Braze, Inc. (BRZE) Earnings Call Transcript & Summary

All right. We will go ahead and kick it off. Thanks, everyone, for joining us at the Braze session this afternoon on day 1 of the Goldman Sachs Communacopia and Technology Conference, delighted to have on stage with me, Isabelle Winkles, CFO; and Christopher, as Investor Relations. Thank you for your time.

Thanks for having us.

[ Kelly Valenti ] my colleague all the way on the left. So I want to start a little bit with a reflection on the last couple of years since you went public because I think like many of the companies in the software stack, you've had a little bit of a roller coaster in terms of full forward of demand normalization through the COVID years and then post the COVID years. So Isabelle, maybe just a little bit on learning lessons when it comes to forecasting through that time frame. And yes, what was some of the biggest learnings now that we're on the other side of it?

Yes. So I think the growth that we experienced over the course of -- not only just the COVID period, but just generally the zero interest rate environment that we had was actually -- it was great from a learning perspective for our organization across a number of different fronts. In the very, very early days of us being public, I remember a lot of investors would ask us, "Hey, what kind of investments do you guys need to make from a technology infrastructure perspective to be able to really grow and come out on this as a platform that can service industries and companies of all shapes and sizes and to have the time with about maybe 1,000 customers, 2,000, 5,000, 10,000 customers?" And I remember our engineering team would sort of say, given sort of some of the growth that we had experienced, we're kind of already there in terms of the infrastructure that we need and all of the service providers that we have within our own technology stack, be it any one of our vendors or some of the infrastructure that we've built on a proprietary basis for ourselves. So I think some of the growth that we've experienced, it's been great to be able to see how we've been able to capitalize on all of the available expansion opportunities and actually continue to maintain our level of speed, scale and reliability across the breadth of customers that we have from the smaller SMBs that are still spending, call it, $25,000 or $30,000 a year with us all the way up to the largest multinationals. The other thing that happened is we continue to expand globally. And so our ability to not only put boots on the ground across the organization, and to figure out what works better in different parts of the world from just a structure, go-to-market motion and just learn from those things and see how do we get more traction with those different parts of the world. Looking out at one of our audience members, we engaged in a JV with Japan Cloud Computing, very, very successfully, and we're very happy about that. and helped us sort of put boots on the ground in the Japanese market. So I think all of these available expansion vectors were available to us during this period. It also enabled us to continue to grow out our platform of available channels. So we increased the number of channels that we offer to our customer base, which is great and then continuing to invest in features and functionality of the platform, making it more performant, more reliable, adding features across the platform. So it's been a multifaceted and multidimensional growth journey that's really enabled us to stretch the platform and make sure that it can continue to perform at the highest level. We have said in the past that we want to be the platform you graduate to and then never graduate from. And I think over the last several years, we have definitely proven that we have the ability to service that demand with -- across the globe and across different industries and across companies, small and large.

You have been very consistent in talking about investing for durability of growth. So I like hearing you talk about the building blocks that have been put in place for a number of years now to be able to support much higher growth at scale. Is there a way to think about incremental priorities for investment from here as you think about the next 3, 5, 10 years of Braze as a scaling company.

Yes. So if we think about -- we definitely want to see more efficiency and performance out of our sales organization. So while we are going to continue to invest in the sales organization, there is still more sort of performance that we need to see and get out of our existing sales teams. We are going to continue to invest across the breadth of the platform. So if you think about places where we're going to invest, R&D is the part of the organization where we're going to see investment track most closely with revenue growth, because we do think it's important to maintain our current moat and keep that flywheel going and maintain our lead in our advance over our competitors. But we're going to continue to invest across the breadth of the stack. And so that -- starting with kind of that ingestion layer, we want to make sure we want to continue to be able to get data into the platform with high degrees of speed, reliability, we want the data to complete and we want to lower the overall cost of ownership for the data for our customers. So we want to bring data in from multiple different sources and continue to increase the breadth across which we can bring data into the Braze platform. And then across the data processing, whether it's classification, orchestration, personalization, we want to continue to increase the performance of the overall platform and then continuing to increase our breadth of channels so that we can continue to allow our organizations that use us to come with more sophisticated cross-channel strategies that really help to engage their end users and optimize and increase that ROI that the Braze platform delivers to its users.

One of the things that we particularly like about the Braze architecture, you're making the points here on data ingestion and data processing and throughput essentially. How do you think about that data advantage [ in dissecting ] now with AI. Maybe you could give us a couple of use cases that you're excited about internally and that your engineering team is working on.

