BRZE - NASDAQ

Welcome to the Braze Fiscal Second Quarter 2024 Earnings Conference Call. My name is Christine, and I'll be your operator for today's call. [Operator Instructions]. I'll now turn the call over to Christopher Ferris, Head of Braze Investor Relations.

Thank you, operator. Good afternoon, and thank you for joining us today to review Braze's results for the fiscal second quarter 2024. I'm joined by our Co-Founder and Chief Executive Officer, Bill Magnuson; and our Chief Financial Officer, Isabelle Winkles. We announced our results in a press release issued after the market closed today. Please refer to the Investor Relations section of our website at investors.braze.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the third quarter ended October 31, 2023, and for our fiscal year ended January 31, 2024, our planned product and feature development and the benefits to us and our customers there from, including our AI features, the potential impact and duration of current macroeconomic trends, our anticipated customer behaviors, including vendor consolidation trends and their impact on Braze and our long-term financial targets and goals, including the anticipated period in which we may generate positive non-GAAP operating income and positive free cash flow. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks identified in today's press release and our SEC filings, both available on the Investor Relations section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and aid investors in further understanding the company's fiscal second quarter 2024 performance in addition to the impact these items have on the financial results. Please refer to the reconciliations of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations section of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now I'd like to turn the call over to Bill.

Thank you, Chris. And good afternoon, everyone. We delivered a strong second quarter, generating $115.1 million in revenue, up 34% versus the prior year while continuing to drive operating efficiency in the business. Non-GAAP gross margin increased 70 basis points year-over-year. And we again demonstrated strong leverage with non-GAAP operating margin improving by over 1,300 basis points compared to the second quarter of last year. We were encouraged by the new business we won in the quarter, sales strength in the commercial and enterprise businesses, the progress of our product initiatives and AI development efforts and the adoption of our newest channel, WhatsApp. While the macro environment still presents challenges, we are effectively navigating them and remain confident in our ability to drive top line growth while maintaining cost discipline and delivering on the financial targets that we have set. Brands continue to recognize the high ROI that can be achieved through personalized cross-channel customer engagement delivered by the Braze platform. Customer growth was solid with our total customer count reaching 1,958, an increase of 92 during the quarter. New business wins and upsells included Miro, the National Basketball Association, Rappi and Stori, among many others. The diversification of new customer wins was also impressive, with the top five new business deals all originating from entirely different types of businesses. A quick service restaurant chain, an e-commerce platform, a provider of coupons and discounts, a digital collaboration platform and a company that connects homeowners to trades people. As those of you who have followed us closely are aware, Braze's business is highly diversified. With no single vertical contributing more than 1/4 of our ARR and many others where we have not only a significant presence but also opportunity for growth. The versatility and adaptability of the Braze platform enables its adoption by any business that prioritizes investments in first-party data and customer relationships, regardless of size, vertical or geography. As the field of customer engagement matures, we continue to win against point solutions that have limited channel offerings are not real time or simply don't scale. We are similarly making progress against legacy marketing clouds as marketers find their fragmented solutions increasingly unfit for modern customer engagement use cases. This quarter, we displaced legacy marketing clouds at numerous enterprises, including at a top quick service restaurant chain, a large consumer discounter and a well-known travel company. In the case of the restaurant chain, a global systems integrator partner was instrumental in the sales cycle and will be working with the customer to complete onboarding and provide ongoing marketing and data services. As we continue to expand our product surface area and enhance its capabilities by infusing AI throughout our stack, we're helping brands create personalized, cross-channel solutions faster than ever before speeding the rotation of the Imagine, Create and Evolve loop that lets them compound learnings and increase their ROI over time. Meanwhile, the legacy clouds continue to be held back by antiquated data foundations and complex siloed architectures, limiting their innovation and causing them to fall further behind. We believe our product innovation and R&D focus, coupled with their relative stasis will accelerate the legacy replacement cycle and compel more enterprises to upgrade to the personalized cross-channel customer engagement enabled by the Braze platform. We also continue to benefit from the vendor consolidation trend we've called out the last couple of quarters as brands look to an all-in-one platform to coordinate messaging across the growing array of B2C channels and accelerate their investments into first-party data. In the case of an accessories retailer, we replaced four separate vendors, providing a great example of how Braze wins on technical integration capabilities, aligning with the customer's vision of working with a comprehensive, best-in-class customer engagement platform. We believe this trend will continue as customers look to capitalize on new AI-driven advancements in customer engagement, an area of innovation, which benefits tremendously from the breadth of Braze's data footprint and messaging flexibility as well as our real-time stream processing architecture. At Braze, we are constantly evaluating new ways for brands to communicate directly with their customers by delivering more relevant content and engaging experiences in the channels that resonate most. In March of this year, we launched a native WhatsApp integration that enables marketers to create, orchestrate and send WhatsApp campaigns directly from the Braze platform. With more than 2 billion active users in 2022, broad international penetration and the ability to engage in content-rich conversations that build retention and loyalty, WhatsApp is a highly valuable addition to our cross-channel portfolio. And I'm happy to report that new and existing customers have responded very favorably to our offering with dozens of customers using the channel and a fast-growing pipeline. One early WhatsApp success story I'd like to highlight is Rappi. One of the most popular and trusted technology companies in Latin America. Rappi has expanded its investment in Braze, specifically adding WhatsApp as an additional channel to its innovative customer engagement strategy that already included e-mail, SMS, push and in-app messaging. Rappi was looking for a more effective out-of-product channel to directly reach their audience and successfully leverage WhatsApp to motivate lapsed users to return to the app to make new purchases and to drive active users to make more purchases over time. Leveraging WhatsApp and Braze's campus environment, Rappi was able to drive an 80% uplift in purchases versus a control group that received only push notifications and e-mail. Case studies such as these demonstrate how marketers can immediately leverage the flexibility of Canvas and the power of our streaming architecture with new channels like WhatsApp to target personalized and orchestrate sophisticated campaigns that drive high engagement and ROI. Beyond additional channels, we continue to improve and enhance our competitive moat by expanding our product surface area and deepening our existing capabilities, particularly around data management and governance. Yesterday, we announced new data transformation and integration options to enable brands to get data into Braze quickly and easily with less ongoing maintenance burden and lower lift from technical teams. I won't go through all these enhancements in detail, but I'll mention a few key innovations that we believe will be particularly impactful for customers. First is data transformations, a feature that gives brands the ability to easily map incoming data from third-party services on to Braze user profiles. Even more exciting, the code that defines these transformations can be automatically generated using a generative AI capability within our Sage AI suite. Second, we are expanding cloud data ingestion to include an integration with Databricks Lakehouse Platform, while expanding the capabilities of our existing integrations into the Snowflake Data Cloud, Amazon Redshift and Google BigQuery. This flexible data ingestion capability helps customers reduce total cost of ownership in their data ecosystem by eliminating complexities when accessing their first-party data. Third, we infused generative AI into our query builder and SQL segment extension tools to empower teams to easily transform natural language prompts into insightful reports and audience segments. SQL segment extensions itself is a recently released addition to our classification layer that enables comprehensive and flexible targeting on top of a customer's entire Braze data set, enabling marketers to execute on more advanced targeting use cases completely within Braze instead of relying on their in-house data teams or third-party tools. Leveraging these advancements, brands will be able to easily access and activate their valuable first-party data to power personalized customer engagement strategies that enhance loyalty, retention and revenue. We also recently launched Braze Instant Insights, a Snowflake native app that provides turnkey visualizations for analysis use cases like attribution, high-value actions, retention and investigating monetary value across cohorts. In the same way that we built Snowflake data sharing to reduce the effort and time to value for customers building outgoing data pipelines from Braze, Instant Insights reduces the effort to go from data in the warehouse to sophisticated reporting. And in June, we announced Sage AI, a set of advanced AI and ML capabilities integrated into the Braze platform. Sage AI is designed to enhance marketer productivity while powering better and more effective customer engagement results. The most recent additions to Sage included three main innovations. First, an AI recommendation engine that utilizes a custom-trained transformer model to match items for Braze catalogs with customers most likely to buy them, providing content personalization that outperforms competing techniques in our tests. We believe this feature, which will become a separate SKU, will boost campaign revenue and improve customer loyalty for the brands that use it. Second, our AI content QA tool that leverages Open AI's GPT-4 to check messages for tone, structure, grammar and appropriate language was promoted into general availability and has now been used by hundreds of brands. We're seeing the advantage of being early movers in generative AI as we're quickly expanding beyond obvious use cases and integrating capabilities that are finally tuned to marketer workflows. Third, we added winning path to Canvas, our visual development environment, which marketers use as a no-code journey orchestration tool. This feature automatically optimizes how customers flow through paths in a Canvas, allowing brands to boost conversions with a single click. Finally, we were refining an A/B test prediction feature designed to use a combination of large language models and other neural network architectures to automatically predict the winner of an A/B test without a pilot send, helping marketers execute on new experiments more efficiently and improving their overall performance. Finally, I wanted to update you on our social impact initiatives. In July, Braze published its second annual ESG report. This report included our FY '23 greenhouse gas emissions audit, an overview of our diversity, equity and inclusion activities and details on our grant-making efforts as part of our Pledge 1% equity donation program. Our social impact mission is to amplify employee impact to create opportunity for underserved groups within our communities and to accelerate science-based climate solutions. We look forward to growing these efforts through continued employee advocacy and participation over time. Thank you to our customers, team members and shareholders for your continued support of Braze. We're excited about our path ahead and believe the investments in our product, people and ecosystem, combined with strong secular tailwinds, position Braze to become the industry standard for customer engagement. And now I'll turn the call over to Isabelle.

