Klaviyo, Inc. Q1 FY2024 Earnings Call

Good afternoon, and welcome to Klaviyo's First Quarter of Fiscal 2024 Earnings Conference Call. I would now like to turn the call over to Jack Grant, Senior Director of Investor Relations and Strategic Finance. Please proceed.

Thanks, operator. I'm excited to welcome you to Klaviyo's first quarter 2024 earnings call. We will be discussing the results announced in a press release issued after the market closed today. Please refer to our Investor Relations website at investors.klaviyo.com for more information and a supplemental presentation related to today's earnings announcement. With me on the call today are Andrew Bialecki, Co-Founder and Chief Executive Officer; and Amanda Whalen, Chief Financial Officer. During today's call, we will make statements regarding our business that may be considered forward-looking under applicable securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our outlook for the second quarter and full year 2024. These forward-looking statements are subject to a number 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 as a result of new information, future events or changes in our expectations, except as required by law. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks and uncertainties described under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2024, that is filed with the Securities and Exchange Commission, or SEC, and in subsequent filings made by us with the SEC, which may be obtained on the SEC's website at www.sec.gov and on our Investor Relations website. In addition, today's call includes a presentation of certain non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials distributed after market close today, which are available on our Investor Relations website. With that, I'll now turn it over to Andrew.