Yes. So we've had AI embedded in our road map, virtually since inception of the product. At the core, if you think about the sophisticated strategies that a brand may want to engage in as it relates to sophisticated A/B testing. So machine learning, AIML, embedded in the platform in order to help the strategies themselves to learn which campaigns and which versions are actually having the best results with end users. And so that capability to enable a brand to run multifaceted strategies, campaigns and then figure out which ones are actually resonating the best with their end users and then double down on those and pulling away from the ones that are being less effective. That's definitely -- that's AIML that has been in the platform for quite some time. More recently, we've actually leveraged the likes of ChatGPT and DALL·E to act as sort of a copilot or muse to help small but mighty teams develop multiple strategies and multiple different versions of copy that they may want to test against each other. And so if you are just a small team that is looking to come up with a variety of different culturally appropriate language specific, regional specific strategies. You can leverage a number of the integrations that we have to come up with appropriate copy to then test against each other. So that is another way that we have brought AIML into the product and the same is true with imaging. And then even more sophisticated is actually when you get into predictive analytics and recommendation engines that are actually able to take real-time user data from the brand and help the brands come up with what is the next recommendation that I should give to this end user? What is most likely to result in a positive conversion or a positive experience? And so all of these different strategies, they are -- and use cases what I like to think about is they add the most value when the data that you feed it is of highest quality. And the data is of highest quality when it is first-party zero party data, which is exactly what we enable our brands to consume in real time. And when it is, recent, when it is current, when it is live. And so our stream processing architecture enables brands to bring that data in, in real time. We like to say that our software platform experiences the world as it happens. And you are taking a sophisticated AIML model and feeding it real-time, high-quality data and information. And so I'd like to say, adding AIML to any tool will only enable it to increase and improve its performance by so much, the infrastructure and the hardware and the software that backs it up has to be able to take that data and actually do something value-add with it and so I think that's the net impact of AIML within our platform is going to be more performance than other potential competitors just because of our native stream processing architecture and the fact that we -- our tool is really experiencing the world as it happens.

So there is an interesting two-sided conversation here on AI has been essentially a part of the Braze platform since day 1. And now you're looking at customers getting usage out of some of these new features. How do you think about monetizing it? On the one hand, it's always been part of what customers pay for on the other hand, I Imagine that you can measure improvements in productivity because of the functionality that you're delivering?

Yes. Yes. So we'll definitely use the net effects of it anecdotally to talk to other customers and prospects about investing in that sort of feature and functionality and buying those SKUs from Braze. We don't necessarily price it as sort of "we will take X percent off of your ROI". So it is priced and sold like a committed product at a standard price with all available discounting that we allow. But a similar style companies will pay similar amounts for the tool even if their ROIs might be a little bit different. The way to think about how we monetize AI is there are certain features and functionality whereby the AI is leveraged once and then replicated millions and tens of millions of time, but not in a way that adds sort of weight or cost to our infrastructure. So if you ask the system to interface with ChatGPT and come up with 5 different copies of text for you for a subject line or for an e-mail. And then you send those e-mails or you send that message across multiple channels, hundreds of millions of time, we won't charge you for that interface with ChatGPT or the DALL-E tool that might generate an image. That is part of the business workflow. You could theoretically have an additional tab that's open and available to you and leverage those tools separately. Those are just part of the business workflow. Those do not get charged separately. They are just available and embedded in the platform, where the tool is being leveraged on a one at a time, in real time, always on fashion. And so that is going to be things like the predictive suite, like the recommendation and the product recommendation engine that interfaces with the catalog tools, those are SKUs. And so those are more premium value-add products that are going to leverage real-time actions and data that are executed by the end user in order to provide one at a time in real time based on that stream processing architecture action to take vis-a-vis that customer. And so since that is an always on data processing capability, that is a SKU that is going to get monetized. So those are sort of the 2 ways at a high level that we -- how we think about the monetization framework for AI capability.

Absolutely. I wanted to ask next a little bit of a TAM question, which is a lot of the features and functionality we're talking about are incredibly sophisticated relative to what some of your peers are doing. The flip side of that is, what percentage of the TAM, if you look at incredibly large CRM marketing TAM, customer engagement, what percentage of the TAM arguably needs that depth and sophistication? And how do you think about that bottom floor coming down over time as to customers that makes sense to buy a premium product from Braze?

