Earnings Call
Braze, Inc. (BRZE)
Earnings Call Transcript - BRZE Q4 2023
Operator, Operator
Welcome to the Braves Fourth Quarter Fiscal Year 2023 Financial Results Conference Call. My name is Michael and I will be your operator for today. I will now turn the call over to Christopher Ferris, Head of Braves Investor Relations.
Christopher Ferris, Head of Investor Relations
Thank you, operator. Good afternoon and thank you for joining us today to review Braze results for the fiscal fourth quarter 2023. I'm joined by our Co-Founder and Chief Executive Officer, Bill Magnuson; and our Chief Financial Officer, Will Winkle. 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 statements include but are not limited to, statements regarding our financial outlook for the first quarter ended April 30, 2023, and for our fiscal year ended January 31, 2024 and our planned product and feature development and the benefits to us and our customers therefrom, including our AI tools, our anticipated market opportunity, the potential impact of current macroeconomic trends, our anticipated customer behaviors, including vendor consolidation trends and their impact on Braze, our growth plan, our vision 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 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 fourth quarter 2023 performance in addition to the impact these items have on the financial results. Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations portion of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now I'd like to turn the call over to Bill.
Bill Magnuson, CEO
Thank you, Chris and good afternoon, everyone. We delivered a strong fourth quarter, generating $98.7 million in revenue, up 40% versus the prior year and 6% compared to the prior quarter, again demonstrating the high ROI and long-term value of the Braze solution. Our results were strong despite a challenging macroeconomic environment that elongated sales cycles, particularly in our Commercial segment. We increased our total customer count by 55% sequentially to $1,770 and continue to win against both legacy Marketing Clouds and point solutions. Notable recent new business wins and upsells include Discovery Communications, Finish Line, McClatchy Media Company, My Fitness Bell, Sonic Drive-in and one of Europe's leading online marketplaces for high-quality used cars among many others. Customers continue to recognize the high ROI that can be achieved through personalized, cross-channel customer engagement enabled by the Braze platform. Despite market challenges, we remain confident in our ability to execute on our growth plans. Braze's momentum continues in key industries such as retail and e-commerce and media and telecommunications as legacy marketing tools come up for renewal, we see traction in newer to Braze industries like travel and hospitality. And today, I'm proud to announce that during Q4, we passed $400 million of committed annual recurring revenue, demonstrating our ability to capitalize on our growing market opportunity to deliver best-in-class customer engagement at scale. Thank you to our dedicated and talented team across the globe who help make this happen. I'm excited to build on our success with you and march toward our next goal of becoming a $1 billion revenue company. Looking ahead, we are confident that whichever way the macroeconomic winds blow, customer engagement will remain a universal business imperative. In tough times, brands shift their focus to higher return activities like life cycle optimization and retention. To stand out, marketers need to use powerful customer engagement technology to drive innovation and productivity, all in service to customer value. And we are increasingly seeing the trend towards vendor consolidation which we think we will benefit from, specifically. Customers come to Braze looking to strengthen their customer engagement suite with a platform that is simultaneously comprehensive while being intuitively integrated and powered by real-time data. These customers are moving from a disparate collection of marketing software, separately sending e-mail, SMS, push notifications and in-product messaging, all with siloed analytics and complex user data tracking. With Braze, customers ranging in size from small digital start-ups up to some of the world's large enterprises can cost effectively consolidate their customer engagement efforts into one solution, breaking down silos between channels and teams simplifying their technical architectures and improving is for customers in one particular new business win with an athletics retailer this quarter, we replaced three separate vendors, signing a deal across an array of channels, including e-mail, push, web and content cards. In another case, we worked with a traditional media company, we replaced the legacy Marketing Cloud and three other messaging vendors as they modernize their customer engagement platform with Braze. We expect this trend to continue as enterprises with ambition and sophistication consolidate their technology ecosystem with modern omnichannel customer engagement solutions, removing legacy marketing clouds and point solutions that don't scale which we believe will provide a tailwind for Braze in the coming years. In another proof point of our leadership in the industry, I'm pleased to highlight that Braze was recently named a leader in the Q1 2023 Forrester Wave for cross-channel marketing hubs. Their coverage of Braze should resonate with those who have been listening in on our earnings calls the last few quarters. So let me just read directly from Forrester's report. Braze lives up to its start anywhere and go Everywhere product vision via innovative products and expert services to help its clients build human connections with their customers regardless of size or technical competence. Its superior innovation road map reflects these concepts by balancing investments across a use, platform depth and workflow flexibility. They continue by saying that Braze suits organizations looking for a flexible and marketer-friendly cross-channel marketing hub solution to refresh their digital experience strategy. Next, I'd like to briefly highlight our recently announced strategic partnership with WPP, a leading creative