BRZE - NASDAQ

Welcome to the Braze Fiscal Third Quarter 2025 Earnings Conference Call. My name is Megan, and I'll be your operator for today's call. At this time all participants are in listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. 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 third quarter 2025. 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 our 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 fourth quarter and the fiscal year ended January 31, 2025, the anticipated development, release timing and performance and benefits of our existing and upcoming products and features, the potential impact and duration of our current macroeconomic trends, our anticipated customer behaviors, including vendor consolidation and replacement trends and their impact on Braze, our potential market opportunity and our ability to effectively execute on such opportunity, the expected effects of our social impact initiatives and our long-term financial targets and goals. 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 identified risks 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 to aid investors in further understanding the company's fiscal third quarter 2025 performance in addition to the impact these items have on the financial results. Please refer to the reconciliation 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 are pleased with our third quarter results, which again proved the high ROI and long-term value of the Braze customer engagement platform. We generated $152.1 million of revenue, up 23% year-over-year, while driving continued efficiency across our business and improving non-GAAP operating margins by 580 basis points year-over-year. I'm also proud to announce that we passed $600 million of committed annual recurring revenue during the quarter, another testament to the strong demand for the ROI delivered by the Braze customer engagement platform. And for the second quarter in a row, we achieved positive non-GAAP net income and expect to maintain positive quarterly net income moving forward. As planned, non-GAAP operating income took a slight step back this quarter due to seasonal investments in marketing and we remain on track to deliver positive non-GAAP operating income and free cash flow in the fourth quarter and to sustain both on a go-forward basis. This is an exciting set of financial milestones on our way to becoming the leading customer engagement platform globally and we look forward to generating meaningful operating income while also thoughtfully reinvesting to grow our business in the coming quarters and years. During the third quarter, we continued to capitalize on the legacy vendor replacement cycle, securing a diverse set of new business wins where Braze is replacing legacy marketing clouds, including at a gaming company in North America, an airline and a financial planning company in APAC and a fashion brand in EMEA. We also continue to win against both channel-specific point solutions and homegrown tools across a diverse set of industries, geographies and use cases. Some notable takeaways included a leading North American party planning application, a QSR in EMEA and a traditional media company in APAC, we grew our customer count by 48 during the quarter to 2,211, up 200 year-over-year. New business wins and upsells included AEON Financial Services Company, Burpple, Crumbl Cookies, E.On Next, Exact Sciences, Hugo Boss, Ippen Digital, Kurt Geiger, Love’s Travel Stops & Country Stores, LUSH Cosmetics, Rightmove, SMARTNEWS, Inc., Telstra and WeatherBug, along with many others. Enterprise customers were again a strength with our $500,000-plus ARR customers increasing to 234, up 24% year-over-year, evidence of how customers continue to leverage rich first-party data and advanced artificial intelligence to drive sophisticated cross-channel customer engagement at scale. And in another proof point of the growing Braze customer community, we are excited to see a growing number of new business deals, which were accelerated by the presence of marketers who previously learned and leveraged Braze in past roles at prior companies. While we haven't seen a meaningful improvement to the demand environment quarter-over-quarter, we remain focused on executing against our long-term product and financial goals while positioning Braze for long-term category leadership. Our path to category leadership requires a range of complementary investments, including the continued elevation of our brand and awareness, strengthening our partner ecosystem globally, enhancing our product and channel offerings, improving system performance and easing the on-ramp into Braze for new customers. Further, we believe that both the legacy replacement cycle and vendor consolidation trends will lead to share gains for Braze as brands increasingly look to upgrade their customer engagement strategies and deploy new AI-driven advancements to increase their productivity and enhance the relevance of their customer messaging. Through the growth of our customer community and the successful execution of our product road map and global expansion strategy, Braze can position itself as a global category leader in customer engagement, delivering increased relevance and personalization to consumers at scale. As brands continue to invest in their customer engagement efforts, it is crucial to find efficient opportunities to initiate new relationships and strengthen existing ones. And the period for Black Friday to Cyber Monday is particularly crucial for many retail and e-commerce brands as they get a jump on the holiday season. This was reflected by both our record-breaking message volumes and the continued rise in sophistication used to orchestrate and enhance the performance of messages sent via Braze. Over the four-day weekend, Braze delivered over 50 billion messages, up 35% year-over-year with 100% uptime. We saw marketers moving even further away from batch and blast single-channel campaigns to instead deliver dynamic data informed campaigns switching customers across a variety of channels. We also saw a 46% increase in the messaging volume orchestrated by cross-channel campuses, supported by a 31% increase in the number of unique campuses executed by our real-time stream processing engine. The rise in usage of Canvas reflects a growing conviction that marketers must embrace an experimental data-driven and omni-channel approach to customer engagement, driving responsive and sophisticated customer journeys that inspire and connect with consumers. In addition, we saw increased usage of Braze AI features to enhance marketer productivity while amplifying the results of campaigns themselves. And finally, we witnessed increases in premium messaging, including WhatsApp, up 36% year-over-year and gains for in-product messaging, with content cards volume up 53% year-over-year and net messaging increasing 46% year-over-year. Existing at the leading edge of technology is in our DNA and at the core of our innovation road map. We foresaw the opportunity presented by the coming wide-scale adoption of mobile more than a decade ago and have since worked relentlessly to seize the opportunity through the use of sophisticated technology focusing on product innovation that can accelerate the legacy replacement cycle and compel more brands to upgrade their customer engagement practices. At our Forge customer conference in late September, we unveiled new low-code and AI-driven product innovations, designed to more effectively personalize brands customer engagement efforts and drive more agile and productive marketing teams. These included Project Catalyst, a new Braze AI-driven agent, which we are developing to help brands deliver personalized customer engagement by rapidly creating, testing and optimizing experience variations at a scale that only AI can achieve. We also debuted additional canvas template and Braze AI assistant features to help marketers more easily get started and deliver sophisticated customer experiences. And we shared upcoming expansions to our channel offerings, including line and RCS business support. And new WhatsApp features such as dynamic images, click tracking and commerce support. I'd like to take a moment to highlight each of these enhancements, starting with our in-development Braze AI agent codenamed, Project Catalyst. As you know, for over a decade, Braze has deployed dedicated teams of engineers and data scientists focused on using machine learning to integrate AI into our product with a multifaceted goal set of optimizing customer journeys, increasing the relevance of message content, improving marketer productivity and enhancing targeting strategies. Project Catalyst combines our past investments in automated decision-making and experiment optimization with Frontier innovation and generative AI to help marketers craft and uncover the best experience for each individual consumer. Marketers using Project Catalyst should benefit from Braze's tightly integrated tech stack, combining its rich data integrations real-time stream processor and cross-channel architecture to create relevant experiences across a range of digital touch points. With Project Catalyst, marketers can define guardrails for journeys or content, specify their goals and then allow Braze AI to optimize accordingly. In addition, marketers can combine capabilities across Project Catalyst and Braze cannabis, our no-code journey orchestration solution to bring together human-inspired experiences with machine optimized performance and scale. Catalyst is designed to truly break down the limits of experimentation as the agent can generate a multitude of variance for each component of that experience. The attention grabbing headline, the tone of the message, the nudges and promotional offers available, the channel mix, optimal timing and more, combining the best of each component to create an individual unique experience for each and every consumer with each one receiving the combination that's best suited for them. And with configurable content controls, optimization levers, experiment automation and real-time reporting, marketers can ensure they are in control of their engagement making adjustments, evolving focus areas and improving their business outcomes over time. Project Catalyst is expected to be available in beta in the first half of next year, helping our customers deliver tailored one-to-one personalized experiences for their consumers at scale. At Forge, we also unveiled new AI solutions that inspire marketers improve ease of use and enable more sophisticated use cases with less training upfront. These include our liquid assistant, now generally available and our message template assistant currently in early access to extend the power of generative AI beyond copy and image creation. These features help marketers create advanced logic for personalization as well as sophisticated message templates, all with the simple and interactive plain text prompt.