Yes. So I think that TAM is just continuing to increase actually. And so whether it's sort of the total CRM market or even the CRM market that can benefit from the higher levels of sophistication that we offer. When we think about the earlier days of Braze and we did very well across the challenger bank organizations and the health tech and the ad tech and the health and wellness organizations. But we don't have any -- we have a bunch of sort of low-cost carriers from an airline perspective. These are sort of the disruptors of a variety of different industries. We -- what you're seeing is as those disruptors are becoming more and more successful, the incumbents are sort of realizing, wait a minute, we actually do wake up to this. And so I think that TAM is ever increasing as more and more organizations are recognizing that actually, this higher level of sophistication will pay dividends if you engage in it. And so the first step is recognizing within an organization, you kind of need to make somebody's job to care about customer engagement. That is sort of step one. Once you've gotten to that point, you can say, okay, well, now I need tools and systems and data to enable me to get the most out of my customer and user base. And then ultimately, the sort of end goal is that you sort of evolve your own business model such that you really can capitalize on this direct-to-consumer model. And there's been so many waves of change across different industries that have actually experienced in that evolution where that direct-to-consumer model has become more and more important. And I think, if you think about the retail industry where it used to be that your relationship was with the big box stores and where you were in the aisles, and now customers like Procter & Gamble have direct-to-consumer relationships across the pampers and they're trying to develop these communities of parenting that actually then evolve into these lifetime relationships between the consumer and the brand. The same is true for the quick service restaurants that were largely disintermediated by the delivery applications and now all of them are realizing, wait a minute, I have to develop a real-time relationship. So I think with my end users in order to maintain that margin and that direct relationship. So I think this TAM is sort of ever increasing as these what one might consider these legacy enterprises are recognizing that actually this is a one directional door. And once you go through the door of sort of higher-level sophistication nobody ever goes back and says, ah, you know what, I'm just going to go back to my Batch and Blast e-mail.

I don't like the ROI.

That -- the ROI of that high quality in real time, always on one at a time, is just so high. I think what's challenging in this environment is for some of those use cases, it's a bit of a greenfield exploratory opportunity for certain brands. And so in this non-zero interest rate environment and where the macro ends up being a little bit more challenging, getting those investments at these organizations to continue and to be -- and to accelerate quite frankly, is more challenging.

Kelly, over to you.

Yes. So Braze now has a couple of 8-figure plus customers. So I think about replicating that success across more of your customer base? And I guess the real question there is, what have you learned from those deals that you can then roll out across your...

Yes. So these customers that have -- that have now achieved the 8-figure status, they've been customers for a while. So it's great to see the different vectors of expansion that has led to those customers achieving this size. And they've all expanded in different ways. With some, it's been brand proliferation across the portfolio of different type of different subgroups. For some, it's been geographic expansion. In all cases, there's been volume increases of either monthly active users, net new channels, volumes of channels. And that's been really great to see how we can get a foothold with an organization, prove out ROI and expand from there. And in a lot of cases, we still haven't fully cracked all of the available market within any one of those particular brands. There is still more running room to have. And so seeing how we can grow these customers to this level. I think it's really exciting for the other 7-figure customers that we have and even below just to understand how much more white space is available and how mission critical we can be within these organizations.

And then can you talk a little bit about specific initiatives that you have deployed across your sales organization this year. You Mentioned that there's still some room to improve productivity. But how is productivity this year trending versus last year as those initiatives are rolled out.

Yes. So we made some investments over the course of the last 12 months, which we are seeing the benefits of. I think the macro still weighs on us in different pockets globally across different parts of the organization. So while we've seen some improvements in overall rep productivity, I think there's still more running room to go there. And so we have added some sales capacity but we're going to be judicious about continuing to do so, making sure that we can continue to see these improvements in rep productivity. But the investments have been fairly broad-based. We ensure that everything from like onboarding and training for the sales team is sort of -- it's consistent, it's constant. The sales team -- sales individuals come into the office in the early days of their time at Braze, we're trying to sort of bring back that kind of in-person mentorship and tutelage. They obviously spent a lot of time on the road and talking to prospects, but definitely trying to bring back that kind of mentorship and apprentice model. We have also evolved some of our go-to-market motions and the way we sell. So now bringing out about the ability to sell message volumes on credit. And we brought back -- so credit just enables customers to use their entitlements a little bit more fungibly. So right now, SMS and WhatsApp is fungible on the credits model, which is very helpful. It helps with customers not having to have such a specific view of the volumes that they actually need to buy different countries of SMS or whether it's going to be SMS or WhatsApp, and it enables more flexible experimentation between an expansion of channel usage, which we find that as our customers increase their channel usage across different types, they tend to become more sticky. We have also implemented the Braze free trial, which is something that while we believe this will be helpful down at the lower end with sort of speed of kind of inbound and the ability to just kind of get your hands on the product, this will also have a positive impact at the enterprise level. So if you think about the enterprises that might be considering new products, they really want to get their hands on something and make sure that they're not buying the vaporware. And so we're right excited about being able to leverage that. This -- we've gotten some questions about the Braze free trial like, "Oh, is this investment something that you're doing really just for the SMEs? Or does this mean that there's issues in other parts of the organization?" This is something that we've been working on for quite some time. And actually at the enterprise level, we historically have had the ability to run either proof of concept or have sandbox environments and so this is just an extension of that. And we've actually been working on this as an investment for the last year or so. So this isn't necessarily new in terms of conceptual from a Braze perspective, we've been working on that for a while. But these are all investments, we hope will continue to support the sales organization, their own ability to perform participation rates and ability to kind of continue to make quota over time.

