Earnings Call Transcript - KVYO Q3 2024

Operator, Operator

Good afternoon and welcome to Klaviyo Third Quarter Fiscal 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ presentation, there will be a question-and-answer session. Thank you. I would like to turn the call over to Andrew Zilli, Vice President of Investor Relations. You may begin.

Andrew Zilli, Vice President of Investor Relations

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

Andrew Bialecki, Co-Founder and CEO

Thanks, Zilli, and thanks to everyone for joining us today. Klaviyo drove another strong quarter of results in Q3, delivering revenue of $203.5 million, growing 34% year-over-year. More than 157,000 customers around the world continue to rely on Klaviyo's data and marketing platform to grow revenue by leveraging first-party consumer data to create highly personalized AI-powered communications over email, SMS, and push notifications. Klaviyo powers smarter digital relationships. Using real-time first-party data, our vertically integrated platform enables our customers to quickly and intuitively customize segments, orchestrate omnichannel campaigns, and measure every interaction. Instead of requiring developer support, partners can leverage Klaviyo AI to get work done faster, optimize campaign testing, and generate creative strategies. Klaviyo makes complex tasks simple and scalable, making marketers much more efficient. Enabling customers to centralize their consumer data on Klaviyo allows them to build more personalized engagement, which ultimately drives more revenue. This is a key differentiator for Klaviyo, as many companies are dealing with a fragmented experience trying to manage consumer experiences across multiple marketing solutions. Companies choose Klaviyo to modernize and consolidate their tech stack because our platform is easy to use, flexible, and capable of handling even the most difficult use cases. This is particularly true at the high end of the market, where our platform and our best-in-class integrations drive value and create efficiencies. In the third quarter, we announced our partnership with Authentic Brands Group, an IP company that owns more than 50 large well-known brands, including Vince Camuto, Billabong, BC Shoes, and Juicy Couture. Authentic came to Klaviyo to modernize their tech stack across select brands within their portfolio. We're excited to build our partnership with Authentic Brands and help them deepen their relationships with their consumers across many of their brands. Every business wants to know their consumer and deliver an experience that beats the competition, so consumers keep coming back. Marketers are leveraging multiple channels with increasing complexity to reach this goal. But trying to combine data across multiple systems is more difficult as the business scales. With multiple channels, CDP, and reviews natively built on one unified platform, Klaviyo makes marketers more efficient. Dragon-Bone, an iconic fashion brand, joined Klaviyo this quarter to consolidate on our vertically-integrated platform. This is another example of an upmarket business turning to Klaviyo for a unified view of the consumer. They were using a legacy marketing vendor with several other point solutions, and due to this fragmented stack, they were having a difficult time getting an aggregated view of their consumers' lifestyle. Centralizing their consumer data with Klaviyo helps them unlock increased customer lifetime value across online and in-store purchases. In the highly competitive fashion industry that relies on brand loyalty, we believe this will be a game changer. We had a similar win with Pressed, the leader in the cold-pressed juice and champion of functional wellness. They were using multiple point solutions and were struggling with reporting, basic personalization, and poor segmentation. They consolidated onto Klaviyo, leveraging email, SMS, and CDP to drive more personalized communications with their consumers. Beyond our new customer wins upmarket, we continue to drive cross-sell growth, particularly with SMS, as customers see the value in leveraging multiple channels on one platform. We recently expanded our relationship with Spot & Tango, a fresh dog food delivery service and a Klaviyo email customer for the past five years. They were looking to drive an omnichannel strategy to create highly segmented, unified consumer outreach and so added SMS to drive further conversion. Moving next to international. We are continuing our investments across go-to-market and product and engineering to address this large growth opportunity. We started a new relationship with The Body Shop, a U.K.-based global beauty brand with more than 30 million global consumers. They were one of the largest customers on a legacy vendor solution, but we were unable to deliver personalized communications due to the complexity of the system. Working with the new Klaviyo partner, Absolute Web, they did a full strategy review and chose Klaviyo to consolidate from nine different tools to one, enabling greater personalization and streamlining their marketing tech stack. On the product side, we now support SMS in 18 countries, having recently added coverage in Norway, Denmark, Sweden, Finland, Italy, and Portugal. Additionally, following the successful launch of our French language products in Q2, we made Flows AI and Segments AI available in French, further expanding our features and functionality to those customers. And just a few weeks ago, we announced that our product is available in five new languages: German, Portuguese, Korean, Spanish, and Italian. Klaviyo is now available in seven languages, including our customer help center, where we offer an immense amount of resources for all of our customers. In addition to making our product available in more languages, we're constantly working to make our platform smarter and more automated for our customers with Klaviyo AI. Our AI-driven content creation tools and streamlined automation setup allow customers to move faster and more efficiently. We're designing these features to boost productivity, deepen customer engagement, and drive revenue growth. As part of our quarterly feature release last week, we announced enhanced email AI, which takes an existing template and creates multiple new versions based on a text prompt. The prompt can