Thank you, Bill. And thank you, everyone, for joining us today. As Bill mentioned, we reported a strong second quarter with revenue up 34% year-over-year to $115.1 million. This was driven by a combination of existing customer contract expansion, renewals and new business. Our acquisition of North Star closed on June 1 and contributed nearly $2 million of revenue in the quarter. Our subscription revenue remains the primary component of our total top line, contributing 95% of our second quarter revenue. The remaining 5% represents a combination of recurring professional services and onetime configuration and on-boarding fees. Total customer count increased 22% year-over-year to 1,958 customers as of July 31, up 359 from the same period last year and up 92 from the prior quarter. Our total number of large customers, which we define as those spending at least $500,000 annually grew 24% year-over-year to 173, and as of July 31, contributed 57% to our total ARR. This compares to a 55% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 120%, while dollar-based net retention for our large customers was 123%. Expansion was again broadly distributed across industries and geographic regions. Consistent with the prior quarter, revenue outside the U.S. contributed 43% of our total revenue in the second quarter. In the second quarter, our total remaining performance obligation was $524 million, up 28% year-over-year and up 10% sequentially. Current RPO was $353 million, up 29% year-over-year and up 9% sequentially. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Overall, dollar-weighted contract length remains at approximately 2 years. Non-GAAP gross profit in the quarter was $80.6 million, representing a non-GAAP gross margin of 70%. This compares to a non-GAAP gross profit of $59.7 million and non-GAAP gross margin of 69.3% in the second quarter of last year. The 70 basis points year-over-year margin improvement was driven by ongoing efficiencies related to personnel costs and continued economies of scale in our core technology expenses. Non-GAAP sales and marketing expense was $51.8 million or 45% of revenue compared to $44.3 million or 51% of revenue in the prior year quarter. While the dollar increase reflects our year-over-year investments in headcount costs to support our ongoing growth and global expansion, improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $18.9 million or 16% of revenue compared to $16.3 million or 19% of revenue in the prior year quarter. The dollar increase was primarily driven by increased headcount costs to support the expansion of our existing offerings as well as to develop new products and features to drive growth. Non-GAAP G&A expense was $17.4 million or 15% of revenue compared to $16.5 million or 19% of revenue in the prior year quarter. The dollar increase was driven by investments to support our overall company growth, including headcount costs and increases in software subscriptions and licenses. Non-GAAP operating loss was $7.6 million compared to a non-GAAP operating loss of $17.5 million in the prior year quarter. Non-GAAP net loss attributable to Braze shareholders in the quarter was $3.9 million or a loss of $0.04 per share compared to a loss of $15.2 million or a loss of $0.16 per share in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with $476.2 million in cash, cash equivalents, restricted cash and marketable securities. Cash used in operations during the quarter was $17.5 million compared to $16.3 million in the prior year quarter. Taking into consideration the cash impact of capitalized costs, free cash flow was negative $18.7 million compared to negative free cash flow of $24.7 million in the prior year quarter. The improvement in free cash flow is primarily due to lower capital expenditures compared to the prior year quarter which included CapEx for our London office expansion. Now turning to our forecast. We're encouraged by the strong first half of the fiscal year. Demand for high-quality customer engagement solutions remain solid, and we're optimistic in our ability to execute against our long-term financial targets. We intend to maintain cost discipline and reiterate that we believe that we are well positioned to achieve a non-GAAP operating margin of better than negative 7% in Q4 of this year. For the third quarter, we expect revenue to be in the range of $116.5 million to $117.5 million, which represents a year-over-year growth rate of approximately 26% at the midpoint. For the third quarter, non-GAAP operating loss is expected to be in the range of $15.5 million to $16.5 million. At the midpoint, this implies an operating margin of negative 13.7%. The sequential reduction in non-GAAP operating margin relative to Q2 is driven by onetime expenses related to the company's annual customer conference, Forge as well as other sales and marketing expenses related to sales enablement, which will be concentrated in Q3 and are not projected to materially impact Q4. Third quarter non-GAAP net loss is expected to be $13 million to $14 million and third quarter non-GAAP net loss per share in the range of $0.13 to $0.14 per share, based on approximately 100.2 million weighted average basic shares outstanding during the period. For the full fiscal year 2024, we expect total revenue to be in the range of $451.5 million to $454.5 million, which represents a year-over-year growth rate of approximately 27% at the midpoint. Fiscal year 2024 non-GAAP operating loss is expected to be in the range of $47 million to $49 million. Non-GAAP net loss for the same period is expected to be in the range of $37 million to $39 million. Fiscal year 2024 non-GAAP net loss per share is expected to be $0.37 to $0.39 per share based on a full year weighted average basic share count of approximately 98.8 million shares. We remain committed to driving revenue growth while improving operating income and free cash flow margins in the coming quarters. We reiterate that we expect Braze will achieve positive quarterly non-GAAP operating income and positive quarterly free cash flow by the end of the fiscal year ended January 31, 2025. I'll conclude my remarks by reiterating our excitement in Braze's future. We remain focused on partnering with our customers to deliver best-in-class customer engagement and growing our top line while maintaining cost discipline to achieve our long-term financial targets. And with that, we'll now open the call for questions. Operator, please begin the Q&A.

