Klaviyo, Inc. (KVYO) Q2 2025 Earnings Call Transcript

Good afternoon, and welcome to Klaviyo's second quarter Fiscal 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. We ask that you please limit your questions to 1. With that, I would like to turn the call over to Andrew Zilley, Vice President of Investor Relations.

Good afternoon, and thanks for joining Klaviyo's second quarter 2025 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. 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 10k and subsequent quarterly reports on form 10q 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, Hilly, and thank you all for joining us today. Klaviyo delivered another fantastic quarter, demonstrating our continued momentum and critical value to consumer businesses worldwide as the only CRM built for B2C. In the second quarter, we delivered revenue of $293 million, up 32% year-on-year. We now empower over 176,000 customers from individual entrepreneurs to global enterprises to build smarter digital relationships that drive revenue and grow their business. Our performance this quarter once again validated the three defining themes for Klaviyo, which continue to guide our strategy and execution. First, we are a growth company and continue to execute on our strategic priorities to deliver sustainable, efficient, long-term growth. We are expanding internationally and we're investing and making progress with our move-up market. Second, Klaviyo remains well differentiated with our vertically integrated data-first approach driven by fully embedded AI and powered by the Klaviyo data platform. The Klaviyo data platform's capacity to process billions of events and profiles is fundamental to our real-time capabilities, which drives faster, more intelligent segmentation and personalization of scale. And third, we're making incredible progress bringing our multi-product b2c crm vision to life with early momentum in service and analytics and continued innovation in multi-channel marketing automation many companies today are dealing with disconnected systems often bolt-ons or stitched together frankenstacks not designed for fluid consumer interactions our platform addresses a critical market gap by providing consumer brands with a single integrated data platform designed for their unique high volume fast-paced needs. We unify the pre- and post-buying experience across marketing and customer service, driven by insights from analytics, delivering inherent speed, simplicity, and flexibility. In fact, IDC noted that Klaviyo clearly addresses a set of needs often overlooked by other vendors and is bridging the gap between commerce and customer service. Our product engineering team continues to innovate fast, delivering incredible new features in the second quarter. At Klaviyo London in June, we unveiled major enhancements to our marketing platform to tackle one of marketing's most persistent challenges, fragmented customer experiences. Our focus here is twofold. First, we want to support the channels that matter to our customers and be great at these channels individually. To support real-time conversational journeys through rich, interactive messages, we released native support for RCS, which is the future of text messaging and WhatsApp. And second, we are focused on making our platform even better at supporting multiple channel, channel affinity marketing. On that note, we announced our Omnichannel campaign builder, a new canvas to plan, launch, and measure complex multi-day campaigns across channels. We now have Omnichannel across all major areas of our marketing platform, and with built-in insights and AI-optimized delivery, teams can execute faster, reduce costs, and increase ROI without switching tools or duplicating work. We also announced Channel Affinity powered by Klaviyo AI. This intelligent new capability leverages predictive attributes to automatically discern each customer's preferred communication channels in optimal engagement times. By understanding these key predictive signals, Channel Affinity ensures messages are delivered precisely where and when they're most likely to convert. Finally, we launched multi-touch attribution providing real-time visibility into revenue drivers beyond last click. Now turning to our service products. The paradigm of customer service is shifting at an unprecedented pace, moving far beyond simple exchanges and returns. In the near future, it's our belief that consumers will expect highly personalized experiences with every brand they interact with, facilitated by their own personal AI agent. We are building the technology that will empower every brand to make this a reality. Just a few weeks ago, we expanded our service offering with the launch of two private betas, one for help desk and another for our conversational agent. Our AI first help desk brings customer support into the same platform as marketing, giving service and marketing teams a shared real-time view of every customer order interaction and conversation. Our conversational agent leverages a brand's Klaviyo data, catalogs, content, shopping behavior, and other integrations, offer tailored product recommendations, facilitate product discovery, surface coupons, and assist with orders. This goes beyond customer service and cost reduction efforts. Instead, we view this as the consumer's personal assistance, which today happens via chat, but over time, this agent can assist across every touchpoint a consumer has with a brand. messaging channels, mobile push, emails, voice, and more. This is not just for traditional customer service issues like returning an item. For example, the agent answers questions like which shirt pairs best with the pants I'm looking at, and it can quickly provide product recommendations directly to the consumer, which ultimately drives more revenue. Our goal is to democratize this technology, making it possible for consumer brands of all sizes and across industries to provide this level of personalized experience to all of their consumers. These products build upon our multi-product strategy, which we launched earlier this year with Customer Hub. Importantly, we view Customer Hub as much more than just customer service. It's really a jumping-off point for the future of personalization and bridges the gap between marketing and service to bring them closer together. We're very pleased with the success we've seen to date, and customers love the ability to unify consumer experiences across marketing and service using the data they have in Klaviyo. When companies successfully create seamless consumer experiences across touchpoints, it helps build more loyal customer relationships, which also drives more lifetime revenue. In fact, in just five months since we launched Customer Hub, we've generated millions in additional, incremental, attributable revenue for our customers. Finally, the third product category of the B2CCRM analytics. Our marketing analytics products, which we launched earlier this year, is also gaining strong momentum and already has nearly 2,000 customers. This powerful tool