Thanks, Jack. Thank you to everyone for joining us today. We're pleased to share our strong first quarter results. Consumer-facing businesses of all sizes across the world are using our platform to power smarter digital relationships. This quarter, we had a number of exciting product launches, along with investments in our products, engineering, hardware ecosystem and customer-facing roles to provide the tools our customers need to drive revenue growth. I'll cover these topics then turn it over to Amanda to cover our financial results and provide our outlook for the second quarter and full year 2024. Later, we'll open up the call for Q&A. This was a strong start to the year for our business as we grew our revenue 35% year-over-year to $210 million, while generating a 14% non-GAAP operating margin and $23 million of free cash flow. We continued to make progress in the mid-market, internationally and integrating artificial intelligence into our products. We just returned from our Klaviyo London Conference known as K:LDN. We like to get close to our customers and partners, and it was great to see so many of them at the largest K:LDN ever and our largest in-person event since 2019. I was inspired by the energy from our customers, partners and employees for what we are building. One of the people I spoke with remarked that Klaviyo was the standard on which they judge the quality of software and the ecosystem around it. This was a further validation of the opportunity we have with consumer-facing businesses across the world. We're doubling down with our community. Our customers are trusting us with their most valuable assets, their consumer databases to power smarter digital relationships. We continue to see retail and e-commerce brands of all types turn to Klaviyo to drive revenue. Bain & Company recently put out their 2024 list of Insurgent Brands, the list of the fastest-growing consumer brands. These companies all had at least $25 million in revenue and are growing at least 10x faster than their peers. We're proud to serve over 70% of these 97 brands with companies like Poppi, Liquid Death, Momofuku, Van Leeuwen Ice Cream and Dr. Squatch, all relying on Klaviyo to drive their revenue growth. During the quarter, we also closed new business with Fila and Fruit of the Loom. From the hottest and up-and-coming disruptors to the already established household names, businesses are finding us to drive revenue. We continue to drive momentum in the mid-market during the quarter. We now have 2,157 customers generating over $50,000 in ARR, which was up 69% year-over-year. These customers represent 31% of our ARR, up from 23% compared to a year ago. This quarter marks the first time this cohort represents over 30% of our business. In the last 12 months, we've seen significant growth in the size of businesses like this that rely upon us. As of the end of the quarter, our top 10 customers have an average ARR of about $1.5 million, which is up over 70% year-on-year. This speaks to the value that we provide for our customers. During the first quarter, we landed one of the largest deals in our company history with a top online fashion store for women. This business came to us because of the quality of our Shopify integration and enhancements to the platform we have made over the past few years. They're taking advantage of our platform to consolidate their channels across email, SMS and push notification. Since going live in the first quarter, they have sent over 1 billion push notifications to their consumers. Once they fully roll out, they expect to be sending up to 13 billion emails per year. Because of our investments in the scalability and reliability of our platform, we help power smarter digital relationships for businesses of all sizes. Another new customer during the quarter was Perry Ellis International and their portfolio of brands, including Callaway, Original Penguin and Rafaella. Perry Ellis was facing a few key challenges with their existing tech stack of multiple email providers. With Klaviyo, they'll be able to have a single view of their consumers, leading to better reporting, ability to A/B test and improve their consumer journey. They'll also be able to replicate their successful strategies across brands and reduce the time to experiment with automated flows. We're excited to help Perry Ellis with their goal of driving more revenue growth. Our land-and-expand model continues to drive successful outcomes for both customers and for us. After first becoming a customer in the summer of last year, Helen of Troy's home and outdoor brands, including Hydroflask, OXO and Osprey, have been driving success after consolidating email and SMS with us. During the quarter, we expanded our business with them, which includes both an expansion in their SMS volume and adding on our CDP offering. The quality of our native integration has allowed them to free up developer hours and better harness their first-party data for their marketing. We're seeing benefits of our strong partner ecosystem to help drive our business. One expansion win during the quarter was with Andie Swim, a swimwear company, that we co-sold with our partner, Luck & Co. Andie Swim had been an email customer of ours and now are consolidating their email and SMS with us. Consolidating with Klaviyo is additionally allowing Luck & Co to grow their own business with Andie Swim in Canada. This is a great example of how we love to lean on our partners to drive fantastic customer outcomes and help our customers power smarter digital relationships. Now I'd like to take a few minutes to speak about some of our progress internationally. As I mentioned, we just returned from our EMEA-focused conference, Klaviyo London, or K:LDN. And we're really excited about our opportunity to grow that business. EMEA revenue grew 43% year-over-year during the quarter, and we see a strong opportunity to continue to grow there with more localized offerings. During the quarter, we added Manucurist, a fast-growing beauty brand based in France, as a customer. After running a trial with Klaviyo in some of their smaller geographies, Manucurist saw strong results and fast-tracked their migration to Klaviyo. We're excited to welcome them on board, and they're a great example of the success we're seeing internationally. The EMEA and APAC regions represented a little over 30% of our revenue in Q1, and we're excited for our opportunity to expand our global footprint in the future as well. On the product front, we have a number of recent announcements that will help grow our international business. At K:LDN, we announced further progress on some of our efforts on internationalization and localization. We now provide SMS coverage in nine countries with more expected to come in the next few months. Our ability to extend our SMS capabilities across geographies has met our international customers' needs to more easily market to consumers across various geographies. Our intent is to add even more customers across Europe and allow them to connect with their consumers across channels. In fact, we recently announced our first localized French user interface, with our France rollout going live later this month. This will be the first time our platform is offered in a local language other than English. When we began marketing locally in French, we saw a meaningful increase in our self-serve conversion rates. We'll be continuing to roll out new languages and localized web pages on a targeted basis over the coming quarters. At K:LDN, we also announced the upcoming general availability of Klaviyo portfolio. Klaviyo portfolio streamlines multi-account management with unified insights across brands, simplifies operations and allows for efficient spend management and swift campaign execution by centralizing control and amplifying marketing success across diverse brands and regions. Portfolio allows for better multi-account management for our customer base and is really geared towards two primary types of our customers, international and those in the mid-market, as both of these types of customers tend to operate across multiple markets and brands. One of our recent customer wins, Liberated Brands, which includes Volcom, Quiksilver, Roxy and RVCA, is using portfolio to have a unified view of their digital relationships across their full brand portfolio. This quarter, we further built out our key differentiator of higher-quality segmentation with our new segment preview feature. Now customers can view a preview of their segment count while building it, improving speed of building the correct segment, reducing support load, and improving manual segment processing fees. Finally, on the product front, we continued our momentum in artificial intelligence with the new launch of Help AI. Help AI uses natural language processing to allow customers to ask questions directly in Klaviyo and get answered in a self-serve manner. We see healthy usage of our AI-based features. But more importantly, we're seeing proof points of AI driving real outcomes for our customers. We are seeing fast-growing adoption with over 20% of our customers using artificial intelligence features, including Segments AI, Email AI, Forms AI and SMS Assistant during the quarter. In the last 12 months, our customers have created over 650,000 objects using those AI features. We've additionally helped our customers generate hundreds of millions of dollars in Klaviyo attributed value, or KAV, through Segments AI since its launch. Forms AI is driving significant value as well. One of our customers, Tata Harper, a natural luxury skincare brand, used Forms AI to optimize the placement and timing of sign-up forms on their website. Twenty different variations of two forms were automatically generated and tested. And then 30 days after the test compared to the 30 days prior, form submissions for both had jumped over 65%. We're continuing to invest across products to provide our customers the tools to drive revenue. We're working to drive usage and adoption in our platform by improving our user interfaces and embedding artificial intelligence functionality. On the go-to-market front, we're continuing to invest across sales and marketing to make sure we are reaching customers across the globe. We're further building out our sales capacity and partner network to expand our footprint internationally. We're improving our ability to articulate the value of our platform and close larger accounts. On the international front, we'll be taking the learnings from France to be well-positioned for further localized expansion. Lastly, before turning it over to Amanda, I'd like to provide a couple of updates on our team. First, I want to announce that our CTO, Allen Chaves, has decided to step down at the end of this calendar year to spend more time with his family. I want to personally thank Allen for his significant contribution over the last 4.5 years to build Klaviyo into the company it is today. When Allen joined, we had fewer than 40 engineers and he's helped us scale tremendously and built a world-class team and a strong leadership bench. We greatly appreciate all of his efforts and wish him well. I'd also like to welcome Carmel Galvin as our new Chief People Officer. Carmel is going to be leading our global people operations team and HR function, including talent acquisition and retention, training and development, diversity and inclusion and corporate social responsibility. Carmel has significant experience within the software industry, most recently serving as the Chief People Officer of Stripe. We're excited to have Carmel on board to help shape and guide our company culture as we build a world-class team. We're proud of our results and confident in the momentum our business has to drive strong, efficient growth in 2024 and beyond. And with that, I'll turn it over to Amanda to cover the financials and our outlook. Amanda?