transformation and services agency. Together, we'll be partnering on joint product and solution development and integrations aimed at helping brands resolve customer identities at scale and power personalized engagement, alongside coordinated go-to-market efforts to help clients make investments in customer activation, retention and loyalty. We look forward to partnering with WPP and deepening our relationships with other agencies and GSIs to create better outcomes for our customers. As we look to the future, we will continue to improve our platform and build our competitive moat. Artificial intelligence is a key component of that innovation push. Those that closely follow Braze know we were founded by two engineers, myself and our CEO, John Heyman and that existing on the cutting edge of technology innovation is in our very DNA. Let me walk you through a few of our existing AI developments and how we plan to leverage AI to drive customer engagement in the future. In 2017, we invested in a dedicated team of data engineers and data scientists focused on using machine learning to build AI into the product, making marketers more effective in engaging their end users by optimizing timing and targeting strategies inspiring new ideas to enhance relevance for customers and when possible, automating decisions entirely. In May of 2022, we started investing in generative AI as a marketer copilot, building GPT-3 into Braze for AI copywriting which saves customers time when creating subject lines and messaging for their campaigns. Last December, we integrated Dolly into our image library and customers have been using both very effectively to be more agile, speed creative production and more easily test and optimize content for different variants. We're very excited about the potential for these tools to enable even small marketing teams to wield an immersive creative vision. While also making it easier for them to take advantage of Braze's sophisticated and differentiated testing capabilities by lowering their creative production burden. We have also already seen examples of that PT successfully leveraged to generate valid message templating syntax and to speed along integration with source code samples. This is a set of capabilities that enhance the efficiency of our product support and further accelerate time to value for our customers. We're also experimenting with customizations of GPT-4 which are aware of Braze's support knowledge base and up-to-date documentation in order to enable a wider swath of Braze users to leverage our most advanced capabilities more quickly. And as we discussed with you in October at our first Investor Day, we've also introduced new machine learning features designed to improve outcomes in Braze campaigns and campuses. We introduced personalized variants to automatically determine for each individual message recipient which content variation they will most likely engage with based on data from consumers with similar behaviors and profiles. And we've expanded our predictive suite to use sophisticated machine learning to identify which users are most likely to churn or make a purchase. This generates models that are customized to each brand's usage fingerprint, a solution that adapts to work effectively across different industries and business models. Finally, we are using machine learning-driven predictive models designed to improve our quality of service while lowering our infrastructure costs. Auto scaling is a technique we've used for years to adapt the cloud footprint of our stream processor in response to dynamic messaging workloads. We recently enhanced it to use machine learning to automatically predict upcoming load based on customer usage and a wide array of historical data. Early tests have shown the potential for meaningful reductions in our infrastructure costs as we continue to drive efficiencies in our core tech stack. You can expect that Braze will continue developing AI and ML-driven products and service enhancements throughout the surface area of our platform in the coming months and years. Finally, and before I turn it over to Isabelle, I'd like to spend a moment to discuss some exciting news we announced earlier this afternoon. We have entered into an agreement to acquire North Star, our exclusive reseller of Braze technology in the Australian and New Zealand markets. We have been working with their team for several years and have been impressed by their ability to drive adoption of our industry-leading solution across the region. We estimate this transaction will close in our fiscal second quarter and we look forward to updating you on the progress in the region in the coming quarters. Thank you for your continued support of Braze. We are very excited about the year ahead and believe the investments in our products, coupled with the strong secular customer engagement tailwinds will keep Braze on the path to becoming the industry standard for customer engagement. And 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 mentioned, we reported a strong fourth quarter with revenue up 40% year-over-year to $98.7 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 96% of fourth quarter revenue. The remaining 4% represents a combination of onetime configuration and onboarding fees as well as other professional services. Total customer count increased 29% year-over-year to 1,770 customers as of January 31, up 395 from the same period last year and up 55% from the prior quarter. Our total number of large customers which we define as those spending at least $500,000 annually grew 46% year-over-year to 156 and as of January 31 contributed 57% to our total ARR compared to a 52% contribution as of the same time last year. Compared to last quarter, this reflects a 5% increase from 148 large customers that contributed 56% of our total ARR as of October 31. Measured across all customers, dollar-based net retention was 124%, while dollar-based net retention for our large customers, those spending at least $500,000 annually was 126%. Expansion was broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 43% of our total revenue in the fourth quarter in line with the prior quarter and up from 40% at the end of fiscal year 2022. In the fourth quarter, our total