ensures that critical efforts like win-back emails and abandoned card flows are precisely targeted and timed for maximum effectiveness in ROI. For example, Hibby, a women's apparel brand, harness marketing analytics RFM segmentation and catalog insights to fuel post-delivery automation that are driving significant incremental revenue the combination of marketing analytics and sms to complement their email strategy resulted in a 100x roi for kibi in the past year across all of our products that make up the b2c crm stack we're taking an ai first approach in addition to the many new ai powered solutions across marketing service and analytics we're solidifying Klaviyo's leadership as one of the next-gen technology stacks with new features like our MCP server. Brands can now access or integrate Klaviyo data directly into the LLMs they're using, and this is more than just a technical achievement. It's an important step in empowering our customers to supercharge workflows and cementing Klaviyo as the indispensable single source of truth for consumer businesses. Customers are already using our MCP server for things like planning out their campaign calendar, finding changes that can be made to flows or campaigns to drive better performance on a daily and weekly basis, and other use cases. This is just one way we're empowering our customers to leverage their data for better consumer engagement. We're also proud to share that Colabio has been recognized as a leader in the 2025 IDC MarketScape for AI-enabled marketing platforms, which evaluates and ranks based on current capabilities and future strategies. As businesses grapple with fragmented tech stacks, the secular shift towards unified data-powered platforms that are AI-first like Klaviyo is clear. Legacy technology is a significant pain point for mid-market and enterprise companies, and we continue to see success with our efforts to displace incumbents. This quarter, we signed Winston Flowers, a premium floral and gift company. They were facing ongoing issues with their legacy marketing cloud, particularly concerning its usability and agility for their small marketing team. They chose Klaviyo for our ease of use, faster time to market, and strong multi-channel capabilities. We also signed a deal with a premium coffee brand who is finding it difficult to execute even basic marketing functions like abandoned card flows despite significant investment in their legacy marketing cloud. They chose Klaviyo because they needed a solution that would deliver immediate results and provide a more intuitive and effective platform for their marketing efforts. We're pleased with the success we've seen in the mid-market and enterprise, and you've heard about many of the notable large customers who have joined us over the last couple of years. But we know there's more we can do to support the higher end of the market, and we are continuing to evolve our product and go-to-market efforts as a result. On the go-to-market side, we're adding additional enterprise experience to our team and increasing strategic partner collaboration, enabling us to drive deeper engagement with complex customers. On the product side, we continue to add features and functionality to the platform that are important to large enterprises, including custom objects, mobile in-app messaging, channel affinity, and more. We are also continuing to expand the scalability of our platform to serve the largest consumer brands and the diversity of use cases they have. These features are key to winning and supporting mid-market and enterprise customers going forward, and will continue our rapid pace of innovation to make our platform the leading solution for their evolving needs. We continue to see companies choose Klaviyo to consolidate their marketing tech stack from the fragmented tools they have been dealing with. In the second quarter, we expanded our relationship with Princess Polly, a leading digital fashion brand with a growing physical presence. Princess Polly has been using Klaviyo email, but was one of the largest SMS customers of another vendor. They consolidated SMS with Klaviyo to leverage the power of our omni-channel platform for more effective consumer engagement across channels. We also signed a deal with Loop Ear Plugs, a rapidly growing company that creates stylish, high-quality ear protection. Loop was struggling with a fragmented marketing strategy, relying on multiple vendors that led to a lot of inefficiency. They chose Klaviyo for our comprehensive platform that will enable them to consolidate email and SMS to drive growth and streamline their customer engagement. International expansion continues to be a significant growth opportunity for Klaviyo. In addition to the WhatsApp launch, we've simplified multilingual email campaigns in Klaviyo and launched our website in German, Spanish, and Italian. These investments are yielding results. In the second quarter, we grew international revenue over 42% year-on-year, adding brands like Nothing, a UK-based, fast-growing challenger in the smartphones and audio category. Nothing was grappling with a fragmented CRM strategy with their legacy tool, which made it difficult to drive repeat business and loyalty. They selected Klaviyo to unify their CRM strategy and leverage our powerful automations to boost direct-to-consumer revenue. Our thriving partner ecosystem is a force multiplier, expanding our reach and functionality. We're thrilled to announce two new integrations that further expand Klaviyo's reach into the hospitality and entertainment sectors. Our partnership with Guesti, a leader in property management, will transform how property owners harness first-party data to boost direct bookings and cultivate lasting guest relationships. Our integration with vVenue, a global leader in event ticketing, will empower entertainment brands to leverage attendee data for unparalleled personalization and engagement at scale, as exemplified by their work with partners like the Grammy Awards. These integrations underscore our commitment to vertical expansion and delivering transformative solutions across industries. Our vision is to empower every consumer-oriented business to standardize on Klaviyo, from marketing to service to analytics, enabling them to build strong, personalized relationships with each of their consumers. We are proud of the progress we've made and are driven every day by the massive amount of white space that still exists for Klaviyo. We're excited to welcome our customers, partners, and all consumer businesses to Klaviyo Boston, the preeminent event for consumer businesses focused on growth, taking place in Boston September 25th and 26th. Following the success of Klaviyo London and Klaviyo Sydney, Klaviyo Boston will serve as another opportunity for sharing our strategic vision and showcasing our latest advancements for our growing ecosystems of customers, champions, and partners. We will also be hosting our first Investor Day live from Klaviyo Boston on September 25th, and virtual registration is open on our Investor Relations website.

