Klaviyo, Inc. Q4 FY2024 Earnings Call

Good afternoon, and welcome to Klaviyo's Fourth Quarter and Full Year Fiscal 2024 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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 fourth quarter and full year 2024 earnings call. Our earnings press release, SEC filings, and a replay of today's call can be found on our IR website at investors.klaviyo.com. With me today on the call are Andrew Bialecki, Co-Founder and CEO; and Amanda Whalen, CFO. As a reminder, our commentary today will include non-GAAP measures. Reconciliations 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 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 Annual Report on Form 10-K filed today. We do not undertake any responsibility to update these forward-looking statements, except as required by law. With that, I'll now turn it over to Andrew.

Thanks, Zilli, and thanks everyone for joining us today. At Klaviyo, we empower more than 167,000 brands around the world to leverage their data to build personalized, lasting, and valuable consumer relationships across multiple channels. Our 2024 financial performance is a clear indication of our importance in driving revenue for our customers. We had a very strong finish to the year with $270 million in Q4 revenue, up 34% year-over-year, crossing a $1 billion revenue run rate as we delivered our strongest Black Friday/Cyber Monday yet. For the full year, we grew our revenue by 34% to $937 million while driving nearly $150 million in free cash flow. I want to thank our partners and Klaviyos around the world for supporting our customers throughout the year, and thanks to all of our customers for choosing Klaviyo to help grow your business. Before sharing highlights from the year, I want to touch on three defining themes for Klaviyo. First, we are a growth company and we are executing well on our strategy to deliver sustainable, efficient, long-term growth by moving upmarket, expanding internationally, adding more customers, and growing with our existing customers. Second, our approach to data with the powerful Klaviyo data platform is a core differentiator and the backbone of our vertically integrated omni-channel platform that positions Klaviyo as a single source of truth for customers. And third, consumer expectations are shifting, and our data-first approach puts Klaviyo in an exceptional position to redefine the next era of consumer engagement. Now turning to 2024 highlights. We continue to innovate and expand the capabilities of our platform, and our pace of innovation is a key driver of why companies continue to choose Klaviyo. Across the company, our teams delivered more than 200 new features to help make our customers more successful and set Klaviyo apart in the market. On our marketing automation platform, we made it easier for marketers to get their jobs done faster with scheduled flows and automated campaign follow-ups. We launched a campaigns library and expanded our suite of AI functionality with features like Text AI and Email AI to inspire creativity and make it easier to create content. And we made SMS audience acquisition more effective by using one-time codes with SMS Smart Opt-in forms. And speaking of SMS, we now have SMS coverage in 19 countries, great progress in helping our customers reach their consumers around the globe. We also enhanced our platform's next-generation analytics capabilities with tools like product analysis to empower marketers with real-time insights that optimize merchandising strategies and post-purchase outreach. We launched the RFM Action Center, which uses recency, frequency, and monetary value analysis to provide actionable recommendations for retention, repeat purchases, and loyalty. These expanded analytics capabilities help customers address the challenges of fragmented data and disconnected tools and more efficiently put their data to work. Growing our presence internationally remains a top priority for Klaviyo, and we made great progress in 2024. We made our platform and customer help center available in six additional languages while launching local language websites and marketing efforts in certain regions. We hosted our Klaviyo London event, continued expanding our team in Europe, and recently opened up a new Dublin office, where we will build out a larger presence going forward. Ecosystem-led growth through strong partners and integration is key to our success, and our partnership team continues to drive great results. We launched a number of new integrations with companies like Canva, Pinterest, Toast, and others and added features like the Universal Content API to make it even easier for partners to work with Klaviyo. We also held our first in-person Partner Advisory Council, bringing together leaders from across our partner ecosystem to discuss and gather feedback on our 2025 strategy, evolution of the platform, and roadmaps to take us forward. And as we announced a few weeks ago, we signed a great partnership with Woo, making Klaviyo the preferred marketing automation partner for WooCommerce, replacing an older newsletter software. With Klaviyo's built-in data platform and WooCommerce's flexibility, our joint customers have everything they need to build direct connections with their consumers and thrive in a competitive commerce landscape. This partnership represents an important step in our expansion internationally, into new markets in retail and beyond retail to support a diverse range of businesses; from content creators to web developers, who are fostering communities and delivering value in unique ways. Companies of all sizes are coming to Klaviyo, whether a brand new business or a large established brand needing to modernize and consolidate their tech stack because our platform is vertically integrated, easy to use, flexible, and capable of handling even the most difficult use cases. Having a unified view of the consumer is important to customers of all sizes, especially in the higher end of the market.