call for copy changes or new sections being added, and the new email will match branding and voice, removing the need for manual editing. For our enterprise and international customers, we released portfolio earlier this year. Now with portfolio-level metric mapping, customers can set up custom metrics that span multiple brand accounts within a holding company. For instance, if one brand within the portfolio uses Shopify and another uses BigCommerce, rather than managing separate revenue reports, Klaviyo allows our users to create unified revenue metrics. For complex businesses, we provide the flexibility for brands to create these types of metrics and easily analyze performance across all brands and integrations, providing consistent reporting at the portfolio level. We've also been expanding our product offerings over the last 18 months beyond email and SMS with reviews and CDP. Our Reviews product continues to make progress, empowering brands to understand their customers, and we're seeing customers who want to consolidate their applications and related spending with Klaviyo. Happy Wax, a Klaviyo customer for several years using both email and SMS, added reviews earlier this year, resulting in a 27% increase in the number of reviews they collected over their first 100 days using the product. As we expand our product capabilities beyond messaging and marketing, providing a powerful data and analytics platform enables marketers to uncover important insights and take action. We're really excited about our progress in CDP and compared to other CDPs in the market, our differentiation lies in its vertical integration, making it fast to implement, see value, and scale. We recently launched a new action center within our RFM analysis report, containing pre-built starting points for customers to enable key use cases like triggering automation based on key inflection points found in RFM. Ultimately, this allows brands to shorten the time from insight to action. We also launched a new product analysis feature, which provides customers with easy access to insights about their product catalog and purchase behavior. Using this flexible dashboard, brands can find insights on every product, including their repeat purchase timing and what products consumers tend to buy together or in succession. This new feature makes it simpler than ever to build a strong merchandising strategy, giving brands insights on how to promote the right product at the right time to drive repeat purchases and ultimately grow customer lifetime value. This quarter, Harn & Sons, a company known for their high-quality teas, added CDP for product and RFM analysis. By leveraging the advanced analytics capabilities on our platform, they created a consumer segment of possible churn risks and then executed a one-time win-back campaign. This targeted approach ultimately led to an average order value that was 29% higher than their year-to-date average order value. In fact, their CEO said this was the one campaign that paid for the first three months of the CDP product. While we continue to make great progress on our product and growth initiatives, we know that we can't do this alone. Our ecosystem of third-party partners, including marketing agencies, system integrators, and developers are key to our success and create important network effects for Klaviyo. We continue to see new partners proactively reach out to join our partner ecosystem, further expanding our reach. Partners are also continuing to build on Klaviyo, adding 20 new applications to our integration directory in the last three months as well as contributing more than 40 new flow templates that customers can implement quickly and easily. Our third-party platform integrations continue to be a strong differentiator for Klaviyo, allowing customers to connect nearly 400 technologies, giving them more choice and enabling them to combine first-party data on our platform. Our team is constantly working to build new connections with other companies. And in Q3, we launched our integration with Canva, which has achieved the fastest adoption growth of any integration in our history. Design and content creation is one of the key roles of marketing, particularly for smaller businesses, and has a large impact on performance. With this integration, customers can now bring images from Klaviyo into Canva and designs from Canva into Klaviyo for use across our platform. These integrations are driving customers to Klaviyo, as we saw in Q3 with True Food Kitchen, a healthy restaurant chain with over 45 locations across the US. They moved from a traditional marketing platform to Klaviyo because of how well we integrated with their tech stack, particularly with Olo and OpenTable, as well as several other software they use. They are extremely excited about the power of the Klaviyo platform and our ability to help them execute differentiated strategies going forward. I'd like to end by thanking all Klaviyo teams for their hard work in supporting our customers and continuing to make Klaviyo a leading data and marketing platform. As our customers gear up for Black Friday, Cyber Monday, and the holiday season, our teams are ensuring they have the support they need. Last BFCM, Klaviyo helped brands generate almost $60 million of Klaviyo Attributed Value or KAV per hour at peak times. This year, we're excited to help our customers hit their biggest holiday goals yet and are making it easier for them with the Black Friday Cyber Monday hub, a dedicated space in-app where users can plan, strategize, and prepare for their upcoming holiday season. Before I hand it over to Amanda, I wanted to highlight two recent leadership hires. Surabhi Gupta joined as our Chief Technology Officer in September. Earlier today, we announced that Adil Wali will be joining as our new Chief Product Officer later this month. Both leaders bring deep experience in scaling world-class businesses and will help us continue to grow and deliver exceptional value to our customers. Ed, my Co-Founder, who has been serving as our Chief Product Officer, will transition to become our Chief Strategy Officer. Ed has obviously played a tremendous role in growing Klaviyo, and I'm excited for him to take a more holistic strategic role to help drive Klaviyo forward over the next several years. And with that, I'll turn it over to Amanda.