Before I turn it over to Amanda, I'd like to cover a couple of changes in our leadership team.

I want to welcome Archana Rao, our new Chief Information Officer, who joined us in June. Archana brings 25 years of experience helping high-growth tech companies scale and will play a key role in shaping how we use AI internally to drive smarter, faster decisions and how we scale our systems to help us serve our customers better and deliver more value to the companies that rely on us. We also announced that our president, Steve Rowland, is retiring. He'll be staying on through the end of the first quarter of next year. Since joining in 2023, Steve has been instrumental in implementing our mid-market and enterprise sales motions, expanding our growth internationally, growing our partner ecosystem, and building an incredibly strong go-to-market organization. During Steve's tenure, we have driven remarkable growth with our revenue run rate growing from $660 million to more than $1.1 billion today. I'm incredibly grateful for his contribution and leadership at Klaviyo. And with that, I'd like to turn it over to Amanda.

Thanks, Andrew. Our second quarter results were very strong as we are delivering efficient growth at scale. Revenue grew 32% year-over-year to $293 million. Non-GAAP operating margin was 14% and free cash flow was $59 million. These results demonstrate another quarter of strong, consistent hop and bottom line performance. Our vertically integrated AI-driven data platform is the only CRM built for consumer businesses, and we are expanding the functionality as we add features across marketing, service, and analytics. Customers are responding well to this vision, which drove strength in the second quarter as we added new customers, expanded with our existing customers, grew internationally, and expanded upmarket. We ended Q2 with more than 176,000 customers, up 17% year-over-year, and up 7,000 from Q1. This strength was driven by momentum in entrepreneur customers with support from SMB, mid-market, and enterprise, affirming Klaviyo's value in every market. We delivered a Q2 NRR of 108% in line with the last two quarters, driven by consistent gross revenue retention, improvement in email expansion, and while a smaller contributor, returns from our newer product offerings. We are advancing our cross-sell motion as evidenced by more of our larger customers adopting multiple products and the growing SMS penetration in our SMB and mid-market cohorts. We are also very pleased with the early adoption of our marketing analytics product and the success of our Klaviyo service beta. Our success in serving larger customers is evident as we ended the quarter with 3,291 customers with over $50,000 in ARR, up 38% year-over-year. This was a record quarter of net adds into this cohort as we drove strength in both new customers to Klaviyo landing in this cohort and existing customers who are growing their businesses with Klaviyo. As you heard from Andrew, our investments towards expanding internationally on both the go-to-market and product fronts are delivering returns as our outstanding international growth continued in the second quarter. EMEA revenue grew 47 percent year-over-year, and APAC revenue growth accelerated for the second quarter in a row, as our international expansion strategy is driving strong results. This broad-based strength drove the revenue outperformance in Q2 as we execute on our growth priorities. As we mentioned last quarter, we incorporated some additional prudence in our guidance due to the uncertain macro environment. However, we continue to hear from customers that Klaviyo is more critical than ever to driving their growth, and we did not see an impact from the macro during the quarter. Our results against guidance, therefore, were slightly higher than they would have been in a normal environment. Moving on, second quarter non-GAAP gross margin was 76%, down approximately two points year over year, primarily due to increased increased infrastructure costs and the continued growth of our SMS product. We are beginning to see efficiencies from these infrastructure investments and our non-GAAP gross margin was flat to Q1 due to infrastructure optimizations offset by our growing SMS mix. Turning to non-GAAP operating expenses, we saw leverage in R&D and G&A. Sales and marketing as a percentage of revenue increased year-over-year as a result of continued investments in sales capacity and timing of marketing program spend. For the second quarter, our non-GAAP operating income was $41 million, representing a non-GAAP operating margin of 14%. This came in better than our guidance, primarily as a result of the revenue upside we saw in the quarter and, to a lesser extent, due to operating expense leverage. We generated strong free cash flow of 59 million dollars during the quarter due to higher collections and the timing of payments. This result excludes the impact from Andrew's option exercise and the related share sale for tax payments which took place during the quarter. Before I turn to guidance, let me quickly touch on our revenue seasonality. As a result of the profile enforcement changes we made in February, we expect our revenue to be less volatile quarter to quarter as profiles tend to grow consistently throughout the year compared to the seasonal increases that can happen from sending volumes. As a result, we expect that our fourth quarter revenue will experience less of a quarter over quarter spike in growth than it has in prior years. Additionally, with the strength in Q2, we are reducing the amount of incremental prudence incorporated into our guidance for Q3 and the full year, though not removing it completely as the environment remains dynamic. Turning now to guidance. For Q3, we expect revenue of $297 to $301 million, representing year-over-year growth of 26 to 28 percent, driven by continued strength across the business. We expect third quarter non-GAAP operating income of $32.5 to $35.5 million, representing a non-GAAP operating margin of 11 to 12%. As a result of our strong first half performance and robust customer demand signals, we are raising our full year guidance by $24 million at the midpoint from $1.195 billion to $1.203 billion for year-over-year growth of 27 to 28%. We expect non-GAAP operating income of $144 to $150 million, representing a non-GAAP operating margin of 12%. This guidance reflects our confidence in the resilience of our business and the value that we provide to our customers who continue to rely on our platform to drive results, even in uncertain times. In dynamic environments, our business is more relevant than ever. In closing, our performance in the first half of the year reinforces that we are executing well on our growth strategies we are delivering on our goal of achieving sustainable efficient long-term growth through adding new customers expanding with existing customers international expansion and moving up markets our single unified platform for marketing service and analytics positions as well to deliver unmatched value to our customers and establishes a solid foundation for continued innovation and growth in the future. I look forward to discussing more about our business at our upcoming investor day in September. And with that, I'll open up the call for Q&A. Operator?

