Klaviyo, Inc. Q2 FY2024 Earnings Call

Good afternoon and welcome to Klaviyo Second Quarter Fiscal 2024 Earnings Conference Call. Please note that this call is being recorded. As of right now, everyone is joined on mute to avoid any background noise. Thank you. With that, I would like to turn the call over to Andrew Zilli, Vice President of Investor Relations. Please go ahead.

Thanks. Good afternoon and thanks for joining Klaviyo's second quarter 2024 earnings call. Our earnings press release, investor presentation, SEC filings, and a replay of today's call can be found on our IR website at investors.klaviyo.com. With me on the call today are Andrew Bialecki, Co-Founder and CEO, and Amanda Whalen, CFO. As a reminder, our commentary today will include non-GAAP measures. Reconciliation to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials, which can be found on our Investor Relations website. Additionally, some of our comments today may contain forward-looking statements that are subject to risks, uncertainties, and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risks, uncertainties, and assumptions, and other factors that could affect our financial results are included in our SEC filings, including our most recent report on Form 10-K and subsequent reports on Form 10-Q. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. With that, I'll now turn it over to Andrew.

Thanks, Zilli, and thanks to everyone for joining us today. Klaviyo delivered very strong results in the second quarter, with revenue of $222 million, growing 35% year-over-year. We believe we are a must-have platform for more than 151,000 customers around the world, as we help them easily and quickly transform their data into more valuable connections across every touchpoint. Our customers are at the heart of everything we do. We work to earn their trust every day, and our model is built for joint success. So as our customers grow, Klaviyo grows. We power smarter digital relationships. Our vertically integrated platform enables customers to use real-time, first-party data to create segments, orchestrate personalized, on-the-channel campaigns, and measure every interaction. Most importantly, we've made it incredibly easy. Marketers no longer have to hire a developer to build and manage an API to connect to a new data source or write code to create a consumer segment. With Klaviyo, complex tasks are made simple, allowing marketers to be more efficient and focus more time on their consumer engagement. From entrepreneurs just starting their businesses to established, internationally known brands, Klaviyo is a revenue engine for our customers. Our unified platform across the data and marketing layer, our on-the-channel orchestration, our fast, flexible functionality, and our more than 350 integrations drive companies to choose Klaviyo. Then they stay and grow with us, adding products like SMS, CDP, and reviews, and take advantage of our new AI features and advanced analytics across their entire consumer data set. As customers leverage all these tools, we can show the actual value of our platform is driving with Klaviyo Attributed Value, or KAV, which measures the revenue generated through consumer transactions after engagement with any of our channels. When customers sign in to Klaviyo, KAV is one of the first things they see, so they know how much revenue our platform is driving for them. Our ease of use and the direct correlation to revenue is a key reason why companies choose Klaviyo. A great example is our new relationship with a Fortune 1000 global company. They wanted to build out their direct-to-consumer offering, engaging consumers with new content. They were previously using a legacy platform, but selected Klaviyo for our ease of use and the ability to integrate their data across all their core marketing channels. They also selected our SMS solution, a channel they'll be using for the very first time to execute their omni-channel strategy to fuel additional revenue growth. We also closed a deal with a multi-billion-dollar revenue national chain of grocery stores. They were using a homegrown solution to batch and blast communications. Each email had to be created from scratch, and they couldn't do any segmentation. The CIO demoed Klaviyo and quickly realized the team would see big productivity gains from our out-of-the-box segmentation, data orchestration, and the flexibility of our campaign and flow creation. Companies of all sizes are building omni-channel marketing strategies using email, SMS, and push notifications to build personalized consumer relationships. But many use multiple point solutions, leaving them with disjointed consumer data, an incomplete view of their consumers, and a fragmented communication experience. If you've ever received an email from a brand asking you to review a product that you returned weeks ago and you've seen this breakdown in action, that's why we've integrated all of those channels on one platform, injecting data from every touchpoint, and giving our customers powerful insights that enable them to execute a differentiated omni-channel strategy. Samsonite, the world's largest travel luggage company, chose Klaviyo this quarter because we could bring all of their data into one place. Samsonite was using multiple point solutions for email and SMS. They had fragmented data, and after eight years with their email provider, they had only built four automated workflows due to the difficulty of customizing the solution. They were impressed with the number of easy-to-build options that Klaviyo provides across our templates, forms, and flows. Samsonite selected Klaviyo over a large legacy provider to unify all seven of their North American brands, bringing email and SMS together onto our platform. SMS continues to be a key driver of growth for us as companies look to consolidate SMS capabilities with Klaviyo to better leverage our data platform for multi-channel flows and campaigns. This quarter, we expanded our relationship with Arsenal Sports, a sports digital media company with over 65 content franchises and 198 million social followers. They've been a Klaviyo email customer for eight years and have seen tremendous success selling their merchandise and expanding their influence in the sports and entertainment community. As their contract with a point solution SMS provider came to an end, they opted to consolidate with Klaviyo so that all of their consumer data will be housed on our platform, allowing them to better segment and orchestrate the data for more personalized communications across channels. We also started a new relationship with Boston Proper, a legacy fashion and apparel brand that historically has relied on selling via catalogs. The company's technology infrastructure was fragmented, hindering its ability to provide a seamless and personalized shopping experience for its consumers. They chose to consolidate from multiple point solutions to Klaviyo, centralizing all online and offline consumer data into our data platform. Boston Proper is leveraging our email, SMS, and CDP solutions to build stronger relationships and to help grow their top line. The more first-party consumer data you have on one platform, the stronger your campaigns will be. With help from our growing ecosystem, we've built out an incredible third-party integration library so our customers can pull in their data from anywhere. These integrations are both inbound and outbound, allowing