Amanda Whalen, CFO

Thanks, Andrew. Klaviyo delivered another quarter of strong financial performance in Q3, driving efficient growth at scale. Revenue grew 34% year-over-year to $235 million, and we reported a 14% non-GAAP operating margin, continuing our consistent top and bottom-line performance. We are delivering on our four primary growth vectors, adding new customers, growing in the mid-market, expanding with existing customers, and expanding internationally. In Q3, we added over 6,000 new customers, and we now have more than 157,000 customers, up 16% year-over-year. Similar to last quarter, we saw softness in the SMB market and strength in entrepreneurs and in the high end of the market. The diversity of our customer base across size and geography allowed us to deliver another strong quarter despite the softness in one part of the business. Speaking of the high end of the market, we are really pleased with the results from our go-to-market initiatives we implemented last year to support our move upmarket. At the end of Q3, we had 2,619 customers, generating over $50,000 in ARR, which was up 54% year-over-year. We also had another record high number of customers landing in this cohort in the quarter, a great sign of the traction we're making upmarket. In addition to the customers you heard Andrew speak about, we also partnered with Lulu's, a digitally native women's fashion brand that was looking to enhance its tech infrastructure, streamline processes, and improve its reporting capabilities. In Q3, they adopted Klaviyo for email and are in the process of consolidating SMS with us. With both channels unified, Lulu's will be able to leverage our advanced flows, segmentation, and AI tools to deliver more personalized omnichannel communications. 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 110% for the quarter. As we've been discussing in the last few quarters, this quarterly decline in NRR was expected. As a reminder, NRR is composed of three factors: gross retention, cross-sell of additional products, and expansion of existing products. Retention remains strong, which is a great indication of the value we drive for customers that makes Klaviyo a must-have platform for them. Our cross-sell efforts have also been quite strong, especially with email customers adding SMS. In fact, as of Q3, more than 80% of our top 50 customers now use Klaviyo SMS. Excluding our entrepreneur cohort, nearly 25% of our combined SMB and mid-market customers are using Klaviyo SMS. We're very pleased with that progress. On expansion, we continue hearing from some customers, especially in the SMB space, that macro pressure is continuing and that they are very focused on the ROI of their software spend. Additionally, with the success upmarket that I just discussed, we're seeing many new Klaviyo customers land with multiple products from the start. There are obvious benefits to landing bigger multiproduct deals. However, it can also limit the expansion opportunities within those customers, which has a negative effect on NRR. This pressure on expansion continues to be consistent with what we've been speaking about over the course of the year. As a result, our expectations for continued decline in NRR in the near term haven't changed, and we expect this expansion pressure to have a modest impact on our growth going into next year. As you heard from Andrew, we're making great progress internationally on both the go-to-market and product fronts, and that is driving strong results. EMEA delivered very strong growth at 45% year-over-year, and APAC accelerated from last quarter. Combined, our international revenue grew 41% year-over-year, sustaining the rate of last quarter. These are great results, and we remain focused on making our product easy to use for our international customers, including with additional language launches, as Andrew mentioned. Local language availability is an important unlock to bring more companies onto our platform, and we'll continue to make our product available in more languages going forward. Moving on, non-GAAP gross profit for the quarter was $183 million, representing a non-GAAP gross margin of 78%, down 200 basis points year-over-year. In addition to the impact from our growing SMS product, gross margin was also pressured as a result of starting our Black Friday, Cyber Monday preparation a bit earlier this year, which increased costs related to infrastructure and testing. As a reminder, due to the seasonality of our business in Q4, we expect Q4 gross margins to be down as a result of elevated email and SMS sending volumes related to the holiday season. We continue to expect our full year non-GAAP gross margin to be down about one point from last year. Turning to non-GAAP operating expenses, sales and marketing and R&D expenses as a percentage of revenue came in relatively consistent with prior quarters. G&A expense was 12% of revenue, down 580 basis points year-over-year, primarily as a result of an additional international tax-related reserve release, similar to what we saw last quarter. Additionally, you may recall from our Q3 call last year that we had approximately $6 million in IPO-related expenses that did not reoccur this year. Normalized for this tax release and the one-time IPO-related expenses, non-GAAP G&A expense as a percentage of revenue would have been down roughly 100 basis points year-over-year. For the third quarter, our non-GAAP operating income was $34 million, representing a non-GAAP operating margin of 14%. This was better than expected as a result of the revenue overperformance, the leverage driven primarily in G&A operating expenses, and headcount coming in a bit lighter than expected for the quarter. We generated free cash flow of $34 million during the quarter, up 57% from the prior year due to higher profit and higher interest income. Moving to guidance. For the fourth quarter, we expect revenue to be $256 million to $258 million, representing growth of 27% to 28% year-over-year. This guidance takes into account the continued softness in the expansion component of NRR as well as the commentary from SMB customers around macro pressure. We expect fourth quarter non-GAAP operating income of $7 million to $9 million, representing a non-GAAP operating margin of 3%. This guidance includes a sequential and year-over-year decline as a result of expenses from a new employee cash bonus program that will begin this fiscal year, which we are implementing in Q4. We have not previously had a cash short-term incentive program for employees outside of those associated with our go-to-market team. This will allow us to enhance our ability to align pay with performance. It will also better align our compensation structure to peers in the market and will allow us to reduce future equity grants as a proportion of total compensation. We estimate the program will impact Q4 in the low teens millions of dollars, which represents a catch-up accrual for bonus payments we will make in Q1 FY 2025 for fiscal 2024 performance. Looking ahead, we will accrue for this program throughout each fiscal year. For the fourth quarter, we expect fully diluted shares outstanding to be approximately 306 million. For the full year, we are raising our revenue guidance to be $923 million to $925 million for year-over-year growth of 32% to 33%. As a result of the bonus program, for the full year, we are revising our non-GAAP operating income guidance range to $104 million to $106 million, representing a non-GAAP operating margin of 11%. This is consistent with the expectations we set at the start of the year that we would keep our 2024 non-GAAP operating margins roughly flat with 2023. Finally, for the full year, we expect fully diluted share count to be approximately 299 million. We are very pleased to be delivering this elevated level of growth at scale for FY 2024. Q4 is our seasonally largest quarter from a revenue perspective and has a significant influence on our outlook for 2025. While we're not providing 2025 guidance at this time, based on the trends that we are seeing, strength at the low and high end of the market and pressure on customer expansion that we've been discussing since the start of the year, we expect our 2025 revenue growth rate will decelerate modestly from our Q4 guidance. Due to the success of our go-to-market and product investment initiatives this year, we plan to continue to make strategic investments in 2025, with particular focus on growing our international footprint. As a result, operating margin is projected to remain relatively consistent with 2024 as we continue to invest for growth in our large addressable market. We will provide formal guidance for fiscal 2025 on our Q4 call, along with additional details around our investments. In closing, these strong results are a clear indication that Klaviyo's platform is driving success for our customers. We're well positioned to continue our success, adding new customers, growing in the mid-market, expanding with existing customers, and expanding internationally. We are excited about supporting our customers through their busiest season and driving a successful Black Friday, Cyber Monday weekend with Klaviyo. And with that, we'll open the call up for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And your first question comes from DJ Hynes with Canaccord. Please go ahead.