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We ask that you limit yourself to one question. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Gabriela Borges with Goldman Sachs.

Hi, good afternoon. Congratulations on the quarter. Andrew and Amanda, I wanted to ask you a little bit about your progress in the mid-market in particular. Amanda, I remember it was a handful of quarters ago where you talked about seeing the pipeline be really good and stepping up the level investment to go off to that opportunity. And now if I look at your unit economics and LTV to CAC standpoint, you're seeing really nice improvement on LTV to CAC. So my question for the both of you is give us a qualitative overlay of what you're seeing in the mid-market in particular. And if there's anything else we can add to quantitatively on what you're seeing with sales productivity and how you're thinking about sales investment in the mid-market in particular, that would be great as well.

Yep, and that, thank you, Gabriel. I'm happy to take those. So just qualitatively, why are customers turning to Klaviyo in the enterprise? We see that, you know, the Klaviyo data platform plus this consolidation story of taking not just all the channels of marketing, but now marketing and service together is really resonating. And then as we talked about, I think there's this trend of all of the, you know, the entire CRM stack is about to go autonomous. And every enterprise is looking at, hey, who is their partner that they're going to work with over the next, you know, five, 10 years on making the customer experience really an autonomous, auto-optimizing thing. So I think that story is really resonating. The fact that we have the data platform at the core and the only one to do that, that's what's setting us apart. Now, on the unit economics, yeah, we've been investing in, you know, building out our mid-market enterprise demand gen and sales motions, and we continue to refine those. I think we still have, you know, work to do, as we always do, but we're very excited about the trend in the unit economics, et cetera.

Yeah, and just a couple of examples to bring that quantitatively to life. You know, you saw the growth in the 50K cohort, 14% year-over-year growth this quarter, in average revenue per customer, and we're continuing to see strong growth in the average revenue that we generate from our top 10 customers. So, all of them are really demonstrating that progress. And one of the examples that I, you know, really appreciated this quarter in the mid-market was Mejorie, who is a prominent jewelry brand. They chose us because of our robust integrations, our ease of use, and the reliability of the platform, especially after last year they had some issues with their prior provider and heading into Black Friday, Cyber Monday, they wanted to know they had a brand who can scale with them and support their business and Klaviyo is that partner.

Your next question comes from Terry Tillman with Truist.

Yeah, good afternoon. Congrats on the results. Hi, Abby, Amanda, and Zilli. My question relates to the service suite of products and I know that they're not actually generally available, I believe, but you're talking about releasing or putting into access help desk and the conversation agents. I'm just curious if you take a step back, and I think investors care about this, is how do you size this opportunity around your service suite versus some of the other products, whether it's mobile, email, or marketing analytics?

And the second part of this is, would it be a similar playbook where maybe it starts with traction more down market, or would this be more potentially actionable across all customer segments? yeah great sorry so happy to talk about what we're doing in service and i'll start with this is i think as you know what we traditionally thought of as customer service as it gets more automated more autonomous you know our belief is every business is going to offer up to every one of their consumers their own personal ai their own agent their own concierge that's there across all modalities so we're starting with web and chat we think it'll be voice we think it'll be on your you mobile mobile apps it'll be everywhere anytime you have a question whether it's something we traditionally think of about as customer service or something proactive you need some advice you know we already are seeing um you know in our uh in our beta questions where people are writing in and asking about things like hey you know i'm shopping and i'm wondering whether this outfit will work for this you know this event that i have to go to and that's not what we traditionally think of as a customer service request it's more it's almost blend between service and marketing so this conversational piece i think is going to be critical um and to the you know the question on hey how big is this market um i look at the marketing uh you know application the market automation um category this this conversational category i think is of an equal size uh now we're early into this uh we're doing a great job with building out the products and uh you know working with customers to refine it and planning to launch it soon but i think it's going to be a you know major accelerants and you know we look at for a lot of businesses i don't know why you wouldn't want marketing and then the conversations you have with customers all to be driven off the same data set so i think this is i mean this is this is where the market's going and it's going to get a lot more automated um because of that you know we obviously when cligio was starting out um we focused uh more on smbs and you know in recent years have started to shift our focus or more of our focus up market as well, I think there's a moment right now where, you know, for service, for conversation, you know, whether you're an SMB or an enterprise, you're looking and saying who's going to provide that personal agent, that personal, you know, concierge to every single one of my customers, and we want to be that. So we're already working with some larger businesses on using and adopting our conversational agent and our other products, you know, the customer hub and student help desk. So I think here we're not going to wait nearly as long to bring this into the mid-market enterprise because we're already seeing a lot of interest.

Your next question comes from Brent Braceland with Piper Sandler.