customers to bring all of their data onto our platform as well as leverage Klaviyo data on other platforms like Google and Meta. This quarter, we added Toast and Bizarrevoice, new inbound integration, and TikTok and Pinterest outbound integration, which allow customers to connect their Klaviyo profiles to the ad audiences, improving return on ad spend. We also announced a new integration framework that significantly reduces time to build on Klaviyo by up to 43%. We plan to open up this framework to third-party developers in the future, enabling them to create both inbound and outbound integrations with Klaviyo more efficiently. Virtual Supply Company, a global travel lifestyle brand, chose Klaviyo in part because of our third-party integration. They were frustrated with their prior point solution due to lack of innovation or integration and reporting challenges. Following a competitive RFP process across point solutions and legacy providers, they chose Klaviyo because they felt that our massive integration library and functionality and AI features would give them the right edge for growth. Speaking to AI, we continue to enhance our AI suite. As I've mentioned previously, we think about AI in three ways: productivity, optimization, and creation of new marketing strategies. Marketers need artificial intelligence to be practical, effective, and easy to use. But AI is only as good as the underlying data. Because our platform can ingest up to the second first-party consumer data, Klaviyo can provide more accurate benchmarks and drive actionable insights through our artificial intelligence tools. A few weeks ago, we announced several new features. Flows AI allows marketers to build a flow in seconds with a simple prompt and ultimately drive more revenue. For five campaigns, take A-B testing to the next level by determining the winning version of a campaign for each individual subscriber based on their likelihood to engage. And reviews sentiment AI quickly analyzes product reviews at scale so brands can get insights and take action faster than ever. We also want our AI features to easily provide guidance, so we recently introduced a feature that gives recommended actions and tailored next steps powered by artificial intelligence as soon as customers log into their Klaviyo homepage. Our customers are increasingly adopting our AI products as we've seen a 61% increase in accounts using one of our generative AI features. We're excited by Klaviyo AI's ability to help marketers move beyond what was previously possible, unlocking new growth strategies. As a customer-first organization, we are focused on investing in areas that will help us support our customers and make them more successful across sales, products, and support. We've been investing in our go-to-market efforts over the last few quarters with a focus on growing our sales capacity to address mid-market and international opportunities. Additionally, we continue to invest in training for new sales hires and expanding our partner ecosystem to ensure we have the right agencies, system integrators, and technology partners to help our customers succeed. Internationally, we are investing to expand our presence and platform offering. During the quarter, we continue to enhance our localization and internationalization with the expansion of our SMS capabilities into Austria, Switzerland, and Spain, as well as adding MMS in Australia. We now provide SMS coverage in 12 countries, more than double the five countries we had coverage for this time last year, and we plan to continue to expand our international footprint going forward. This quarter, we launched our product in French, and we saw a large increase in new customers and usage as a result. For example, we signed a new deal with Le Petit Ballon, a French wine subscription company, and we're looking for a new solution to help them generate more revenue through email and to improve overall consumer retention. They chose Klaviyo because of our data platform and plan to start testing SMS in addition to their use of email. We are dedicated to continually improving our platform and product offering for our customers. Customers tell us that our product roadmap is a key differentiator. In Q2, we released a number of new features, including a bulk profile suppression tool, which helps our customers keep their active profiles clean by suppressing profiles that may have stopped engaging with their brands. Companies can now suppress those profiles with one click, so they can market to the right consumer and ensure good deliverability. Today, we also released Reputation Repair AI, which will determine when an account has poor deliverability, identify and segment out those accounts to create a clean list, and ensure brands are setting the highest quality profiles, leading to stronger deliverability and email performance. Deliverability is hugely important. You may have the best content in the world, but it only works if it gets delivered. We've been investing heavily in our deliverability infrastructure and systems, and I want to thank our team, who is focused day and night on ensuring the highest quality deliverability and sender reputation. Equally important is compliance. Our team is focused on preventing abuse of these channels, whether malicious or accidental. We're able to maintain strong compliance because we have insight into an enormous amount of data that allows us to see what's going on and how to stop it. As a result of these efforts, we've navigated the changes from the email service providers extremely well, and we're seeing the benefits from those efforts as companies turn to Klaviyo after negative experiences with other providers. A great example of this is Olive & June, a leading provider of at-home manicure and pedicure products. They were using a lower-cost provider but were facing severe deliverability issues. They came to Klaviyo because of our strong reputation in the market, the power of our platform, our deliverability strength, and our integrations with their other systems that will help them build better relationships with their end consumers. As we continue to add more features and functionality to the platform, we are committed to empowering our customers to get the most out of Klaviyo by making it easy to find answers about best practices, partners to work with, and a community to engage with. To provide excellent customer support across all segments, we recently launched Klaviyo Power Up, our new centralized customer resource center designed to bring all of these assets together in one place. Power Up will help customers easily discover self-service resources and deliver curated content throughout their journey with Klaviyo. We will continue to enhance Power Up as part of our dedication to support our customers' long-term success. I'm extremely happy with our second quarter results and the strong first half of the year. We have a tremendous long-term opportunity ahead of us as we help our customers power smarter digital relationships around the world. And we have even bigger plans for the future to unlock use cases beyond marketing for our customers. Before I hand it over to Amanda, I'm very proud to announce that Klaviyo was named an Inc. Best Workplace for the sixth year in a row and Newsweek listed us as one of America's greatest workplaces for 2024. We thank all the Klaviyo team for keeping up the energy of our culture. And with that, I'll turn it over to Amanda.