[Operator Instructions]. Our first question comes from Ryan MacWilliams with Barclays.

For Bill, let us see the improvement in monthly active user growth this quarter. I know that's not a perfect metric but would love your thoughts on where your customers' usage and marketing spend currently stand at this point in the year. Like are they becoming more willing to make growth investments at this point? Or is it more stabilization? I'll love your thoughts here.

So I think overall throughout the year, we've seen pretty consistent conditions for our customers and just broadly around the macro, and we're seeing that same consistency around the globe. Everyone's experiencing pretty similar interest rate conditions. A lot of marketers are operating with flat or frozen budgets. And so while we're -- we've been really happy with our execution through the environment. We obviously highlighted the new business growth. We've been really happy with the diversification of new customers that are coming in. I also do think that we've got some gas in the tank from the perspective of a lot of the product expansion that's happened, a lot -- the WhatsApp launch. We've been happy with the traction there. But in an environment where marketers in general are sitting on frozen budgets, a lot of scrutiny from procurement and a lot of scrutiny from their CFOs, the opportunity for a new product launch like that or expansion to continue to really see its full potential is going to be more limited. And so we're -- from the beginning of the year, we've seen things continue to be challenging and unpredictable. I'd say that conditions broadly haven't improved, but they also haven't gotten worse. And we've been really happy with the execution that we've seen across the company. We've strengthened a lot of the foundations, both in our product as well as in our go-to-market strategy and our sales organization. We've been really focused for setting up the organization for our path to 1 billion in ARR, but it is definitely still challenging out there.

Appreciate the color. And then for Isabelle, good to see the continued improvement in gross margin? What were some of the drivers of the gross margin improvement in the quarter? And do you think you can continue to see step-ups in this metric as your customers begin to utilize more large language model capabilities?

Thanks for the question. Yes. So I think the trajectory that we're on within our gross margin metric is very consistent with our long-term targets that we've stated. So our long-term target is 67% to 72%. We're operating well within that range and already at 70%, which is great to see. And we're really kind of just ticking up as we continue to experience and realize cost efficiencies and operations of scale across our technology stack and then, some personnel efficiencies that we have. I think some of the ongoing things that we can look to that I've talked about before in terms of our path to profitability is ongoing economies of scale across the tech stack, which we will continue to leverage and continue to improve over time. And then specifically across personnel, we've talked about our leveraging cost optimized locations as we continue to grow that headcount finding ways to do so in a more optimized fashion. So I think the combination of those two things will continue to kind of lead us to where we are and beyond within that range that we've stated for the long term.

Our next question comes from Jake Titleman with Goldman Sachs.

Congrats on a great quarter. Bill, you mentioned an AI recommendation engine that will be a separate SKU. Can you talk a little bit more about that, what the plans are to monetize it? And maybe are there some other AI SKUs that are coming down the pipe that you also charge for separately?

