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

Good morning, everybody. I'm Tyler Radke, Citi's Co-Head of U.S. Software. We are joined by Braze Co-Founder and CEO, Bill Magnuson. Bill, thank you for joining Citi's tech conference. I think the third or fourth year in a row and shortly after earnings.

I always appreciate it.

There's been a lot of noise in the market, and maybe we can just sit on the earnings topic for a moment. Just maybe to kick off, could you just walk us through how the quarter played out? I think there were a lot of questions on the dynamics specifically around CRPO growth. So maybe we would hit that with -- how you're seeing underlying growth versus some of those metrics?

Yes, absolutely. So yes, I mean overall, a great quarter, as we mentioned, bookings were strong within the quarter, and it was also one of the most consistent global results that we've seen probably in the last 5 years with all of our major regions contributing at a high level. And similarly, trends around our competitive win rates and sales force productivity, all continued into the quarter. And so great to see that. The organic CRPO did take 2 percentage point down step to 23% in the quarter. And part of that also contributed to by just seasonality of Q4 and Q1 of this year were really big renewals quarters. Which is -- it's great to get through the early -- get through more of the renewals for the year, a little bit earlier on, and so some seasonality contributing there. But overall, we were really happy with the booking -- the continued bookings momentum from Q4 into Q1 into Q2. And looking at the pipeline and the setup for the second half. So happy to flow through the beat and put a raise into the revenue forecast as well for the full year, and we're looking forward to Forge here in a couple of weeks, which historically has always been a big accelerator of pipeline for us. And so I think that our competitive positioning also continues to be in a really strong space, especially vis-a-vis the legacy marketing clouds. And so the continuation of share gain within that part of the -- primarily in the enterprise space is something that certainly my sales leaders are looking forward to here through the end of the year and into the next few quarters. And our AI road map is really resonating out there in the market. When you look at the pace at which we've been able to bring products to market, the acceleration of the road map this year, the fact that Agent Console and operator, it got put into people's hands months ahead of schedule and now we've done the same with a lot of our work around our remote MCP server, our headless operator, and other work around things like Decisioning Studio Go, all of which you're going to hear a lot more about at Forge. But all of those things have accelerated. And one of the really exciting things about a lot of the Forge updates this year is just how much of it is already in beta or already like moving into general availability. Like this is definitely not -- this is not a year where there's a bunch of like slideware and future promises like the build is all happening in real time. And that means that we're putting capabilities in customers' hands faster. It also means it's driving contributions to our growth more quickly as well and is enhancing our competitiveness too, because, frankly, in the competitive landscape, I think that we are sprinting and everyone else is still standing, sill.

Yes. No, it's great to hear. And I definitely want to hit on some of the AI product stuff, but just a few more kind of financial questions because they've been topical. How would you characterize just this reclassification of revenue from subscription into ProServe? I think you had talked about maybe that dynamic allowing you to progress through renewals faster. So just how -- what happened? How should investors kind of think about that PS versus subscription going forward?

Yes. So first of all, I'll just take a step back. The motivation for the pricing and packaging change that is now playing out in the numbers, which I'll explain in a bit more detail. But the motivation actually was to do a better job of aligning the professional services delivery with exactly where customers had a distinct willingness to pay for the different types of advisory services that we provide. And you actually -- if you go look at our post-sales headcount, you will see that our post-sales headcount is not like selling at this rate that professional services revenue, obviously, it appears to be growing. And that's because the -- while there is this kind of accounting shift in terms of how this revenue is labeled there has not been like a meaning -- it's not like there's been a shift in business strategy towards services. In fact, actually, the relative proportion of post-sales headcount is shrinking in the business because we're achieving efficiency gains through operator doing things like delivering technical support and customer success advisory and things like that. Now one thing that is happening, and I mentioned this on the call, though, is that there are forms of advanced advisory services that we are seeing increased demand for because of -- some of the increases in like the adversarial environment, right? It is deliverability is harder than ever. And everyone in this room with an e-mail inbox probably understands why. When you look at the amount of Agentic, like messaging and mail traffic that's out there right now, for brands that actually are trying to play this game the right way with the right levels of consent and engaging with their loyalty programs and loyal audiences and things like that. Simply getting that signal through all the noise is like harder than it's ever been. And so we are seeing incremental demand for things like our premium deliverability services. And that's because your pipes can't be dumb. If you're going to actually drive revenue and get effectiveness out of your messaging and customer engagement strategies. And similarly, on the technical account management side, our TAMs really help customers with the architectural setup of their -- the way that they set up their marketer workflows and the way that they integrate their data flows and things like that. And we're seeing increased demand for that too because the AI models that are able to drive enhanced performance for customers need to be fed with the right data and context in order for them to do their job. And there's a ton of enthusiasm for marketers to do things like adopting our MCP server, being able to adopt and run operator. And then additional kind of more bespoke AI workflow work like we've got customers that are using Claude Cowork and then headless operator and our MCP servers together where they're going from kind of full brief to end-to-end strategy and then actually headless operator can go and implement it in Canvas, and so they can actually kind of work in a Claude Cowork workflow, if you will, and then go and see the results of all the programs that got built like inside the Braze dashboard. And that's -- that's really cool, but requires also setting up those MCP servers and getting the right secure like architectural setup in place and such. And those are places where our technical account managers help people with that. And so we are -- a part of this is that we're seeing increased demand for those advisory services. I'll remind everyone that actually the way those advisory services are purchased from Braze is that they're always co-termed with subscriptions and the revenue is recognized ratably. They are all -- like 90% of those services are recurring, and they're tied to the exact same contract length as like everything else. And that's kind of always been the case. And then the other thing, as I mentioned, that has been happening is that we started breaking out certain services that used to be bundled into the platform, and that has caused them from an accounting treatment standpoint to move from being classified under subscription to under professional services. That means that when you do the year-over-year compare, those -- that same revenue was in subscription in the prior period, and now it's in services, but it has traveled, but it is not. And that is causing the relative growth rates to look out of whack. And so if you want to do an apples-to-apples comparison, and we shared this on earnings night as well, but the apples-to-apples percentage of revenue from professional services, if we had not done the packaging change, would be about 4% to 5% of the revenue would be in services. And so if you want to look at that as a comparison point to just get a better understanding of how the underlying subscription revenue has been growing, that you can use that as a number to flow through.