Thanks, Andrew. Klaviyo delivered another quarter of strong financial performance in Q4 to close out a great year as we continue to deliver efficient growth at scale. In the fourth quarter, revenue grew 34% year-over-year to $270 million. Non-GAAP operating margin was 6%, and free cash flow was $54 million, up 57% year-over-year. For the full year, we delivered revenue of $937 million, up 34% year-over-year, with a non-GAAP operating margin of 12%, delivering well above the Rule of 40. We are very proud of these results as we continue to deliver both growth and profitability at scale. Andrew discussed several key themes earlier, and these results are evidence that our data-first approach is resonating, and we are executing well on our growth strategy. We are adding new customers, growing in the mid-market, expanding with existing customers, and expanding internationally. In Q4, we added over 10,000 new customers, and we now have more than 167,000 customers, up 17% year-over-year. We continued to see strength in the low and high end of the market. And notably, we started to see some stabilization in the SMB space as the number of new SMB customers improved quarter-over-quarter. We acknowledge that this may be partially driven by the heightened demand during the holiday season, but it is an encouraging sign nonetheless. Our Q4 revenue came in stronger than expected driven by the continued high value our customers realized from our platform during the holiday shopping season. The pricing changes we made back in April related to prorated billing also benefited revenue in the mid-single-digit millions of dollars, though a majority of that was included in our guidance. Our investments to move upmarket continued to show success as we ended Q4 with 2,850 customers generating over $50,000 in ARR, up 46% year-over-year. We had another strong quarter of adding new customers in this cohort, continuing the trend of landing larger customers from day one. We continue to drive expansion with our existing customers as they grow their usage and add new products as can be seen in our dollar-based net revenue retention rate, or NRR, which was 108% for the quarter. Notably, our in-period NRR stabilized from Q3 to Q4. So while I don't want to call a floor based on two data points, it's good to see some stability in that NRR metric. Our cross-sell motion continues to deliver strong results, especially with email customers adding SMS. As of year-end, Klaviyo SMS is used by more than 18% of our total customers and more than 26% of our combined SMB and mid-market customers. Going forward, we will only be disclosing the combined SMB and mid-market SMS attach rate as we believe that is a better indication of our traction in this product. We will continue to provide this update on an annual basis. As you heard from Andrew, we made tremendous progress this year in our international expansion on both the go-to-market and product fronts. In Q4, EMEA revenue growth accelerated to 49% year-over-year with notable strength in France, Germany, and the Nordics, while our combined international revenue grew 22% year-over-year. Moving on. Fourth quarter non-GAAP gross margins were 74%, down approximately 5 points year-over-year primarily due to increased infrastructure costs in support of the holiday season, continued growth of our SMS products, and, to a lesser extent, our new employee bonus program. For the full year, non-GAAP gross margin was 77%, down about one point from last year. Turning to non-GAAP operating expenses. Each line item increased as a percentage of revenue from Q3 as a result of the impact of the full year accrual related to the new employee bonus program that was recognized in Q4. Aside from that impact, R&D was slightly higher as a result of additional expenses to support our Black Friday, Cyber Monday infrastructure. In G&A, we had an additional international tax-related reserve release, similar to prior quarters, that offset some of the employee bonus impact. Going forward, we do not expect any additional tax-related reserve releases that would have a material impact on our G&A line. For the fourth quarter, our non-GAAP operating income was $15 million, representing a non-GAAP operating margin of 5.6%. This was better than expected, primarily as a result of the revenue upside we saw in the quarter. For the full year, non-GAAP operating income was $113 million or a non-GAAP operating margin of 12%. We generated free cash flow of $54 million during the quarter, up 57% year-over-year, and $149 million for the year, up 35% from the prior year due to both higher operating income and interest income. Before I get to guidance, let me discuss some pricing updates that went live yesterday. Klaviyo introduced new pricing features that our customers have been asking for, including auto downgrade and flexible sending options. In addition, we are recommitting to our original pricing intent to enforce pricing based on active profiles because we believe in the value of the consumer profile and the power of the data it contains. Customers who are out of compliance will be moved to a compliant plan, and in the spirit of being customer-friendly, we are limiting price increases to a maximum of 25%. Importantly, most customers are not expected to see a pricing increase as a result of these changes. That said, we do anticipate some incremental churn, which may impact customer accounts in Q1. These changes are expected to generate minimal benefit to full year revenue. Very importantly, though, they will reduce pricing friction for our customers and better position us for the future. As we move to 2025, our priorities as a growth company remain consistent. We will continue to invest behind adding new customers, expanding internationally, moving upmarket, and expanding with existing customers. Our investments in 2025 will largely be aligned with these priorities. In addition, we are planning incremental investments in supporting our expansion into new products as well as new verticals. From a capital allocation perspective, we anticipate 2025 will be similar to 2024. As growth is our top priority, we are confident that the investments we're making today will support our efforts to drive long-term sustainable growth. Now turning to guidance. For Q1, we expect revenue of $265 million to $269 million, representing year-over-year growth of 26% to 28% driven by continued strength upmarket and internationally. This guidance also takes into account the seasonality of our business from Q4 to Q1 as well as our expectations for a smaller benefit from the prorated billing changes than we saw in Q4. We expect first quarter non-GAAP operating income of $25.5 million to $28.5 million, representing a non-GAAP operating margin of 10% to 11%. This guidance includes an expected increase in our Q1 marketing spend, including our product event tomorrow and additional demand generation investments that will take place earlier in the year. Additionally, you'll recall that we accrued the entire 2024 employee bonus expense in Q4, but going forward, it will be accrued in each quarter. As a result, you should expect non-GAAP operating margin to be down mid-single digits year-over-year for each of the first 3 quarters and up year-over-year in the fourth quarter. While we don't provide guidance for gross margin or cash flow, I want to highlight a few items that will impact our Q1 performance. First, we plan to make additional infrastructure investments to support our growing cohort of larger customers. While these investments will scale over time, we expect it will result in Q1 gross margin coming in slightly below our 2024 gross margin of 77%. Second, regarding Q1 cash flow, as you build your models, there are two factors to consider. One is that the payment related to our employee bonus program will go out in Q1. In addition, we'll see the seasonal reset of some payroll-related items, such as social security tax, which typically have a greater impact in the first half of the year. As a result, we expect our Q1 free cash flow will be negative. As we look to the full year, we are taking into account not only the trends in our own business, some of which are starting to stabilize, but also the broader environment. We are cautiously optimistic about the improving external small business sentiment, but we are not yet assuming meaningful improvement in our guidance until we see a sustained change in purchasing behavior. With that said, for the full year 2025, we are initiating revenue guidance of $1.156 billion to $1.164 billion for year-over-year growth of 23% to 24%, consistent with the expectations we set on our Q3 call. We expect non-GAAP operating income of $130 million to $136 million, representing a non-GAAP operating margin of 11% to 12%. Because of the impact of the bonus accrual as well as timing of marketing spending, we expect this year's operating income linearity to look different from last year, with our annual operating income lighter in the first three quarters and more heavily weighted in Q4. As we discussed on our Q3 call, our non-GAAP operating margin is roughly consistent where we ended 2024, primarily driven by continued investments in the growth drivers I discussed previously. In closing, 2024 was a great year for Klaviyo. We are executing our growth strategy, continue to differentiate ourselves in the market with our vertically integrated Klaviyo data platform, and we are excited to expand our scope to power and improve even more of the customer journey, helping brands deliver omni-channel experiences that fuel growth. We are well-positioned to continue delivering growth and profitability at scale as we continue to drive success for our customers. And with that, I'll open up the call for Q&A.