Thanks, Andrew. Klaviyo delivered another quarter of strong financial performance in Q2 as we continue to drive efficient growth at scale. Revenue grew 35% year-over-year to $222 million and we reported a 15% non-GAAP operating margin, both exceeding our expectations. We're very pleased to deliver well above the Rule of 40 with this performance. We continue to deliver across our four primary growth vectors, adding new customers, expanding with those customers, expanding internationally and growing in the mid-market. In Q2, we added over 5,000 new customers and now have more than 151,000 customers, up 16% year-over-year. We saw strength in entrepreneurs and in the high end of the market. However, we are seeing some softness in the SMB market that has been widely discussed across the industry over the last several months. Despite this, we delivered a strong quarter due to the diversity of our customer base across customer size and geography. Existing customers continue to expand with us by growing their existing usage and adding new products, as can be seen in our dollar-based net revenue retention rate, or NRR, which was 112% for the quarter, an expected decline due to the lapping of our September 2022 price increase as well as the customer trends we spoke about earlier this year. We continue hearing from customers about macro pressures, and they remain focused on the value they're driving from their software. As a result, our expectations for a continued decline in NRR in the near term haven't changed. It's important to note that despite this, we continue to see strength and stability in our gross retention rates, which confirms our belief that Klaviyo is a must-have platform for our customers. Internationally, we continue to grow our global business. You'll recall that we announced the launch of our French language product in Q2, and we have seen extremely strong trends there as a result. France was our fastest-growing country in new business in the quarter, up more than 65% from Q1. We also saw strength in the UK, Ireland, Italy, and Germany. In fact, our year-over-year revenue growth in EMEA accelerated to 45% in Q2 from 43% in Q1. In aggregate, our international revenue grew 41% year-over-year. Finally, the go-to-market initiatives we implemented last year are delivering great results. At the end of Q2, we had 2,386 customers generating over $50,000 in ARR, which was up 64% year-over-year. We're also seeing a healthy trend of landing new customers in this cohort from the start, adding the largest quarterly number in our history, evidence that our strategy is working and of the growing importance of our platform to our customers. Non-GAAP gross profit for the quarter was $175 million, representing a non-GAAP gross margin of 79%, up 140 basis points year-over-year. This came in slightly better than expected as we continue to absorb mix shift pressure from our growing SMS business through operational efficiencies across our infrastructure and support organizations. For the full year, we expect non-GAAP gross margin to be down slightly from last year. Turning to non-GAAP operating expenses. Sales and marketing expense was 32% of revenue for the quarter, up 140 basis points over last year as a result of our investments in sales headcount and marketing programs that we've discussed over the last few quarters. R&D expense was 19% of revenue, down 100 basis points year-over-year, primarily driven by an increase in capitalized software as a result of more development work on customer-facing features that we'll be rolling out. Finally, G&A expense was 13% of revenue, down 170 basis points year-over-year, primarily as a result of the release of some international tax-related reserves. We do expect more of these releases over the next few quarters, which may drive some fluctuations in G&A expenses. For the second quarter, our non-GAAP operating income was $34 million, representing a non-GAAP operating margin of 15%. This was stronger than our guidance as a result of the revenue strength, the items I discussed earlier, as well as headcount coming in a bit lighter than expected for the quarter. We generated free cash flow of $37 million during the quarter, down slightly from the prior year due to payroll and other operational expenses as well as the timing of collections. Moving to guidance. For the third quarter, we expect revenue to be $225 million to $227 million, representing growth of 28% to 29% year-over-year. We expect non-GAAP operating income to be $21.5 million to $24.5 million, representing non-GAAP operating margin of 10% to 11%. This is a bit better than we had suggested last quarter due to a shift in the timing of some investments, as well as the lower OpEx related to slower-than-anticipated headcount growth in Q2. For the third quarter, we expect fully diluted shares outstanding to be approximately 300 million. For the full year, we are increasing our revenue guidance by $11 million to $910 million to $918 million, representing growth of 30% to 31% year-over-year. We are also raising our non-GAAP operating income guidance by $6 million to $103 million to $111 million, representing a non-GAAP operating margin of 11% to 12%. We continue to make incremental investments across go-to-market and product opportunistically and expect those investments to be spread across Q3 and Q4 as we set Klaviyo up for long-term growth. Finally, for the full year, we expect fully diluted share count to be approximately 301 million. In closing, these strong results are a clear indication that Klaviyo's platform is driving success for our customers. We are excited about the remainder of 2024 and the coming years as we continue to build the foundation for durable and efficient growth going forward. And with that, we'll open up the call for Q&A.

