Klaviyo, Inc. (KVYO) Earnings Call Transcript & Summary

All right. We will go ahead and kick it off. Huge thank you for Klaviyo joining us this afternoon, AB, Founder and CEO; and Amanda Whalen CFO. Carolyn Valenti, my colleague on the far right of the stage, and thank you all for joining us at the Klaviyo session on Day 2 of Goldman Sachs Communacopia and Technology Conference. I'm Gabriela Borges.

With all that said, AB, here about a year now since the anniversary of the IPO. You've done, what, probably hundreds of investor meetings in the last 365 days. What do you think the biggest disconnect is between the way investors perceive the company and what's actually going on in the inside?

Sure. So I think for us, I think Klaviyo is nominally known as like a marketing platform. And I think there's a couple of misconceptions that can come with that, that I think are important because you see a question for a long time, like well, gosh, marketing, like hasn't that been done? And is there kind of a ceiling to that? And so why are you bucking this trend and why should I believe that's going to continue? So I'll say two things. The first is when we started Klaviyo, we started it as a database company. And so its interesting because we sell -- we're known for marketing because it's kind of the first application we built on top of our database, a lot of folks don't understand the amount of data tech that's behind the scenes. And I think in a world of where people want to do more personalization, certainly in a world of machine learning and artificial intelligence, it's so critical that you, one, have all the data; and two, you build technology that makes it easy for people to put to work, whether doing it -- human users doing it or machine algorithms put it to work. So, I think that's been core to our success because I think we've been able to, frankly, outcompete a lot of other marketing platforms where that was not something they did. They outsourced that to say some other external party. So that's number one. The second thing is I think a lot of people when they think about marketing, at least, marketing is a category kind of started in B2B. And so a lot of people know of a lot of companies that sort of focus on marketing in a B2B context, right, to do lead gen and all that kind of stuff. Klaviyo has been predominantly focused on consumer businesses. And if you think about it, the role of marketing in a consumer business is very different than in a B2B business. In the B2B business, you still sort of lean on a sales team to ultimately be the one that have the customer relationships, close the deals, drive revenue. In a consumer business, there is no sales team. So actually, marketing software you use and marketing team is the bread winner. And that really changes the way people think about our software. So for a lot of our customers, we're either the #1 or #2 revenue driver for the business. So rather than being this kind of nice to have or kind of assistant to a sales organization, in our case, we're front and center. I think that centrality for Klaviyo has been really helpful because now as we're expanding the products and what we can offer to a business, they already say, okay, you're already front and center in terms of helping us drive our business growth, if there's other parts of our business you can help us improve other parts of the customer experience, then we're all yours.

I want to spend time on both of those points, and maybe we'll start with the database piece that you mentioned. During the IPO, there was a slide that had your architecture. And there were about 5 to 7 different flavors of database on the back end, which is so unique given, I think, most application software companies, they're locked into one flavor of database, and they make trade-offs on the back of that. So how are you able to keep the back-end architecture so flexible? And how do you think about what the right mix is of database technology on the back end?

Sure. So when we think about like what's the value of storing all this data, then giving people access to it. Our mental model is just like a person is good at storing lots of data, we store in our brains or neurons, and then we have different access patterns. Like sometimes we do deep thinking, sometimes we just need basic record retrieval. But there's multiple storage formats in here, and we're able to leverage all of them without really thinking about it. We wanted to provide effectively the same functionality to any business. So look, it doesn't really matter how you want to use this, right, whether you just need, you've got a single customer and they're visiting your website and you want to render the perfect experience form. Great. We've got a solution to that. Or you're building a machine learning model to try to predict who's going to buy next in product affinities. Great. We've got access patterns for that. So we wanted to make it say like, look, regardless of how you want to access it, Klaviyo can support all of those modes. So the architecture we decided to use on the back-end was one where we said, there's actually a lot of great databases that are out there, a lot of open source databases and some that we've helped built, helped contribute to. And we said we're just going to make it so that a little bit like car engines, I guess, you can kind of plug in multiple engines and you can actually have several of them. So what's going on behind the scenes the Klaviyo was every time you store data with us, we intelligently figure out what's the best way to -- which kind of database under the coverage to store that in such that when you want to access it later, it's fast. And that -- figuring that out, it's something that, frankly, if you had a really big engineering team, you could probably do on your own. But we've just -- we basically built models that will solve all that for you. And so for a lot of the companies we work where they say, like, gosh, we don't have that expertise or the budget to do that. We say, like, that's okay. We've actually solved this already for you. So I think that architecture decision to allow multiple storage engines on the back-end to allow for multiple different query patterns has been a game changer. So we do things like real-time personalization versus building machine learning models. All of that can be covered by our data infrastructure.