Thank you. We'll take our first question from Gabriela Borges at Goldman Sachs.

Hey, good afternoon. Thanks for taking my question. AB and Amanda, I wanted to kick at a little bit more color on your mid-market pipeline. And thinking about the call that you've pretty consistently provided over the last year about the opportunity you see there, could you give us maybe a little more qualification – how is the mid-market pipeline growing? And when I look at your own data on customers greater than $50,000, that number has obviously been growing really nicely for a while. So how sustainable do you think the growth in that cohort is? And any other qualitative or quantitative commentary you're willing to provide would be helpful?

Great. Thanks, Gabriela. Yes, happy to talk about that. First off, we're very happy with both the results in terms of customer adds and revenue as well as the pipeline and forward-looking demand that we're building in the mid-market segment, and now increasingly, also starting to get that enterprise segment as well. The value prop that we have for our mid-market and enterprise customers is very clear. We provide a data platform that allows them to pull all of their customer data in one place. It connects with all of their systems and allows them to put that data to work in our marketing platform and other applications that they're using to deliver the customer experience. And the fact that there's more complexity actually plays to our advantage. We can handle the scale and their security requirements. But we also have the flexibility through our API-first design to support a lot of the use cases that those larger businesses have. So we're very excited about the growth that we've seen, businesses like Clarks, Grunt Style, Reebok, Champion, and others, all joined us in Q4. Like you commented on, we're very excited about the growth we've seen in a number of customers in that $50,000 cohort. And then one other thing that we're really excited about, we're seeing more of our mid-market customers adopt more of the Klaviyo product suite. So our average revenue per customer in Q4 was up 15% year-over-year, which is another very strong indicator to us that there's good product-market depth. So that's something we're going to be investing in this year, always with an eye towards strong unit economics. And we think that's a very durable growth driver in 2025 and the next few years.

We'll move next to Terry Tillman at Truist.