Thank you, Bill, and thank you, everyone, for joining us today. As Bill stated, we reported a solid third quarter with revenue increasing 23% year-over-year to $152.1 million, driven by a combination of existing customer contract expansions, renewals and new business. Subscription revenue remains the primary component of our total top line, contributing 96% of our third quarter revenue, while the remaining 4% represents a combination of recurring professional services and onetime configuration and onboarding fees. Total customer count increased 10% year-over-year to 2,211 customers as of October 31, up 200 from the same period last year and up 48 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 234 and as of October 31, contributed 61% to our total ARR. This compares to a 58% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 113%. While dollar-based net retention for our large customers was 116%. Expansion was again broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 45% of our total revenue in the third quarter, consistent with the prior quarter of this year and up 1 percentage point from 44% in the prior year quarter. In the third quarter, our total remaining performance obligation was $717 million, up 28% year-over-year and up 4% sequentially. Current RPO was $458 million, up 24% year-over-year and up 5% sequentially. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Overall, our dollar-weighted contract length remains at just over two years. Non-GAAP gross profit in the quarter was $107 million, representing a non-GAAP gross margin of 70.5%. This compares to a non-GAAP gross profit of $89 million and non-GAAP gross margin of 71.4% in the third quarter of last year. Decline in year-over-year margin was primarily driven by expansion of premium messaging channels, partially offset by continued cost optimization of our technology stack with additional benefits from personnel efficiencies. I'll remind you that we increased our long-term non-GAAP gross margin target by 200 basis points to 69% to 74% at our recent Investor Day in September as we continue to realize scaling efficiencies across both personnel and technology costs. Non-GAAP sales and marketing expenses were $65 million or 43% of revenue compared to $58 million or 47% of revenue in the prior year quarter. While the dollar increase reflects our year-over-year investments in head count costs to support our ongoing growth and global expansion. The improved efficiency reflects our disciplined investment approach to resource deployment across our go-to-market organization. Non-GAAP R&D expense was $22 million or 15% of revenue compared to $20 million or 16% of revenue in the prior year quarter. The dollar increase was primarily driven by increased head count costs to support the expansion of our existing offerings as well as to develop new products and features to drive growth. Our R&D expenditures reflect our intentional yet disciplined technology investment strategy as we approach our long-term non-GAAP R&D percent of revenue target of 13% to 15%. Non-GAAP G&A expense was $22 million or 15% of revenue compared to $19 million or 15% of revenue in the prior year quarter. The dollar increase was driven by investments to support overall company growth and global expansion. Non-GAAP operating loss was $2.2 million or negative 1% of revenue compared to a non-GAAP operating loss of $8.9 million or negative 7% of revenue in the prior year quarter. As a reminder, third quarter operating income was impacted by approximately $5 million related to the cost of several global customer events, including Forge, our annual flagship customer event. Non-GAAP net income attributable to Braze shareholders in the quarter was $2.5 million or $0.02 per share, compared to a loss of $4.5 million or a loss of $0.05 per share in the prior year quarter. Now turning to the balance sheet and cash flow statement. We ended the quarter with approximately $493.1 million in cash, cash equivalents, restricted cash and marketable securities. Cash used in operations during the quarter was $11.4 million compared to cash used in operations of $2 million in the prior year quarter. Including the cash impact of capitalized costs, free cash flow in the quarter was negative $14.2 million compared to a negative free cash flow of $5.9 million in the prior year quarter. And as we have noted in the past, we expect our free cash flow to continue to fluctuate from quarter-to-quarter given the timing of customer and vendor payments. Now turning to guidance. For the fourth quarter of fiscal 2025, we expect revenue to be in the range of $155 million to $156 million, which represents a year-over-year growth rate of approximately 19% at the midpoint. Fourth quarter non-GAAP operating income is expected to be in the range of $2 million to $3 million. At the midpoint, this implies a non-GAAP operating margin of approximately 1.6%. Fourth quarter non-GAAP net income is expected to be $5 million to $6 million and fourth quarter non-GAAP net income per share in the range of $0.05 to $0.06 per share based on approximately 107.5 million weighted average diluted shares outstanding during the period. For the full fiscal year 2025, we expect total revenue to be in the range of $588 million to $589 million, which represents a year-over-year growth rate of approximately 25% at the midpoint. Fiscal year 2025 non-GAAP operating loss is expected to be in the range of $5 million to $6 million. At the midpoint, this implies a non-GAAP operating margin of negative 1%, roughly a 750 basis point improvement versus fiscal year 2024. Non-GAAP net income for the same period is expected to be in the range of $11 million to $12 million and net income per share is expected to be $0.10 to $0.11 per share based on a full year weighted average diluted share count of approximately 107 million shares. And as Bill noted, we remain on track to deliver positive non-GAAP operating income and free cash flow beginning in Q4 of this year. We remain excited about Braze's future and remain committed to providing industry-leading customer engagement solutions and driving product innovation, while executing against 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 will come from Ryan MacWilliams with Barclays.