Thank you. Good afternoon here. A.B., talking about the moment you're in right now and was hoping maybe you could help quantify the opportunity. You have a good base of a 50,000K customer cohort, mostly using marketing today. What does that cohort look like when they layer in service, when they layer in marketing, when they layer in the AI First Help Desk, when they layer in this AI First Conversational Agent, any sort of sense of what the revenue capture for cross-sell could look like as you think about the full bundle?

Yeah, sure. I'll start. I'll begin with where I answered the last question. We think the opportunity in service and all the products we're building there is large, and it's sort of equivalent size, you know, for some businesses potentially larger than marketing, because it's not just responding to customer service requests, it also has an element of helping customers in generating incremental LTV. So, you know, the way the way it is, like, every business is going to have to buy the entire CRM stack, they're going to want all those products to work together on one data platform. So that's marketing, all of the various marketing channels, then service and conversation and then analytics and then they expect all of that software to become more automated you know we're really obsessed with this idea of what is the autonomous crm look like and i think that's going to start with b2c businesses with consumer where every you know every experience is already at scale you need more automation more personalization more optimization there um and i think if we can deliver better you know ltv to our customers you know if they've engage their consumers better, those consumers are spending more, then that gives us, you know, the ability to share, you know, in that upside. So, you know, we're not putting numbers on it yet, but I'd say, like, compared to some of the products that we've launched around marketing that fit in that marketing category, service is a real expansion.

And I think we're going to find that, you know, with AI and this ability to do more and generate better results automatically, that's a further you know you know revenue per customer expansion as well your next question comes from DJ Hines with Canaccord hey thank you guys congrats on the next quarter so AB look you've always had this interface for brands for marketing and now service and analytics use cases but if I understand right it now sounds like you also have more of a consumer facing interface right with these personalized conversational AI commerce agents, you kind of talked about your long-term vision and why that's important. But does it create any conflict with e-commerce partners that I suspect may be trying to do something similar on their own? Like, how do those agents work together? Like, help me understand how all the pieces kind of fit together.

For sure. No, I don't think it creates any real competition. And in fact, we're collaborating with a lot of the, you know, platforms and partners that we have to help develop this technology and then help put it to work. Frankly, we're in a rush right now where we feel like every single one of our customers ought to be delivering to their customers their own personal agent. And right now, that doesn't really exist. If you go to the major e-commerce players, then yes, that technology is there. But for everybody else, it hasn't really been adopted yet. And when I talk to our customers about what's slowing them down, a lot of it is technically challenging. We're not sure what to do. We're not sure how to train these models, how to put them the work it's actually in that case i think we've got a great team working on that we're working with customers and i actually think our partners are an accelerant there we've actually worked with a lot of um you know a lot of our agency partners on what you know how they can build up and see the practices and services around helping take conversational to all of our consumer businesses so uh i look at our partners the other you know in the platforms we work with we all have the same shared mission, which is help our mutual customers be more successful, own their destiny, and I'm excited to work on it with them. Thank you.

Your next question comes from Jackson Ader with KeyBank Capital Market.

Thanks for taking our questions, guys. Amanda, can we talk about the push and pull on gross margin? When, I guess, with the launch of service and agents and kind of the new products that have a little bit more software gross margin when should that be able to kind of outweigh some of the SMS headwinds and then is there any impact from the smoothing of your revenue through the seasons would there be any kind of seasonal impact or a similar smoothing on gross margin thank you yeah great question thanks so much Jackson.

In thinking about gross margin, I would probably think about three key drivers there. One is what's happening with growth in SMS, and we've spoken about that over time. The second is the investments that we've been making in infrastructure and the leverage that we're getting from those. And then the third is new products. Now, new products, we are really excited about them, but I would not at this point build in meaningful revenue into this year's outlook for it at least not to the extent that it would meaningfully shift gross margin now over time it is exactly what you spoke about which is we see some positive gross margin impacts coming from those products particularly marketing analytics which leverages largely the same infrastructure as our existing email plus data product and then service which is early days and we're still working through the pricing but again have a have a positive view on the margins there In terms of the infrastructure investments, which is a big benefit, we talked about in Q1 some of the investments that we had made and that we expected to get leverage for them over time as we continue to grow and scale with our customers. And sure enough, if you look at our gross margin in Q2, it was flat quarter over quarter. And what was going on within there, as we talked about in the prepared remarks, was the fact that we were getting leverage from those infrastructure investments, which offset some of the headwinds from SMS. So again, feeling good about where we're looking in terms of gross margin based on those trade-offs across the tube. Regarding the seasonality, I would not anticipate too much of a change because while email revenue will be less seasonal with the profile enforcement and the fact that those grow more steadily, SMS is still a subscription that is based on the sending volume, and we tend to see a higher portion of SMS in Q4, and that tends to be the biggest driver there.

Your next question comes from Derek Wood with TD Cowan.

Great. Thanks. Congrats on a great quarter. Amanda, you had a nice seasonal rebound in both net new total customers and net new 50K plus customers. Just hoping you could double click on this. Are you seeing more seasonality on the new customer side or did you see some sequential improvement or was there the change in pricing somehow a factor? Just what would you chalk up to the sequential numbers being so strong and, you know, what that kind of means for seasonality looking into the second half on the customer side?