Yes, hi, AB, Amanda, thanks for taking my question. It might be a multi-parter, so just beware. About the upmarket opportunity here, what I'm curious about is as Steve and the teams are kind of building out the infrastructure, I'm curious about like how much you're able to leverage PLG and kind of word-of-mouth as opposed to having to be heavy outbound? And the second part is, like how ramped is the sales team? And is there any kind of natural ceiling right now upmarket in terms of the size of the customer?

Sure. Thanks, Terry. First, regarding the PLG approach, it's an integral part of our product development. Although many of our mid-market and enterprise clients prefer to have discussions with us before making a purchase, we’ve designed Klaviyo to easily integrate and utilize data, which accelerates and simplifies the evaluation process. This aspect of our PLG strategy is effectively reducing acquisition costs. Additionally, as we develop more social proof and establish relationships with various brands, we are noticing that many mid-market enterprises start with one brand and then expand the use of Klaviyo across their entire operations. As for the sales team ramp-up, we've been quite strategic. We've cultivated demand in both the mid-market and enterprise sectors and have gradually expanded our sales team to align with this demand. Specifically, we've increased our sales capacity in the U.S. for the mid-market segment in 2024 and are satisfied with the progress. We've also seen significant growth internationally, especially in Europe, where there is rising demand in both mid-market and enterprise segments. We plan to enhance our sales capacity in that region this year, as we believe there are opportunities to grow the mid-market business following the internationalization of our product and initial marketing efforts.

And Terry, just building a little bit on what AB said, as you look to 2025, we've made good progress with the sales team that we hired in 2024. And therefore, we're going to continue to invest behind growing that quota-carrying capacity, so hiring sales teams who have a track record of strong success with mid-market and enterprise customers, investing in training behind them and really evolving the way that we sell and continuing to expand our partnering business from there as well. And then to the last part of your question about what is the size of those customers, what is that looking like, consistent with what we've spoken about before, these customers can be quite large. In the top 10, the average of our top 10 customers is north of $1.5 million of ARR, so certainly growing into some very significant relationships with these larger brands.

We'll go next to DJ Hynes at Canaccord.

Hi guys, congrats on a nice quarter. AB, I was wondering if you could update us on ARR overlap with the Shopify ecosystem, how that partnership is progressing from a lead flow perspective. And then you mentioned WooCommerce, but I'm curious if there are any other B2C ecosystem opportunities that seem promising as you guys kind of continue to diversify away from Shopify?

Yes, let me break that down into three parts. First, regarding Shopify, we have had a fantastic experience collaborating with their team. Our work began with product integration, and we've made a lot of improvements over the past year to facilitate better data exchange between Klaviyo and Shopify users. As Shopify continues to onboard more businesses to its platform, many of those customers are also choosing Klaviyo. Interestingly, several brands have opted to move to Klaviyo first, and subsequently shifted their e-commerce operations to Shopify. Our partnership is very strong. Next, I want to highlight WooCommerce, which attracts a somewhat different type of customer. With over 4 million merchants, the WooCommerce customer base is more international and features more varied use cases. The platform's open-source nature allows for easier customization, which helps us reach beyond just pure e-commerce applications. Finally, we've introduced several new integrations in 2024, drawing from our partnerships with Shopify and others, like Zenoti, Olo, OpenTable, and Toast. These integrations aim to enhance Klaviyo's product-market fit across different use cases and improve our go-to-market strategy. For instance, transaction data from restaurants or yoga studios can be easily connected to Klaviyo, leading to promising growth in these areas. We are excited about upcoming features tailored for non-e-commerce applications that we plan to release this year. While diversifying into new verticals isn’t our primary growth strategy, we are pleased with the progress we're making.

Just building a little bit on what AB was talking about, regarding the progress that we're making with Shopify and how we co-sell with them. We've been working on unifying our messaging, our account mapping, our enablement. And some of the evidence that, that is working and that we are going to market together, many of the large enterprise customers who Shopify has been speaking about are also strong Klaviyo customers as well. That's brands like Reebok and Champion and BarkBox. And so we're really excited to partner with them as we each continue to move into the mid-market and enterprise and beyond.

We'll take our next question from Rob Oliver at Baird.

Great, good afternoon. Thanks, guys. On international and AB you touched on this a little bit in response to DJ's question. But I'd be curious to get an update from you guys on what you've seen on the ground in some of the geographies, such as France and others, that you've enabled in the back half of '24. And then if you could just take a moment to update us on what the roadmap is in terms of additional either geos or languages for '25 and how the Woo relationship may have either accelerated or changed that in any way? Thank you.