We are now opening the floor for the question-and-answer session. Our first question comes from Brent Bracelin from Piper Sandler. Your line is now open.

Thank you. Good afternoon. I guess I wanted to start out here with the durability of growth. Clearly, the macro is pretty challenged out there, it remains challenging for many. But looks like growth for you was actually stronger this June quarter than it was a year ago. Growth accelerated a little bit on the top line. You're guiding up for the year. Can you just double click into the demand drivers that's giving you optimism and underpinning the strength here? It is surprising and just love to hear a little bit more around what's driving the optimism in the business and momentum. Thanks.

Thanks, Brent. It's Amanda. Appreciate the question, and we're very pleased with the results from the quarter. It was a really strong revenue quarter in Q2. As we talked about on the call, we saw strength in the entrepreneur side of the market, driven by efficiency from our marketing investments as well as some investments we made in product to increase our free-to-paid conversion. We saw strength in the upper end of the market. And we added this quarter, as we said, our highest number of greater than $50,000 ARR customers that we have in our company's history. And then we also continue to see strength in SMS. We're expanding our penetration and our usage with customers, and we're seeing strong growth internationally. International had a significant quarter, growing 41% year-over-year. So really multiple drivers of the strength in the quarter. And I think what it is a testament to is the diversity of our customer base across customer size, across geography that shows that we can be durable and resilient in multiple operating environments.

Our next question comes from Keith Weiss from Morgan Stanley. Your line is now open.

Thank you for taking my question, and congratulations on a strong quarter despite the challenging macro environment. I would like to ask one question regarding the top line and another regarding the bottom line. For the top line, I noticed that new customer additions have significantly increased compared to last quarter. What factors are contributing to this growth? Is it driven by partner initiatives or the introduction of products to international markets? Could you provide some insights on what is driving these customer additions despite the difficulties faced by small and medium-sized businesses and the broader economic backdrop? Now, regarding the bottom line, I noticed a solid operating margin this quarter, but it appears that our Q4 projections have decreased considerably in comparison to the guidance we provided for Q3 and the full year. Is there a specific reason for the potential decline in Q4, or is it related to the timing of investments or an increase in investments that could account for this change? Thank you.

Thanks so much, Keith, and I appreciate your kind words. It was a strong quarter for net adds. We added 5,000 net new customers in Q2, and now we've got over 151,000 customers. As we talked about last quarter, increasingly, we are shifting our go-to-market resources towards SMB and mid-market. And in the entrepreneur group, we're putting more into product like growth. And this quarter, we saw the benefit of those efforts. We saw strength in that entrepreneur customer group that was really driven by efficiency from our direct marketing spend as well as improvements in free-to-paid conversion coming from our product-led growth efforts. We talked a little bit just a minute ago about the strength that we saw at the upper end of the market as well, and that is as a result of the go-to-market investments that we've been making to really drive that strength in those larger customer lands as well. Now I will say on the net adds, keep in mind, that is a number that might move around a bit over time. We're okay with that because our focus is really on adding high-quality customers. We're really pleased this quarter that we added customers like Samsonite, Boston Proper, the Fortune 1000 company Andrew spoke about and the national grocery retailer, and we're looking forward over time to helping even more customers grow. And then regarding your question on investments and the timing of investments and how those may unfold during the year. As we spoke about at the beginning of the year, as we are going through the year and see outperformance in the business, we're going to be reinvesting that back to continue to drive durable growth. We're reinvesting it incrementally across go-to-market and product. And two of the areas that focus for investment for us are mid-market and international. Those investments are ongoing. We're continuing to build out the right team, the right infrastructure to capture those markets. And importantly, we're seeing strong returns. As we talked about on the call, international investments are leading to really strong growth in EMEA and APAC. As we look towards the back half of the year, we're going to be increasing our marketing efforts in the run-up to Black Friday, Cyber Monday, and we're continuing to invest in our product team to enhance existing features, to launch new features. Some great examples of that this quarter were the new features that we launched AI that we announced recently. So as always, as we make those investments, we're doing it with a really clear eye and a focus on unit economics to make sure that we're getting good returns to continue to drive that efficient growth in the future.

Our next question comes from Siti Panigrahi from Mizuho. Your line is now open.