Thanks, Andrew. Today, I will provide a brief overview of our first quarter 2024 financial results and discuss guidance for our second quarter and full year 2024. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation of GAAP to the most directly comparable non-GAAP financial measures. As Andrew noted, we started the year with a strong first quarter. We continue to see strong growth at scale in an efficient manner, in line with our financial framework. In the first quarter, we generated $210 million in revenue, representing year-over-year growth of 35%, and we delivered a 14% non-GAAP operating margin. We continue to perform across our four primary growth vectors, adding new customers, expanding with those customers, expanding internationally, and growing into the mid-market. In terms of adding new customers, we increased our customer base 17% year-over-year and are proud to now serve over 146,000 customers. We're seeing consistent trends with regards to logo retention and a bit of softness on the new logo addition side, particularly amongst our smallest entrepreneur customers. As a reminder, while we continue to target entrepreneurs, we're doing it through continued investment in product, and we are intentionally shifting more of our go-to-market investments towards SMEs and the mid-market. While net new logo adds were down in the quarter, revenue dollars from the new logo cohort was up year-over-year. You'll see this reflected in our average revenue per customer, which continues to increase and was approximately $5,800 in Q1, up 15% year-over-year. We are continuing to expand with our customers as evidenced by our dollar-based net revenue retention rate or NRR of 114%. As discussed last quarter, we expected our NRR to decline from the prior period due to the impact of lapping our September 2022 price increase and the spending trends we discussed on our last call. Consistent with last quarter, we are not seeing Yahoo and Google's updated requirements impact our customers' upgrade behavior, and we have not seen any material changes in our unsubscribe rates. We are continuing to see our customers drive strong KAV, or Klaviyo attributed value, through our platform capabilities, particularly through the ability to personalize and segment their consumer bases. Internationally, our aggregate revenue from EMEA and APAC increased 40% year-over-year in Q1 as we continued to increase our global business. We're seeing particular strength in Europe with strong growth in the U.K., Germany, France and the Netherlands. Finally, we're seeing more and more businesses in the mid-market turning to us. We ended the first quarter with 2,157 customers, generating over $50,000 in ARR. This represented 69% year-over-year growth. As Andrew mentioned, we hit an important milestone this quarter with over 30% of our ARR now coming from these customers. Moving down the income statement. I will be discussing results on a non-GAAP basis. Gross profit for the quarter was $167.6 million, representing a gross margin of 80%. This marks a 2.5-point improvement compared to Q1 2023. We continue to see the benefits of our R&D team's efforts on system and cloud engineering optimization. We've continued to migrate volume to our Klaviyo Mail Transfer Agent, KMTA. Looking ahead, we expect to see these efforts help to offset a portion of the higher costs associated with the SMS channel. For the full year, we continue to expect a couple of points of headwinds on our gross margin compared to last year. Compared to Q1, we expect a couple of points of headwind to gross margin over the next two quarters and a further decline in the fourth quarter due to the growth and seasonality of SMS. Turning to operating expenses. Sales and marketing expense was $66.7 million or 32% of revenue for the quarter. We've continued to invest in marketing programs to generate demand and sales headcount to grow our capacity to serve our international and mid-market customers. Our new Klaviyo narrative that we rolled out in Q1 is resonating. We continue to closely monitor the unit economics of the different investments we are making, and we will continue to make investments where we see the right level of returns. R&D expense was $41.7 million or 20% of revenue. We're continuing to invest behind our core products, AI capabilities and our new offerings, many of which Andrew highlighted earlier. Finally, G&A expense was $29.8 million or 14% of revenue. We are now lapping investments tied to public company readiness and expect to get more leverage from this line over time. For Q1, our operating income was $29.3 million, representing an operating margin of 14%. We also generated free cash flow of $23 million during the quarter, up 65% year-over-year and leading to a 2-point improvement in free cash flow margin year-over-year. To give some perspective on our ability to generate sustainable cash flow, our trailing 12-month free cash flow increased by $123 million compared to the prior year. Finally, turning to the balance sheet. We finished the quarter with $756.9 million in cash, cash equivalents and restricted cash with no debt. Next, I'd like to talk about our outlook for the second quarter and full year 2024. As a reminder, we experienced typical seasonality in our model. As we discussed last quarter, the second quarter typically has modest sequential revenue growth due to the lagging impact of downgrades after the holiday season. For the second quarter, we expect revenue to be in the range of $211 million to $213 million, representing growth of 28% to 29% year-over-year. We expect non-GAAP operating income to be in the range of $19.5 million to $22.5 million, representing a non-GAAP operating margin of 9% to 11%. This sequential step down in operating margin is due to the timing of some investments made late in the first quarter, which have a greater dollar impact in the second quarter, particularly in engineering and go-to-market. For the second quarter, we expect fully diluted shares outstanding to be approximately 298 million. For the full year, we are increasing our revenue guidance to be in the range of $899 million to $907 million, representing growth of 29% to 30% year-over-year. We expect non-GAAP operating income to be in the range of $97 million to $105 million, representing a non-GAAP operating margin of 11% to 12%. As we spoke about last year, as the year progresses, we are making incremental investments across go-to-market and product opportunistically to set Klaviyo up for long-term growth. Based on the timing of these investments, we expect to see some year-over-year operating margin deleverage in the third quarter as well with margin expansion in our seasonally strong fourth quarter. Finally, for the full year, we expect fully diluted share count to be approximately 298 million. To close out, we delivered strong results this quarter with healthy growth on the top line and strong operating income and free cash flow. We are excited for this year and for the long-term opportunity ahead of us, and we are focused on executing against it for our shareholders. And with that, we'll open up the call for Q&A. Operator?