Sure. So 2024 was a great year for international. Our full year international revenue grew 42%, and we're very happy with that. And kind of like you alluded to, we've tried to lay a lot of the foundation for growth internationally over the next couple of years. We expanded Klaviyo from being in one language, English, to now seven. We also took SMS, a product where we have to work with local regulators and telcos. We've expanded that now to 19 countries. And that actually gives us an enormous amount of coverage of the European market and growing parts of Asia. So built on top of that, we're now focused on building out teams that are localized to those countries. Germany, France, Spain, and Italy are all places where we're going to hire local language-speaking sales and support to help us support growth there. We're also working on partnerships that are more regionally oriented. So folks like PrestaShop, Think Digital, Oz, and others are helping us expand our partner-led motion outside of the U.S. So you add all that up, I think we don't feel that we need to introduce more languages or increase our coverage of SMS dramatically this year to support accelerated growth internationally. Now we'll continue to evaluate those as we see opportunities, but I think we've done a lot of the heavy lifting on the product side in 2024, which is going to help support accelerated growth or large growth in 2025.

We'll take our next question from Elizabeth Porter at Morgan Stanley.

Great. Thank you so much for questions. I wanted to touch on the NRR, where you mentioned seeing some stabilization in the in-quarter metric. And I understand it's just too early to call a bottom. Would love to better understand just the behavior that you're seeing. Sounds like gross retention has been strong for a while. So any sort of incremental clarity on where you're seeing the improvements, either cross-sell or expansion? And then when we should think about the point in time that we start to lap some easier compares? Thank you.

Thank you, Elizabeth. As we stated in our prepared remarks, we noticed some stabilization in the in-period net revenue retention from Q3 to Q4, which is promising. While we are hesitant to draw too many conclusions from just two data points, we remain cautiously optimistic as we look ahead to 2025. Breaking down net revenue retention into its components, gross retention continues to be strong and consistent. Once customers utilize the Klaviyo platform and recognize the value, ROI, and revenue we help generate for their businesses, the platform proves to be very sticky. Regarding expansion, we are observing some stabilization in the trends, and we are making good strides in our cross-sell initiatives, evident in the growth of the number of customers utilizing SMS. Additionally, this is the first full quarter without the influence of the 2022 pricing changes that had affected net revenue retention for the past couple of years, contributing to the stabilization we've seen. Overall, we are confident that by continuing to deliver significant value to companies and expanding our product offerings, our customers will keep growing their business alongside us. Our focus continues to be on providing value for our customers and making it easier for them to leverage Klaviyo in boosting revenue and fostering lasting consumer relationships.

Thank you.

Next question comes from Arjun Bhatia at William Blair.

Thank you and congrats there on the nice fourth quarter. Maybe if I can come back to you, just on the product side, you talked quite a bit about where the platform might expand to next. You clearly have kind of the foundational data layer built out and you've built on top of it, obviously, with marketing. But as you're thinking of product evolution, what are you prioritizing? And is that something that we should expect this year or is that kind of the longer-term more kind of ambitious product roadmap that you've laid out?

Yes, that's great. Let me address three key areas we're concentrating on regarding our products. First, we're integrating artificial intelligence throughout the different layers of the Klaviyo stack. As we've previously mentioned, Klaviyo's data platform serves as the main source of truth for all consumer data, aggregating it from various sources and making it actionable. We have effectively implemented AI for predictive capabilities, allowing us to anticipate consumer behavior, such as product recommendations and predicting next actions. We're expanding this AI functionality to other areas of the Klaviyo platform, including suggestions for marketing campaigns, both on an individual level and in aggregate. Our goal is to embed AI across our data platform as well as within our marketing applications and other products, which we believe will help our customers accelerate their revenue growth with Klaviyo, creating additional value we can potentially monetize in the future. Secondly, we are committed to being the definitive source of truth for our customers. We have significantly scaled our data platform and are enhancing the number of connectors, incorporating new integrations and data sets. Additionally, we are developing more tools to enable users to manipulate and utilize that data outside of Klaviyo. I'm very enthusiastic about this initiative, as every consumer business will require a real-time data platform that accurately reflects consumer activities and connects with every application that enhances customer experiences. Finally, in relation to the applications built on this data platform, we initially focused on marketing and are thrilled with our progress in areas such as email, SMS, and mobile. Our vision is to incorporate data and AI into each of those applications and channels while also creating best-in-class creative tools, utilizing both conventional tools and generative AI for high-quality content creation and superior deliverability. We are now beginning to develop features that facilitate cross-channel operations, enabling the intelligent decision-making of whether a message should be sent via email, SMS, mobile, or potentially other platforms like WhatsApp in the future. We are advancing the intelligence to automate this process and boost ROI. Additionally, we are considering ways Klaviyo can enhance other aspects of the customer experience. I mentioned that we have several product releases coming soon, so I won't reveal everything now. However, it's essential to remember that marketing is just one component of the overall customer experience. We believe that Klaviyo can support use cases beyond marketing, and we are excited to continue building and investing in these areas.