remaining performance obligation was $456 million, up 22% year-over-year, and up 11% sequentially. Current RPO was $313 million, up 31% year-over-year and up 10% sequentially. The year-over-year increase was driven by contract renewals and upsells and the signing of new customer contracts. Overall, dollar-weighted contract length remains at approximately 2 years. Now I'll review the income statement in more detail. As a reminder, some of the metrics I will discuss are non-GAAP. We've 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 $66.2 million, representing a non-GAAP gross margin of 67%. This compares to a non-GAAP gross profit of $47.3 million and non-GAAP gross margin of 67.2% in the fourth quarter of last year and 69.7% in the third quarter of this year. In addition to normal seasonality which reduces gross margin in Q4 due to higher levels of customer activity, our cost of revenue in Q4 included the impact of a onetime expense true-up. Excluding this impact, Q4 non-GAAP gross profit was $67.5 million, representing a non-GAAP gross margin of 68.4%, up 120 basis points year-over-year due to continued economies of scale in our core technology expenses and ongoing efficiencies related to our customer support functions. Turning to operating expenses. Non-GAAP sales and marketing expense was $46.5 million or 47% of revenue compared to $35.3 million or 50% of revenue in the prior year quarter. While the dollar increase reflects our investment in headcount to support our ongoing growth, global expansion, and increased travel and entertainment expenses, the improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $19 million or 19% of revenue compared to $13.1 million or 19% of revenue in the prior year quarter. The dollar increase was primarily driven by increased headcount to support the expansion of our existing offerings as well as to develop new products and features to drive growth. Non-GAAP G&A expense was $17.5 million or 18% of revenue compared to $12.4 million or 18% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth and public company expenses. Non-GAAP operating loss was $16.7 million compared to a non-GAAP operating loss of $13.4 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $13.7 million or a loss of $0.14 per share based on 95 million weighted average basic shares outstanding during the period. This compares to a loss of $13.8 million or a loss of $0.18 per share based on 78.4 million weighted average basic shares outstanding in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $482.7 million in cash, cash equivalents, restricted cash, and marketable securities. Cash provided by operations during the quarter was just over $12,000 compared to a use of approximately $24.5 million in the prior year quarter, driven by lower net loss and positive changes in working capital. Free cash flow was negative $1.9 million in the quarter compared to a negative $26 million in the year-ago quarter. As we have stated in previous quarters, we expect our free cash flow to fluctuate from quarter-to-quarter given the timing of customer and vendor payments. And now turning to our forecast. We continue to see solid interest in high-quality customer engagement solutions, tempered by macroeconomic headwinds that persist in a number of geographic regions and industry verticals. Like many of our peers, we continue to experience elongated sales cycles and slower new business growth. As such, our guidance assumes an elevated level of conservatism and that the current macro environment persists throughout fiscal 2024. And as we navigate this fiscal year, we will continue to maintain cost discipline and believe that we are well positioned to make significant progress towards our long-term operating targets outlined last October. For the first quarter, we expect revenue to be in the range of $98.5 million to $99.5 million which represents a year-over-year growth rate of approximately 28% at the midpoint. As a reminder, our first quarter contains 89 days or 3 fewer days compared to the other three quarters of the year which each contain 92 days. Because we recognize revenue ratably over the course of the year, the Q1 day count is reflected in our revenue guidance. First quarter non-GAAP operating loss is expected to be in the range of $19 million to $20 million. First quarter non-GAAP net loss is expected to be in and first quarter non-GAAP net loss per share in the range of $0.18 to $0.19 per share based on approximately 96.2 million weighted average basic shares outstanding during the period. For the full fiscal year 2024, we expect total revenue to be in the range of $433 million to $438 million which represents a year-over-year growth rate of approximately 23% at the midpoint. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $57 million to $61 million. Non-GAAP net loss for the same period is expected to be in the range of $53 million to $57 million. For fiscal year 2024, non-GAAP net loss per share is expected to be $0.55 to $0.59 per share based on a full-year weighted average basic share count of approximately 97.1 million shares. As we look further out, we are focused on growing revenue while improving operating income and free cash flow margins and expect Braze will generate positive quarterly non-GAAP operating income and positive quarterly free cash flow in the fiscal year ended January 31, 2025. In addition, we expect our non-GAAP operating income margin in Q4 of this year to be negative 7% or better. I'll conclude by reiterating our excitement in Braze's future. We are focused on growing our business, partnering with customers to help them achieve incredible customer engagement outcomes while effectively managing our expenses 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 DJ Hynes at Canaccord.
DJ Hynes, Analyst
Bill, to start with you, are you noticing any indications that legacy Marketing Cloud customers are finding ways to make their current solutions more effective, especially with the increased access to third-party streaming data solutions and ongoing advancements in AI and machine learning? I'm considering the potential impact this might have on their willingness to replace their existing marketing infrastructure and transition to a service like Braze.