And it leads a little bit to a question on how you think about the TAM because if I think about the horsepower that you have on the back-end, the main value that it releases when you target SMBs is ease of use. As come up market, I wonder if there is more of an appreciation for the sophistication of what you're doing on the back-end? And do you see the use case in the middle market? And as you come up market, evolve commensurate with that?

Yes. We actually see there two things, two things are interesting. So the mid-market and enterprise, there's a lot data teams, development team start to get very interested in, okay, that's great. Can I get raw access to this? One of the APIs that you offer because I want to plumb it into some of our other applications. I've talked to customers that have used this to not just say like to personalize say, a digital experience. I've seen folks plumb this into applications they use for in-store experiences. I've seen people plumb us into their back-end logistics systems to help them prioritize which customers' orders when there are delays get prioritized based on things like predicting lifetime value. On top of that, it's not just our customers, our enterprise customers, we also have a growing ecosystem of third-party developers that want to leverage this data. So just, for example, I was talking to somebody earlier this week, who had built an advertising platform for connected TV. So when you think about all the streaming apps, they've opened up their own advertising networks and have allowed you to decide who you want to target for advertising. Well, great. Klaviyo is a great source of like consumer data. That developer said, "Well, that's great. If you can actually give me access to that API, I can pull in, help people run targeted advertising campaigns on these other media types, these other mediums that you don't support natively. And I can push back data to help them understand inside of Klaviyo what's working, what's not", and that just expands the breadth of Klaviyo. So I think there's this, both for SMBs and through third-party developers and then for enterprises. This just takes us super core in terms of like, great, we're the central source of truth and then you have all these different applications and experiences that are being powered off that central data set.

So how do you think then about monetizing some of those use cases? You talked about a customer using your database technology for logistics. At what point do you say, okay, we can actually build that application in-house and monetize it across the customer base?

Yes, sure. So we're already working on a set of applications that we think are very core, right, that we think are ubiquitous. So obviously, we do a lot around marketing and messaging. We think about other interactions, patterns that are very common. We're doing a bunch of work around what we normally think of as like customer service patterns. If somebody has a question, how do you get them an answer, we also mentioned like personalizing some of these digital experiences to improve conversion rates on a website or mobile app. So there's some of those where we're building product ourselves. And then yes, we look for things that, where we think there's very common use cases where we can be experts, we build those. But we also think there's many, many more applications that third-party developers can build. And we think there's an opportunity over time to monetize those. But frankly, like the amount of -- both in terms of the fit, the stickiness of our platform as well as the third-party developers, their ability to introduce us to new verticals and new use cases has been exceptional. So we're very excited to have them as part of the ecosystem. And I think we're able to monetize it a bunch of ways indirectly.

I want to ask one more strategy question, and then I'll turn it over to Callie and some of the near-term model dynamics. The second part of your answer to perception versus reality was customer engagement beyond just marketing. And you've already alluded to some of the examples in the last 5 minutes. But talk to us about what this means for where Klaviyo fits in the ecosystem longer term if we change the denominator to be customer engagement instead of just marketing?