Yes. So across our AI and machine learning investments, we expect there to continue to be a mix of ways that we will realize returns on it. Some parts will be monetized independently. Our predictive suite has actually been in the product as a separate SKU for a while. And if you look at the transformer driven recommendation engine, we anticipate that to both, be a separate SKU and also to support additional upsells for another product we have called product Catalogs, which could be used with or without the recommendation engine. And so those are both great examples of places where we have independent monetization and then, we also have support of other aspects of the product that independently monetize. In addition to that, I think that a lot of the generative AI investments that we're making, which are improving marketer productivity and allowing for marketers to just bring their ideas to life more quickly, to be able to inspire them more. In the example of the SQL segment extensions or the data transformers that I spoke about earlier, we think that these are really good places where the generative AI is actually helping build confidence for marketers to take on more technical tasks within the platform. And what all of those lead to is faster time to value, more usage, the confidence to deploy more use cases. And of course, when we see new use cases coming to the picture, those usually come with more monthly active users, and they often come with expansion into new channels or expansion into new data products. And so they're all very much self-reinforcing even without independent monetization. And of course, across the board, we make marketers more productive and when we make the teams that use Braze more agile, it also leads to higher levels of experimentation, which compounds ROI, improves customer satisfaction and ultimately leads to a better differentiation for Braze. And so we see this kind of flywheel effects happening where, yes, we are absolutely going to independently monetize. But even if we weren't, we still think there's a lot of monetary benefit. And the ability for our community to continue to up-level themselves more quickly, so that Braze can further separate from our competition in the sense that we are certainly characterized in the market as being the top of the sophistication pyramid in the space. And so the more that we have marketers who are operating with agile team methodologies and who are comfortable with more kind of data-driven strategies as well as using more technical features. All of those things lead to them being able to utilize the parts of Braze that are very differentiated and very hard to mimic or copy, and that leads to pricing power and other sorts of benefits for us.

That was very helpful. And then I just wanted to follow up on the GSI being instrumental in one of your displacements of the legacy marketing clouds. Can you just talk a little bit about the GSI relationships, the global agency relationships, how those are evolving? And when do you think that, that could actually be a material driver to revenue growth?

Yes. So we're continuing to deepen our relationships with solutions providers, including global systems integrators, the big agency holding companies and also a vast global network of smaller marketing and growth agencies. And the fundamentals of those relationships continue to be really solid. We're investing to allow that mutually beneficial flywheel that I've spoken about in prior quarters to continue to spin up. And I'd say we're also advancing at varying speeds depending on the partner, but we're really excited about the overall trend line, and we're seeing examples of tremendous success where we're generating really strong services revenue for those partners that are leaned into their Braze practices and our joint go-to-market motions. But the characterization of how your really great Braze partner is very different from the way that you may have been a great partner of the legacy marketing clouds. Braze represents easier integration, faster time to value. But on the flip side, it also represents greater opportunities to compound ROI through experimentation, through additional data analysis. And so the types of services that really resonate with the Braze customer base are different from what the GSIs were maybe used to providing for legacy marketing cloud providers. They're better, and they're exactly where those partners are trying to evolve to, because it represents more ongoing revenue as opposed to being predominantly the upfront integration-oriented revenue. And so it's definitely an evolution that our partners want to make, especially at the GSI level. It's one that we're supporting them and making. But as I mentioned, they're certainly progressing at different speeds, depending on how leaned in those organizations are. And we're looking forward to seeing the success that we are in all the places where partners are really leaned in, where they've adapted their model to spread more evenly across that entire ecosystem over time. And we're investing internally to make sure that's going to happen. So we're seeing really promising early results from the GSIs and from the big holding companies, we're seeing growing momentum quarter-over-quarter. And like I said, we have complete confidence that the foundations of how we get that flywheel spinning in a mutually beneficial way are completely sound and will continue to be. And we're excited about where that's going.

Our next question comes from Michael Berg with Wells Fargo.

Congrats on quarter. I just have a quick one on the cloud data adjustment progress. You have a number of announcements in and around that space. And with the strength you're seeing in the business, maybe you can help us understand how that's helping either drive expansion, stickiness adoption, or how you're thinking about the benefits of that longer term? It certainly seems it can ease the adoption curve here.

Yes, I think that's exactly right. And broadly, we are focused on ensuring that our customers can get their data into Braze quickly, easily, affordably and that they can do so without an ongoing maintenance burden. And so when you think about whether you want to call it the total cost of ownership or just think about the characterization of how Braze first deploys and then lives within a technology ecosystem. What we're trying to do with things like cloud data ingestion is the activation energy to both, get data flowing into Braze in the first place, but also to add those incremental use cases over time. And so that ability to onboard a customer more quickly to have them get comfortable in the Braze environment, get their early use cases out the door and then immediately be looking at new opportunities to say, "Hey, oh, I didn't anticipate that I might want to personalize with this particular bit of data," or "My data science team has just completed these new machine learning models around propensity scoring. That would be really helpful to incorporate into my personalization strategies in Braze," or "I have a new corporate KPI that I want to be able to measure that was not a conversion event that was in my initial integration, but it lives in my data warehouse." There's a lot of examples like these that in the past, our marketing team would have had to have gone to an engineering team or a data science team, gotten into their next sprint cycle, gone through all of the heavyweight machinery that goes into releases around new software and such and just leads to delays additional energy and investment required. And often, that's enough for them to get their progress blocked up. And so what we're really trying to do is put marketers in control of their own destiny for a wider swath of the data that lives within their ecosystem. We're committed to giving customers flexible options for our stream processor to ingest either their raw data, the insights that they're generating through additional data science work, and obviously, all of the events and other activities that are generated by end user actions. And that means that we're committed to continuing to integrate with our whole partner ecosystem, working with CDPs, with reverse ETL vendors, with various analytics software as well as the data warehouses and lake houses and our own customers bespoke data engineering pipeline. So you should expect to continue to see a broad investment by Braze on the data front, so that the Braze data platform continues to allow our customers to both, get up and running more quickly, get more use cases to us. And we're not trying to monetize things like that independently because, of course, we have the great advantage of new data that flows into Braze drives more use cases. It leads to incremental monthly active users when people bring in new user populations, and it leads to additional messaging usage as people start to deploy Braze into more and more parts of their user journey. And so we really look at data as an input. We want to make sure that customers can get it into Brazes very easily, they can expand that over time. And it's all a really good self-reinforcing loop for us.