Bill Magnuson, CEO
Yes, thank you for the question. First, I want to highlight the vendor consolidation trends I mentioned earlier. In both cases, we are observing that legacy Marketing Cloud and point solution deployments are consolidating onto Braze. This indicates two things: a replacement cycle for legacy tools and that the presence of a legacy Marketing Cloud alongside point solutions in their original deployment means they aren't effectively delivering across the touchpoints and channels that modern customer engagement requires. We are also observing similar trends, particularly in the travel and hospitality industry, but across various sectors that have been slower to adapt. We are seeing not only legacy marketing tools being replaced but also other outdated software in the enterprise. Increasingly, the default choice for this replacement is not moving to one of those legacy marketing clouds but is shifting to Braze. Regarding AI, I can elaborate on this later as I expect more questions on AI and ML before we conclude the call. I believe that our access to a more complete view of the customer, along with the ability to engage with them directly and our vertically integrated real-time data flow, provides us a comprehensive understanding of customer interactions. This positions us favorably in the technology stack, enhancing our data flow and real-time access, which will give us greater flexibility and options in building future AI and ML capabilities.
DJ Hynes, Analyst
Yes. Helpful color. And then is about one for you. Just in terms of the guidance, like what are your expectations in terms of the mix of growth from the base, so NRR versus contribution from net new in fiscal 2024, that gets you to that midpoint 23% growth guidance?
Isabelle Winkles, CFO
Yes. Thanks for the question. So first of all, I just want to say, I think we've been performing very well against an increasingly tough environment here that we've been seeing over the course of this past year. And we're seeing the same dynamics that a lot of our peers are seeing with regards to elevated levels of deal scrutiny, certainly when it comes to kind of that net new business and then continuations of these elongated deal cycles. So, I think we are going to continue and we've incorporated into our guide a good degree of conservatism across a number of fronts. And so specifically across a number of KPIs, we have incorporated the expectation that we'll see some further degradation. That's true for pipeline generation and therefore, some ongoing weakness in kind of net new business. Conversion rates, win rates, the deal cycle length, we think will continue to stay long or we've assumed that rather in the context of our guide. We're assuming limited improvements to sales productivity. This is all embedded in the guidance. And so I think it's fair to say that we do expect in the context of the guide for the net new business to continue to struggle. We've also been able to incorporate the events of kind of the last few weeks that have led to a little bit more market disruption and a little bit more uncertainty and maybe how net new buyer behavior and net new investment is going to behave over the coming months and quarters. And as a result of that, we feel really comfortable with where our guidance is right now against many of the possible scenarios that might play out for FY '24.
Bill Magnuson, CEO
I'll just add that in general, obviously, the environment has been super dynamic and it's been challenging to operate in. But that said, I'm really optimistic about where we are as a business and also how we're positioned in the ecosystem. We've been focused, especially over the last couple of quarters on preparing for the world as it is but doing that while also setting us up for long-term success. And qualitatively, I've never been more excited about our position. When you look at things like our product road map and the momentum there with things like cloud data ingestion or the recent launch of WhatsApp. You may have seen the announcement that came out yesterday about the partnership with WPP which is exciting. All its own but it's also a for our continued progress with the GSIs. Our go-to-market investments and the trends that I just highlighted around the replacement cycle for legacy tools and vendor consolidation, these are all things that really build the one that we're going to build Braze into the future on. Now quantitatively, obviously, the environment is difficult and you see that in the numbers across the industry. And as Isabelle mentioned, we're being very mindful of the events of the last couple of weeks and our experience in this environment so far and our guidance is informed by that but we feel comfortable with the guide that we're providing.
Ryan MacWilliams, Analyst
Great to hear about the profitability improvement in the guidance and the fourth quarter exit margin rate was better than we expected. So if the macro stays current or similar to the current environment, do you have any updated thoughts about the potential path of profitability timeline for Braze? And how do you think about making investments in this current market?
Isabelle Winkles, CFO
Thank you for your question. In December, we announced that we had broadly paused net growth in our overall headcount, and that decision remains unchanged. We are committed to this course of action, which is allowing us to continue our journey toward profitability and make significant progress this year. We have a strong grip on our spending for the remainder of the year, which we believe will be a crucial factor in achieving profitability. This has also proved beneficial for our leaders as they reassess how to allocate resources during this period of headcount growth pause. Therefore, I wouldn't expect us to significantly increase new investments for the rest of the year.
Bill Magnuson, CEO
Yes. And I'll just say that touching on the culture and how leadership has rallied around our entire employee base has rallied around this move to profitability. We've been able to do it while also making great foundational investments and that's just through a lot of the advantages that we have around our mastery of R&D and data as well as the adaptability of the employee base. I've been really proud of our employee culture through this transition and it gives me not only great confidence for our path to profitability but confidence for our future as we continue to build our leadership position in the space.
Ryan MacWilliams, Analyst
And then one for Bill. Exiting the fourth quarter, how should we think about how the macro is currently impacting customer usage of the Braze platform? Because data points processes messages sent still seems healthy at like mid-40% year-over-year growth rate. So to see or you're thinking about how different verticals or different customer sizes are currently faring.