Yes, sure. So I mean we've always felt that Klaviyo as a product and as a suite of products should be about much more than just selling to the marketer. We love marketing. We love marketers. But we've always felt that like whoever is running the business, be it that owner, if it's an SMB, the CEO, if it's a larger enterprise. And that entire -- like they should be thinking about Klaviyo holistically because ultimately, we want to help them power better customer experiences, it results in better monetization. And so I think what we expect is, if you look across these different customer experiences, we ask ourselves like, is there an opportunity to do three things for those different touch points. One, can we make them more personal? If we can make them more personal, they're going to be more engaging to that consumer, it's going to lead to higher lifetime value. Two, can we help them measure those experiences better? When we entered marketing, the norm was, well, what's a good open rate? Nobody was thinking about conversions. I think there's a lot of customer experiences where nobody is really optimizing them because they're not thinking about how they impact either the top or bottom line. And then third is if we can do better personalization, measure those, can we help introduce more machine learning and artificial intelligence in those use cases? Can we help optimize them? So rather than somebody who's leading in that function or working that function, rather than analysts have to program that software, can we help automatically make it better? So the example in marketing is we can now take marketing campaigns, and we'll automatically adjust the content or who they're sent to optimize for something like conversions, we can do that for you. Well, what's stopping us from doing that with your website? Why can't we -- one of the things I always thought was crazy, you go to a typical retail website, everybody gets this exact same website. Unless you're going to like Amazon. That doesn't make any sense. Everybody, every time any of us show up to a website, all of the graphics and everything should automatically rearranged to be perfect for us. So if we can help do that through machine learning. I think there's -- when we find there's applications and use cases where we can do those three things, help improve personalization, help improve measurement and attribution and then help optimize the actual end outcome, that attribution through machine learning, that's something that we should get involved in. And I think you look across -- when I talk to business like what are the different parts of the customer experience where you think there's an opportunity there, typically, when I talk to these CEOs, CFOs, the entire leadership -- they are -- marketing is one, but that's just the tip of the iceberg. And so we look at that as our responsibility whether it's applications that Klaviyo build itself, or our ecosystem is building, we need to make sure we have coverage across all of those so that we can ultimately like help optimize the customer experience and help optimize the monetization.

So at any given time, we see a lot of conflicting data points or just the health of the overall consumer environment. How do you separate the signal from the noise internally? How do you determine what -- which of these data points are impactful to Klaviyo's business?

Yes. So we are -- we love data. We're a database company. So we're looking at a whole lot of different signals. We're looking at internally, not only what's happening with our customers and their subscriptions, we're looking at what are the patterns of usage. So we're looking at how are their sending behaviors changing, what kind of ROI are they generating from the messaging. And then we're also looking at what is the health of their overall business. So the most important metric for us, our North Star is what we call Klaviyo Attributed Value. Klaviyo Attributed Value is the dollars of revenue that a customer of ours generates from messaging that they send via Klaviyo, and it's really important to us, as Andrew said, that that'd be really strong in terms of the attribution. So if you are a customer and you're logging into Klaviyo, you cannot only see your KAV, if you want to, you can double-click into it and say, where was that generated from? which campaigns did I send? When I sent this campaign, which customer did it go to? when I sent it to that customer, how did they interact? And then when exactly was that order placed? So we're looking at the dollars of KAV that they're generating. And then we're also looking at what's happening with their total business. So for our customers, because we're integrated with their commerce platform, we can see the GMV that, that business is generating. So as we're thinking about the health of that customer and the health of the consumer, we're looking at how quickly is their total business growing, how is Klaviyo contributing to that revenue growth, and then how is their usage of our product contributing to the way that they're generating revenue.

And then to build on that a little bit, SMB probably have had a very rocky back and forth over the past couple of years. But Klaviyo's customer base has definitely outperformed what we've seen your typical SMB go through. So what about your customer base has resulted in that? And kind of what do you think people kind of miss looking from the outside in?