Bill, we'd love to hear more about Project Catalyst. If -- well, this will be included as a part of Canvas or be separate add-on. And then maybe if you aren't charging for it discretely, how do you think this can be additive to Braze's results next year?

Yes. Great question. And we're obviously really excited to see Project Catalyst start to get into customers' hands as we release it into beta and then continue its progression next year. So we're expecting Project Catalyst to absolutely be a part of Canvas. And that's one of the things that I'm actually most excited about as this ushers in kind of a new era of Canvas design. Historically, obviously, we've done a lot with artificial intelligence machine learning to be able to automatically make decisions when it comes to orchestration or to targeting, we've been able to help optimize the content through things like personalization or localization or drive better results. But what this allows us to do actually is have the marketer come in and just tell us the goal. And then we optimize that on a one-on-one basis with the aid obviously, of generative AI content generation with hopefully, as we continue to see more of the reasoning capabilities of Frontier LLM models continue to improve throughout the year and in the years to come, [ought] to be able to make more and more comprehensive decisions throughout the journey, and then continuing to optimize that on a one-on-one basis. Now, I was talking about personal lines path quite a bit in the past because it's an exciting place where we already do one-on-one optimization. But the way that something like personalized path works, marketers still need to build different variants. And so that limits them both from the kind of productivity side of the house because they have to literally create more of those variants and build them out within Canvas, but it also limits our ability to do that full one-on-one optimization at scale with as many degrees of freedom as Project Catalyst is going to bring to bear. And so we're really excited about it, bringing in this kind of new era of customer journey design, if you will, to really be a companion to that journey, optimizing for exactly what the most important goals are of the businesses that we're working with. And then having that live within a really robust environment in Canvas, where customers will be able to guide, configure, test the different versions of Catalyst and their preexisting solutions head-to-head against each other, be able to use Canvas' robust reporting frameworks in order to understand performance over time and how that's evolving and really just all the capabilities that you need around these frontier capabilities in order to really bring them to life quickly. Now from a monetization standpoint, definitely still early days, but this will be a paid and premium feature. We’re first focused on getting it out there and kind of optimizing its performance and usability. We're going to have two different options for pricing this. The first one is going to be leveraging our flexible credit model, and we'll talk about that more, I'm sure, throughout the call and the progress that we've been making there. To charge per in vacation or establishing as a net new SKU and it will really depend on the kind of the volume and the cost function as we get it out into customer hands and start to see the performance there.

Excellent. And then one for Isabel. How should we think about the dollar-based net retention rate within the third quarter itself? And I know we're still going through some of the renewals, but any update on how we should think about the dollar-based net retention rate from here?

Yes. So we back in September, we gave an indication of where we thought the year would land around [110%]. And so when you think about where we are in Q3, that [113%], that number is actually sort of rounding up to [113%]. So it's actually landing pretty much where we would have anticipated it to land in the context of that visibility that we wanted to provide for that year-end number. So, we are encouraged by some of the in-quarter stability that we're seeing, but we do continue to see some pressure on this metric. And so that [110%] number will stick to that for the end of the year.

Our next question comes from Gabriela Borges with Goldman Sachs.

Bill, I wanted to ask about some of the improvements that you've been making with your go-to-market added sales and marketing productivity. Maybe just level set us on how some of your new initiatives are going? I remember you're talking about time credit -- not time credit the module credits. I remember you're talking about ways to improve engagement within the platform and customer success. So would love to hear taking a step back how some of those missions are going?