Yeah, sure thing. Great question, Derek. And, And, you know, on the net new ads overall, similar to what we've spoken about in the past, the primary driver of that was in our entrepreneur segment because they tend to be the highest number of customers. But we did see also strength in ads across S&B and mid-market and enterprise. So really it is further evidence that the value proposition is just resonating across customer sizes. And specifically in terms of what's driving that growth and entrepreneur, I would point less to seasonality and more to the changes that we've been making driven by both our marketing and our product teams, thinking about how do we get increasingly dialed in on how we attract those entrepreneur customers in a really efficient manner, and then also how we bring them through the product usage curve, graduating them from free customers to highly engaged paying customers who are making great use of the platform. So a couple of things that we did in Q2 that helped to drive that. One, we put in an earlier payment step into the process for new customers just to reduce friction in the free-to-paid conversion process, and that helped to improve that conversion rate. And we redesigned our Klaviyo login page, which is one of our highest traffic pages, by testing out various marketing messages and improving product and feature discovery. And as a result of that login page change, the new design, it's been really, really positive. So really proud of the great work that the team has done to drive the strength in those overall new ads. On the 50K side, as we've spoken about before, 50K ads are a mix for us of new customers who land directly into that cohort and customers who expand into that cohort. And what we saw this quarter was a record number of net new ads across both of those. The new lands was near our record highs, and the expansion was a record high number there. So, you know, as we long have talked about, the fact that customers expand their usage with us is something we're really proud of because it shows that as their businesses grow, we can grow with them. And a great example in that 50K cohort this quarter of expansion was a household electronics company we work with who started with Klaviyo a few years ago with just email. They've been growing their profile steadily ever since. And then in Q2, they added marketing analytics. And the combination of the organic growth of their business and the addition of the new products moved them up into that 50K cohort. So we love it when our customers are successful and they expand their business with us.

Your next question comes from Elizabeth Porter with Morgan Stanley.

Great, thank you so much. As customers are standardizing on Klaviyo and you go with more of this one brain, one Klaviyo data platform, how does the go-to-market motion need to evolve? Is it still the same buyer or do you need to target kind of more decision, senior decision makers?

It'd be great just to get to your perspective on how the go-to-market motion evolves just as the product portfolio expands if there's anything tactical we should watch out for that can better unlock the opportunity and just overall where you are on the journey thank you yeah that's a great question thanks uh so i look at the the portfolio expansion of product the extension of the product portfolio is really opening up more doors more ways to um you know work with um the businesses that were uh you know they were uh want to partner with and especially in the enterprise So to give you an example, with marketing, you know, we've traditionally gone through, you know, the CMO and the marketing organization. You know, now with the expanded portfolio of B2C CRM, we're finding a lot of those conversations are getting up-level. More increasingly, we're starting to talk to chief digital officers, CIOs, heads of technology. Why? Because they see the shared data platform, you know, the brain, as you said, And they say, hey, look, we can actually use this in a lot of ways. And the fact that we're bringing multiple applications to the table across analytics and now the different service products we're going to offer, it starts to become more of a company-wide conversation. Now, in a lot of cases, we still say, hey, look, it was great to start in one area. And often that's still marketing. But we definitely anticipate over time that we're finding more customers who want to buy the entire Klaviyo stack at once. So we see a bit of that trend. And I think with what we're doing with conversational and our conversational agent, we actually think that's going to open up a whole new angle for us. That's such a new market. You know, it didn't exist a few years ago. And we find, you know, we have such, you know, with great respect, we've earned the trust of our customers. And so when we say, hey, we've got something for you to help you deepen your relationships with customers, you know, that goes way beyond just customer service, a lot of those folks think, okay, well, let me introduce you to our team because, you know what, we're actually trying to explore this category and understand, you know, who we should be going with, you know, looking forward. So, our kind of mental model is like now it's not just through marketing, you know, we might be going, in some cases, we may be a little more tops down. In other cases, we may be going through other parts of the organization that own the customer experience. It's given us now, you know, multiple vectors, multiple ways to start the conversation.

Your next question comes from Rob Oliver with Baird.

Great. Good afternoon. Thanks for taking my question. It's on the international strength, a really strong numbers with the 42% year-over-year, and I think, Amanda, you called out accelerating growth in APAC. If you could just remind us, you know, I know you guys have been rolling out languages at a really brisk pace, and where are we in terms of that language rollout? Are there major geos that still need to be rolled out? And then, A.B., I'd just be curious to hear from you. I'm sure mostly SMBs and entrepreneurs early on, but I'd love to get a sense from you of what kind of flavor of customer that could be, and if there's an opportunity for, say, multinational companies that now see an opportunity within the Klaviyo platform to do things multilingual and globally for you to really make a move up market via that path. Thanks very much.

Sure. Thanks so much, Rob. Great to hear from you. Yeah, we're very pleased with the results that we're seeing in international overall 42% year-over-year growth outside of North America this quarter, and in particular, I would like to call out strength in three countries, Norway, Germany, and Spain. Each of those countries, the new ARR that we landed in them in the quarter grew over 90% year-over-year, and we have rolled out new languages, and we will continue to roll out some new languages later this year, so look for more announcements coming there. In addition, an important part of what we've been doing in international is improving the product experience for international customers, as well as rounding out the end-to-end customer journey across all of our go-to-market interactions with customers. So some examples of how that came to life in Q2, the release of WhatsApp, which was really important for international customers, where WhatsApp is much more prevalent as a mobile texting option, simplifying multilingual email campaigns. Many of our customers in Europe operate across multiple countries and multiple languages, and so we made it easier than ever for them to leverage their content across multiple languages. And then on the go-to-market side, we are rounding out the product offering in languages by supplementing it with things like the launch of new websites. So we rolled out German, Spanish, and Italian websites and hosted our big marquee customer events internationally this quarter, both K-London and K-Sydney. So, you know, looking ahead, what you should expect is we're going to continue to invest in that local language selling capability, continue to invest in growing our Dublin office and building out the partner network, because as we build on those, it helps drive better, you know, even better returns and results from the language investments that we've made.