Thanks for taking my question and congratulations on a strong quarter. And just my question about your new products. You guys talked about AI, even some of the integration as well and review some that don't have the direct pricing. How do you monetize that to your base? And then as you're seeing large customers using your product, how does that influence your product strategy? How should we think about the upcoming products in the next few years?

Sure, I'm glad to respond. Looking at the products we've launched, we started with our core database and email offerings. Over time, we've introduced SMS, and in the past year, we've added Reviews and CDP, which we're monetizing directly and seeing strong adoption for. We're very excited about the progress with these products. Regarding artificial intelligence, we consider it in three key areas: productivity, optimization, and expanding marketing strategies. The productivity tools we're developing are not directly monetized yet, but they do encourage increased usage, providing an indirect benefit. For other initiatives focused on optimizing marketing campaigns—like ensuring the right content is delivered at the right time to the appropriate audience, and generating new marketing strategies—we believe these will contribute to the Klaviyo Attributed Value and the revenue our customers generate. While we aren't monetizing these right now, we see potential to do so in the future. Importantly, these tools are designed to drive revenue and our customers recognize their value. We're collaborating with many customers to expand these options, although we don't have a timeline for monetization yet. Finally, regarding product strategy, as we gain more users, especially those utilizing multiple products, the foundation of Klaviyo remains our data platform, which serves as a comprehensive reference for understanding consumers. We aim to help every business utilize this data for personalized interactions, measuring customer engagement, and leveraging artificial intelligence for optimization. We believe this functionality can extend beyond marketing and into customer services, including user education and addressing inquiries via digital platforms like websites and mobile applications. We are excited about the numerous use cases and product developments we'll pursue in the coming months and years.

Thanks for the color.

Our next question comes from DJ Hynes from Canaccord. Your line is now open.

Hey, guys. Congrats on a really nice quarter. And thanks for taking the question. So Shopify obviously reported this morning, I'm sure you saw that really strong merchant adds. Interestingly, they said about half of their new merchant adds in Q2 came from outside of core English-speaking markets. So two questions there. A, do you see the same demand characteristics in those markets? And then b, how quickly can you guys move to localize the platform for those merchants?

Yeah, I'll start and give a little color on international. Amanda can follow on. So I think we're seeing strong international growth as well. So we mentioned earlier this year, in the last few months, we launched our product in French, along with local language marketing, and that's gone very well. And I think that we can take that playbook that we've run into France and take that to other languages and then other markets. We've had some great wins there like with companies like Le Petit Ballon. And more broadly internationally, I think we're starting to invest in place to look like the documentation, the customer stories. Also we're localizing some of the digital marketing ad campaigns we're running. So I think you'll see those play out over the coming months.

Thank you.

Our next question comes from Arjun Bhatia from William Blair. Your line is now open.

Thank you, and congratulations on a strong quarter. Andrew, I have a question for you. We haven't discussed your mobile push capabilities yet, and I'm interested in hearing about your progress in that area. Considering the momentum we're seeing in the upmarket, especially with new customers from the 50,000 cohort, to what extent are mobile capabilities contributing to this? Are customers purchasing all of your channels upfront as they seek a scalable platform?

Yes, definitely. As we begin to penetrate the mid-market and enterprise sectors, we’re seeing that many clients are primarily attracted to our data platform which offers integrated marketing channels. Specifically regarding mobile, as we mentioned in our last call, we now have several customers who are sending a significant number of push notifications and utilizing other mobile features. A large portion of our product team is focused on enhancing these capabilities. We're noticing similar trends with email and SMS, where clients are keen on the interaction between these channels and prefer having everything consolidated in one platform. They are looking for effective content creation tools and want to leverage the data provided by Klaviyo to personalize and assess the impact of their campaigns. Although it's still early for us, we are finding clients who have these needs, and we can now meet them. I anticipate that over time, enterprises will include a range of customers, some of whom require mobile functionalities while others do not. We are discovering that we can cater to both groups. In retail and e-commerce, there are definitely clients yet to launch, but there's also potential for new use cases that we can start addressing. I believe that in the next few quarters, we will increase our investments in this area. Our goal is to enable any method of communication with your customers and end-users through our products.

Okay, perfect. Thank you.

Our next question comes from Derrick Wood from TD Cowen. Your line is open.

Great, thank you. Congratulations on an excellent quarter. Andrew, it appears that the increase in interest around AI is prompting more companies to invest in personalization within the marketing and customer engagement sectors. It certainly seems that you're observing AI-driven new marketing strategies. Given your vertically oriented stack with a comprehensive data layer that enhances personalization, how would you describe the current demand and competitive positioning for Klaviyo compared to a few quarters ago, especially with the heightened focus on AI initiatives?