Yes, absolutely. So I'll start with the flexible credit just as a continuation from Ryan's question as well. And we actually already have over 450 customers that have purchased the flexible message sending credits across the Braze customer base. So rapidly approaching quarter of our legacy customer base, but it's also a very high percentage of all incoming customers. And that's already enabling a few exciting things. First of all, we launched LINE earlier this year. And all of those -- all of the early LINE upsells were done with flexible credits. And not only that, but actually the way that we price them is a pilot for how we're anticipating pricing things like WhatsApp's dynamic pricing -- dynamic message pricing in the future where a customer simultaneously has a billing relationship with LINE by the message volumes and then Braze is selling them a higher margin, kind of higher up in the software stack orchestration, personalization and reporting capability. And so, as we continue to push ahead on both the flexible credits, being able to sell existing channels, it's also unlocking great opportunities for new channels. Another great testament to that actually is that we announced earlier today to eligible customers in the U.S. and the UK, a pilot for early access to premium RCS messaging that is immediately available to those customers who have purchased flexible message credits already who are already sending SMS in the UK and the U.S., but it's something where they're not going to have to process a new order for them to buy a new message channel. And so we can already see the great benefits both from the flexibility of how we can bring new channels to market, but also being able to speed up the go-to-market side. And as we've discussed in the past as well, we think that customers' ability to use these channels more flexibly and use these flexible credits more fungible will also support expansion over time and lead to less instances of places where a customer may be estimated a particular channel or a country channel in the wrong way and then we experienced partial churn at the renewal, which is something that we've talked about seeing throughout this year. So those are all really great advances we think that our customer-friendly as well as really helping out from a go-to-market productivity standpoint. We're also really excited in the quarter to bring on our new VP of Sales for the Americas. Jerry Schorn joined us. He was previously at Salesforce for 11.5 years. And that actually completes the transition of our global sales leadership that began with the elevation of our Global SVP of Sales at the beginning of this fiscal year when Eric Sanders stepped into that role on the hiring of our VP of Sales for APAC in December of last year, and then we saw the promotion of our dock regional leader to the VP of Sales for EMEA over the summer. And so really great to see all of those leadership roles now fully completed around the sales organization. And there's just been a lot of great progress as well as we've continued to strengthen the Braze value framework motion as we continue to activate the partner ecosystem and have been bringing more of our services and agencies, partners, into deal cycles earlier to be able to coordinate with them better, that's leading to higher win rates. It's leading to better onboarding outcomes as there's more services support throughout. So really excited to see these different dimensions of investment in the go-to-market motion, and we're starting to see those bear fruit.

Absolutely. I'll ask one follow-up on the go-to-market, which is specifically around the Braze for start-ups and the free trial programs for smaller companies? And maybe as part of that, maybe give us an update on the health of that small company ecosystem as a whole?

Yes. So I think that we're continuing to see the health metrics around the SMB sector. Our main -- they're maintaining the same challenges that we've seen throughout the year. Just as a reminder, we did lower our sales capacity in that category midway through last year. And so while our sales team there does continue to be productive and we've been kind of happy to see their progress with new business there. It's definitely a category that has still been challenged. On the free trial side, I'll remind everyone as well that our free trial goal is two-fold. First of all, is really helping with top of funnel awareness and those customers, in particular, that might participate in the Braze start-ups program or those that are in geographies around the world that we maybe don't have a direct sales presence in and just being able to give them an opportunity to have a more fulsome experience within a Braze trial environment right out of the gate, but also to be able to be there as a sandbox environment during enterprise sales cycles. And so we're seeing good early progress in both of those used cases. We're definitely learning and iterating as we go as we're seeing places where a product that had previously been gated by very deliberate onboarding, obviously, is going to have some rough edges and we're still working on smoothing out those when we find them and improving the on-ramp into Braze. We think that it's obviously a really exciting investment area for us as we continue to focus on product-led growth investments that are going to make our existing sales team more productive in the near-term and then also allow us to unlock a much larger opportunity over the long-term with a big customer -- addressable customer base.

Next question comes from Tyler Radke with Citi.

Bill, you talked a lot about Project Catalyst. And I'm wondering if you could just sort of frame how you're seeing the conversations just around agentic AI in front office evolve? Obviously, you have Salesforce out there talking a lot about agent force. I know you did talk about a lot of competitive takeaways being strong in the quarter. But what role are customers sort of viewing Braze in this context? And do you think the focus on agentic AI by kind of the incumbent front office provider sort of help or hurt your competitive win rates over time?

Yes. So there's a lot to unpack there. And I think that just to speak to Salesforce out of the gate and what we're seeing competitively, obviously, with their huge focus on agent force. I think that another consequence of that is that they've clearly taken their eye off the ball on the Salesforce marketing cloud. And it's not just their existing in particular, enterprise customers, but also the agency and analyst community they're noticing. We're excited that that's opening the door to a new generation of both ecosystem relationships. And specifically, a lot of businesses out there that built great agency practices on the back of Salesforce marketing cloud are now kind of picking up their heads and looking around and realizing that, that product has been by and large orphan by Salesforce in terms of future investment and they need to work out where to build practices. And I think that's really well timed for us continuing to mature our own ecosystem support and our own agency partnership work. And so, we're excited about that and seeing both previous Salesforce customers that may have been in the kind of late majority or in the laggard side who still haven't ever evaluated new modern solutions. This is giving them a good reason to start to pick up their heads and look at that. So we're excited about that competitive opportunity. I think from an agent perspective, and what we're seeing with the broader conversation to go back to the beginning of your question, there's definitely still a lot of noise out in the market. The underlying technology in the space continues to advance extremely rapidly. I think that we're -- and so therefore, we are also seeing, I think, a wide array of approaches to kind of testing or implementing generative AI backed capabilities within a marketing stack, within customer engagement, within product delivery. I think that also it's really interesting to look at where we've seen broadly across the marketing space and this is in the third-party and advertising world where Braze doesn't operate as much, but, it's no surprise that some of the first places that the broader marketing industry saw Gen AI start to drive results was when that generative content production got married with an existing machine learning system. And when I say something like that, I'm thinking specifically of Meta's ad products, you have a massive experiment optimization engine that's already operating, and it's eagerly awaiting new content variants to get fed into it. And when I think about that as an example and then we think about Braze Canvas and we think about the Braze data platform and how Braze AI has been able to be integrated throughout the stack and that our differentiated foundations in terms of real-time data access, the ability to rapidly understand context and then the advanced optimization that we're able to do around experimentation. I think Braze continues to be extremely well positioned with all the right foundations and the surrounding capabilities to continue to ingest and take advantage of new advances in the state-of-the-art. And that, I think, is where we're investing. We are simultaneously doing things like upgrading the Canvas language to support things like Canvas context and continuing to upgrade the run time to be able to better -- provide better native support for things like conversational use cases within that continuing to expand across all these new channel options so that as the kind of Gen AI reasoning capability or the content optimization capability continues to advance that we're going to have the most optionality to be able to leverage that across channel -- supported channels, of anyone in the industry. And at the same time, obviously, investing in our own agented capability through things like Project Catalyst. And so broadly, when we look at the space, it's still one that's moving very fast. I don't think there's anything near an industry consensus across marketers about exactly where to be placing their bets broadly across the space. But I continue to also feel really good about the pre-existing advantages that Braze is going to be able to leverage as we continue to bake Braze AI more broadly into the platform and advance our canvas environment. And then when we look at that against what we're seeing with both Salesforce and Adobe, both effectively kind of admitting that the prior products that they had in the space around Adobe's campaign products and the Salesforce Marketing Cloud are not fit for purpose for modern customer engagement use cases. They're going to require a rebuild. They're obviously going to invest in and do that. But during that transition period, it's a great opportunity for Braze to be able to step in to both customer and the ecosystem -- the partner ecosystem community and be able to build more momentum in a place that they definitely had a strong incumbent advantage for the better part of the last decade.