Got it. Okay. No, that's helpful. And then on gross margins, typically, Braze has seen some gross margin pressure in Q4 due to holiday messaging. How should investors think about the gross margin outlook this year?

Yes. So the seasonality will operate exactly the same as it has in prior years. As a reminder as well, like as a consequence of our revenue being recognized ratably which means that it's throughout the term or throughout the multiyear terms in most cases, the customers have. The Q4 is just a higher activity level quarter across the board. It's not just SMS and WhatsApp. It's like literally -- there's also -- we have more servers online because there's more data flowing and everything else. And so -- it's just a -- it's a quarter with more activity and, therefore, higher infrastructure COGS. And so it will have the same seasonality in gross margin percent. All that being said, gross margin definitely has been a big focus area for us. We were working on it on multiple fronts. The new products that we've been rolling out in the BrazeAI family are all priced to be accretive to overall gross margin. Similarly, there are certain workloads that we are able to monetize now for the first time. For instance, like we don't charge for push notifications in Braze. We never have. and we send like over 1 trillion of them every year. But as customers start to use our AI capabilities to optimize those push notification campaigns, we'll actually start to make money on those workloads for the first time incrementally. And so that's an exciting forward-looking opportunity as customers start to invoke our more advanced models in more and more of their existing messaging workloads as well. And that's -- a lot of that is on the foundation too, of the work that we've done to move our whole -- most -- the vast majority at this point of our customer base into our action credits model, which allows for them to more fungibly utilize those committed credits across different channel types or using the same credits that they previously would purchase to send an SMS they can now also use to invoke or reinforcement learning model that's going to enhance the performance of their upcoming campaigns. We actually -- I just got another data point yesterday of a customer testing out a Content Optimizer and their SMS welcome flow. And they had more than an 80% increase in clicks in the welcome flow. And similarly, I think it was like 81% on clicks and 83% on conversions in terms of uplift from taking the workflow that they were doing before, where they were spending a good amount of money to run a welcome workflow through SMS as a channel and they ran a 90-10 test where they put 90% of the traffic on the new one that use content Optimizer, and they left 10% on the prior strategy as a control. And that experiment, of course, is dead simple to do in Braze to be able to go from your old strategy to one that has like an experiment branch on it. And the 90% path used content optimizer, and they achieved over an 80% increase in the performance of that. And so that's just a great example where there's a whole bunch of optimized workloads that have been previously programmed into Canvas and Braze that we're really looking forward to customers being able to go back through like not just build with AI moving into the future, but actually also go back through all the abandoned cart campaigns and the new user onboarding series and the cross-sell messaging and things like that. And put more advanced AI into the flows that actually generate that content in order to drive more performance for them. And I think that there's a lot of performance enhancement opportunity for our customers as they go and work through that. And the good news for them from just the burden of doing those builds and modifications is that operator can now do it for them. We have been rapidly advancing the capabilities of operator. It now even just over the last 6 weeks, we've added the capability for it to independently navigate to all different pages of the dashboard. It can now also build multistep Canvases for customers. And so you can just give it like, "Hey, I want to build a new welcome series" or "I want to build a new abandoned cart campaign." And for instance, like within an abandoned cart campaign, it can actually -- it knows now, and we've been -- we're going to continue to train it on these more advanced strategies that an abandoned car campaign should use Agent Console step in order to enhance the content personalization that actually gets sent out. And so it's no longer just like here's the starting trigger and a time delay and then like send the message. It's also going to include like and send the message based on the intelligent channel for that given customer and take all the breadcrumbs that you've got along the way around what else the customer may be looked at recently, the last few products that they were considering between, et cetera, and put all that into context window and have the agent actually use that understanding from the breadcrumbs of the customer journey leading up to that to write a really compelling abandoned cart compare and contrast of everything that they were looking at recently or something with inspiring ideas of a great recipe or a great fitness plan or a great vacation that they might be able to go on depending on what category or vertical you're operating in, right? And those types of more dynamic like content optimizing opportunities are now -- they're simple to build using an operator now. And so I think we're really excited as well that a lot of the advanced capabilities that, frankly, I think Braze has been on the leading edge of building advanced capabilities for our space for a long time now. And the adoption of those capabilities has kind of always lagged behind what I think the potential of them has been, and that's left a lot of performance on the floor that, frankly, people could have picked up. But for bandwidth and training, and there's all these things that kind of got in the way. But now with operator, it collapses down all the steps to be able to move from us building more advanced capability that can drive uplift to getting built and implemented and tested and deployed.