Yes, there's a few different things that I would point to. One is that I think people miss the diversity of our customer base. We do have a very strong SMB customer base. We also have a large customer base of what we would call entrepreneurs, so businesses with less than a few million dollars in revenue. And we've got a substantial customer base of mid-market and enterprise customers. So $30 million, $50 million, hundreds of millions of dollars in revenue as well. And I think sometimes people miss the fact that there is that diversity across there. The strength that I think we see among on a relative basis among SMBs and it's driven by what Andrew spoke about earlier, the fact that our product is a must-have for customers, we're generating significant revenue for them. But I think it's also important to look at the total customer base. If you look at our results last quarter, we saw strength at that lowest end of the market among the new lens with entrepreneurs. We saw strength at the highest end of the market. It was our strongest quarter ever as a company in terms of the number of new adds that we had in $50,000-plus customers, customers who are landing with us for the first time at over $50,000 in ARR. But we are seeing a little bit of softness among those SMBs. We're seeing them be sensitive to the messages that they're sending. We're seeing a little bit of lengthening in sales cycles. But we're seeing them stick with us because of the revenue that they generate and then we're able to generate strong returns as a company because we have that diversity of customer sizes. And then also in terms of geography, with strength across different parts of the globe and across different products where our SMS product had a particularly strong quarter last quarter.

And you've spoken a bit to the expectation that you'll continue to invest pretty aggressively going forward as you believe you have a big opportunity, you want to invest in that. So the investments over the past 3 quarters have been kind of elevated, how do you think about the guardrails you're putting on payback period and what other metrics you look at? I mean how quickly you kind of ramp up and ramp down those investments?

Yes. It is one of the wonderful things about working with Andrew as a CFO is that Andrew and Ed from the very beginnings of Klaviyo have always been strong believers that it's not an either or that you have to choose between either growth or strong unit economics. That with creativity and dedication you can and should deliver on both, lot much easier because we don't have to pivot from growth at all costs to efficient growth. It's a business who's always been very focused on strong unit economics, and that shows up in the form of metrics like the one that we had when we weren't public from our inception through to the time that we went public, we net used $15 million of capital in building and growing the business. The rest of the capital that we raised either is still sitting on our balance sheet today or was distributed in terms of secondaries as part of some of that capital raising. And so the way that we manage that, Andrew and I had a really fun car ride one time where I think we spent 2 hours talking about the nuances of different ways to look at unit economics. But to summarize it at the highest level, we look at payback period is our primary metric that we're looking at. The reason that we bias towards payback period is because we like that cash efficiency, we were a bootstrapped business originally, and so therefore, wanted to get the cash back in the door quickly. As we expand more into the mid-market and enterprise, we also look at LTV to CAC because some of those mid-market businesses do have longer sales cycles, but strong LTV to CAC. And so as we're thinking about unit economics, we're triangulating across the two. But it's something we keep a very close eye on.

I want to connect two of the themes we've been talking about, which is the product and expanding the product into new cohorts of the market and the unit economics of you expanding over time. And maybe we can focus on the mid-market because Amanda, I have heard you talk about the pipeline in the mid-market and how excited the company is. So we've had a number of SaaS companies historically that have been successful in SMB and they go to expand upmarket and ends up taking a lot longer and costing a lot more than they expect. Talk to us about the early signs of traction that you're seeing in mid-market that make you think that you're on the right track?