We'll go to our first question from Arjun Bhatia at William Blair.

Congratulations on the impressive results. Andrew, I'd like to discuss the disclosure you shared regarding some of your larger customers, specifically the top 10, which have an average annual recurring revenue exceeding seven figures. It appears that the clients you're acquiring are becoming increasingly substantial. Can you provide some insight into where you're directing your go-to-market efforts, particularly regarding the sales representatives you're hiring? Additionally, how do you perceive the upper limit of your target market, if there is one, as you aim to expand further into the mid-market?

Sure. Thanks, Arjun. Yes, we're very happy with the results we're seeing there. And we shared that because, to answer your question on upper bound, we don't see a strong upper bound on the size of business that can be on Klaviyo. We continue to see that there's a lot of legacy marketing platforms out there, a lot of folks running on those. There's a lot of point solutions that just does email, just does SMS, just does one channel. And the fact that we built this great customer database and it's integrated with marketing in all of the channels in one place makes it much easier to use. We integrate directly with folks' retail and e-commerce stacks, and all that adds up to better access to data and more personalization, which is what everybody is after. So just to give you a quick example, we had a sporting goods store with over 100 locations. They were on one of these legacy email marketing platforms with a point solution for SMS. They consolidated all that to us for better access to that data, so they can experiment more quickly. And they know that's going to lead to more engagement from customers and more revenue growth. So we think we can take that into the mid-market and beyond.

We'll move next to Rob Oliver at Baird.

Amanda, I wanted to just ask you a little bit. You talked a little bit about the seasonality in the SMS portion of the business. And I just wanted to see if there had been any change to that at all and then maybe get an updated view from you relative to the macro, lots of different investments that you guys are making and obviously quite a dynamic macro. So I just wanted to get an update from you on what you guys are seeing in terms of the macro opportunity.

Sure. Thanks, Rob. Yes, in terms of SMS and seasonality, what we see continues to be very consistent with SMS. Generally, with SMS, it tends to be more point-in-time, high-priority communication that tends to be linked to some of the peak holiday shopping periods. So we see SMS peak during those holiday shopping periods, so of course, during Q4, Black Friday, Cyber Monday, being the natural one that we're all familiar with. Interestingly, there's a little bit of seasonality, which you can see in Q1 and into Q2, and some of what we were talking about in gross margin. That Q1 is a little bit lighter from a holiday period. Q2, you have more of those big shopping holidays coming back around again between Mother's Day, Father's Day, Memorial Day, the lead up to the Fourth of July. But again, all of that is very consistent with what we've seen from SMS in the past, so no real change there. In terms of what we're seeing on the macro, based on what we're seeing, what I would say is it's steady. It's not getting better, but it's also not getting worse. We do see some linkage in the macro to some of the trends that we called out on customer behavior on our last call, and we think that some of that is coming from the macro. But again, what we see there is that those trends are consistent, they're steady and they're very stable. The other trend that we see that's interesting is our customers' GMV growth is pretty stable as well. And we continue to see the pattern that we have seen over time, which is that their KAV or Klaviyo attributed value is growing faster than their GMV.