Bill Magnuson, CEO
Yes. This highlights the fact that customer engagement is a complex and ongoing process. Many people view marketing technology solely as a discretionary expense, similar to advertising spend. However, the responsibility for communicating with customers is shared among different areas. As we observe customers exploring new use cases and utilizing new features like cloud data ingestion to incorporate fresh data sets, we notice an increase in their engagement across multiple channels. The product's reach is expanding, and customers are seeing returns on their initial use cases, prompting them to explore additional ones. Much of Braze's work involves essential communications necessary for delivering products and services. The ongoing trend of developing first-party relationships, utilizing first-party data, and acting on that data is becoming crucial for brands across various industries and sizes.
Arjun Bhatia, Analyst
Bill, maybe just to stick with you. You mentioned some of the AI investments that you've made over the past several years. But when you think about the advent of generative AI, what do you think that can do for the platform from a customer standpoint? Does it help you be more competitive? Does it drive more productivity for your customers? Just would love to get your thoughts on how this plays out over the next several years?
Bill Magnuson, CEO
Yes, absolutely. I'll take a step back and provide a framework for how we consider AI and machine learning and their impact on customer engagement. We categorize these technologies in a few ways: as copilots for humans, automated optimization, or full autopilot. The standard for full autopilot is significantly higher when it comes to managing first-party data and relationships compared to areas like advertising or B2B prospecting. Therefore, we anticipate a cautious approach to fully automated systems in the first-party data and relationship space. It's one thing to execute a targeted ad or email to someone you don't know well; it's quite different to integrate that experience within your product. We acknowledge that some concepts require training data and will evolve over time, while others can be immediately utilized. We actively balance our investments to cater to both cases. Recently, many advances in generative AI have been particularly notable because they allow for immediate application. The rapid learning cycles in chatbot conversations exemplify this. Our systems, which learn progressively, are more suited for partial automation, particularly for strategy testing where platforms like Canvas excel or in predictive intelligence targeting. I believe Braze is uniquely positioned to leverage these advancements due to the breadth of our touch points and our ability to access real-time data immediately. This comprehensive view puts us in an advantageous position to benefit from new developments in AI and machine learning. Specifically regarding generative AI, I'm excited about using predictive targeting and ML-driven orchestration intelligence already present in our platform to enhance experimentation. A significant barrier to experimentation for marketers is the challenge of creative production. Crafting multiple engaging, relevant variations of a message to drive a similar action becomes even more complex when incorporating elements like image and video generation. As I mentioned earlier, all these tools serve as creative copilots, whether it's using ChatGPT to overcome writer's block or employing AI for image generation. We anticipate similar advancements in animated GIFs and video production soon. These innovations are crucial, especially for our customers with smaller teams and limited resources, but they also allow everyone to operate more quickly and efficiently. This not only differentiates Braze by opening new use cases through our real-time capabilities but also enhances the cumulative benefits from experimentation. The easier we make it for customers to produce multiple strategy variants and implement machine learning to optimize their testing, the greater their return on investment becomes. I hope this provides some insight into our perspective and the road map ahead. Braze has unique aspects regarding first-party data, along with remarkable advantages stemming from our position in the technology stack. Yes, absolutely. I mean you'll all cite as well just as kind of foundational stat that 43% of our revenue comes from outside of the United States. And so as we know, Braze has a very global footprint and because of the nature of mobile and the app stores and such, especially in our early days, we've always been a very global company. In fact, actually, our second largest office is in London. So I like to say that the geographic center of Braze is somewhere over the North Atlantic. And that global exposure and footprint is a particular reason why I'm most excited about WhatsApp within Braze, especially vis-a-vis a lot of the competition that you see in the marketing tech space who, in general, you see a huge concentration in their SMS being in the United States. And so when we can take our differentiated WhatsApp capability and we can multiply that by our international footprint, I think it's got a lot of exciting potential.
Jake Titleman, Analyst
It sounds like Braze is experiencing many of the same macro headwinds as other software companies but it would be good to get an update on the win rates you're seeing. And maybe you can comment on how those win rates are trending with both larger and smaller customers, especially because we've heard that some of the smaller private players are really pulling the pricing lever to try and win new business.