That's great. I'll add a little bit of color on the, you know, the question around like, hey, is international unlocking new enterprise opportunities? And the answer is absolutely yes. You know, I've talked to a couple of customers in Europe and Asia where we're already working with them, you know, their business in the U.S. And, you know, we've started to have opportunities that, hey, you know, we've actually got a larger business outside of the U.S. Can you help? And, you know, we mentioned some of the accelerants, some of the investments that we're making in the enterprise. There's a lot of stuff we're doing. Amanda mentioned, you know, WhatsApp support, multiple languages. We're also doing a lot with, you know, data residency and data locality, spinning up new data centers outside of the U.S. to help address those needs. So, I actually think that the enterprise growth we're seeing, you know, it's not just within the U.S.

I think we're going to see that it's also, you know, around the world and internationally Your next question comes from Brett Huff with Stevens.

Good afternoon. Congrats on the nice results. Thanks for squeezing me in. And early on when we picked you all up, we thought that international was going to be kind of the big kahuna growth opportunity here in the near term, however we define that. But it seems like now international kind of is accompanied by the AI conversational interaction, the service beta, and then continuing upmarket growth. How do you all, you know, should we think about reshuffling how assiduously you're going after each of those? Or maybe can you rank them and kind of give us pros and cons in how you're approaching those? thank you. Yeah, sure.

You know, there's one takeaway here is that we are very much believed that the future of CRM, and it's going to be led by consumer businesses, is going to be AI driven, going to be AI first. Our belief is every company in the enterprise and the SMB in the next few years, they're going to adopt a CRM stack that is AI native from the start. And this means not just our data platform and some of the predictive analytics we do on top of that, but finding ways to make marketing more autonomous self-optimizing make customer service something where everybody gets their own agent this i think is the massive opportunity that's right there and it's it's all market segments uh we see an smb we see an enterprise it's global it's not just here in the states uh it's around the world that is the number one opportunity that we see and that's why i'm very excited about the work that we're doing with our service products the work we continue to do with our marketing platform expanding channels making building on top of that the autonomy layer um so that's definitely number one and then you know after that you know i think we look at uh enterprise a great area of growth you mentioned that's also global um and international i mean we still have a lot of runway there as well uh so maybe it gives you a little bit of the stack rank but um i'm very proud of what our team has done uh you know on the product side to really set the table for really being able to deliver this b2c crm in one that is truly ai first and can automate a lot away a lot of the work personalization that end last mile personalization to consumers.

Your next question comes from Parker Lane with Staple.

Hey team, thanks for taking the question here. AV, you've added a lot of AI enhancements to core products this year, including things like automated campaign follow-up automation and conversations and SMS. How would you assess the adoption and utilization by different customer cohorts, the size of those customers, and how is that correlating with message volume?

Yeah, that's a good question.

So the AI features that we've rolled out so far, you know, we track for each of them this adoption rate. And I think what we're finding is our more advanced users, which tend to maybe skew a little bit more towards the enterprise and SMB, tend to be faster adopters. This is actually something we're working on. We find that a lot of the AI features we're building. So imagine things we rolled out like channel affinity. a lot of questions I get from customers are, how should I go about using this? When is it appropriate? We actually think that's something we can automate too. So rather than just giving people tools, actually telling them exactly when to do it, to use it, recommending it so that they can just, you know, accept those, you know, accept those recommendations and automatically embed it in their marketing. So that's what's happening on the, you know, on the adoption side. And then Yeah, I think it's still early for that, but I think what we're finding is the quality of the messages that folks are sending has increased quite a bit. We have a lot of stories from customers that are now, for instance, using the channel affinity feature that we rolled out, and it's helping them prioritize email versus SMS versus other channels, and it's leading to better consumer interaction.

And that's why the key thing for us is actually how much lifetime value, as we often talk about, attributed revenue back to Klaviyo. how is that growing that's ultimately the metric that our customers care the most about so that's the metric that we measure as well your next question comes from city panagrahi with mazujo hey this is phil on for city i just wanted to ask for all these new products like help desk conversational agents the customer hub how would you stack rank them in terms of revenue potential over the medium term and then on the mcp server what's the early feedback been and any initial thoughts on how you would price this thank you yeah terrific so uh you know out of the three