We'll go next to Elizabeth Porter, Morgan Stanley.

This is Katie Keyser on for Elizabeth Porter tonight. Congrats on the quarter. I wanted to ask one on NRR. Can you provide more visibility into the expansion behavior of customers in the quarter? I appreciate that NRR is impacted by lapping the price increase. It would be helpful to better understand the health of customers' expanding spend and perhaps how we can think about the NRR trend over the next few quarters.

Sure. Thanks so much. As we look across our peer set and others who play in our space, we feel really positive about where we are with our NRR. I think 114% is a great expansion trend to have. And we're pleased with where we are. We did talk about last quarter that we expected NRR to tick down. And just as you mentioned, that's due to a couple of factors. We expected it to tick down because we're lapping the price increase and also because we continue to see, as I just talked about, when we're speaking about the macro, the customer behavior trends that we called out last quarter. So as we look forward in NRR, I would anticipate that it will continue to decline a few more points over the next coming quarters. And as a reminder, another factor that is going on in there is that when we land larger customers, some of those big deals that Andrew spoke about earlier, they tend to make larger purchases upfront. That's reflected in their land and then not so much in the NRR expansion. As we think about NRR and where it is over time, one of the things that we're particularly proud of is how sticky our product is. It's so important to our customers because of the high ROI that we're driving for them and also because of how foundational we are to their tech stack because we are the central source of customer data for them. So we think our gross retention, which is, of course, an important part of that NRR number, is really best-in-class for the size of businesses that we serve.

We'll take our next question from Gabriela Borges at Goldman Sachs.

This is Callie Valenti on for Gabriela. Really nice to see the upside to revenue in the quarter. Just wanted to dig in a little bit. What was the main driver of that? What was the biggest part of your business that surprised to the upside in the quarter?

Sure. I will refer back to what Amanda mentioned earlier. When considering our growth strategies, we focus on acquiring more customers. We are observing impressive adoption among small and medium-sized businesses, and mid-market companies are transitioning from older newsletter platforms or outdated marketing suites to solutions that feature a customer database as the core element, along with consolidating marketing channels. We are still bringing in many new customers, and there's significant adoption of SMS and other products, which we've noted is increasing. Regarding mid-market and international expansion, we are very pleased with our growth in international markets. We are investing in product and sales initiatives to drive this growth. For example, we just launched an update last week, making Klaviyo available in French and continuing to grow our partnerships internationally. Overall, all four of our key growth drivers are showing substantial momentum, which makes us optimistic about the upcoming year.

We'll move next to Brent Bracelin at Piper Sandler.

AB, I wanted to take a step back. There aren't many $800 million ARR businesses with 70% SMB exposure that are still growing 35%. What we're seeing, slowing growth across the broader SMB software category. But the Klaviyo spend category feels different. It feels slightly more insulated. Can you maybe just step back and walk through maybe why that customer database, coupled with marketing, gives you maybe a little higher priority from a spend prioritization standpoint? Any color there just given the concerns that investors have around SMB spend would be super helpful.

Yes, absolutely. When we engage with our customers, we consider the distinction between nice-to-have software and must-have software. From the beginning, we aimed to position Klaviyo as essential, primarily because we contribute to revenue growth. Amanda mentioned that a growing share of our customers' sales is generated through Klaviyo. We believe there are two key aspects that establish us as a must-have. Firstly, we serve as the central source of truth for all customer data, which not only enhances our marketing products like email and SMS but also allows integration with numerous other applications. This centrality is crucial. Secondly, we've integrated attribution capabilities, enabling users to measure their outcomes effectively. If a product can correlate its usage directly to real revenue and profit, that's a significant advantage. In fact, as we incorporate artificial intelligence into our strategy, it becomes a substantial part of our narrative. Our original concept for Klaviyo was to create better, more personalized experiences that increase engagement and drive sales. With our focus on AI, we see it as a key factor in aiding businesses to enhance customer engagement and sales through more experimental marketing and campaign optimization. When budgets tighten, companies tend to reassess which software they consider essential, and since we drive revenue, we fit that requirement well.

Our next question comes from Raimo Lenschow at Barclays.

If you consider the question about the health of the SMB space, there are geographic differences to note. For instance, Shopify mentioned that Europe wasn't as robust as the U.S. Does this affect your perspective on the European market? Are you reconsidering your resource allocation for the European build-out based on that?

Yes. Great question. So as we called out on the call, we're actually seeing strength in Europe. So our European business was up over 40% in revenue year-over-year, and we're seeing particular strength in France, Netherlands, Germany, U.K., in particular. So I think we are a little bit earlier days in our penetration in Europe, particularly as we're just now starting to make that really important inroad in launching in a new language, starting with French. We're launching SMS in new markets, and there's just so many SMBs who are out there. If you look at our customers and our customer count, we're continuing to see strength from Europe. And that's why we're leaning into expanding in new countries, adding new languages, because we see lots of opportunity. Not only great results there but opportunity ahead.