DJ Hynes, Analyst

Hi. Thanks, guys. And congrats on the nice quarter. And Amanda, I appreciate the early look at 2025. Can you just give us an update on your various customer acquisition engines or channels, whether that's through Shopify, marketing agencies, direct selling? Like anything stand out to you in terms of performing particularly well or vice versa?

Andrew Bialecki, Co-Founder and CEO

Certainly. To recap, we approach customer acquisition through several channels. Our marketing team focuses on inbound acquisition, raising awareness and attracting visitors to Klaviyo. We offer a freemium option for customers of all sizes to start using Klaviyo at no cost, which supports our sales team's efforts. Partnerships play a significant role, involving both digital agencies and major tech platforms, with Shopify being a key partner. Additionally, our sales team is increasingly targeting the mid-market and enterprise sectors, adopting a sales-driven approach for acquisition in those areas. We align our marketing strategies more toward small and medium-sized businesses, particularly the lower segment of entrepreneurs, while our sales efforts are more focused on mid-market and enterprise customers. We're seeing positive momentum across all three segments. In the entrepreneur sector, particularly smaller SMBs, we're experiencing notable growth driven by acquisitions through Shopify and similar platforms that cater to new businesses, along with our digital marketing initiatives. On the mid-market and enterprise side, we are establishing strong relationships with both our sales team and larger partners, bringing more of these into our partnership program to generate demand and collaborating with platforms that serve enterprise clients. We're optimistic about all three acquisition strategies.

