BRZE - NASDAQ

Welcome to the Braze's Fiscal Second Quarter 2026 Earnings Conference Call. My name is Luke, and I'll be your operator for today's call. [Operator Instructions] I'll now turn the call over to Christopher Ferris, Vice President 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 2026. 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 third quarter and fiscal year ended January 31, 2026, the anticipated benefits from and product advancements due to the combination of Braze and OfferFit Technologies, our expectations concerning new customer verticals, 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 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 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 to aid investors in further understanding the company's fiscal second quarter 2026 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 great second quarter results, generating $180 million of revenue, up 24% year-over-year and 11% from the prior quarter. I'm also pleased to announce that we recently passed $700 million of committed annual recurring revenue, demonstrating continued strong demand for the ROI delivered by the Braze customer engagement platform. Thank you to our dedicated team across the world who helped us achieve this milestone. I look forward to building on this success as we continue our journey to make Braze the industry standard for customer engagement. We also continue to drive efficiency in our business, delivering $6 million of non-GAAP operating income, $17 million of non-GAAP net income and $4 million of free cash flow in the quarter. We've now posted 3 straight quarters of positive non-GAAP operating income and free cash flow as well as 5 straight quarters of positive non-GAAP net income. Looking ahead, we remain committed to driving higher profitability while thoughtfully reinvesting in our business, strengthening our competitive advantage and maintaining our position as the leading customer engagement platform globally. Our business momentum continued in Q2 as we achieved solid bookings across verticals and geographies. As we've stated in the past several quarters, global trade and economic concerns have yet to materially affect deal cycles, and we are optimistic looking into the second half of the year and fiscal year 2027 as we realized record pipeline generation and competitive strength across regions. In the quarter, we increased our customer count by 80 sequentially and 259 year-over-year to 2,422. Our large customer additions were again strong with $500,000-plus ARR customers rising 27% year-over-year to 282. Recent new business wins and existing customer expansions include DocMorris, Fogo de Chao, Gopuff, Kleinanzeigen, Laundryheap, Little Caesars, Metcash, Saily, Sweetgreen, and Wix. Additionally, the enterprise replacement cycle remains a robust source of new business. Takeaways from the legacy marketing clouds in the quarter included a European digital employment solutions firm, a Japanese career website, a Canadian telecommunications company, a North American discount retailer and digital media and consumer companies across the U.S., Europe and APAC. Our competitive win rates remain strong as a result of these ongoing legacy replacement cycles and continued trends in vendor consolidation, which creates further opportunities for Braze to expand its market share. In addition to our wins against the legacy marketing clouds, we also continue to displace less sophisticated point solutions, including recent new business wins at an American e-commerce company, a women's online retailer in APAC, an American shapewear and clothing brand and many others. As frontier capabilities and artificial intelligence continue their rapid advance, brands are increasingly eager to leverage AI-driven innovation to achieve improved customer results and greater marketer productivity. Braze remains future-focused and is rapidly deploying new AI solutions in tandem with first-party data activation, applying leading-edge reinforcement learning and generative AI technology to an ever-evolving set of messaging channels and product interfaces to help our customers deliver more relevant customer experiences and grow their businesses. Throughout our history, Braze has emphasized the importance of living in the flow of first-party data and customer context, pairing it with the intelligence of a machine learning enhanced stream processor and delivering on critical use cases with the reliability, performance and security that enterprises demand. As Braze forges ahead, it is increasingly clear that the same architectural defects, user experience complexity and performance limitations that held back our competitors through the rise of mobile and the advent of stream processing are also barriers to their ability to leverage frontier capabilities in AI and machine learning. By contrast, Braze has built the critical foundations of customer engagement, delivered them to our growing customer community at extreme scale, and we are eager to continue to unlock the promise of our sophisticated vision for customer engagement with the rapidly advancing power of AI. While our product development accelerates, we also remain committed to category-leading UX design and heavy investment in the education and activation of the community of marketers and agencies that are integral to the Braze ecosystem. Now is an opportune moment to lift the craft of customer engagement to new heights, allowing marketers to transcend the mundane aspects of campaign creation and emerge as conductors of exceptional experiences and business strategy. After closing the acquisition in early June, we also got off to a strong start with OfferFit by Braze, quickly integrating their team, melding cultures, fostering tight collaboration and beginning to educate our customers on the potential for AI decisioning to transform their customer engagement strategies. Within our existing customer base, the pipeline for OfferFit by Braze has sharply accelerated, especially across our enterprise segment, where we have earned a high level of trust by delivering sophistication at scale throughout our lifetime as a company. Our combined selling motion is off to a great start, tallying Q2 wins in each of our major geographic regions. We view OfferFit's AI decisioning engine as a uniquely effective asset, providing a best-of-breed platform for autonomous one-on-one personalization with a deep technical moat. By integrating OfferFit's AI decisioning engine with the Braze customer engagement platform and combining our R&D teams, we are extremely excited to be expanding and accelerating the Braze AI road map to elevate the experiences delivered to customers through the billions of content and orchestration decisions made by Canvas and Braze AI decisioning products every day. As customer engagement teams continue to prioritize one-on-one connection, creativity and business growth, the