We'll go next to Scott Berg at Needham.

A really nice quarter here. Congrats. AB, I wanted to ask a question on your AI functionality. You've been able to release several components of it over the last few quarters. As you look at your customer base in terms of what they're using that functionality most frequently, where do they start? What do you see them, maybe over the course of time, use maybe more often than others? Maybe just help us understand that AI journey from what you've seen, at least initially today.

Yes, certainly. To summarize, our AI strategy has been a significant focus for us over the past several years. I can break it down into three parts. The first part centers on productivity. Klaviyo AI encompasses many features like Segments AI, Email AI, SMS Assistant, Flows AI, and Forms AI, all designed to help users maximize their use of Klaviyo, increase their output, and conduct more experiments. We believe we can help marketers and businesses accomplish twice as much, leading to more experiments and increased KAV and usage. We are pleased with the adoption we’re seeing in this area. The second part focuses on optimizing marketing strategies. For instance, we mentioned Forms AI, which improves sign-up rates through running various form versions, resulting in more subscribers and ultimately more revenue. The third part, which excites me the most, is assisting users in generating new marketing strategies. Businesses with large consumer bases have numerous opportunities for personalized marketing, pairing the right products with customers at the right time. Our artificial intelligence can identify these campaigns, adding to KAV and revenue for Klaviyo users. Overall, we’ve rolled out the most products in the first area of productivity, where we see the highest usage. However, I anticipate more developments in optimization and expanding marketing strategies in the upcoming quarters. All three components are valuable for our customers, particularly the ability to devise new marketing strategies, which is of great importance.

Next, we'll go to Terry Tillman at Truist Securities.

AB, it relates to your go-to-market investments and moving upmarket. I'm curious from an innovation standpoint about what you see as unlocking opportunities, whether it's the CDP, portfolio, or some of the AI capabilities that Scott mentioned. I would like to know more about their needs and if you are seeing RFPs. What do you consider the most significant unlocking potential among these newer products?

Yes. Thanks, Terry. I'll take this. To clarify, I will take this more for as we move upmarket, what we're seeing from folks. So I mean the first is, it all starts with a central source of truth, our CDP, this customer database. Just to touch on the CDP and the progress we're seeing there, I'm really excited about the adoption and the pipeline, the demand that we're seeing there. We mentioned Helen of Troy adopting our CDP almost right away. I think you could think about that CDP as two opportunities. One is data governance and federation. So one thing we're seeing from larger businesses, they want all their consumer data in one place, and they want it to easily integrate not just into marketing but to advertising, to customer service, on their website. And we're providing for that, and so that's a real differentiator. The second thing that we're focused on is really rounding out the marketing stack for a lot of these bigger businesses. A lot of them still rely on point solutions for different channels. They want all of that to be orchestrated to work together. And we've been able to prove out with some of our larger customers that there's real lift in doing email and SMS and other channels together. Not only to reduce complexity but actually, consumers like it better. It's a better consumer experience. So adding on those marketing channels, over time, one of the things we found with CDP is that it's not just about data governance, but there's actually an analytics play. With part of our CDP feature set allows our customers to run more advanced reports, some of which are out of the box, to help them discover some new marketing ideas. For example, we have large customers that use our RFM analysis that's out of the box to discover customers that used to be really loyal, but have since lapsed, and quickly create marketing campaigns based on that. That's something that in the past, it was an idea folks had, but it would take months to actually implement. And we've made it something you can do in hours or days. So you take all those two things, you then layer on some of the productivity boost, the optimizations with machine learning and artificial intelligence, I think that's the complete picture. I think for the larger businesses, they really want a complete stack that allows them to store customer data and then drive personalized consumer experiences all in one place. And so we're trying to do that both with the products we offer and then making sure that we integrate with the other software they're using.

We'll move next to Siti Panigrahi at Mizuho Group.

It's great to see the largest online fashion store deal you mentioned regarding Shopify integration. Considering your partnership, what potential do you see for further penetrating the Shopify Plus installed base? Is this opportunity primarily about displacing existing services, or does it represent more of a greenfield opportunity?

We enjoy our collaboration with Shopify and maintain a close partnership, especially with Shopify Plus. Our integration with Shopify is robust, and our products complement each other effectively, which is important for personalization. We have a strong market presence among Shopify Plus merchants, but there is still significant potential for growth—not only in acquiring more customers but also in leveraging data from Shopify within our customer database to enhance various marketing channels and consumer experiences. Customers and partners resonate with this vision and are eager for us to outline a roadmap. Our sales team, particularly the customer growth team, plays a crucial role in encouraging customers to fully embrace Klaviyo. We are pleased with the progress we've made within the Shopify Plus ecosystem and believe there is ample opportunity for further expansion.