Very helpful. And then a quick follow-up on the product front. Generative AI, you mentioned you were early to the game. When I think about your Data [indiscernible] platform, it certainly seems like the products are coming out at a pretty high velocity. Is there anything structural in either your architecture or how you're using generative AI that's helping with your R&D velocity? And do you feel that's a competitive advantage moving forward to help take further share from the legacy players?

Yes, absolutely. I mean especially when comparing to the legacy players, many of which were assembled through a series of acquisitions and still maintain the siloed architectures that come as a result of that. I think Braze has always been super focused on keeping tight vertical integration through all the different layers of our stack as well as just keeping complexity under control, making sure that we're constantly upgrading our foundations or we're keeping tech under control. A lot of the things that keep a well honed and the sharing machine running at high velocity even as you continue to scale. And so when we're -- when we look at the roadmap velocity, we've been really happy with it for years. We've continued to add more and more investment to our R&D teams. And unlike in a lot of companies, as they get to a certain scale, you start to see the unit productivity slowdown out of R&D. I actually feel like in many ways, because of the strengthening of the foundations of Braze, we've sped up our unit productivity over the last few years. And you're seeing the results of that as see not only the rapid injection of AI into more and more of our platform, but you're also seeing channel expansion, platform expansion, the Braze data platform continuing to deepen its capabilities. And as we think about where the future of customer engagement is going, what we're trying to do is make sure that we're supporting exactly where the leading edge of modern customer engagement teams are driving towards. They're becoming responsible for more and more of the customer journey. They're becoming responsible for not just the delivery of marketing messages but also aspects of the product experience. And those are all the leading edge of where we think that you can bring in a lot of these ideas around: How are we data driven about what we're delivering? How do we use agility and experimentation to compound learnings over time? How do we make sure that we're delivering personalized and relevant experiences where we can take in the combination of all the context around the customer, all of the strategies and the important priorities for our business, and we combine those with automated decision-making through all the investments in AI and ML? And those things compound together to create a tremendous amount of value for the brands that use Braze. They also deliver better product experiences to end-user customers. And so we've always looked at the importance of us controlling that end-to-end data flow. And when you think about Braze's vertical integration where we live inside the end-user products, as users take actions, we know about it immediately. We're able to respond to it in the moment, in the product or we're able to use those insights in order to inform subsequent actions. And marketers are able to actually stay focused on business strategy as opposed to thinking about channels. And so that's all inherent to our architecture. It's been there from the very beginning. And you're seeing the benefits of that, not just in our great growth as a company but also in our R&D velocity.

Our next question comes from DJ Hynes with Canaccord.

I'll echo others' comments on the quarter. It was nice to see the sequential growth in cRPO. Isabelle, the last time we spoke, I think the message from you was kind of like signs of stability are forming in the business. Like to that end, can you talk at all about linearity of bookings in the quarter? Any observations on kind of intra-quarter NRR? Any of that sort of stuff would be interesting to hear.

Yes. So I think we're really pleased with the execution that we had this quarter. And linearity actually -- I think one quarter does not a pattern make, but we were very pleased with our linearity results. And in fact, if you look at sort of some of the over attainment that we had relative to kind of the consensus number that was out there, linearity played a non-negligible part of that. I -- we are not including that type of expectation going forward for purposes of guidance. So I definitely expect that the over-performance that you're seeing here, this is not a pattern that we would expect to repeat. But it was very pleasing to us to see the linearity that we did achieve in this quarter. We're kind of back to the pattern of -- in this quarter, back to the pattern of about 50% of our bookings occurring in the first 2 months of quarter, which is great versus some of the back-end that we had been experiencing over the past several quarters.

And then a quick follow-up for you. Is that WhatsApp channel kind of gets in the market and continues to scale? Any comments you make around kind of contribution margin of that channel, like does it look more like SMS, does it look more like higher-margin channels? How should we think about things?

Yes. So we don't speak specifically to that. I'll just sort of -- and I think we've made comments around this just sort of in terms of like where it lives in the sequence, it's going to be somewhere between e-mail and SMS. So think of it as kind of there in the pecking order, but that's what I'll say. I'm not -- certainly not concerned. In fact, even as SMS was growing as a proportion of our total top line, which it's done very steadily over the last 3.5, 4 years. We've continued to find ways to expand our margin, and you've seen that fairly meaningfully. So I would not look at the incorporation or growth of WhatsApp as -- with any concern towards gross margin compression.

Our next question comes from Derrick Wood with Cowen.

Congrats on a solid quarter. Following on that same topic, just curious, Bill, or Isabelle, what you're seeing in terms of cross-sell activity across channels including e-mail, SMS, in-app WhatsApp. Just wondering how side to push where you're seeing the most traction and whether there's any change in what channels you're landing with for new customers.