I want to highlight two key points. First, it's crucial for businesses to utilize their consumer data effectively and integrate it with applications that allow them to take action, particularly in marketing. This connection between data and action systems is essential, and I believe we have a significant advantage in this area. We are beginning to see the benefits of some features we're developing. For instance, we've introduced tools like Email AI, Segment AI, and Flows AI this past quarter, aimed at helping both small businesses and large enterprises create marketing campaigns more efficiently. These tools can analyze your data and automatically generate different segmentations or workflows. On the productivity front, we are making considerable advancements, including the release of personalized campaigns. Our capability allows businesses to create multiple variations of a campaign, which historically meant selecting the best option for the whole audience. However, with our data platform, we can determine the most effective content for each individual consumer, resulting in incremental success. Our goal has always been to bring together all of a company's data so they can act on it. With the support of artificial intelligence and machine learning, we can accelerate this process. I'm particularly excited about our ability to suggest strategies and optimizations that enable businesses to operate more autonomously. We are very optimistic about our progress and remain dedicated to enhancing the lives of brands. This is not just about our products; it's about generating additional revenue, which is crucial for businesses.

Building strong customer engagement is essential for customers of all sizes, and we are seeing it reflected in their reasons for choosing us. This quarter, we partnered with a provider of spa-inspired hair products who was previously using a legacy cloud provider. They were struggling with poor open rates, ineffective segmentation, and a lack of insights. After switching to Klaviyo, they were able to consolidate their email and SMS communications through our Customer Data Platform and reviews. We are looking forward to collaborating with them to leverage our platform and their customer data to enhance personalization and drive revenue growth.

Our next question comes from Terry Tillman from Truist. Your line is now open.

Yeah, thanks for taking my question. I guess I should say bon jour with the ramp you're seeing in the French market. It's a single question. It's got two parts, though. First, I know you all have been evolving and kind of testing and learning with CDP, but what are you seeing after you've done some kind of packaging updates? Is that helping incrementally with adoption? And then the second part of this question is, I heard a lot in your prepared remarks around deliverability as you're getting more of these kind of bigger customers than initially and kind of this world around TCO and maybe with bulk tender changes is deliverability creating kind of a new almost replacement cycle? Thank you.

Thanks, Terry. First, I'll discuss our customer data platform, or CDP. We've identified two main use cases. The first involves storing data to create a system of record and maintaining data hygiene. The second focuses on enabling analytics to determine which customer segments should be targeted for marketing. We're experimenting with different approaches to packaging these aspects together or separately. I'm really excited about the products we are developing. On the data tooling front, we've significantly enhanced both the speed of data processing and its integration with other systems. We highlighted earlier how outbound connectors are crucial for integrations with Klaviyo, and we're working to improve that as well. On the analytics side, for example, we recently introduced a feature within the CDP that provides product analytics, helping brands with many SKUs identify product affinities and quickly convert those insights into marketing campaigns that generate additional revenue. We're pleased with our progress in this area. Regarding deliverability, it has always been a key focus for us since our inception, as Klaviyo stands for personalization and delivering the right content to the right person. Recent changes among email service providers haven't significantly impacted us; in fact, some customers have chosen Klaviyo because they understand the importance of deliverability and recognize our commitment to email and SMS. Our customer and R&D teams have done an excellent job ensuring deliverability meets customer needs. Thus, we believe that our focus on deliverability has become a significant differentiator, and we are very excited about our advancements with the CDP. We're starting to gain valuable insights into use cases and are considering some changes in packaging.

Our next question comes from Raimo Lenschow from Barclays. Your line is now open.

Thank you. I would like to return to the discussion about the health of the small and medium-sized businesses. Could you share your thoughts on how these businesses view your solutions? It seems that they regard you as essential since effective marketing directly impacts their survival. How do you perceive your customers' priorities in choosing your offerings compared to other options that may be seen as less critical? Additionally, could you clarify how the more unpredictable environment for SMBs is influencing your strategy? Thank you.

I’ll build on what Amanda mentioned earlier. First and foremost, we are a crucial revenue engine for this business, which underscores our importance. We take pride in assisting our customers in expanding their operations. When we look at the SME space, it's a bit more complex since we categorize SMB into two segments. The first includes entrepreneurs—essentially businesses that are just getting started with very small teams. The second segment comprises larger SMBs. Regarding the softness we mentioned, particularly in the larger SMB category, we’ve observed fewer ads, which we believe is partly due to slightly longer sales cycles. Nonetheless, we see that people are still progressing through these sales cycles, which, just to clarify, we still measure in days and weeks rather than months. For the smaller segment of startups, we noticed strong performance across that customer group in terms of acquiring new logos and new clients who are trying Klaviyo for the first time. This is a positive indicator that when businesses are in their early stages and seeking growth, they consistently choose Klaviyo to manage their customer data and communicate with their customers, ultimately driving their growth.

Okay, got it. Thank you.

Our next question comes from Scott Berg from Needham. Your line is now open.

Hi, everyone. Really nice quarter here. I guess one question for me is on your go-to-market investments here kind of mid-year. SMB, as Amanda pointed out, still a little on the softer side at the moment, but you both called out a really good strength up market. Have you made any tweaks or changes to the investments that you're making across those different segments that might maybe favor some of those areas of strength up market that you're seeing today?