DJ Hynes, Analyst

Yeah. Make sense. Thank you.

Operator, Operator

Your next question comes from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow, Analyst

Thanks and congrats from me as well. Amanda and Andrew, like the softness mentioned on the call, if you think about the economy, we've been in tougher times for a while, and you guys have been managing this pretty well. Did you see a change again in the last quarter that you think is more macro? Or do you think it could be election uncertainty that plays a role here? I'm just saying we've been in this environment for a while and most other people talk about more stabilization on lower levels, but stabilization? Thank you.

Amanda Whalen, CFO

Sure. Thanks, Raimo. I would say that what we're seeing is consistent. As you said, we've been in this macro environment for a while, and the trends that we are seeing, particularly focused on our SMB segment of customers remain consistent with what we've seen and what we've discussed in prior quarters. We're seeing some softness in new customer acquisition. We're seeing some softness in expansion but we are not seeing that macro environment or the impact become either materially better or materially worse. It has been steady. What we hear from customers based on our conversations with them is that it's clear that we are in a value-based market, meaning that customers are very focused on the value that they're getting from their software. In this environment, we are really pleased with the way that we are able to deliver strong results because we're a must-have for customers to help them drive their revenue and drive their growth. The other thing that I think is important to remember is that we have a very diverse customer base, both in terms of size, ranging all the way from, as Andrew said, entrepreneurs all the way up to global enterprises as well as geographies around the world, which means that we're not reliant on either one specific type of customer or one region to drive our performance. In fact, this quarter, we saw strength in the entrepreneurs, and we also saw strength in the high end of the market. I think the last factor that's important to think about in this environment is that it's important to remember Klaviyo is not indexed to GMV. We index to digital relationships and the digital relationships that our customers are building with their consumers. And so especially during this time of year, as we get close to Black Friday, Cyber Monday, helping our customers engage with their consumers in the right way over the right channel with the right message at the right time is extremely important because that is how we help our customers thrive.

Raimo Lenschow, Analyst

Okay, perfect. Thank you. Makes sense.

Operator, Operator

Your next question comes from Scott Berg with Needham. Please go ahead.

Scott Berg, Analyst

Hi, everyone. Thanks for taking the question, and a nice quarter here. AB, I just wanted to ask on the two new hires that you mentioned, the CTO and CPO. At your platform, I know you've talked pretty extensively about the database kind of bottoms-up platform and the benefit you all receive from that. But how do these two new hires impact the technology footprint going forward?

Andrew Bialecki, Co-Founder and CEO

Sure. We've got a great team. We have some big ambitions, and I'm very excited for Surabhi and Ed to join forces, because I know they have ambitions that match our own. I think for all leadership hires, there are maybe two core traits we look for. One is humility, the ability to dig into the details and roll up your sleeves. The second is having seen things at scale. And the second point is particularly material for what you're talking about. Ed is actually a Klaviyo customer. One of the businesses he started was one of our early customers, so he's got a lot of context for the space. And for both Surabhi and Ed, they've worked on some of the PlanetScale infrastructure. As we think about Klaviyo as the source of truth for consumer data for businesses, being that system of record, how do you build systems that are very elastic, very scalable, very reliable, and very secure? I'm excited that they both have a lot of experience building that. We've done a really good job with our engineering team to date in instilling that in our culture, and I think they're going to help us scale that quite a bit.

Scott Berg, Analyst

Wonderful.

Operator, Operator

Your next question comes from Brent Bracelin with Piper Sandler. Please go ahead.

Brent Bracelin, Analyst

Thank you. Good afternoon. AB, the Q4 guide suggests the business is poised to cross over $1 billion in ARR exiting the year. I'd be curious to hear your thoughts and product vision here on the next $1 billion. Wall Street always wants more. You're bringing in new talent. You have a strong balance sheet, good cash flow. You could always lean into M&A. Walk us through kind of the appetite to add that next $1 billion and how much you're going to lean into M&A and internal investment. Walk us through that vision that would be helpful. Thanks.