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

Thank you. Good afternoon. Amanda, wanted to double-click into the customer logo growth. It accelerated to 17% for the first time in a couple of years. Could you walk through the puts and takes on customer growth expectations in the coming year? I think, Amanda, you talked about new simplified pricing potentially driving some churn. On the other hand, you have this new WooCommerce partnership in international going strong that could possibly offset that. So are we thinking about mid-teens logo growth? Or could simplified pricing be a bigger impact on the entrepreneur part of the business, and we should be thinking closer to low teens growth for customers? Any color there would be helpful? Thanks.

Thanks, Brent. Yes, we're very proud that we added over 10,000 net new customers in Q4. And what we saw in Q4 was strength across all of our customer cohorts. So now as you recall, the largest number of our customer adds tends to come from our entrepreneur customers. And in that group, we saw strong results coming from our marketing team's efforts to really target those and bring them into the Klaviyo family. On the high end, we had a near-record high number of new lands in our greater than $50,000 cohort. And then also in the middle, as we mentioned on the call, we also saw a strong quarter-on-quarter growth in SMB net adds as well. The key driver for it is that we continue to drive great value for our customers. And so as a result, the Klaviyo platform is really being seen as the standard for B2C businesses. Now customer adds is not necessarily a number that we guide to specifically. But maybe as you think about some of the puts and takes for the year and how the linearity might play out in Q1, based on the seasonality of the business, we typically see lighter Q1 customer adds in general. And then additionally, as I mentioned in my remarks, we are expecting a modest increase in churn as a result of the new pricing enforcement. And so that may impact our total customer count in Q1. But over time, we continue to see adding new customers as a key lever for our growth, along with expanding existing customers, growing in the mid-market, and growing internationally.

We'll go next to Raimo Lenschow at Barclays.

Thank you. Congratulations from me as well. My first question is regarding WooCommerce. The strategy seems to have shifted upwards over the last few quarters, while WooCommerce appears to be more directed downwards. How should we interpret this? Is it a new direction or simply an expansion of the strategy? What is your perspective on this? I also have a follow-up question for Amanda.

Sure. Let me comment on that. The reality is we've had a preexisting partnership with the WooCommerce team. We already have over 15,000 brands using Klaviyo and WooCommerce together, and we think there’s potential for that number to grow significantly. We're being opportunistic here, as we see a strong product-market fit and have worked closely with the Woo team. We believe our two products can complement each other well, helping WooCommerce businesses achieve even greater success. This highlights what Klaviyo has accomplished for e-commerce businesses worldwide, catering to both entrepreneurs and enterprises. We believe we are reaching a default status in the market, and this reflects our ability to support companies from their early stages to becoming iconic brands. So yes, we can pursue both paths simultaneously, and we are very excited about this partnership.

Okay. Perfect. And then for Amanda, can you discuss the new offer of auto downgrade for customers? Could you explain the reasoning behind this and how it may affect the numbers for Q4 and Q1 as well? Thank you.

Thanks, Raimo. Yes, as we shared in the remarks, we made a few changes to pricing that were effective yesterday, including flexible spending for e-mail and SMS and an auto downgrade option. And what that auto downgrade option does is it checks whether a customer's profile count qualifies them for a lower plan. And if it does, then it moves them down automatically. Those were features that our customers had been requesting for a while. We are committed to removing friction in the process so that our customers have Klaviyo be as easy to buy as it is easy to use. And so adding those two new features was an important part of being responsive to customers and making sure that we're just removing that friction from the process for them. The other change that we made is recommitting to our pricing intent to enforce pricing based on active profiles because customers drive value from the data that they store with Klaviyo. And so pricing based on profiles and making sure that we're consistent in how we enforce on that is an important part of committing to that value that our customers are driving from Klaviyo. Now a couple of things to note on it. One is that I mentioned that the majority of customers are not expected to see a pricing change because of any of these changes because they're already on a plan that is appropriate for the number of profiles that they're storing with us. And then for those customers who do see a change, regardless of how many profiles they're storing with us, in the spirit of being customer-friendly, we're limiting price increases to a maximum of 25%. We did see a slight uptick in churn in January after this was announced. That was expected based on our experience with pricing pilots that we ran leading up to these changes. And so if you think about what is the impact for this for the full year, if you take into account all of these factors, the uplift from pricing enforcement, offset by a small amount of churn and then as well as some expansion impact that comes from the introduction of auto downgrades and flex pricing, overall, we are assuming a minimal overall revenue benefit for the year. But most importantly, what these changes do is they reduce friction for our customers. They anchor our pricing in the unique value that Klaviyo drives through data, and both of these changes tee us up well for the future.