Follow-up for you, Isabelle, as we look at bookings in the quarter, both bookings and billings, they reaccelerated from about 15% to, call it, 22%, 23%, yet the implied Q4 guidance suggests something in the teens, 18%, 19%. So can you help us understand, was there any timing benefits in that bookings performance? Or how should we just think about the run rate of current RPO relative to that guide for Q4?

Sure. So for the billings number, just keep in mind that that's obviously revenue plus change in deferred revenue. And there's a dynamic that occurred between Q3 of last year and Q3 of this year. Q3 of last year, we actually had a bit of a low trough in terms of the volume of annual upfront contracts that we signed. Q3 of this year, we actually had a bit of a peak in the annual upfront contracts that were signed. And so that leads on a deferred revenue basis. That will lead to sort of a year-over-year acceleration in the change in deferred revenue. Just by virtue of that dynamic that's happening year-over-year. So that's a bit of what you're seeing in terms of the reacceleration, so not necessarily directly tied to the evolution of the business, although we're encouraged to see our ability to kind of continue to move our customers more and more into the annual upfront contract. But that's a bit of the dynamic that you're seeing there. .

Our next question comes from Scott Berg with Needham.

Bill, I wanted to focus on something that you said earlier in your scripted remarks around existing Braze customers when they go to a new company, you're seeing them kind of rebuy. I guess when you look at those customers, do they purchase the platform any differently than the new customers? Just trying to understand with the buying trend or even embrace customer would be?

Yes. I think that the key thing that our sales team sees is just greater velocity because obviously, there's less education required and we usually have someone at the customers, helping be our champion and helping educate internally. Braze, we both differentiate via our interconnections into the data ecosystem and into the product environment. It provides us both with greater context and understanding of customers of stronger kind of wealth of first-party data to be able to optimize both journeys as well as content with as well as more interfaces to be able to interact with those customers. But on all of those fronts, it means that there are more stakeholders and it means that there's more kind of relationships to navigate within existing -- or within prospects. And there's often important architectural decisions that need to be made, both from a technical architecture standpoint as well as data flows and data governance. And so having preexisting Braze customers within the environment, I think just helps all of those things on a lot more smoothly. I wouldn't necessarily isolate a specific difference in buying like literally what they buy or like what their goals are at the end of the sales process. But I think that it definitely speed them up. And this is something I've been talking about for a few years, which is that as Braze came in to broadly call it this marketing automation space and we approach it with -- we approached it in a way that was more data driven. It was more experimental. It was tied tighter into the product and the first-party experience. What that meant is that there was -- there were new skill sets that were required that were new working relationships that we're going to need to be forged and there were new kind of working cadences as well in order to take advantage of things like the gains that you get out of rapid experimentation and new agility. And so those have all been, I think barriers in front of our growth over the years. They are ones that we knew we would eventually break down. They're ones that -- we know that a strong customer and ecosystem community continues to break through. And we explicitly called this out because I think it's a consequence both of all the investment that we put into the customer community and just the growing volume of Braze educated customers and marketing experts out there, but also, I think it's no secret that the marketing world over the last two years or so has seen a lot of turnover within organizations. There has been a lot of moving around marketing experts and CMOs across the broader enterprise and across the start-up sphere. And so that dislocation of marketers has obviously been a difficult challenge for us to work through with existing customers as we've had to retrain new teams or kind of regain new executive stakeholder relationships. But now we're seeing the upside of that, in some cases, on the other side, where those people as they move around the industry, they land at new customers and then they're bringing braces with them. And so while that is a difficult transition to go through and we think that there's great upside there, and it's a strong testament to the strength and the value in the customer community.

Got it. Very helpful, Bill. And then Isabelle, if you look at your non-GAAP profitability in the quarter or non-GAAP operating margin that you've guided to in the fourth quarter, you're crossing over the chasm, how do we start thinking about profitability versus growth going forward? I know you all are very focused on growth now that you've hit this, and I know you're not guiding for fiscal '25, you were ‘26, obviously. But do we see this kind of like a plateau for a period of time? Or can we get further margin expansion for the growth and demand remains in the range you have given?