We'll move next to Derrick Wood at TD Cowen.

Amanda, you have a strong customer acquisition engine at the lower end of the market, but you're also investing more resources up market. So I wanted to get a sense of how to think about the impacts on new customer generation levels in 2024, especially in light of the macro and some of the comments you made. We did see net new customers drop down to 3,000 in Q1. Should we be thinking that's kind of the new run rate? Or are there other seasonal factors quarter-to-quarter that we should expect as we progress through the year?

Thank you for the question, Derrick. As we mentioned during the call, we experienced some softness in new logo additions, particularly at the lower end of the market. We believe this is due to a combination of macroeconomic factors and the strategic investment decisions that you noted. We are still targeting entrepreneurs, but we are shifting our go-to-market strategy more towards small and mid-sized businesses. Although smaller customers can significantly influence the logo count, they have less impact on our total revenue. Interestingly, within our customer groups, including entrepreneurs and SMBs, we are closing more deals with higher average selling prices. These customers are expanding their businesses and turning to us for revenue growth, which leads to them opting for larger plans. Looking ahead to the rest of the year, we anticipate continued growth in new logos, albeit at a more moderate pace, reflecting a balance between logo growth and average selling price growth.

That's great. I'll add one thing to what Amanda just shared. Our product teams are still very focused on providing an excellent out-of-the-box experience, whether for those just starting out or large enterprises. In the mid-market, particularly among more established SMBs, we believe there's significant room for growth in our market share. We've discussed our relationship with Shopify and Shopify Plus, and we are expanding in that area. Additionally, we are continuing to invest in our existing partnerships and platforms and working with other platforms in the retail and e-commerce sector, including internationally. As Amanda mentioned, we are still in the early stages of growing internationally, and we see a large number of SMBs that should be using Klaviyo.

Next, we'll go to Tyler Radke at Citi.

Yes. I have a similar question regarding the go-to-market strategy. First, it seems that sales and marketing expenditures decreased slightly sequentially. Can you explain the changes in spending you’re observing? Additionally, where are you concentrating your go-to-market investments? You mentioned some international opportunities, particularly in France. Are there specific industries you are focusing on more? Please elaborate on where you are directing those investments.

I'll discuss our strategy, and then Amanda will cover the trends in sales and marketing spending. On the sales side, we've been intentionally increasing our sales capacity to concentrate on three main areas. Firstly, we're seeing robust growth in the mid-market segment. Secondly, there's significant international potential. And thirdly, our customer growth team collaborates with our existing Klaviyo customers to encourage them to utilize the complete Klaviyo platform. This initiative is progressing well, and we believe we're positioned effectively. Regarding marketing, we're focusing our investments in these emerging areas, as well as enhancing our brand presence so more people know about us and can connect with our offerings. Recently, we launched our Klaviyo ad campaign. We strongly believe in hosting customer events, such as our Klaviyo London Conference, which not only brings together current customers to encourage greater platform use but also attracts new customers to learn from those existing experiences. We are pleased with the returns from these marketing investments as well. Additionally, we are putting significant effort into educating both the market and some of our current customers about all our products, particularly the newer ones. For example, I often speak with customers who are experienced email users but are still discovering the benefits of SMS and other channels or our Customer Data Platform. Consequently, we see considerable growth potential in that area. We remain highly focused on retail and e-commerce, with a solid commitment to maintaining strong unit economics, experimenting, and exercising discipline.

And then regarding the sequential step down in sales and marketing that you asked about, that has to do with the seasonality of investments. So it's primarily marketing and marketing timing because we have a lot of marketing programs that are linked to the holiday shopping season. As Andrew said, we're continuing to invest in sales capacity. We'll be ramping up marketing programs, particularly through the second half of the year. And you can see the timing of that reflected in some of the comments that we had in our prepared remarks talking about how we expect operating margins to unfold over the course of the year.

We'll take our next question from DJ Hynes at Canaccord.

AB, maybe we can go back to that large win with the women's online fashion brand. Curious what the RFP looked like there. Who else was involved? How long was the sales cycle? Kind of what ultimately tipped the decision in your favor would be helpful color.