Yes, that makes sense. And then when I could dig in a little bit to 2Q, I think one thing that was very impressive for Braze is the organic growth actually held up kind of very consistently in a time where we saw a lot of deceleration. But then 2Q, we did see a couple of basis points of deceleration. NRR came down quite a bit. Can you speak to some of the moving pieces that were going on in 2Q and just how you view some of the deceleration we might continue to see like NRR, for example, through the balance of the year?

Yes. So we -- the dollar weighted contract length is about a little over 2 years. And so when we think about when the environment started to shift, not necessarily so much coming out of kind of COVID period, but really when the zero interest rate environment started to trade away from us. That was just about 2 years ago. And so there was a bit of a large [ gas ] in the buying patterns and buying for growth that happened in a number of these contracts. Now we're just about 2 years through that. So we're through a number of those contracts that we're buying in a differentiated environment. But that's just the dollar weighted average length of our contracts, and we have some 3-year contracts and we have some 4-year contracts. And so -- and I've said this in the past, I think we have not fully called the bottom of the dollar-based net retention. And I think that some of the stability that we saw between Q4 and Q1 at that 117 level, that was actually on an unrounded basis, it did fall a little bit, and I did sort of say that during the call and afterwards, in Q1. Now in Q2, again, on an unrounded I think the decline looks more steep than it actually was -- and so the combination of those 2 things, I think, may lead investors to think that there's more negative outcomes than what's actually happened. That being said, embedded in our guide is the expectation that these numbers will continue to be under some level of pressure.

Isabelle, can you just -- maybe just one more question on the NRR numbers so -- and maybe for Chris as well, actually. So we get, as analysts we try to back into what the real-time NRR is and it's kind of a futile exercise because there's a couple of different dynamics going on to a point. So the follow-up question is, well, if NRR continues to fall and you are increasingly reliant on new business coming through the door to be able to build to your growth algorithm, does it make it harder for you to sustainably grow north of 20%, north of 25%. How do you think about that over the next 12.

So I can start and then you can fill in the pieces. So I think that when we think about sustainable long-term growth. And we're going to talk about this a little bit at our Investor conference on the 23rd. I don't necessarily want to speak to specifically a top line growth number. The way we are sort of going to frame out the evolution of kind of our financial picture is more as it relates to a path to a return of rule of 40. And so we are -- and you've seen it, we've traded off here some level of profitability with revenue growth as we've -- as revenue growth has been on the path that it's been on, you've seen us give back more in the context of profitability. And so I think what's important to us is we do still prioritize revenue growth, and we are investing in what we believe are the right and the best places for kind of the long-term strategy of the business to have all of the right pieces in place as the market starts to come back [ writ ] large, whether it's by industry classification, by global market or by customer size. So when those things are all firing on all cylinders, that is when we'll be able to see sort of a reacceleration of that top line growth. In the meantime, what's important to us is to continue with the efficiency that we have had as kind of a core tenant as an organization since the beginning. And so what that means is to be able to continue to grow efficiently and to be on a path returning to a rule of 40 over some medium term. And so we're going to talk about that more specifically at Analyst Day.

The rule of 40 dynamic is really interesting because what we've seen from software companies over the last 2 years is being able to maintain the same growth rate on higher margins or being able to deliver higher margins while not losing the growth or is actually a really fine and challenging balance. What are some of the things that we should be looking for? Is it a function of, hey, you've got the building blocks in place and so the incremental margins are high. Is it a function of, well, the SaaS business model and you tend to hit these inflections on free cash flow, and it makes a really nice S shape. Give us a little more on how we underwrite Braze essentially taking a step forward on the frontier of 40 or how...