And in that customer example where they saw this massive increase in click-through and conversion rates, like you also are benefiting from that, right, because they're using more credits and the AI capabilities.

Absolutely. Absolutely. Because, yes, the content optimizer that's running as well as the fact that -- and then, of course, when customers succeed and they engage with their customers more, then that's more monthly active users, their business is stronger, right? Like there's a -- you keep that customer engaged and so you continue to communicate with them more over the long term like the higher quality and the more effective messaging is, the better our customers grow their businesses, and that obviously results in increased growth for us.

Yes. Yes, absolutely. Maybe the last financial question, and you're doing a good job with the CFO hat on these. But the beat in the quarter on operating benefits was strong. I think some investors were a little underwhelmed by the raise for the full year. So can you just talk about how we're thinking about back half operating income and profitability?

Well, so first of all, we did raise the operating income margin percent from 8% to 8.3% on the guidance for the full year and though flowed through an increase in profitability for the year, both in absolute and in percentage terms. What we didn't do is we didn't flow through the entirety of the Q2 beat into the second half. The Q3 number and consensus, frankly, was a little out of position didn't take into account Forge, which has been there every year for the last several years. And so we'll share responsibility on that one. But yes, I mean we're excited about the investment for Forge this year Forge is just going to be bigger and better than ever. We're in a new venue in Vegas at higher capacity -- Yes. Yes. This year, we're -- it's a little bit, I don't know, north or south, but we're not right in the heart of it. We're at Fontainebleau this year. And we're really excited to bring together that community. I think at this point, Forge is actually the largest focused gathering of marketers like for any event in the world. You've got events like Cannes Lions, the advertising festival, but those are -- it's kind of overrun by advertising and large tech companies or what have you. Forge really is -- it's a professional retreat for the most ambitious and creative marketers in the world, and we're really excited about what it means for the business because it's always a big pipeline accelerator for us. But also it's time to build right now. And we've put a lot of really exciting tools into the hands of our community. And if you haven't been to Forge, the entire first day is dedicated to learning and workshops, and we anticipate doing like in excess of 1,000 certifications on the first day of Forge and running a number of hackathon workshops that are going to bring hundreds of people through and introduce them to our new AI products in person, in a lab building hackathon like setting. And so yes, really excited about that investment. Yes. And then when you look at the full second half, we held back about $0.5 million of the Q2 beat in terms of the full year. And the primary use case for that is actually that we're starting or ramping of recruiting for new sellers into next year earlier than we normally do. So that's normally a Q4 kind of start that in Q4, so that they're here in time for kickoff in February. This year, we're just starting now for a few reasons. One is that we're -- we've been really happy with the consistency of performance around the world. As I mentioned, we've got -- within our verticalized teams as well as within all of our global regions, we've got strong leadership, strong programming, great momentum across the board, and so there's room to be adding capacity. Sales productivity also has been in a strong position. And then the last reason is also that there's frankly a talent war going on out there, right, for people that are adept at selling AI software. There's a lot of competition for those people. And we think that there's a great opportunity for us to start next year with an enhanced sales capacity relative to the year in a meaningful way. But we got to get those bus and seats. We got to get them recruited and on ramp. And so we're spending to make sure that we're able to do that as we start next year. But we did all that as well against the backdrop of increasing the full year operating income margin percent, as I mentioned, from 8% to 8.3%. And so I hope that people appreciate that, that not only fulfills our prior commitment of 400 basis points year-over-year, but we're actually now pacing ahead of that. And we're pacing ahead of that even while we're investing more in building up capacity for next year. And so from my perspective, like all pointed in the right direction.