We are very focused on identifying opportunities where we see market demand and investing in those areas. To provide some context, we have been increasing capacity in segments where we are observing growth, such as international markets and the mid-market. On the marketing side, we have been encouraged by the outcomes of some of our digital marketing initiatives aimed at driving growth. Additionally, we are working on increasing awareness of Klaviyo in different markets, as we have found that some potential customers are not yet familiar with Klaviyo or our full range of products. As Amanda mentioned, we are deliberately investing in areas with strong unit economics, and we see several opportunities to continue investing.

Our next question comes from Rob Oliver from Baird. Your line is now open.

Great, thanks. Good afternoon, guys. I guess it's kind of a two-part question about SMS traction. Maybe you talked about some of the consolidation wins you guys have seen and I know that it sounds as if you're getting pretty solid traction quickly in some of your rollouts internationally with SMS. Just would love to hear, I know you don't break out on a quarterly basis, what percentage of your customers are on SMS. But would love to get a flavor for how that's progressing broadly for you relative to your expectations? And then I guess, Amanda, a side part of that would be, we haven't seen the impact on gross margins that we might have expected with a commensurate ramp in SMS. I know there's other things driving that, but I just wanted to reconcile those two things.

I will address what Amanda can share about gross margin. While we aren't providing specific penetration rates, we are experiencing good adoption and will communicate milestones as we achieve them. We are seeing positive traction, particularly with our international expansion, which includes adding Spain, Austria, and Switzerland for SMS, as well as introducing multimedia messaging in Australia. A significant aspect of our international strategy is ensuring that SMS is accessible in these regions, and we are observing solid adoption there. For instance, a mattress manufacturer started using our SMS service and has since benefited from various features we've rolled out, not solely the international options but also enhancements specific to SMS. One notable feature we introduced is SMS Smart Opt-in, which simplifies the consent process for customers and reduces the number of actions needed to subscribe to SMS lists. This has significantly boosted their SMS program, and we are thrilled with the progress we are making in this area. However, there is still much room for growth regarding penetration.

Yeah. And to your question on the gross margin front. On gross margin, it did come in slightly better than what we had expected, and that was primarily because we continue to see the benefits of the progress that we're making in infrastructure and support efficiencies. And those are offsetting the continued progress that we're seeing and the growth that we're seeing in the SMS business. So one of those infrastructure efficiencies that I would love to highlight is our KMTA, Klaviyo Mail Transfer Agent. We expect to continue to get further leverage in comps over the coming quarters as we transfer more of our mail volume onto our own mail transfer agent. SMS, as Andrew said, continues to grow very well. And so we do expect that as it continues to grow, it's going to become a bigger portion of our business. That will create some pressure on our gross margins. We're proud of the fact that we've been able to largely offset that to this point and deliver what we see as some pretty best-in-class gross margins given our product and customer mix.

Our next question comes from Tyler Radke from Citi. Your line is now open.

Thank you for addressing my question. I have a follow-up regarding the SMB side. As we consider the behavioral patterns of some of your SMB customers, I'm interested in what you observed this quarter concerning email utilization rates, message volumes, and content lists. Did those metrics increase or decrease in relation to the SMB environment? Additionally, if those SMB customers are experiencing a decline in consumer purchasing, do you notice that this leads to increased email and message volumes to compensate for that demand? Could you help us understand what behaviors you're observing on the SMB side? Thank you.

Sure, Tyler. Thanks so much for the question. And overall, I would say that what we saw in terms of behavior in the quarter was pretty consistent with what we've spoken about on our prior earnings calls. We continue hearing from customers about macro pressures. They remain very focused on the value that they're getting from their software. In general, in terms of the macro and the changes in the behavior, we are not seeing it get materially better. We are also not seeing it get materially worse. And we think that we're continuing to perform strongly through this environment because, as Andrew mentioned earlier, we are a must-have for these customers. We are a core part of how they drive revenue. We're a revenue engine for them and being a revenue engine means that when they're thinking about their business, and thinking about the pressures that they're facing, they're thinking about how do I efficiently drive that growth and Klaviyo is a really important part of that.

I want to add one more point about Amanda's comments. We also monitor the percentage of revenue that comes from Klaviyo. We've spoken with several customers who are seeing that percentage grow, indicating they are increasingly committed to us. We are a vital revenue driver, and customers are recognizing the value of existing relationships, which serve as a strong source of demand, especially amid uncertainty.

Our next question comes from Nick Altmann from Scotia Bank. Your line is now open.

Awesome. Thanks, guys. I wanted to ask another question on the international side of the equation, just given the strength there. But you guys added three new countries on the SMS side. You spoke to the growth acceleration in EMEA and kind of building off of Rob's question earlier, but can you just talk about how much of an unlock some of these international additions have been on the SMS side? And how much pent-up demand you're seeing from some of these geos as you look to add SMS in new countries? And then, just as a follow-up, just given the outside strength on the international side, how do you think about potentially accelerating those international efforts and investments, just given the strength you're seeing. Thanks.