In the mid-market and enterprise segments, we still encounter a lot of outdated technology, which doesn't include our back-end customer database. This limitation affects the level of personalization and the types of experiences we can create across various channels like email and SMS. Legacy technology and point solutions that only address one marketing channel are prevalent. In this instance, the customer had previously used Klaviyo but believed they had outgrown our platform. However, as they have since expanded significantly, we have enhanced our systems, and they returned to us for several reasons that resonate with many of our customers. Our integration with their back-end retail and e-commerce systems is strong, along with our connections to their consumer-facing elements and aspects beyond marketing. These integrations, along with our platform's ease of use and the ability to accomplish a lot, facilitate access to data, which in turn allows for effective personalization. Furthermore, we are looking ahead at how artificial intelligence can enhance the consumer experience by utilizing their existing data. Many of our larger mid-market and enterprise clients feel they have yet to completely unify their consumer data. Not all their front-office software applications, which interact with consumers, communicate effectively. I believe Klaviyo has a real opportunity to be that solution. We are committed to quickly developing products that meet their current data and marketing needs while also expanding our broader CRM capabilities for consumer businesses. This vision of where we are and where we are heading is what makes our journey exciting.

We'll go next to Nick Altmann at Scotiabank.

I wanted to build on Raimo's question on the international side. Andrew, just given you guys are coming off the EMEA event and you guys have rolled out a plethora of features geared at those international customers, I was wondering if you could just maybe talk about how those conversations with international customers are different from customers in the U.S. just in terms of buying propensity, where they're at with their martech journeys, interest in various channels, willingness to consolidate, et cetera. Just any other color you can provide and how those conversations differ with international versus U.S. customers would be interesting.

Yes, it was a great event, and it's always valuable to engage directly with customers and understand what truly matters to them. The level of sophistication in both Europe and Asia is impressive. These businesses are highly driven; they know what they want and what data is essential for them, and they have numerous ideas for utilizing it effectively. However, a common challenge in both regions is complexity. We aim to address that, as it's a significant part of our value proposition. For example, we launched Klaviyo portfolio, a set of tools to manage multiple Klaviyo accounts across various regions and brands in one platform. At the event, I asked a panel of customers how many log into Klaviyo with multiple accounts at least once a week, and almost everyone raised their hand. When I inquired about logging into at least 10 different accounts weekly, most still indicated they did. Many were managing different brands or had distinct stores and websites for each region in Europe. We're introducing features aimed at simplifying this complexity. Over the past year, we have been enhancing our product's infrastructure to support internationalization, including the software itself as well as all technical documentation, guides, and tutorials. We recently launched this in France, thanks to the team's significant efforts, while ensuring a transition capability from English to French and other languages to better serve our international customers and potential future clients. All of these initiatives, alongside our extensive network of sophisticated partners in Europe and a growing customer base, are creating a positive momentum that enables us to add more sales personnel, execute marketing campaigns, and expand internationally in a more efficient manner.

We'll go next to Jackson Ader at KeyBanc.

Great. This is Kyle Diehl standing in for Jackson Ader. I have a quick clarifying question. I noted the emphasis on spending thoughtfully towards the end of last year, especially in December, and it seemed like this was the case across the SMS side of the business. Did this approach continue throughout the entire quarter, given a similar context? Was this quarter more about improved productivity or better execution in the mid-market? Additionally, could you provide some insights on the $50,000-plus customer cohort? Is the growth mainly coming from larger acquisitions, or is there still a significant portion coming from customers moving up into that cohort?

Sure, great question. Thank you. So with regards to the thoughtfulness and the trends that we're seeing in customer behavior, the themes are very consistent with what we spoke about last quarter. So this quarter, it was less focused on SMS, but the overall magnitude of the trends that we're seeing in customer expansion remains very consistent. And generally, what we're seeing is that they continue to expand their plans with us. They're just doing it at a more moderated rate. And the reasons behind it when we talk to customers and look into the data is that they're being targeted in the emails and SMS that they send, and they're being more proactive in managing the plans to make sure that their plan size aligns to the usage that they're driving. And both of those things contribute really well to high ROI. And what we see when we look across our customer base is that customers with high ROI have high retention, and that one of our key competitive differentiators is the fact that we let customers be very, very targeted, very intentional, build relationships with the data, and so that helps them be more effective in their marketing. So over time, we think both of those are very good trends in the business, and we've just got to figure out how do we continue to help them drive revenue and how we share in that value that we're creating. And then regarding the $50,000 customer mix, it's important to remember, I guess, first, the seasonality of our business. The second half of the year and, in particular, the fourth quarter, is the biggest expansion time for us, and expansion is a key driver of that number of $50,000 adds. So overall, we're really pleased with the progress that we're seeing there. We're really pleased with the continued adds that we have and proud of the milestone that we reached that we spoke about on the call, that over 30% of our ARR is now coming from this $50,000-plus cohort of customers.

And those are all the questions I have for today's call. With that, I'll turn the call back over to Andrew Bialecki for closing remarks.

Great. Well, thank you all for joining us on today's call. We want to again thank our Klaviyo team, our customers and our partners for a great start to the year. We're very excited for the year ahead. Have a nice evening, everyone.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.