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

Great, thanks and congrats on a great quarter. AB, it sounds like you've made great strides in expanding the number of countries you can deliver SMS in. Just how should we think about the revenue unlock? Is there a lot of pent-up demand? So quickly after you turn this on in new countries, you'll see some incremental revenue conversion? Or is this something that now you start a new sales cycle and start looking to cross-sell in these new countries and expect dividends to come down the pike over the next six to nine, 12 months? Just curious about the go-to-market now that you've expanded the countries.

I believe it's a combination of factors. As we've broadened our SMS coverage, mainly in Europe, we've attracted numerous customers who were previously waiting for Klaviyo to support their specific regions. This has led to an initial increase in SMS demand from them. Additionally, some customers may have existing SMS programs and might delay their transition while waiting for contract renewals. Thus, I believe we will see long-term benefits from this expansion. Regarding our SMS strategy in relation to international markets, we find that many of the businesses we collaborate with operate cross-border and are multi-region, multi-country enterprises. Therefore, offering SMS support that covers a large portion of their customer base makes a significant impact. When businesses choose to invest in SMS programs, they generally seek comprehensive solutions. The enhanced SMS coverage, along with our developments aimed at international clients—such as facilitating campaigns in multiple languages and managing product catalogs and inventory across borders, where pricing can vary—greatly enhances Klaviyo’s functionality. When we combine all these aspects, we position ourselves to attract more businesses looking to expand their SMS programs while also drawing in those interested in Klaviyo as a whole. We can effectively assist them in marketing globally across regions or worldwide. I'm very excited about the opportunities this expansion creates. Notably, we've observed increased international demand in the mid-market and enterprise sectors, as many of these businesses operate across multiple countries. We believe we've made significant progress in achieving a better product-market fit for these customers.

We'll take our next question from Scott Berg at Needham.

Hi everyone, thanks for taking my question very next quarter. I just wanted to follow up on the WooCommerce partnership on the press release on it and the commentary. Didn't hear anything along the lines of, I don't know, maybe any financial incentives or any sort of terms of engagement, how you all are working together. Preferred partnership can mean a lot of things. But maybe help us understand what the commitment level of both companies are, whether it's on a financial basis or maybe it's something else, maybe from, I don't know, a technology perspective?

Yes. Thanks for the question, Scott. So in terms of the financial arrangements of the partnership, as you would expect, there's a revenue share component to it. We are not disclosing the specific details to it, but it's typical for these types of agreements to come with a revenue share agreement. There is no equity associated with the partnership, so that's an important part to note there. In terms of overall, we're really excited to be named their preferred marketing automation provider. So now when brands join WooCommerce or for existing brands, we are their recommended partner, saying that Klaviyo is the company that we believe in who can help brands continue to grow and expand their customer base and build those ongoing strong relationships with their customers. We think that together, we can provide a better experience for our joint customers. And there are 4 million merchant brands who use WooCommerce around the globe, not only in retail, but as Andrew mentioned earlier, in services and in content. And so we're really excited about the opportunity that partnership opens up for local growth and then also for international and new vertical growth as well.

Next, we'll go to Mark Zgutowicz at Benchmark.

Thank you. Maybe just a macro question, if I could. A lot of good fundamental questions have already been asked. Curious on the tariff front, kind of a fluid situation right now. I'm curious if you've anticipated any downstream impacts or have heard anything from any of your customers in terms of any disruption there? Thanks.

Thanks for the question. We are monitoring the geopolitical landscape as everyone is these days. But as of now, we don't expect the tariffs would impact us directly. As you spoke about downstream implications, some of our customers may be impacted. But if they are, we're confident that they're going to continue to use Klaviyo because what our platform does is we help them efficiently drive revenue and build lasting relationships with their consumers through all economic cycles.

We'll move next to Brett Knoblauch at Cantor Fitzgerald.

Hi, guys. Thanks for taking my question. Maybe to start, as you look at maybe the SMS adoption or increased adoption throughout the year going from 16 to 18.2, is that about what you would have expected going into the year? Did you overachieve, meet, underachieve expectations with regarding to that?

Yes, I can address this. We would love to see faster growth. We are pleased with the adoption rate we’ve observed. It’s important to emphasize that while the aggregate metric is valuable, we will be sharing the attach rate for SMS with our SMB customers and above, which was 26% in Q4. We believe that this reflects our success more accurately than the segment we refer to as entrepreneurs, which includes small and medium-sized businesses. Many businesses, particularly when they are starting out, don’t find SMS relevant right away, or this may not apply to all of them. We aim for every business to engage with consumers using channels that matter to those interested in the business. We’ve noticed that for many smaller businesses, especially in their early stages, focusing solely on SMS doesn’t make sense until it’s fully automated; they often concentrate on the core channel, which is usually email. We are satisfied with this approach and expect that the percentage will continue to rise. We have undertaken significant work to enhance our SMS international coverage and are proud of the new SMS product features our team has launched this year. There’s much more to come in the upcoming months to ensure our SMS product is top-notch. Lastly, I believe SMS will become increasingly compelling over the next 12 to 24 months as it transitions to a new standard known as RCS, which will enable a more enriched experience through mobile messaging. We are excited about the initiatives we are pursuing to help our customers leverage this new technology, which we anticipate will positively influence customer engagement and further drive adoption.