Andrew Bialecki, Co-Founder and CEO

Yes, for sure. Well, I think it's hopefully, it will not take us nearly as long to get to $2 billion, as it took us to get to the first one because we like to get there pretty quickly. Let me talk about a couple of things. Amanda talked about the four areas that we're focused on: continuing to get more SMBs on the Klaviyo platform, doing that internationally, expanding up into the mid-market and enterprise, and also growing our product portfolio. So let me speak a little bit about the product side, and I'll come back to the customers we're going to serve. A mantra we've had at Klaviyo is, if we're going to build a product, it's going to be best-in-class. The word we use is premium. A few years ago, Klaviyo's core product was a database and then kind of email and marketing on top of that. We've taken an approach of how do we extend to all of the messaging channels that matter for a business? That's why we put big investments in SMS. Now going forward, we're doing a lot more with mobile applications and the experiences there as well as social channels, things like WhatsApp and other social networks. So I think we can do a lot more than just email and go way beyond that into all of messaging and marketing. What we're doing with reviews is another product category that is very important to a lot of marketers. Even thinking beyond that, we think about what are the other customer experiences that you can use the source of truth that we're building, this database, to power, to personalize, to measure, and to use AI to automate so those experiences get smarter over time. That's what we're doing with CDP. A lot of the CDP usage we've seen comes from analytics, businesses that want to understand who their customers are and immediately take action. We're excited about the growth we're seeing with that product. We think about the other services, the other touchpoints that a business has with its consumers. We consider that across websites, in-store experiences, and customer service experiences. Our ambition is to ensure all of those services and experiences are great for the customer and high value for the business. For some of those, we're considering building, and some of that will be organic. However, we'll also be open to doing M&A. We also very much look at our ecosystem and our partners. We have many great partners that have built features that we can't get to or help us address various use cases domestically and internationally, different verticals. That's also an approach that we'll take. Ultimately, we want to be that source of truth about who your customers are and the entire software platform that you use to drive customer experiences that drive revenue.

Brent Bracelin, Analyst

Helpful color. Thank you.

Operator, Operator

Your next question comes from Michael Berg with Wells Fargo Securities. Please go ahead.

Michael Berg, Analyst

Hey, congratulations on the quarter. I appreciate you taking my question. I want to briefly discuss the international opportunity. It seems things are running smoothly there, and you've made some significant announcements regarding language support and native capabilities. How should we view the progress since those launches? I understand it's still early, but regarding the new languages and the five new regions, do you have any initial insights that could be helpful as you expand into additional geographies? Thank you.

Amanda Whalen, CFO

Sure. Thank you so much for the question, Michael. We are very excited about the progress that we're seeing across international. This quarter, there was particular strength in EMEA with 45% revenue growth. When you talk about some of the impacts that expanding languages and that focus on international is having in the business, this quarter, we saw notable strength in our new business across France, Germany, Spain, and Finland in particular. We are focused this quarter and going forward on adding local language-speaking sales reps to support that product capability so that we can support local language selling in regions like Germany, France, Spain, and Italy. In terms of other progress that we're seeing in the business, it's leading to some great wins. We had terrific wins this quarter internationally, not only with The Body Shop but also with Minelli and Passionata, all of which are great brands internationally. Another important part to highlight is the strength of our partner network and the impacts that our partner-led approach is having on our international growth. We are very appreciative of our partners around the globe, including companies like PrestaShop, Think Digital, and Oz, among many others. They are helping to support us as we expand outside the United States. It's still early days, but I can tell you that the customer response has been terrific for the launch of five new languages: German, Portuguese, Korean, Spanish, and Italian. It was just in October, but they are very excited, and we are excited to see how they can continue to drive growth internationally.

Michael Berg, Analyst

Awesome. Thank you.

Operator, Operator

Your next question comes from Rob Oliver with Baird. Please go ahead.

Rob Oliver, Analyst

Great. Good evening. Thanks for taking my question. AB, mine is for you. A couple of questions ago, Brent asked about the next leg of growth to $2 billion. When you look at some of the other products aside from SMS, which is obviously number one on cross-sell, I know Amanda called out cross-sell still as an area of strength. Maybe talk a little bit about what you're seeing from Reviews and then in particular, CDP, where I know you guys made some changes to how you package the CDP solution and would love to get an update on how that sort of bifurcation of the product is perhaps driving incremental wins. Thank you.

Andrew Bialecki, Co-Founder and CEO

Yes. I think going forward, we very much look at being a multi-product company, something where you can buy all of the applications or a lot of those applications that integrate. That's our goal. I'll start with SMS, and then I'll talk about CDP. For SMS, we talked about how 80% of our top 50 customers are using SMS. That shows a lot of demand from both SMB and mid-market and enterprise. We're very excited about the story around wanting to consolidate and wanting things on our platform because of the data we have. We continue to look at adoption rates and what percentage of our customers can adopt and how do we make it easier for them to do it through our sales team, through partners, and also directly through our products. The CDP story, I mentioned going beyond marketing. We've realized there are two core use cases. The first is around analytics and understanding who your customers are, and the second is around data governance. For that analytics use case, we've seen a great amount of customer adoption. If you want to understand who your customers are and build a funnel of where customers are dropping off or other engagement metrics, we've made our product easy so that you can quickly turn insights into marketing campaigns. We're shortening the loop from insight to action, and we're seeing that customers get it. The ROI is significant because the cost of our CDP product pays for itself almost immediately in terms of incremental revenue. We're excited about how our platform continues to evolve and serve our customer needs across multiple product categories.