i think it's it's it's early um so i'll just i'll give you some rough thinking on this we're very bullish on this idea of every business being able to offer their consumers a personal ai a personal agent um and that's going to be driven we think primarily by our conversational agent technology um so i expect that that that's there's going to be an enormous amount of value there uh you know we're also very excited about what we're doing with customer hub but the customer hub actually has the conversational agent embedded in it so in some sense you can think of those two working together so we see that as additional you know an additional revenue opportunity um and then the health desk piece you know frankly we talked to customers that have said look you know when we think about uh the customer experience and customer service you know there we know that hey there's still going to be moments where our conversational agent needs to you know it's maybe too challenging of a question for it as it exists today. And so that's what our help desk helps solve for. But the thing I'm most excited about, I think consumers are most excited about, our customers are most excited about, is the idea of extending customer service beyond just questions about where are my products, where are my orders, very tactical things, and into more forward-looking use cases, things that feel more like marketing, they feel more value-add to the end customer oh and then mcp on that that actually we're not we're not intending to price and package that right now you know what's really cool about that is i talk to customers they're they're using that with you know the llms um you know their personal llms and we're finding people it's just another way for people to ask questions about the data inside of klavio and it's actually it's been really interesting we're learning a lot about the patterns of the kind of questions that people want to ask and that's you know we're using some of that feedback loop in terms of how we build you know, kind of agentic technology inside of Flavio. So, for instance, we're seeing people use it to, hey, analyze my recent campaigns. Tell me which performed best and why. We love making that data accessible to our customers. It's also giving us great, you know, examples of things that we can build into our analytics product or into our recommendations, you know, and this will all help power, you know, the recommendations that will ultimately make things like marketing more autonomous or help improve automatically, you know, those conversations that our conversational agent is having with Your next question comes from Arjun Bhatia with William Blair.

All right. Thank you so much. Maybe for you, you started off, I think, in your prepared remarks, you mentioned that you guys are seeing some pretty good traction in terms of incumbent displacements. And obviously, it seems like we can see that in the net new customers. And I imagine some of those are also landing in that 50K plus cohort. But I'm curious, as you look out at the market you know where are we in the in the incumbent kind of replacement cycle where are the legacy players like how much opportunity is there um still on that front and when you look at that opportunity is that mostly larger enterprises or do you still see um a lot of room to go on the kind of you know longer tail of entrepreneurs and smds yeah that's a great question.

So I see a lot of room in both areas. And I'll kind of say that there's a little bit of a difference in the opportunity. So amongst our entrepreneur and SMB customers, we still think there's always a ton of businesses starting up in the retail and commerce category. But we see even bigger opportunities outside of commerce. That's why some of the partnerships and integrations that we shipped this quarter around Getty, the venue, I think those are going to open up new markets for us. So we see a lot of opportunity even outside of pure retail or pure e-commerce. And then in enterprise, you know, we've made a lot of progress in the last couple of quarters, but the more we look at it, you know, we're just getting into really that enterprise segment. We see a lot of opportunity there. And, you know, the things I mentioned, you know, and Amanda talked about investments that we're making both on the sales and marketing and product engineering side. That's why things like we talked about custom objects, allowing for, you know, more bespoke or more custom enterprise data models, allowing that data to be inside Klaviyo really matters. It's the work that we're doing to better support mobile applications and mobile experiences and rounding out the true, all of your marketing channels in one place. I feel really good about the progress we're making there. As we do that, what we're finding is that customers say, okay, great, you're meeting my requirements. Obviously, you've got the Klaviyo data platform. You have everything you're doing around AI, and then obviously the ease of use. everyday usability that comes with Klaviyo, that is turning into more social proof points that's helping drive our growth in the enterprise segment.

An example recently of a customer who came to us from one of these legacy providers was a customer of ours who's in the food space, and with their legacy technology, what they were finding was that it was really cumbersome, and whenever they wanted to execute on even just very basic marketing tasks, they needed developer support in order for the marketers to put their ideas into action. And the other thing that they were dealing with was that they had a totally separate data warehouse and maintaining the data integrations was a big burden on them. So they came over to Klaviyo. They actually replaced four different products and moved on to Klaviyo, not only for email, but also for our CDP, the advanced Klaviyo data platform. And as a result, two things happened. One is they saved over 50 developer hours per month because the Klaviyo system is just so much easier and self-enabled to use. And two, more importantly, it empowered their marketers. So now they can move faster and generate more revenue. And that's what we hear consistently from customers is that they want to reduce their reliance on development teams and increase their ability to move with speed and engage their customers.

Your final question comes from Scott Berg with Needham and Company.

Hi, this is Rob Morellian for Scott Berg. Thanks for taking my question and congrats on the quarter. Excited to see the addition of support for new channels like RCS and WhatsApp. I know it still might be early days, but can you touch on customer feedback and interest so far? Is interest skewing more a market or is it relatively broad-based? And then additionally, apologies if this was touched on earlier, but any insight you can provide on the potential impacts of gross margins with increased adoption of these channels? Thanks. Yeah, that's great.

I'm happy to cover that. So with RCS, we think about SMS 2.0, the future of text messaging and WhatsApp. WhatsApp is obviously opening up a whole new communication channel that's especially popular outside of the US. But for both, it's really allowing for a lot more enrichment of the end experience that a brand can deliver to a customer. So we're very excited about both. We're seeing adoption, you know, amongst SMBs and our larger mid-market enterprise customers, everybody's interested in that. And so I'm very, very happy about the work that we've done to support those channels and some of the new media type experiences offer. And then in terms of the gross margin impact, you know, it's still early, but I think the gross margin profile is going to end up looking somewhat similar to what we see for SMS. The RCS, I think it was almost like a, will eventually be like a directional placement for SMS in most places. And we think of WhatsApp as, you know, apparently a messaging channel that's comparable to SMS, but is more of the default in certain markets.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.