Bill Magnuson, CEO
Yes. So there are some great things that we've been seeing from a competition standpoint. First, the vendor consolidation momentum has been really positive for us. We also continue to win at higher prices and head-to-heads because we are effectively value selling. We've spoken a lot about our go-to-market investment that we've been making over the last few quarters and I've been excited to see the results from that. We're operating with less opportunities to go around which I think because of the macro, everyone is, we're definitely seeing more desperate tactics from competitors. And frankly, we're actually seeing those efforts from competitors that are both large and small. But we don't see anything that is fundamentally changing the competitive landscape. I'd also say that even those competitors who are progressing by trying to imitate our feature set, they're still built on either old or cheapened incomplete architectures which simply means that their attempts to fast follow us and try to sell at lower prices are eventually going to hit a wall. And in the meantime, we're going to keep innovating and leading the way. You know from our track record that we don't do margin dilutive deals and we're seeing those win rates improve or hold up, depending on which category we're operating in. It is definitely a dynamic competitive landscape. And as I mentioned, there are less opportunities to go around before and that's having predictable second-order effects from our competitive cohorts but we feel really good about where we're positioned, especially over the longer term.
Jake Titleman, Analyst
That's great. And then maybe you can comment on if you think this market slowdown has maybe concerned you at all that the TAM for an offering like Braze isn't as large as you previously thought? Maybe if not, you can talk about your conviction in the long-term fundamentals and why investors should not view the current environment as the new normal?
Bill Magnuson, CEO
I want to highlight two key points. First, as mentioned earlier, we're observing that messaging and data volumes are holding steady, which indicates that the interaction between brands and customers is not just a temporary trend. Additionally, when considering the ongoing secular and generational shifts towards greater digitization in our lives, it's important to recognize that we are still in the early stages of the transition to first-party data. The initial push towards first-party data has been a natural response to the decline of third-party data, whether due to IDFA changes or the demise of cookies. Brands are now focused on collecting first-party data to substitute the third-party data they previously relied on. More crucially, first-party data fosters actionable customer relationships, allowing brands to understand and enhance those relationships effectively. Combining investments in first-party data with advanced customer engagement tools like Braze creates significant business value for brands already leveraging these resources. Looking at the broader trends that have benefited Braze over the years, we first saw the rise of mobile and app stores, followed by a breaking down of barriers between messaging channels, leading to an increase in cross-channel deals and expansions into email, web, and in-product messaging. Recently, the emergence of data scientists and engineers has further expanded Braze's product offerings to cater to these new roles in customer engagement teams. Ultimately, the overarching trend is the ability for brands to directly act upon their customer relationships, guided by the first-party data they are accumulating, and to execute this through software, strategies, and team structures within the customer engagement field.
Brian Peterson, Analyst
Just one for me. So I wanted to hit on the NorthStar acquisition. Any help on what drove the timing of that, the strategic rationale? And anything you can share in terms of the financial contributions that's in the fiscal year '24 guide?
Bill Magnuson, CEO
Yes. I'll let Isabelle cover the financial aspects. However, regarding timing, we've had a long-standing relationship with North Star in the market. This relationship is unique because they are the sole sellers of Braze in Australia and New Zealand, and they are the only reseller we collaborate with in that area. We've worked closely with them for many years, and we recognized that combining our teams could significantly enhance efficiency. I visited in November and spoke with various teams, and it became evident that the separation caused by not being direct Braze employees was hindering their day-to-day productivity. We aim to integrate them as a valued partner into Braze to accelerate our growth in the region.
Isabelle Winkles, CFO
Speak to the guidance. There's nothing in the guidance currently that accounts for North Star. This is a tuck-in, a small tuck-in acquisition. The overall impact to FY '24 revenue is going to be fairly small. We won't even close until Q2, so we won't get a full year's worth of revenue impact. So you're talking about a modest revenue impact in this year. So it's not included. We'll update you guys on that progress as we get through to closing the deal.
Taylor McGinnis, Analyst
So the outlook for negative 7% operating income margin by Q4 or better is really solid. It seems that in order to get there based on some of the math that we played with might imply mid-single digits or so OpEx growth versus the 36% growth you did last quarter. So can you maybe just talk about or even quantify the drivers of that? So how much might be related to the pauses in hiring versus fixes in some of the sales efficiencies that you flagged in past quarters? And if we really use that negative 7% as a starting point for next year, how to think about the drivers beyond?
Isabelle Winkles, CFO
Yes, thanks for the question. So yes, I think that one of the keys here and I touched on this when I answered a previous question, is really related to our commitment to pausing headcount for the time being. And so what that really has required our leaders to do is actually look at their existing resources. So it's not about less investment. It's actually about reprioritization of investment dollars. Now, yes, sequentially, the cost structure did go up from Q3 to Q4 but I think we talked about this in Q4 as we implemented the headcount pause. There were still a few strategic heads that were being onboarded and we had sort of the remaining number of heads of offers that had been made that needed to come and join the company. You're going to start to see that stabilize over the coming quarters which is why there's not any appreciable improvement in our guidance, appreciable improvement in the operating leverage between Q4 and in Q1, for example. And so you're going to start to see that over the coming quarters as we the revenue growth continues to evolve and that continues to play out and the overall growth in the expense structure moderates as a result of the headcount pause.