Rob Oliver, Analyst

Great. Thank you for all the color. Appreciate it.

Operator, Operator

Your next question comes from Keith Weiss with Morgan Stanley. Please go ahead.

Keith Weiss, Analyst

Thank you guys for taking the question, and congratulations on a solid quarter. I wanted to dig into the NRR commentary a little bit and why it weighs on growth into next year. I was a little bit surprised because it sounds like the upsell motion is going and the cross-sell motion is going quite well for you guys, particularly with SMS, but the switch portfolio is expanding really nicely. The expansions have been pressured by macro for a while. You’re anniversarying that, and that's not a net new impact into next year. The bigger lands, I mean, that's just you're accruing the revenues elsewhere rather than NRR; you're just getting it upfront. So can you touch us a little bit on why the NRR can use sliding, like why there's not better offsets from cross-sell and why that's an incremental pressure on revenue growth into the forward year?

Amanda Whalen, CFO

Sure. Great to hear from you, Keith. Thanks so much for the question. As we said, we don't guide to NRR specifically, but we do expect that it will continue to decline in the near term, and that expectation for a near-term decline hasn't changed. If you break NRR into its components, there are three primary components of NRR. First is retention. Second is expansion of existing products; and third is cross-sell. Retention on the retention side, our gross retention remains strong because we are a must-have for our customers. On the expansion side, if you split that into expansion of existing products and then cross-sell, expansion of existing products tends to be the largest driver of our overall expansion. It's a significant driver of NRR. And that is part of why we're talking about the impacts that we're seeing there. We continue to hear from customers that it's a value-based market, particularly among SMBs; they are very mindful of their spending. In summary, our NRR is subject to pressures due to a macro environment where customers are looking to optimize their software expenses.

Keith Weiss, Analyst

Got it. Just a quick follow-up. If we think about the expansion within SMB being somewhat macro-related, can we read through that as you're assuming a continued sort of the current macro environment we're seeing right now, which hasn't been great going into next year? So like we could take it away, saying you're being conservative about macro assumptions into 2025.

Amanda Whalen, CFO

I think that's a fair assumption. As we mentioned earlier on the call, this trend has been pretty consistent all year. Because it has been consistent, we're assuming that, that's going to continue at a similar growth rate into next year. Therefore, it’s prudent to adopt a conservative view of the current macro environment.

Operator, Operator

Your next question comes from Arjun Bhatia with William Blair. Please go ahead.

Arjun Bhatia, Analyst

Thank you very much. I wanted to touch on the upmarket traction. It sounds like to the earlier point you were making, Amanda, just then that your customers are landing larger. You're seeing the $50,000 customer count increase quite a bit, and you have a host of kind of large logos to show for it. As you move further upmarket, how are you seeing the competitive dynamics change? What impact is it having on win rates and sales cycles in particular? As you look into next year on the NRR front, what should we expect from those larger customers? Because it seems like some of the pressure is with smaller customers. Should we expect that those larger customers might actually expand at a faster rate than your current customer base today? Thank you.

Andrew Bialecki, Co-Founder and CEO

Sure. I'll take the first part on competition and how we see their spend along with the adoption of our products growing over time. From a competitive dynamic, as you move up into the mid-market enterprise, we built Klaviyo to be the system of record and extremely scalable. We're quite pleased with the expansion we're seeing there. We see a lot of modernization happening for businesses that are using older technology. This is a very durable trend. We're seeing customers want to adopt more of our product set upfront, which is great. Over time, we'll find opportunities to expand with the larger customers as they create business units and regions needing consistency in their marketing strategies. In summary, we see plenty of opportunities for both customer growth and expansion as we continue to move upmarket.

Arjun Bhatia, Analyst

Okay. Understood. Perfect. Thank you.

Operator, Operator

Your next question comes from Derrick Wood with TD Cowen. Please go ahead.

Derrick Wood, Analyst

Thanks. Amanda, another impressive quarter around margins. It sounds like there's a lot of moving parts to consider in Q4. By my calculation, ex the cash bonus payments, operating margin guide would be around 8%, which is still down from the mid-teens year-to-date. Could you just comment on how to think about some of the seasonal factors, especially the degree of seasonal compression in gross margins and the seasonal uptick in sales and marketing spend? And remind us why you typically see such a big ramp in sales and marketing spend in Q4?