Yes. So I'll call it two things. One is that we've been really excited to see that as we've added new channels and as we've grown the sophistication of those channels, even some that have been in the product for 10 years, like e-mail, that we continue to find the ability to start new contracts across any subset of channels. So we have customers that are starting with just SMS, with just content cards, with just e-mail, Obviously, just mobile, which is a big part of our heritage. And so as we continue to build out these new channels, we're looking for them to both, provide upsell and cross-sell opportunities. But also a new way to introduce people into the Braze ecosystem. And our goal with all of these and this comes under that umbrella of start anywhere, go everywhere that we've been talking about for a while is that when we get a customer into Braze on any given channel, we introduced them to Canvas. And they also set up a data flow that flows through every layer of our stack. And once they do that, it's incrementally very easy for them to then expand across to other channels. The feature sets that they use for targeting and for personalization, the concepts that exist around reporting are all the same. In many cases, the data flow can be augmented, and I spoke earlier about how things like cloud data ingestion and a lot of our partnerships across the broader data ecosystem make it easy for new use cases or new channels to have the data that backs them, supplementarily come in and get set up quickly. And so we've got the right mechanisms, both to have customers start in a flexible array of places as well as have them continue to expand across new channels. I'd say that the thing that's most exciting though is the sheer number of customers that we see go from 4 to 5 to 6 to 7 to 8 to 9 channels. I was visiting a customer in Australia earlier this year, who proudly told me that they were in 11 different Braze channels, and they had made it like an internal mission to make sure that they continue to adopt all of them. And when we look at the adoption of WhatsApp in the quarter, there were certainly some of the customers that came in there were brand new, but there were other places where a customer was adding and it's their fifth, sixth or seventh channel. And I think that when you look out across the legacy marketing cloud landscape and if you look out across our -- the other start-up competitors that we have, you're just not going to see examples of that. And it goes back to a lot of the points I was making about architecture earlier, which is that unless you're laser-focused on controlling complexity through the entire lifetime of your existence and unless your R&D process is continuously focused on upgrading your foundations and maintaining tech debt and making sure that you're doing a lot of user experience research, that you're going back revamping the UI/UX of all of these different products as you introduce new channels, so that the complexity stays under control. You just are not capable of being able to have your customers expand so fluidly and across so many different channels as we see with Braze. I talk a lot here about how if we're talking about channels, we're actually missing the point. The idea is that if we can get people into orchestration and into sophisticated data-driven strategies that are focused on what the customer cares about and what the brand cares about and how you marry those together and have them self reinforce each other through sophisticated customer engagement that the channels are more of an implementation detail. And you're not achieving that unless your customers are able to spread across them. And so we really carry that as a goal, both with our product development as well as how we help our customers through integration and onboarding, and through the post sales process as they add new channels over their years of being a Braze customer. And we'll continue to measure ourselves by that yardstick to be able to say, "Hey, it should be just as easy for a customer to adopt their eighth channel as it is for them to adopt their first two." And as long as we can keep accomplishing that, we think that our ability to invest in net new channels or to deepen the capabilities of existing channels and have our customers take advantage of those to both, drive more revenue to Braze through cross-sell and upsell but also to enhance our own ROI will continue to be a really vibrant growth path for us.

Great. Maybe one for Isabelle. Just on the guidance. I mean, going into Q2, you had guided for 7% sequential growth. You ended up with 13%, very strong quarter. Going into Q3, you're guiding for 2% growth. It sounds like maybe that upside in Q2 was linearity, and you're not assuming that in Q3. But anything else to call out in terms of potential maybe some pull forward, or how to think about some extra seasonality around the Q3?

Yes. Thanks for the question. I think one other thing to call out, so the linearity is certainly at play, and we did have a very strong execution quarter. I think one quarter does not a pattern make. So the combination of the strong execution with the linearity. Those two things combined drove some higher-than-anticipated results, which I wouldn't necessarily expect to repeat and are not embedded in the guide in the back half of the year. The other item is, you'll remember in my comments that North Star was in terms of the guide, we had embedded about $1 million. And we had an extremely successful on-time integration right at the beginning of June for that had very limited surprises to the downside, and they contributed almost $2 million instead of that $1 million. So when you combine that factor with the strong ACV and the linearity, all of that combined together that drives kind of the level of outperformance that you saw. We are continuing -- you heard Bill talk about the -- where we are in the macro. We're not anticipating that to improve. And therefore, we're continuing to have a risk-adjusted posture in our earnings -- in our guidance. The only other thing to mention is on a sequential basis, remember that Q1 to Q2 has the number of day count that changes. So Q1 only has 89 days. All the other quarters have 92. And so from a sequential perspective, you end up with a very strong sequential growth between Q1 and Q2. That does not repeat in any other quarter.

Our next question comes from Arjun Bhatia with William Blair.

Bill, maybe one for you. It seems like ease of use and kind of maybe [indiscernible] reconfigured data marketing is a big part of the investments that you're making. How much of a sticking factor, gating factor was that with customers for growth? And as you make these investments, is the goal to expand the [indiscernible] customer segment that you didn't have access to or maybe just increase the intensity with which customers are even [indiscernible] the data that you're putting in the platform?

Yes. So it's definitely both, but they really go hand in hand. If you take, for instance, consumables or CPG as an example, many of those brands don't have large mobile app audiences. And so the historical way, which was very SDK-centric that we got the vast majority of the data into Braze is not going to be as applicable to a lot of their use cases. But when you look at -- to take -- to continue with that example, when you look at their paid ad spend, the combination of pulling the growing first-party data sets that they're creating out of data warehouses through something like cloud data ingestion or using a partner like a CDP or [indiscernible] CTL provider into Braze and then being able to take action with things like our audience sync capability is not what you would think of as a traditional Braze use case of integrating into a mobile app and sending push notifications. But it's actually a tremendous ROI when you consider the per user orchestration of data as it's generated in order to direct marketing actions. And so it's a combination of both, us expanding into new verticals and into new use cases as well as the expansion of our own channel and platform breadth. So as Braze has more places to interact with customers and more places collect data, that enables us to execute on more use cases. Of course, Canvas has been architected the entire time to be incredibly flexible and to enable customers to be able to take action across all of these different places. And so when you combine those things together, what you get is a greater amount of optionality for our customers to move within the surface area of our product. And in order to support their movement through that surface area, you need to be able to -- we need to be able to make it easy for them to get new data into Braze and into places where we're going to be able to make sense of it and take action on it quickly.

Got it. Super helpful. And for Isabelle, I know you have a free cash flow breakeven timeline out there. As we just kind of navigate through the next few quarters of continued macro, what would be some of those factors that maybe get you to push or pull that timeline and some of the investments that you're making in the business?

Yes. Thanks for the question. So are you asking specifically only on free cash flow or the operating income as well? So I mean there's two different sets of answers.

No. In general...

Got it. Okay. Great. Yes. So I'm going to reiterate some comments that we've been making as we've been talking about this path to profitability. Don't expect us to overachieve on this, because to the extent we generate extra capacity, we are going to look to prudently reinvest that into the business in order to foster overall growth. So I think we're sticking to the timeline that we have articulated, both for the free cash flow and the operating income. We were very pleased with our performance this quarter. But actually, we are taking some of the savings that we've realized on a year-to-date basis, and we are enabling certain parts of the business to redeploy some of those savings through the back half of the year while maintaining a laser focus on our guidance for Q4. So the short answer is don't expect us to overachieve and we have -- we're consistent in that commentary.