Taylor McGinnis, Analyst
Got it. And then just as a quick follow-up. So when we think about the positive quarterly by 2025 commentary, is there any level of revenue growth, I guess, even directionally that you guys are thinking in that time frame that would drive that? And then also to anything on the hiring front embedded in that further out outlook.
Isabelle Winkles, CFO
So I'll say two very high-level comments on that. One is for that to happen for the positive quarterly operating income and free cash flow to come to pass in FY '25, we are not expecting any acceleration in revenue growth between FY '24 and FY '25. And we do have the ability to hire some level. We will have some incremental headcount that is embedded in the forecast for the following year. So we've not dependent on sustaining this headcount pause through to next year.
Derrick Wood, Analyst
Bill, I wanted to start asking about pricing and packaging. I think one of the changes you made last year was to diversify away from platform sales. sell a bit more on a modular basis. And just from a sales standpoint or to be more precise with the use cases. Has there been any kind of material change in terms of how you're selling your various products? And what are the netbacks to think about when looking at the impact on sales cycles and deal sizes and transaction volumes and all that when looking into the new year.
Bill Magnuson, CEO
I would break this down in a couple of ways. First, we've been preparing the product for this situation, which is essential for both the short term and long term. Through our framework of starting anywhere and going everywhere, we aim to provide customers with more locations to initiate their journey. In the future, this could involve new channel and customer touch point combinations that we don't currently offer. We're excited about laying the groundwork for these possibilities. You shouldn't expect significant changes in the average selling price. We actually saw an increase in ASP as we approached Q4. While some customers are purchasing a more limited set of products, there's also a trend of vendor consolidation that is influencing the opposite direction. When we consider both factors, I don't anticipate major changes in average deal sizes due to these strategies, but they are broadening our addressable market and facilitating easier expansion.
Isabelle Winkles, CFO
Thank you for the question. I want to highlight the spending above $500,000, which usually involves larger multifaceted enterprises. A significant portion of the upsell efforts with these organizations resembles acquiring new business. Our sales team is engaging with new stakeholders and budgets within existing parent companies, leading to an entirely new sales cycle similar to that of acquiring a new organization. This is where we anticipate ongoing pressure, as it behaves like new business and will pose challenges for us regarding the evolution of dollar-based net retention, especially among large vendors. In fact, we are noticing that both the overall company and the larger vendors are experiencing a narrowing gap. Regarding our guidance, we are incorporating an assumption that there is still more adjustment to come. You are right that this has been factored into our guidance with a conservative approach.
Scott Berg, Analyst
Isabelle, I wanted to see if you can comment maybe on the linearity of sales in the quarter. Your Q1 guide kind of suggests the minimal sequential increase from Q4 which suggests maybe a more front-end weighted quarter than back end. But I just wanted to see if you had any commentary around that.
Isabelle Winkles, CFO
Yes. So we have been evolving into kind of continually more actually back-end loaded. Q4 was fairly back-end loaded. In fact, we're actually pretty proud of even our last day of the quarter, had operationally a lot of great success in pushing through quite a bit of business on the last day of the quarter. So that was a great success sort of internally from an operational perspective. But we are continuing to see back-end loaded quarter. So under normal circumstances, it would be about 50% of the net bookings get done in the third month and we're seeing that trend upward.
Pat Walravens, Analyst
Bill, we're going to go a little afield here with this future of life pause letter, did you sign it? Would you sign it? What are your thoughts?
Bill Magnuson, CEO
I was preparing for earnings and didn't focus on that yesterday. However, I believe that with all technology, which can be beneficial or harmful, we should be responsible in its development. Braze has always been cautious regarding AI's capabilities and where we can place our trust in it. As I mentioned earlier, when dealing with first-party data and relationships, we have a higher standard for when to rely on AI. Braze has never claimed to offer a perfect solution to every issue. Nevertheless, it is an exciting time for AI development, and we must approach it with maturity and responsibility. There should be greater transparency regarding how large models are trained, the rule sets applied, and the data sets used. Without increased transparency, it will be difficult to trust future developments. I fully support the need to keep pressure on this ecosystem, as it shouldn't be allowed to operate without oversight.
Isabelle Winkles, CFO
So we haven't necessarily seen things getting worse in Q1 other than some of the disruption that we're seeing or that one could expect as a result of the most recent sort of banking uncertainty that obviously will have impacts on potential buyer behavior. But we're not necessarily seeing anything more negative in Q1 specifically.