Yes. So thanks for the question. So if we go back to some of the comments that we made and the framework that we laid out at Analyst Day back in September, that -- the purpose of that framework was that to be sustainable for the next several years. And so I would think about as we start to guide for next year and we start to kind of work our way through the quarters, and you'll see kind of the results of kind of the growth, we would look for the expansion in operating income, non-GAAP operating income to be within the boundary conditions of the framework that we laid out. And so I think philosophically, nothing has changed today or our expectations for the future even relative to kind of where we've been in terms of never going to be growth at all costs. We're always going to be balancing growth with profitability. We are -- I am very focused on being able to reinvest available dollars back into the business. I've said this to the employees. I've said this to analyst, I've said this to investors. And so we are very disciplined with kind of having visibility and transparency into the financial path that we're on and ensuring that the capacity to reinvest is actually leveraged to the highest ROI potential possible.

[Operator Instructions] Our next question comes from Pinjalim Bora with JPMorgan.

Isabelle, just one for you. Any way to understand when does the last cohort of the

Yes. So look, I'm not going to guide specifically on dollar-based net retention going forward, but one kind of indication that's encouraging is the -- at Analyst Day, we did highlight the performance of post-

Our next question comes from Arjun Bhatia with William Blair.

Bill, maybe one for you. Just as you're talking to customers and discussing plans with them for next year, what is your sense on the overall spending environment as it relates to marketing budgets. And I think you've highlighted a couple of times in your prepared remarks that the replacement cycle remains strong with the focus on AI and first-party data and cloud data warehouses. Why could that replacement cycle not accelerate further next year as more folks look to up-level their marketing stacks?

Yes. So I'll start off just reminding everyone that we haven't -- we're not expecting any sort of improvement in the demand environment in the forward guidance that we've provided. And as we've discussed, well, we are seeing great progress on the legacy replacement cycles. It's also the case that many of them have been harder to catalyze over the last couple of years as businesses have prioritized cost savings over value creation and expansion. But we feel really good about the comparative gains that we've made over these last two years. When we look at the competitive landscape and the broader partnership ecosystem. We look at the pipeline of, in particular, these enterprise takeaway opportunities that we've been able to build over the course of the last 12 to 18 months. And we're looking forward to a robust competition for these opportunities that, by definition, only come up every 5 to 10 years in the years to come. And so excited that the -- I think the pieces have moved around the board in a way that's favorable to us and we do think that those opportunities are certainly going to continue to show up in particular over the next 12 to 24 months due to some of the platform shifts at both Adobe and Salesforce and their focus shifts that I highlighted earlier in the call, but it does continue to remain a difficult environment. I think that consistent with the last few quarters, we've continued to see stability. Their marketing teams, they know what their priorities are for next year. They’re not worried that their teams are going to get cut or their projects are going to be canceled or their budgets are going to fall into next year. But that kind of full rotation back into a growth orientation where their business overall is looking at new regions, new product expansions, new customer acquisition efforts, et cetera, et cetera, all those things that kind of define a forward-leaning growth posture. We're not seeing robust signs of that yet. We're seeing it in pockets and that's great. But we are seeing strong stability, I think, across marketing teams and across strategies. And so we're making as much progress as we can from an ecosystem and a competitive standpoint as well as our own product robustness and improving our pricing and packaging flexibility. I'm just trying to be prepared for when that rotation back toward more of a broad growth posture to show up amongst marketing teams and across more of the business sphere. But for right now, having stability having great foresight into next year's budgets and being in the position that Braze's in is one where we're confident operating through this demand environment and that's something that we're -- in our early -- in our forecasting and our guidance, we're not assuming that, that's going to improve into next year.

Our next question comes from Derrick Wood with TD Cohen.

I'll direct it to you, Isabelle. Quarter, you guys saw some very large upside in operating income. This quarter was solid with about $2 million of upside, but the last quarter was like $11 million. So could you just talk about the puts and takes on margins and investment focus this quarter versus last quarter? Or maybe what were some of the variances you would flag including on the gross margin side?

Yes. So on the gross margin side, we're continuing to see -- on the headwind side, we're continuing good uptake of the premium messaging channel. So that is -- and that's been happening over the last several years. And even with that continuing to happen, we've been able to expand our gross margin over the last several years and commit to two rounds of increased long-term ranges with the most recent one being at 69% to 74%. And we expect that to continue because as the engineering team kind of continues to do work to improve the efficiency and performance of the overall platform. They're very, very focused on those initiatives across the board. And we've seen success there ongoing and there's more to do and more to come in that area. So from a gross margin perspective, we're pretty excited with the continued trajectory and we expect to operate within the range that we have provided over the long-term here. On the operating income, Q3 does have the impact of the Forge event and some other events, customer driven events that occurred in the quarter. And so that's some of the dynamic that you're seeing in terms of the volatility with being over the profitability line in Q2, then back under it in Q3. And then obviously, we've committed to being back over that line in Q4 and beyond. And so that's some of the dynamic that you're seeing is just specific to the seasonality around some of the events. And then leaders as they -- we're very disciplined as it relates to performance management and then the process of backfills and the timing and so I always want to make sure from a budgeting perspective that we have the capacity to hire at the pace that makes the most sense for the business. And sometimes what we find is leaders are extremely disciplined about going through the process to find the right person and that may result in head count adds that are a little bit behind what finance has budgeted for and that -- some of that dynamic you're seeing come through in the results. But again, I'm very focused on staying very close to that. And when we have capacity, which I can see intra-quarter, we work to find ways to put those dollars to good use.

Our next question comes from Taylor McGinnis with UBS.