And just building a little bit on what AB said, one of the reasons that we're so upbeat about SMS is that we see the benefit it drives for our customers. So when an email customer adds SMS, not only do they get the additional KAV, that Klaviyo Attributed Value and revenue from SMS, but they also see a direct uplift in their email-specific KAV. So it shows that these two channels are better together. And in fact, Klaviyo customers who added SMS to their marketing strategy during Black Friday, Cyber Monday this year experienced a 20% increase in their e-commerce revenue year-on-year. And one of our favorite examples, a customer who came to us for SMS this past quarter is CorePower Yoga. They were a prior customer of ours, a nationwide yoga studio with over 200 locations. They're a great customer, and they expanded with us in SMS because they are facing challenges with as many of our customers experienced a broken tech stack. They were batching and blasting anyone who signed up for their marketing, which led to a high number of unsubscribes. And so we are now partnering together. And with Klaviyo, they're going to be able to leverage detailed customer data to make smarter spending decisions, which will reduce unsubscribes and help enhance their brand growth.

We'll take our next question from Michael Berg at Wells Fargo.

Hi. Thanks for taking my question. I'll ask a quick one here for Amanda. Just double-clicking on the pricing mechanism changes, have you worked through most of the installed base already by giving this monthly contracts and you announced it about a month or so ago? And just from a functional standpoint, how do you think about how that works from how the customer finds out if they're in compliance versus not? And maybe just squeeze one more in there, longer term, philosophically, how do you think about pricing here given the competitive end market, but obviously a highly value-added product?

Sure. I'll start with how does it wind its way through our customer base. So we announced this to our customer base a month ago to give everyone a heads-up that this change was coming. And then the pricing change and all of these changes went into effect yesterday. And so customers who are on monthly billing cycles, it will go into effect for each of them at the point where their monthly billing cycle renews. So that will happen over the course of the next month. As part of the announcement a month ago, we did let customers know here's where your profiles are today, here's the plan that you're on and how those two compare and what the implication for you personally would be based on the appropriate pricing tier for you to be on as well as the appreciation discount that we are giving, which limits any pricing change for an individual customer to no more than 25%. And then importantly, as AB said, part of what we're doing through this is also educating and working with our customers on what are the profiles who they want to keep in their database? Who are those engaged customers? How do they keep them appropriately engaged? And then if customers are becoming unengaged, what's the right way to manage their profile list? And we've put in place tools to make it easy for our customers to manage their profile list on an ongoing basis.

And let me just add on the philosophy side. Look, we very much believe in building best-in-class premium products, but having a pricing model that's very approachable for our customers. So as we iterate on pricing, it's always with that in mind. We want to make our products easy to adopt, easy to use, and more of. And we try to align our pricing axis to whatever that value metric is for the specific products. So for both email and SMS, I think we're making some very positive changes for our customers here better in response to a lot of the feedback that we've had from them over the last couple of months and even the last year or two.

We'll take our final question today from Nick Altmann at Scotiabank.

Awesome. Thank you so much. AB, you mentioned you held your first in-person Partner Advisory Council for strategizing around 2025. So I wanted to ask a follow-up there. But can you maybe just give us a sense as to how much of the business is being driven from the channel today, what the overarching message to partners is around 2025? And maybe just talk about the channel internationally and where that sort of fits into those expansion plans.

Sure. Our partners have played a crucial role in making Klaviyo successful. We collaborate with various technology platforms, integrating on both product and go-to-market fronts. Additionally, we have a dynamic network of developers creating applications on the Klaviyo data platform to enhance its utility for our customers. Beyond our technology partners, we also work with numerous service partners, including marketing agencies and system integrators, particularly as we expand into the mid-market enterprise. These different partner types surround our customers and contribute to their success, amplifying the value of our products. We focus on a product-led and partner-led strategy. As we grow internationally, we are keen to engage local partners who understand our customers and can assess our performance, introduce us, and drive demand. We've made significant updates to our partner program over the past year to better engage our partner ecosystem, and this year, I'm excited to increase the number of agency and system integrator collaborations and deepen our connection with the developer community around Klaviyo. I believe these efforts will enhance our growth internationally and also improve our overall business in the U.S.

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