in buying trends from existing customers versus new customers?

William Magnuson, CEO

The existing customers generally show greater velocity in purchasing due to their familiarity with our offerings. They tend to have more stakeholders at hand when navigating their internal processes, which usually accelerates decision-making. However, there are always new challenges as technical architectures need evaluation.

Isabelle Winkles, CFO

As we consider our non-GAAP profitability in the current and upcoming quarters, we would expect to be disciplined about balancing growth with profitability. The expectations we shared in September remain intact as we move forward.

Operator, Operator

There are no more questions in the queue. I will now pass it back to Bill for closing remarks.

William Magnuson, CEO

Thank you, operator, and thanks, everybody, for joining the call today. We appreciate your continued interest and support, and we're looking forward to seeing you at a conference or on the road soon.