Maybe just Isabelle for you. So just to clarify, think about the in-period NRR in the quarter and the stability that you mentioned, so was that, I guess, around like 110% similar to what it was last quarter and then as a follow-up, as we think about NRR in 4Q, could you just maybe walk us through the puts and takes of that? It sounds like on one hand, you guys are seeing good traction with messaging volumes from the holiday and obviously, it's your biggest renewal quarter. But on the flip side, maybe there are still some customers out there that are rightsizing or not expanding to the degree that you'd like to see. So I guess, one, what are the drivers behind some of the cautiousness near-term? And what do you need to see in the demand environment to get comfortable that we're closer to the bottom?

Yes. Thanks for the question. So I just want to clarify that things related to kind of near-term messaging activity or even in some cases, like a short-term, the renewal cycle doesn't necessarily play in directly to the NRR, because we don't -- the revenue isn't based on utilization. And so it's really more about continuing to manage the churn and continuing to improve that upsell motion and bringing us back to levels that we had ascended to in prior years. So that's really the dynamic that we are dealing with is continued management of both the churn on the downside and then continued push for more success on the upsell motion.

Our next question comes from Yun Kim with Loop Capital.

I have a quick question. Bill, can you just give us some update on the partner ecosystem, not just with global system integrators but also perhaps OEM opportunity with other ISVs out there?

Yes. So our strategy around sales continues to be direct sales. We do have some OEMs out there or OEM agreements, but it's not a big part of the way that we go to market. We will continue to expand on our indirect motion using more resellers over time as Braze -- the Braze community continues to expand into new geographies. But right now, when we look at the tech partner relationships, many of these are about making sure that we've got sales teams aligned. We've got technical architectures aligned and rationalized around bigger digital transformation efforts. And that we've got the right partner integrations and product integrations, which you can see a lot of examples of across the Braze data platform, but we've got lot of great interconnection points throughout our product that our partnership ecosystem takes full advantage of. And so, that's something that we're going to continue to invest heavily in. We know that having more partners involved in deals leads to faster deal cycles, leads to more usage of Braze. Entitlements by our customers and better expansion rates and better renewal rates. And so it's a part of our partnership portfolio that we continue to invest heavily in. But specifically, like OEM sales through them is not a key component of that strategy right now.

Our next question comes from Brian Peterson with Raymond James.

You gave some really healthy stats on activity for in-app and content cards. As we think about what's pushing that activity to those channels, how do we think about the balance of upsell via higher volumes or cross sell a new channel, any perspective there?

Yes. So I think that there's an interesting -- and there's an interesting impact that flexible credits will do, which is that I think that in terms of cross-sell, it's super supportive. And the way that we're doing pricing and packaging and expanding across both the optionality that marketers have to bring their strategies around the world. So for instance, if you are effectively running a U.S. SMS strategy, it is now very straightforward for you to expand that to WhatsApp in key markets where WhatsApp is dominant to then further expand that using something like LINE, if you're in Japan or Taiwan or Thailand. And looking at now the launch of RCS across Europe, and so but Braze has really been committed to, I think, across the messaging space is that we want marketers for anywhere in the world to be able to engage with global audiences across the messaging channels that are most important for them to really accomplish their goals and deliver their messages. And so the flexible credit model giving them the opportunity to try out these use cases, expand them globally and expand them to new channels in a way that's commercially flexible for them is really strong. It could potentially have an impact on the way that they purchase new volumes because before, if you were committed to a certain set of volumes across a certain set of channels and you wanted to try out a new one, you would have to make a net incremental commitment to Braze to buy that new channel. But we also saw that was slowing down deal cycles. It was making customers less likely to experiment with new channels. And as I alluded to earlier, in some cases, led to partial churns as people weren't able to forecast their consumption across these different channels or the -- with global SMS, the kind of cross-section of channels and countries, as accurately as they would hope to, and that would lead to unused entitlements, which they would then, in some cases, choose not to renew. And so there are some puts and takes as we think about moving into this new world. But we think overall, it's customer-friendlier, it's also speeds up deal cycles, helps with expansion across use cases. And ultimately, that will be of more revenue, but it does have a little bit of -- if you think about that mechanic with respect to how net new bookings would come about as a customer adopts a new channel, they're not forced to do that right away, which will have some -- a little bit of a headwind on that versus before. But when you -- we think that when you net it out against customer expansion that we're going to be better in the long run.

Our next question comes from Nick Altmann with Scotiabank.

Thank you. I wanted to circle back to Tyler's questions around bookings. Isabelle, you historically talked about how roughly 1/3 of your net new ACV is typically booked in the fourth quarter. And so I was just wondering if you could provide, any update on whether that same linearity applies for this year?

Yes. This -- we're basically in a similar type of zip code for this year. And then keep in mind that, that from a linearity within the quarter is going to be about 50% of that is generally expected to be booked in the last month of the quarter. So that's -- I think that dynamic is largely still intact.

Our next question comes from Michael Berg with Wells Fargo.

I want to give one for Isabelle here. You talked about some strength in Black Friday, Cyber Monday period and also talking about the poster customers showing some stranger compressing the expansion relative to the zero interest rate customers. As we enter into the New Year where it looks like interest rates are coming back down and coming out of a period of a strong holiday shopping season, how we think about how end customers are thinking about their spending here? And is there a reason to believe the expansion rates could meaningfully accelerate as rates come down next year?

Yes. So I don't -- I wouldn't necessarily draw a huge parallel there and look at kind of activity around Black Friday, Cyber Monday. Remember, as it relates specifically to kind of retail, e-commerce that exposure for us is, call it, about 1/5 of our business. So we're very exposed on a global basis. First of all, there are a lot of companies that are not tied to that seasonality specifically, which is largely a U.S. phenomenon and also in a very different industries than retail and e-commerce. So I wouldn't necessarily look for any material upside related directly to that. And the interest rate environment, these are modulations around the theme. I think we're not seeing material enough moves there relative to kind of going back to serve environment, very different.

Our next question comes from Brian Schwartz with Oppenheimer.