Sure, I'll address that. When we discuss our international efforts, we've been focusing on both product enhancements and our go-to-market strategies. We've localized our language offerings and tailored our marketing content for specific regions. As we grow our customer base and partnerships, this approach is creating positive momentum. It's crucial that all our products are accessible, particularly SMS, which remains a priority for us. We will keep investing in language localization, SMS, and channel accessibility. We're also considering the role of platforms like WhatsApp in markets outside the Americas. Furthermore, when partnering, we emphasize strong integration with partners who have a robust national presence. For instance, our collaboration with Shopify on their market products illustrates our commitment to tight integration. We've also partnered with various tech and software platforms popular in Europe and Asia, which has led to increased demand and a solid product-market fit. In terms of investment, we are focusing on countries and regions experiencing significant growth. Our progress in France, driven by digital demand generation and our go-to-market teams, is likely to serve as a model for our strategy in other markets. Where we are seeing strong performance, we will continue to invest. Many of our customers may start with email services, and then we can expand our offerings to include SMS, CDP, and reviews.

Our next question comes from Jackson Ader from KeyBanc Capital Markets. Your line is now open.

Great. This is Kyle Diehl on for Jackson Ader. Maybe just squaring some of the headcount commentary, I think, Amanda, you might have alluded to some of the increased margin this period just coming from a little bit lower headcount. Can you kind of help us think about that in terms of sales capacity and where you guys currently are in terms of your plans for the year? And then also on that same note, how quickly you can ramp some of the new folks given the quickly approaching holiday season here? Thanks.

Yeah, I'll take that. And so on the hiring front, I'll say a couple of things. One, we've always been very intentional since we started now to the business about hiring and making sure that headcount was proportionate to the demand and the products that we want to build. So headcount grew slightly from the end of Q1 to the end of Q2. Specifically on the sales side, we think we've got the right amount of capacity, and we're also prepared to scale that as we see more demand. And then to the last comment on the holiday season, one of the great things is we do actually see an uptick in customers that come to us that want to use Klaviyo over the holiday season. But actually, a lot of that growth is coming from our existing customers using more Klaviyo over the holiday season. So in that case, we think we're very well staffed across all of our customer teams to meet that demand when folks say, want to increase their usage. One of our core products, email or SMS, we think we're well staffed to cover that demand.

Our next question comes from Gabriela Borges from Goldman Sachs. Your line is now open.

This is Callie Valenti on for Gabriela. Congrats on the quarter. Wanted to ask on the mid-market. How much of the momentum that you're seeing do you think is attributable to the broadening of your product set with CDP reviews and any incremental AI functionality? And then also to what extent are you seeing customer lands today that probably would not have closed without these new features? Thank you.

Thank you for the question. It's a matter of both aspects. It showcases the product we've developed, particularly how Klaviyo functions as a data platform that can store extensive data and effectively utilize it. We discussed artificial intelligence and its capability to enhance personalization, improve attribution, and enable automatic optimization. One key area we mentioned is SMS availability and mobile integration. With more channels consolidated in our Customer Data Platform and its analytical features, we are discovering that larger customers are particularly drawn to the idea that all these features and applications work cohesively. As we continue to invest in our product roadmap and expand those capabilities, we believe that our offering is becoming an even better match for larger enterprises.

One example that we had in the quarter, I think, of some of the questions that you're asking, was it an organic food and home goods company who came to us this quarter. They wanted to consolidate their multiple brands onto one single platform so that they can optimize their strategy and have unified multichannel reporting. And they chose Klaviyo in part because of our portfolio offering. So that portfolio feature that we recently launched allowed them to easily do high-level reporting across accounts to drive better insights and they are really excited to get launched with Klaviyo.

Our next question comes from Yun Kim from Loop Capital.

All right. Congrats on the strong quarter. Question around go-to-market motion around new customer acquisitions for mid-market and enterprise customers, which I think you mentioned was a record quarter. So just curious on where is the biggest source of these new 50,000-plus customers. Is this still Shopify Plus merchants? Or are you specifically going after legacy displacement opportunities outside of the Shopify platform? And also, how much of your incremental sales and marketing investments are focused on going after these large customers outside of the Shopify platform? Thanks.

I'm happy to answer that. There's a distribution in our customer base, and we have a strong partnership with Shopify. We share many mutual customers, particularly in the mid-market and enterprise segments. Additionally, we have several customers who started with different technology stacks. While we don't disclose specific distribution figures, it appears to be quite diverse among larger customer sizes. Our success across these segments largely stems from our seamless integration with their commerce systems, enabling effective data storage and usage. Our collaboration with Shopify is outstanding, and we are also exploring ways to assist customers using various software platforms, including those with custom solutions, to ensure their development teams can integrate smoothly. When discussing the ease of use of Klaviyo, this often refers to the capacity for larger enterprises to connect all their systems. However, we recognize that some data sources will require these customers to utilize our developer API, and we believe we offer a very robust product with strong functionality in that area.

Okay, great. Thank you so much.

We have reached our closing for the question-and-answer session. Thank you so much again, everyone, for attending Klaviyo's Second Quarter Fiscal 2024 Conference Call. We hope you have a wonderful day. You may now disconnect.