[Operator Instructions]. Our next question comes from Nick Altmann with Scotiabank.

Just a quick one for me. As we entered the year, there was sort of this notion that COVID perhaps had a little bit of front office pull forward and then the turbulent macro front office, MarTech initiatives, maybe get put on the back burner. Just given the booking strength in Q1 and 2Q here, is there any way to sort of parse out the strength between the end market holding up a little bit better than maybe you guys had expected versus you guys just executing much better? Because I know that Isabelle, you had called out execution was very strong in 2Q. So just wondering if you could kind of parse out the strength between those two factors?

Yes. I mean I said this at the top, which is that I think that the broad macro that we're experiencing and that everyone is experiencing together has been pretty consistent throughout the year so far. And so I've also been speaking for quarters now on these calls about how we think that a lot of the narratives out there about the front office, about concepts like optimizing spend don't apply to customer engagement in the same way, because the marginal ROI of customer engagement activities by customers is so much higher than a lot of other marketing spend. We're not a seat-based model. We're tied to the activity of the customers. And the fact that you also can't go through, a lot of the optimization strategies that companies have used for things like data warehouses or other sorts of analysis where you do things like sampling, just simply don't apply when you need to actually be able to talk to your customers, right? It's on responsibility for brands. And so I would present that in two ways. One is that we think we're seeing a pretty consistent buyer behavior throughout these periods, but I think also a lot of the front-office narratives that have been floating around out there don't apply to customer engagement in the same way. And then I'll just reiterate that we have been really happy with execution. It was four quarters ago on this call that we highlighted some of the struggles that we were seeing from a salesforce productivity perspective. And in those last four quarters, we've done a tremendous amount of work on this topic, including org structure and leadership changes across both, sales and go-to-market strategy. We've enhanced our training and our in-person onboarding, tighter performance management. And we also had a renewed focus on competitive strategy to make sure that in an environment with less opportunities that we're winning as many of them as we can. And we're encouraged by that progress, and we think we're going to continue to make progress there. I think sales moral is high, and we're working really well together as the team. We're actually currently completing what is effectively a midyear global sales kickoff, complete with training, workshops and role playing, all of which have been done in person. It's actually an example of some of these incremental investments that we're making right now that Isabelle just alluded to on the last answer. Within that, we've been prioritizing things that are not as sticky. So that's why you're seeing headcount is still growing in a very tempered way. But we are really focused on making sure that we are prepared with extremely solid foundations and continuously improving execution, so that when we do come out of this, that Braze is going to be right there ready to stop on the accelerator and springboard out of it.

Our next question comes from Matt VanVliet with BTIG.

As guess as you look at the -- somewhat of an acceleration on the $500,000-plus net revenue retention rate, curious if you're seeing even more sort of cross-sell and new channel adoption there? Or is this just sort of the natural expansion of large customers landing and expanding and already being at that size? Any additional color you can help that particularly at the larger sized customers where you're clearly gaining market share.

Yes. So I think it's really just a combination of existing large customers that are continuing to grow, adopting more channels, more use cases were further penetrating organizations by getting into new geos and new business units that they have, being able to support incremental new use cases, all of that comes with new volume and new monthly active users. So I think there's existing customers, and we're also doing well in terms of large net new customers. And so I think when you look at the contribution in our ARR from these large customers, we are built for a broad range of customer sizes, but we're very well built for the top-tier enterprise. And so that I think you're seeing the needs across those enterprises for highest level sophistication customer engagement platforms. And as we continue to improve the product, increase our breadth of channels, we're just continuing to further penetrate these organizations. In addition, 43% of our revenue earned outside the U.S., that means we already have a solid presence globally. A lot of these organizations, large multinationals, we can continue to support them and increase our exposure with them across the globe. So you're just seeing us continue to penetrate a very -- a great market that we think we have the right to win in.

Our next question comes from Taylor McGinnis with UBS.

Isabelle, just one for you. So the sequential cRPO growth was really solid. So aside from just strong execution on linearity, was there any impact from North Star or something onetime in the renewal base to keep in mind? And the reason why I ask, because as we look ahead, if the environment is stabilizing, could we start to see stronger growth quarter-over-quarter adjusting for seasonality, of course, throughout the year versus maybe what we saw last year?

Yes. Thanks for the question. So North Star did have an impact. And actually, if you -- we're not going to quantify it specifically. But if you remove the impact of North Star, Q2 of this year looks a little bit more like Q2 of last year. If you want to look at sort of sequential percentage growth in RPO, cRPO. So it looks a little bit closer to that. So that's one way to think about the impact of North Star.

Our next question comes from Brent Bracelin with Piper Sandler.

Great to see the change in the business. Even if Isabelle, even if I back out North Star, it looks like it's the highest dollar change in subscription revenue and overall revenue ever. You got the acceleration in U.S., accelerating growth internationally, accelerating RPO growth. It just feels like something's changed here. The strength, is it one area? It feels pretty broad-based. So my question here, does it feel the environment year-end or your ability to execute in this environment, the new normal, is it different now? Or again, I know one quarter doesn't want to make it a trend, but it does -- outside looking in, it feels like there was a change here and maybe I didn't appreciate it going into the quarter that changes and just trying to understand to make sure if we fully do appreciate what it looks like to be a little healthier environment, your ability to at least execute in this environment has changed. So what do we think about that?

I think we're very pleased with our execution results in the context of the macro that we continue to live in. So we've been talking about investments that we've made across our sales organization over the last several quarters, and Bill talked about some that continue on today. And we're very pleased to see some of the results of that in Q2. That said, the environment continues to be challenged. And so while we are going to continue to invest in this improved execution across our sales organization, I think it is too soon to declare that we really feel like things are different on a persistent basis.