Yes, I'll be starting. I think there's a couple of things here. The first is we're very big believers in a product-led motion. And like what that means is I think there's broad strokes. You can divide companies or product market approaches and hey, we're going to make sure the product market, the product has good product market fit. It's the kind of thing that people -- and then people can -- they can try it, the adoption curve is easy. So by the time you start to layer in marketing and sales, you're already playing from ahead. We have found that to be an enormous tailwind. I think folks tend to equate that with SMB, but there's an enormous tailwind if you can do that in the mid-market and enterprise as well. And so I think we found that, that I mean, literally will reduce deal cycles enormously. All of a sudden, things like, for us, for example, the time to import data into Klaviyo, so you can start to look at it and scaffold out some example use cases all before you bought, it literally measured in like minutes or hours. In other cases, I've seen instances where it's like to get up some sort of like sandbox environment, can take days and weeks and lots of human capital. For us, the fact that's so cheap and easy means we can talk to more businesses. It doesn't require as much effort on our end, it reduces that cost. At the same time, then adopting Klaviyo. We've done a ton of work on when folks are migrating or importing data sets. It's enormously -- it's very fast, and it's the kind of thing they can drive. We compete against software -- in some cases where if you want to make a change to a marketing campaign, you have to call somebody. You have to wait for that person to file a ticket, and they're probably not the one who does the work, they sent it over to somebody else who's got to ask a bunch of questions to then actually maybe, I don't know, code an e-mail or do some configuration. All this cost and waste that we just don't have to incur. So that being product led, I think, makes an enormous difference. The second is we really try to -- I think, being judicious about like you wait to see some organic demand before you invest behind that has made a big difference. I think when I -- when you look at like companies that have struggled, I think, oftentimes, there's a bit of this hope that there's like fit there. Yes, we're going to hire out the sales team, and we were actually not going to know for 12 months, how effective they are. We're going to marketing and let's see what happens. That's why as we talked about like how we've grown into the mid-market enterprise, this all started with very small sales team that sold into certain markets. We wanted to make sure there is actual fit there. Oftentimes, we get feedback of why are you not going faster, pushing harder I'd say there's some risk there. But we like to calibrate that once we go into a market, we know that we're going to be successful. So I think doing those two things has made an enormous difference, so there's less of a bet the farm mentality when it comes to moving upmarket. I think one of the things that Amanda and I often talk about that gives us a lot of confidence is we've got such a great business in SMB. We look at this as an opportunity to accelerate. We think there's a long way to go inside of our SMB business, and so that's a very durable growth. That's given us the time, we both have a lot of urgency, but like giving us the time to do this the way that we like to run it. And so I think what's very exciting now is and we talked about this on some of our calls is we're seeing a lot of that organic demand at those early signs that we think lead to us of signs that we should start to lean in more. And so we'll see, but that's been our approach.

You both alluded to demand indicators. So I'll ask the question explicitly. What are some of the demand indicators that are trending more positive for the mid-market or even more broadly?

Sure. So I think first, I always look at like, one, how much do you see organic demand come in. It's one thing to have a sales team reach out and work territories. But when you have -- when you start to see -- one of the good signs for us when I see people moving around companies and bringing Klaviyo with them, not just in the SMB, but in the mid-market and enterprise, we start to see partners developing practices around Klaviyo in wanting to lean in there, that's an excellent sign. A lot -- we have an outstanding partner network, and that's now increasingly in the mid-market enterprise, increasingly international. We see folks that are willing to say like, yes, I actually want to be a first mover here. I think this really has legs and folks that are in the market working with who really should be clients, who should be Klaviyo customers, another really good sign. So honestly -- and we prove into like we do -- we spend dollars in marketing, run events, we'd like to stay close to customers. "Hey, it is what Klaviyo offers really, does it resonate? Or are there gaps that we need to address. So those are all ways that we kind of prove into the market. And I think when we see those things trending in the right direction, we know there's probably an opportunity to move faster.

So one of the things that has been thematic across the last half an hour is just how vibrant the customer engagement space is. That vibrancy tends to come with competition and certainly during the time of the IPO, there were a number of competitors that aspire to be or have the success that you're having. How has the competitive landscape changing? And compare and contrast for us what you see competitively at some of the large and mid-market customers versus low?

Sure. Yes, I've always felt like the fundamental competitiveness -- it relates to the marketing space, and then we can talk beyond that. We felt for a long time that we have this unfair advantage because we have this underlying data in sort of way of storing customer data that made it easier to put to work, which means you're going to get better results with Klaviyo, better ROI, would actually give us pricing leverage. And I often look for, do I see other folks kind of going down the same path? Are they willing to invest in building out the infrastructure that we've built? To date, I really haven't seen many of our competitors, both folks that existed before us, more legacy platforms and more contemporaries. In the SMB and in the enterprise, I've not seen folks invest in this. So in the SMB space, we still see a lot of -- with 10, 15 years ago were kind of -- you think about like running an e-mail newsletter. We're still competing with a lot of that with some bolted-on functionality to allow for some data, but it's very limited. And so we still see like we're very competitive there. As we've gotten into the mid-market enterprise, what we found there is I think we're competing against a lot of folks trying to work together. Hey, I offer a data warehouse, data lake, CDP, some set of functionality around that, and I go to market with a marketing platform. I have not talked to any customers that are like, "Oh, yes, I love that setup. That's working really well for us." It's cheap, that it's fast, it's easy to work with. All the complaints are the same. And so they come to us because I think they look at us and say like, "Well gosh, I can do this all-in-one place with Klaviyo. It's very fast. I don't have to set up all these data pipelines. I don't have to call somebody to hire a bunch of engineers to configure this thing." That is fundamentally winning for us. And so we'll continue to watch the market. But I think there's a lot of stuff about folks like especially in marketing, like which channels you covered, all kind of stuff. We've taken an approach of like we're going to be your one-stop shop. We're going to cover everything. I think fundamentally for us, the winning strategy is because we're the place you store all your customer data, you can put that to work and especially now in an age of artificial intelligence, where you need to use that data and use it as put it to work to help customize personalized content, that gives us a big leg up over the other folks that are out there.