I wanted to just ask you about the impact you're seeing in terms of either sales cycles or deal sizes from all the AI data and orchestration product enhancements that you've announced this year, I know you announced some of them earlier this year that you had a lot of new product enhancements announced at Forge. Are you seeing -- what is that doing the sales cycles? Is it -- are you driving more opportunities with them? Is it making the deals bigger? And then maybe just kind of a follow-up, the big question in Q4 because clearly, that is the biggest bookings quarter for the company. It sounds like the macro hasn't changed much at this point. But how are you thinking about that specifically in Q4 and kind of anticipating that type of selling season?

Yes. So I think the biggest impact of the Braze AI innovation so far has really been competitive differentiation and helping to stand out both in RFPs for new customers as well as be able to deliver on differentiated use cases for existing customers. And so, that's been -- that's a win-win-win, I think, across the board. And actually, when we look across the start-up landscape and our startup competitive landscape, we've spoken a lot about Salesforce and Adobe so far on this call. But I'd say, just to give an update there, we continue to see a fragmented landscape on the startup side, and it's against primarily regional competitors. But while there's been some noise on the margin, I think we've been really happy with our win rate and our take a trajectory against those competitors over the course of this year. And we feel really set up well set up for the medium and long-term, in particular, because of the investments that we've made in the brace data platform into Braze and in the Canvas where we see these some of the start-up competitors who have obviously kind of follow a copycat product strategy, just have not shown anywhere near the same ability to be able to mimic the features that we've been building into more advanced Canvas capabilities and across all the different Braze AI functionality. And so that's been, I think, great to see. I think that's been supportive of the improvement in competitive win rates that we've had against the start-up environment throughout the year, and we feel well positioned there. I think that -- in terms of product, the deal sizes and such, it would be hard to disentangle the effects of these against the broader backdrop of the demand environment, a lot of the other things that have changed in the way the deal cycles have been happening year-over-year. And so I won't try to kind of pull that apart, but looking at Q4, I think that also we started Q4 with a solid pipeline heading into it. We've been executing as expected against that pipeline so far. Our differentiation with Braze AI is a big part of that. And I think we feel really good about our ability to execute competitively and continue to see this improvement in win rates that we've enjoyed throughout the year.

Our next question comes from Parker Lane with Stifel.

Bill, maybe just to follow-up on the last one. If we get into a better demand environment out there and budgets start to unlock a little bit what is the right balance of legacy vendor replacement versus more point solution consolidation or VC takeaways?

Yes. It's a great question. And I think a lot of it goes back to the posture that businesses are in and what they're prioritizing. We've seen a lot of these point solution consolidation instances over the course of the last couple of years are even just being motivated by cost savings or being motivated by operational, total cost of owner savings, ownership savings or a smaller team trying to grapple with hodgepodge of tools and realizing that consolidating their own software usage into Braze is going to make their lives easier now that their teams have shrunk, right? So those are some of the major dynamics that you've seen in terms of team resources and prioritization over the course of the last 12 to 24 months, and I think that we've seen Braze able to execute within that. When you shift gears over to a more expansionary posture that starts to create a lot more of the greenfield opportunities where we both have been able to go into enterprises that maybe had long-standing Salesforce or Adobe relationships and take down a new project that they're working on, and we use that to get our foot in the door. That's obviously a motion that utilized first crack in the enterprise and also to build up all three of those eight figure customers that we've celebrated throughout this year, and that has been a really robust motion for us over time that hasn't been very potent over the course of the last 12 to 24 months because there just hasn't been an expansionary footing for many of these businesses. And then similarly, making a kind of wholesale switch from one platform to another, does have change costs associated with it. And when businesses are not prioritizing value creation and they're stead very narrowly focused on cost reduction, paying a transition cost versus just delaying that transition a little bit ends up being less desirable for them. And so that other side of it, where just being able to go in and do wholesale replacements, which we are very capable of doing and we have great examples of those each quarter but we definitely think that a more expansionary environment where businesses are prioritizing value creation again, over certainly looking at cost optimization is one that's going to be conducive to them incurring those switching costs and us being able to convert more of the legacy marketing cloud installed base into Braze customers.

Our next question comes from [Austin Cole].

Just wanted to follow-up on some of the net retention questions from earlier. Can you remind us, maybe just asking this in a different way, can you remind us what are the fundamental reasons for the pressure on net dollar retention? And -- how much of that is pricing for this software. Gartner has some research out that shows marketing budgets as a percentage of total revenue expected to be less than 8% this year from 9% last year. Is that kind of a simple data point, accurate way to think about it?

Yes. So as we think about the dynamics that drive any sort of pressure on the dollar-based net retention, so on the upsell and we've talked about this a little bit in the past buyers, whether they're new buyers or existing buyers that are upselling are buying a lot closer to their known needs. And so they recognize that they can come back to the well, whether it's 6 months, 8 months, 12 months later and buy more volumes, more entitlements if they need them but in the moment, their levels of commit. So this is inclusive of upsell commits are going to be a little closer to the pin for them. And so that means that the size of the upsells maybe aren't in the same zip code as they used to be in this zero interest rate environment where people were really buying for levels of future growth. And so on the upside, it's -- that you have that challenge that's kind of working against you. And then there's the element of churn where there are still some customers who are going through some element of rightsizing their contracts. So contracts can't be down traded in size or value prior to a renewal date. But as they come up for renewal and they're recognizing that maybe they didn't quite grow into a level of entitlements that they had purchased and they're doing that rightsizing. And so you've got those two dynamics kind of that are working simultaneously that are driving some of the pressures that we see on dollar-based net retention.

Thank you. That was our last question, and there are no more questions in the queue. I will now pass it back to Bill for closing remarks.