Amanda Whalen, CFO

Thank you. It's a great question. I appreciate you asking it. On operating income, we discussed in the prepared remarks, the guidance includes the impact of the accrual for the new cash bonus program. Think of that in the low teens millions of dollars as a catch-up accrual for all of fiscal 2024. In terms of the underlying performance, what we're expecting in Q4 is our normal typical seasonality in the business. What we tend to see in our business in Q4 is a bit of gross margin pressure, which comes from a result of increased sending volumes. Those increased activities occur because Q4 is the most important time of year for our customers. We want to be top of mind, so we tend to market more in Q4. This expectation is in line with historical trends.

Derrick Wood, Analyst

Got it. Thank you.

Operator, Operator

Your next question comes from Terrell Tillman with Truist. Please go ahead.

Terrell Tillman, Analyst

Thanks, AB, Amanda, and Zilli. My question is kind of a multi-parter here. First, in terms of just another reminder for us, Amanda, in terms of 4Q, how does that usually look in terms of seasonality of winning new customers? Do they want to keep kind of those decisions off the table because of the holiday selling? Or because of your upmarket motion, could you still see some strong activity in terms of new customer business? The second part of this question is I appreciate the macro dynamics and value-based decisions by your customers. Do you assume in the holiday period that your existing cohorts of SMS customers are actually going to send lower volumes than last year? Thank you.

Amanda Whalen, CFO

Sure. Thanks so much, Terry. I'll take the adds first, and then we can talk a little bit about what happens with SMS in Q4. Historically, Q4 is a seasonally strong quarter for us. We don't separately forecast net adds, but we do tend to see many customers come to us in Q4, particularly at that lower end of the market, right as they get ready for the holiday season. It’s important to remember that as we are moving more upmarket, we may add fewer but higher quality customers. That's a worthwhile trade-off over time because one mid-market or enterprise customer can be worth several entrepreneur customers in terms of LTV. Regarding SMS, we typically see SMS volumes increase as a result of the holiday season. This year, we're anticipating continued healthy growth in the SMS channel as customers look to connect in a timely manner with their audience during this peak season.

Operator, Operator

Your next question comes from Nick Altmann with Scotiabank. Please go ahead.

John Gomez, Analyst

Hi, this is John Gomez on for Nick Altmann. Thanks for taking my question. Can you talk about your pipeline for upmarket logos? And when you think about the pipeline and seasonality upmarket, should we expect the bulk of that strength to come in Q4, given that's the biggest renewal quarter, and perhaps this provides an opportunity for displacement activity?

Andrew Bialecki, Co-Founder and CEO

Yes. Just in terms of pipeline, when we think about — again, we work with a lot of retailers. A lot of our enterprise customers are not making buying and switching decisions in Q4, typically. They'll do that offset by a couple of months or a quarter or two. We do see some larger folks that will say, hey, I'm getting in the rush right before the holidays. But in general, we think this is a quarter to build up those relationships. We see a lot of that materialize into post-holiday customers.

John Gomez, Analyst

Great. Thank you.

Operator, Operator

Your next question comes from Mark Zgutowicz from The Benchmark Company. Please go ahead.

Mark Zgutowicz, Analyst

Thank you. I was just curious if Shopify's recent expansion and success at the enterprise level is starting to trickle into your pipeline and sort of how your preparedness and go-to-market looks there relative to mid-market?

Andrew Bialecki, Co-Founder and CEO

Yes. Our partnership with Shopify continues to get better. As they're working with larger retailers, we're doing the same. The integration that we've worked on over the last decade with the Shopify team is paying off. This model is something we want to replicate as we approach enterprise businesses. We aim to expose APIs for custom development while ensuring out-of-the-box functionality. We're excited about the progress with Shopify.

Mark Zgutowicz, Analyst

Excellent. Thank you.

Operator, Operator

And our last question comes from Kelly Valenti with Goldman Sachs. Please go ahead.

Kelly Valenti, Analyst

Hi. Thank you for taking my question and congrats on the quarter. Building on the discussion we had on integrating the e-commerce and marketing layers, can you talk a little bit about some of the ways that you're helping Klaviyo connect to ad audiences? I know this came up last quarter.

Andrew Bialecki, Co-Founder and CEO

Sure. To help with marketing, there's a big chunk of the marketing budget that fits into advertising and demand generation. It’s crucial for Klaviyo as a platform to integrate tightly with Google, Meta, and TikTok, among others. We want to integrate with all those platforms. Our goal is to help businesses build relationships with visitors without additional retargeting spend. We also want to improve customer acquisition. In summary, Klaviyo is focused not only on retention but also on acquisition.

Kelly Valenti, Analyst

Great. Thank you.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.