Absolutely. Let us pause for a moment, questions from the audience. Callie, back to you.

I wanted to ask on kind of how you're thinking about monetizing the infrastructure layer of Klaviyo more over time? I think CDP has been a really good start of that. But, just kind of any way that you're thinking about that going into the future?

Yes, sure. I [indiscernible] a little bit. It's interesting, our infrastructure, we've kind of -- we've baked in as kind of part of our core marketing platform. I think as we move upmarket, what we found is that there's really two things that folks are willing to buy there. And so we're starting to set up pricing impact for both. The first is, any time you offer data infrastructure, often times, there's often some like reporting analytics that comes with that, where folks want to understand the data they have and then use that to put its work. So with our CDB products, one of actually the most exciting things we've seen is a real propensity from folks to say, if you can help us do more analysis, run more queries against this and then put that to work to improve our marketing, we're willing to pay for that. So I think there's an element of that. And then for the core infrastructure, we've started to build out a bunch of governance tooling, things to help people protect the data they have, make sure it's normalized, it's clean and then federate it out to other places. So I mentioned advertising networks being a big use case. So all that functionality that you tend to start to think of as things that you kind of see included in like a data warehouse or another data kind of infrastructure piece of software, I think that's where this goes. And so for our customers, like offering that functionality and then offering them the ability to query it and leverage it in other external applications that aren't Klaviyo's, I think there's a strong willingness to buy. So I think like a lot of other infrastructure products, it will probably be something that's based on storage and compute. And I think the fact that we are this kind of central repository, and we offer this fast access, I think that's why I think a lot of folks are interested, like I actually would rather use that than try to stitch it together with off-the-shelf data warehouse or other data storage components.

And then last one for me. So to what extent are you seeing other verticals kind of struggling with the same data challenges that you're seeing from your retail and e-commerce customers? And how do you think about addressing that over time?

Totally. It's interesting. One of the things we found in the -- as we move upmarket in the mid-market enterprise, a lot more of those businesses are actually not as we say like outside of retail and e-commerce. The challenges are all exactly the same. In fact, I think they're almost more acute. If you think about service businesses, there's often whether it's implicit through subscription, sorry, explicit through subscription or implicit, there's a much more recurring relationship. And folks are eager to put that to work. I think there's even more of an understanding that like, yes, this customer data I should be using this to drive the customer experience because I know these are people that want to have a recurring relationship with me. So I think one of the things we're very excited about is just broadening the aperture of Klaviyo, we often think about like our marketing. We want to be clear that we're still -- we're a great fit for retail and e-commerce but also letting other businesses know -- I talk to companies all the time and say, I think like Klaviyo is a great fit for me, but I don't see it on the website. And I think there's a big opportunity for us to say, "Oh, no, no, we're open for business. And here's other folks that look like you that are doing similar sort of things and use cases." But no, I mean, Amanda and I talked about like we fundamentally think about like the kind of the market that Klaviyo's after, if you think about like world or U.S. GDP, there's a huge, 2/3 of it is B2C spending. Those are consumers that are reaching out to some organization that they have a relationship with. And we think about how do we address every single part as many components of the B2C economy is possible, so obviously, a huge chunk of that is retail and e-commerce. But when you look at all of the other sectors, I think those are equally addressable.

We'll leave it there. Please join me in thanking Andrew and Amanda for their time. Thank you both. We appreciate your insights.