Bill Magnuson, CEO
Yes, we are very encouraged by the increasing interdisciplinary nature of the teams using Braze year-over-year. We are excited to see more users accessing the Braze dashboard and accomplishing a wider range of use cases. As you heard us mention with the announcement of feature flags at Forge, this has attracted more product engineering teams. In terms of cloud data ingestion, there has been significant work done around data transformation and integrating currents, along with enhancements to product catalog capabilities. Additionally, we're developing subsets of the artificial intelligence feature set that require a degree of sophistication in training, learning, and nurturing, which is bringing more data scientists into our ecosystem. We have a clear understanding of our current position and are not rushing to sell directly to the industry at this moment. We believe there is significant value in bringing these professionals into our community, allowing them to collaborate with marketers and the marketing budget we are currently targeting. This engagement enhances our awareness and reputation among these groups, creating great opportunities for us in the future. Yes, absolutely. So actually, to answer your last question first, we actually had Snowflake go into GA on February 7. And excitingly, Redshift went into early access on the same day. And so actually, the product momentum there has been quite rapid. We also are off to a strong start in terms of customer adoption. We've got an early wave of customers actively sinking data from their warehouses into Braze. We're already counting the number of data points with units of $1 billion which is exciting to see, especially in the early days. We've also been really happy with how quickly people have been able to get those connectors up and running and integrated and configured. And you should also expect much like with our launch of currents that we'll plan to roll out a few more connectors to cover the most popular data warehousing solutions in our customer base. We're not going to try to build 100 cloud data ingestion connectors or anything like that because we're tightly integrated also with Reverse ETL and CDP partners. And so once we have covered bases with some of these more popular data warehousing solutions, we then will switch to refocusing on tightening the vertical integration into Braze with those partners as well as with our own cloud data ingestion products.
Yun Kim, Analyst
With the new year, are there any changes you are making in your go-to-market strategy to improve execution or adapt to the current environment? Additionally, do you have a specific focus for this year regarding your SKL?
Bill Magnuson, CEO
We are very pleased with the investments we have made in our go-to-market strategy and across all field teams. There have been many developments from the summer through November, which we discussed in our previous earnings calls. As we approach the new year, we are not making significant changes because we have already prepared for this year in advance. The programs have been performing well. Our annual kickoff in early February went smoothly as we launched our new fiscal year, and we received excellent feedback. Additionally, the slowdown in new hiring has relieved some pressure from the system, allowing us to concentrate on supporting a team with an increasing average tenure. This situation has provided us with the flexibility to focus on more advanced strategies, and we are satisfied with the progress of these investments. Yes. I want to highlight the announcement we made about our partnership with WPP yesterday. We are very excited about this collaboration and see significant potential for the future, both in terms of product development and coordinated go-to-market strategies. We are also making substantial progress with global systems integrators like Accenture and Deloitte. Additionally, there are several key technology partners that have played a crucial role in our co-development efforts, such as Snowflake for cloud data ingestion and Meta for the launch of WhatsApp. We are leveraging these partnerships to strengthen our ecosystem. This ties back to my earlier comments about my enthusiasm for the developments taking place, which are improving our position. We are seizing the opportunity to solidify strong partnerships and are backing this up with investments in both product and go-to-market strategies. While the macroeconomic environment is affecting everyone and these partnerships may not be performing at their full potential in terms of revenue right now, we are focusing on building their qualitative aspects. This groundwork will ensure that when the macro conditions improve, we will be prepared to accelerate our efforts alongside all of our partners.
Matt Benett, Analyst
I guess, Isabelle you mentioned in the guide you're essentially assuming no major improvements to sales productivity. Although with the pause and hiring and what Bill was talking about with the extended tenure of the sales team, I think that was sort of the assumption for most of us at least that sales productivity will continue to improve throughout the year. So maybe just help us think about what's giving you the pause or at least the level of conservatism on that front? And anything that you can share kind of influencing that, that we might watch to see if you're outperforming.
Isabelle Winkles, CFO
Thank you for that. I believe it's important to carefully evaluate the appropriate level of current investment in the business. We want to observe more indications of improvement in the new business environment, our ability to effectively upsell to enterprise customers, and our access to new clients within existing organizations. We're looking for a bit more acceleration in these areas before we incorporate that into our guidance. We would prefer to take some additional time this year to see how the macroeconomic situation unfolds, as there is still considerable uncertainty. We have always taken a cautious approach to our guidance, and we think it's sensible to assume that sales productivity will see limited improvement for now, though we hope to exceed those expectations. So most of our headcount infrastructure is fairly model-driven. And so what we do and we are consistently evaluating this is evaluating the algorithms for the models, the inputs. And then what that would say in terms of headcount requirements to support the needs of the business around the organization. So we do that consistently, we do very regularly 4 to 5 times a year in a very structured fashion. And so we will continue to evaluate the inputs of the overall business growth, business size and make those decisions around increasing the overall size of the headcount as a result of how those algorithms play out.
Bill Magnuson, CEO
All right. We are right at time. So thank you to everyone for joining us today. We remain committed to delivering industry-leading customer engagement solutions for our customers and high growth at scale for our shareholders and are looking forward to updating you on that progress in the coming quarters.