Well, you're certainly surprised us this quarter. Hopefully, we'll get more surprises in the next few quarters.

Next question comes from Brian Schwartz with Oppenheimer.

Following up on that last question, for you, Bill. The commentary is that the macro is unchanged and still challenging out there. So I wanted to ask you, what are you looking for to help you decide when to underwrite a higher level of new investments for the business for whenever the macro does turn?

Yes. So first of all, we are actually still carrying some excess sales capacity, and we've spoken about this in past as well that we think we have the ability to grow into. And we're similarly investing on the demand generation side to make sure that we can have our salesforce be as productive as possible. And all of that is about remaining in a forward posture, so that as things start to improve, we're able to pick them up immediately. We believe that we have a right to win across this market and that, as I mentioned at the very top of the call, I think there's been a lot of really exciting product innovation that we haven't seen the full potential of from a revenue generation perspective, simply due to the realities of a lot of frozen or declining budgets that marketers have been living through in this year. And so part of it is going to be the conditions and confidence improving, looking at brands extending their planning horizons. I think it's why we have seen a bit more relative strength in the enterprise and we have across the SMB sector, simply because those businesses are more able to quickly shift back to planning on a multiyear time horizon. And that's exactly where you're going to invest in a premium product like Braze in order to set you up for your future. Some of the other things to that end that we would look at are going to be the venture activity. And we're starting to see some green shoots there but continuing to see just more investment flowing into more promising and businesses, so that they can scale quickly. Part of it is going to be the calendar as well, getting into the next budget year, so that businesses are ready to be back on an investment footing as they start to look ahead into next calendar year, next fiscal year as we get to the end here. And in the meantime, we're going to continue to execute as well as we can and stay in control of everything that we can.

Our next question comes from Rob Morelli with Needham.

Congrats on the quarter, [indiscernible]. As customers look to expand on the platform in the current macro. Are you guys able to touch on where they're expanding now compared to 1 year or 2 ago? Is it in different channels of capabilities, just still looking to understand where the incremental expansion dollar is going?

Yes. I would broadly characterize it as being consistent with the caveat that it's conceptually consistent because obviously, the product continues to expand in net new ways, and we are seeing customers continue to adopt those. So for instance, has had a really high attach rate for a long time. It sounds like data sharing has gotten more capability. We're seeing more customers adopt that. But conceptually, those are very similar products in the sense that they help customers with their data export pipelines. We also are seeing people add incremental capability through things like product Catalogs or Audience Sync or the Predictive Suite. These are net new, but they kind of follow this trend line of customers continuing to deploy new use cases on Braze. And so I think that the drivers of it, which are how do we expand into new use cases, how do we over channels that are currently being run by other vendors? We talk about that for new business in terms of vendor consolidation, but that vendor consolidation trend obviously exists once a person is already a Braze customer as well as we supplant other vendors that might still have them in their ecosystem when we first got going with them. And then things like WhatsApp are net new for everyone. And so those are great places where we see a lot of greenfield. We don't need to go in and replace a legacy vendor. And especially as we get the early proof points like the case study that I referenced with Rappi early on, we can bring to life the ROI and the business case for more customers to be able to expand into those. And that's very exciting. But conceptually, that's similar to how we've gone to market with SMS over the last years too. And so I think at a high level, we're able to exercise muscles that we're getting more and more familiar with over time, as we go through cross-sell and upsell. And the number of opportunities that we have to expand within our product surface area continue to multiply it as our R&D innovation continues at the rapid pace that it's at. I would say that it's all tempered by this -- by the flat or declining budgets that a lot of marketers went through this year. But I'd like to think that we're also generating some pent-up demand that when we start to see those budget levers loosen a little bit at whatever point in the future that we'll be ready to sell into those.

We have time for one more question. The final question will come from Yun Kim with Loop Capital.

I'll make just a quick one, Bill. As you roll out more generative AI-based products and solutions, how are you thinking about pricing model around those products? As you can see from a couple of large high-profile vendors, they're putting premium on their general Gen-AI products? And then maybe Isabelle can talk about the cost side of the equation on these products?

Yes. So I think that a lot of the Gen-AI work that we're doing to help with customer productivity or with marketer productivity, we're not looking to keep those amazing tools out of the hands of marketers, because we know that they lead to higher usage of Braze. And we're able to monetize them in that way, and I spoke about that earlier. If we're helping a marketer deploy more variants more quickly to help them check their copywriting or generate or inspire themselves to have new content strategies, if we're helping them be able to use a more technical capability through code generation or other sorts of scheme syntax checking. These are all things that really encourage uses of Braze that we already monetized on our own. And so we're not looking necessarily for those aspects of Gen-AI that help the productivity of the marketer be monetized independently. But there are other aspects that incorporate in LMs or other sorts of transformer models. I mentioned the personal -- or the recommendation engine earlier, the things like the Predictive Suite and other aspects of automated decision-making that will get deployed into both, our classification layer and your orchestration layer, that we think there's both, an appetite to pay more for those or an expectation based off of other investments that have been made. And they just produce a tremendous amount of value in terms of improved ROI and improved results for marketers. And so I think we're going to continue to take a hybrid approach across those, and we're going to look for them to all -- really feed each other in mutually self-reinforcing ways, but we always have the tremendous advantage of being able to build based off of the monthly active user, based off of the message volumes. And to the extent that we incorporate more value into value generation into each monthly active user, that gives us more pricing power within that. And you've actually seen this for several years now where our revenue growth rate has outpaced our monthly active user growth rate for quite a while. A big part of that is because we continue to add more productivity for marketers that use Braze. And then they're able to extract more ROI out of the platform. And we're able to capture that very smoothly through monthly active user pricing.

And the only thing I would say on the cost side is, I do not expect -- and I talked about this a little bit earlier in the Q&A., don't expect the impact of AI to sort of be margin dilutive. So we are continuing to remain within our long-term margin targets of 67% to 72%. And embedding the AI functionality and that cost structure, we don't break out the individual components but don't look for that to be margin dilutive.

This concludes the Q&A. I will now pass the call back to Bill for closing remarks.