Yes. So I think there's a couple of different places. So we're continuing to make progress from a margin perspective across the parts of the P&L, not the least of which, and you've seen some of this accelerate faster than -- I think even we had sort of guided the market to on gross margin. So I think our ability to continue to capitalize on some of the investments that we've made and the efficiencies that we've built into the technology stack to continue to get as much as we can out of the gross margin piece of the business, which is, of course, fall straight to the bottom line. I think some of the investments that we've made across the sales organization, particularly with technology partners and the partner ecosystem to help accelerate the flywheel of kind of top of funnel and deals coming in, in a more efficient fashion. That's really where we need to kind of bring in and I sort of like talked about sales efficiency and the productivity of the sales force, that's where we need to see the most leverage, and that's probably where we are working the hardest to gain that leverage over the coming years in terms of like being on that path to 40 -- that path to return to rule of 40. I think the other -- whether it's R&D, like I said, we're going to see that part of the business track most closely with revenue growth. Just to make sure that we can continue to invest in the long-term health of the business and a long-term growth potential of the business. And I do think that the -- I believe that we are investing in all of the right places. And what we are -- what we've seen is we've seen some green shoots of kind of goodness and productivity come out of different parts of the business, different parts of the globe, different parts of industries, different parts of kind of customer classification and sizes. But nothing that we've seen sustained for more than 2 quarters or so sequentially. And so having that diversification is great because we can capitalize on positive benefits when other parts of the world are not going so well, but to really see that reacceleration and efficiency gains we do need to see more of that firing on all cylinders, simultaneously and in a sustained fashion.

Let me pull questions from the audience. Isabelle, maybe I'll ask 2 follow-ups. The first is, I think this idea of fungible raising across the channels matches perfectly with Braze's channel-agnostic go-to-market. The whole point as well, you can mix depending on what your customer base wants. Talk to us about how you think that will evolve over time. I think it's a really neat idea where Braze can actually already say, look, your SMS channel is X accretive compared to your WhatsApp channel compared to your push notifications. You already have all the data on that. So can you -- is that already being translated into this credit idea of being able to mix across channel?

So the credit model isn't necessarily so much about pushing the customer into any particular mix of usage but rather lowering the activation energy so that they can fungibly just take resources that they've spent money on. So they've spent money on the credit and they can make sure that there's less breakage at the end of a contract term, so they can more easily use credits across different parts of the organization. And so for example, it used to be that you had to actually specify the country-by-country volumes of SMS. And if you didn't know how many volumes you were going to buy in one particular part of the world, you could overbuy in that part of the world, and they were not fungible to other parts of the world. You could not translate them. And that's the way our own -- at the time our own revenue recognition model works. Now if you buy these credits, you can use them across any country within the SMS stack or you can use them across WhatsApp. And what's great about this is every time we add new channels, they're going to be added. They can be added into the same framework. And so we're going to add more and more channels to the credit framework over time, which in theory is going to add the -- it's going to add to the perceived value of a credit because the credit can be used by the company, by a brand in whatever way makes the most sense for them without having to initiate a new order form, commit to new volumes, think through a new strategy, they're just already going to have access to it. And so it's materially going to lower the activation energy. And so the benefit on the back end is that you get customers that will more frequently are more likely to expand their channel utilization. And what we find is the more channels you use with Braze, the harder it is -- the harder it is to trade away from Braze and stickier we become over the long term.

One of the other debates that we should be keeping top of mind or updates that we should be keeping top of mind into Forge and if you are one of us as an investor going to Forge what are one or two questions we should be asking your customers while we're there.

We want to make sure that what our customers are getting out of Forge is a recognition of this community of high-quality customer engagement users. And so how I would, as an investor ask -- how is that community evolving? How are -- we're continuing to increase the number of individuals who are using Braze certified as a mile marker on their resume on their LinkedIn profile, how are the Braze certifications continuing to evolve at our partners at the GSIs, how are they're continuing to increase and improve their use of Braze and their education on Braze. And then I'm really excited about our customers sharing some of these very sophisticated use cases that they've been able to evolve and develop. And we'll do some of that in the context of the Analyst Day, and then there'll be a lot of that of customer sharing best practices with each other in the context of the conference.

We look forward to it. Please join me in thanking Isabelle Winkles. Thanks for joining us.