tools and techniques for delivering relevant and memorable experiences are rapidly evolving, and AI is set to revolutionize the role of customer engagement teams, transforming them from day-to-day campaign tacticians into strategic conductors of autonomous customer engagement systems that foster mutual customer value and drive business growth. With the Braze AI road map, we are harnessing composable intelligence to enhance both the marketer and customer engagement experiences. This approach unlocks meaningful one-on-one personalization at scale while maintaining continuity of brand and product experiences. Much as Canvas embeds the knowledge and creativity of our brand's business priorities and marketing strategy today, in the near future, we believe that the context and intelligence of brands and marketing teams will be embedded in composable models, agents and operators, fundamentally reshaping how marketers operate and interact with their customers, providing not just efficiency, but also strategic leverage and improved decision-making. We plan to share more of our AI vision and upcoming product innovation plans during our annual customer conference, Forge, which takes place from September 29 to October 1 in Las Vegas. You'll learn more about our approach to investing in AI, data unification, activation and distribution, channel expansion and our generative, predictive and agentic solutions to deliver composable intelligence to customer engagement. We'll also share more about our growing work with global strategic partners, many of whom are sponsoring Forge, including new joint solutions like Subscribed Studios, which was built by VML in collaboration with Stripe and is specifically designed to address the unique challenges of subscription businesses. It combines AI-driven life cycle intelligence with live customer and usage data, enabling smarter subscription journeys. Through the integration with Braze, these insights become immediately actionable, triggering personalized event-based communications across the subscriber life cycle. At Forge, attendees will have the opportunity to experience exciting customer engagement innovations from top brands and Braze practitioners at live workshops and hear from many of our outstanding customers and partners, both on stage and in the hallways. While we won't be hosting a full Investor Day this fall, we will be welcoming investors for a reception on the evening of Tuesday, September 30. Contact Investor Relations for more details. I'll wrap my remarks by reiterating our commitment to driving long-term growth, efficiency and profitability in our business. Thank you for your interest and support of Braze. And now I'll turn the call over to Isabelle.

Thank you, Bill, and thank you, everyone, for joining us today. As Bill stated, we reported a strong second quarter with revenue increasing 24% year-over-year to $180 million, driven by a combination of existing customer contract expansions, renewals and new business. Excluding the $2.8 million contributed by OfferFit for the 2 months of Q2, organic revenue grew 22% to $177 million. Subscription revenue remains the primary component of our total top line, contributing 95% of our second quarter revenue, while the remaining 5% represents a combination of recurring professional services and onetime configuration and onboarding fees. Total customer count increased 12% year-over-year to 2,422 customers, up 259 from the same period last year and up 80 from the prior quarter. This figure includes 17 net new OfferFit customers added as a result of the transaction. As a reminder, OfferFit had 27 customers, of which 10 were Braze customers prior to closing the transaction. The number of large customers, which we define as those spending at least $500,000 annually, grew 27% year-over-year to 282, up 60% from the same period last year and up 20% from the prior quarter. OfferFit contributed two net new large customers as a result of the transaction. Customers spending $500,000 or more annually contributed 62% to our total ARR compared to a 61% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 108%, while dollar-based net retention for our large customers was 111%. Expansion was again broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 45% of our total revenue in the second quarter, down approximately 60 basis points sequentially and in line with the prior year quarter. I'll note that the in-quarter dollar-based net retention has stabilized over the last 7 months and increased modestly from slightly below 107% in Q1 to slightly above 107% in Q2. While we are not providing specific guidance for the trailing 12-months DBNR, we are encouraged by the recent in-period stabilization and look forward to updating you on this metric in the coming quarters. In the second quarter, our total remaining performance obligation was $862 million, up 25% year-over-year and up 4% sequentially. Current RPO was $558 million, up 27% year-over-year and up 7% sequentially. These numbers include a contribution from OfferFit of approximately $12 million to RPO and approximately $10.5 million to CRPO. 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 2 years. Non-GAAP gross profit in the quarter was $125 million, representing a non-GAAP gross margin of 69.3%. This compares to a non-GAAP gross profit of $103 million and non-GAAP gross margin of 70.9% in the second quarter of last year. The decrease in year-over-year gross margin was driven primarily by higher premium messaging volumes, partially offset by continued cost optimization of our technology stack with additional benefits from personnel efficiencies. The OfferFit acquisition had no material impact to our gross margin in the quarter. Non-GAAP sales and marketing expenses were $70 million or 39% of revenue compared to $58 million or 40% of revenue in the prior year quarter. The dollar increase reflects our year-over-year investments in headcount 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. Notably, we achieved this incremental efficiency while adding the 2 months of OfferFit expenses during the quarter. Non-GAAP R&D expense was $27 million or 15% of revenue compared to $21 million or 15% 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. Our R&D expenditures reflect our intentional yet disciplined technology investment strategy and are in line with our long-term non-GAAP R&D percent of revenue target of 13% to 15%. Non-GAAP G&A expense was $22 million or 12% of revenue compared to $19 million or 13% of revenue in the prior year quarter. The dollar increase was driven by investments to support overall company growth and global expansion with continued efficiency as a percent of revenue driven by economies of scale and the use of strategic cost locations. Non-GAAP operating income was $6 million or 3.4% of revenue compared to a non-GAAP operating income of $4 million or 2.9% of revenue in the prior year quarter. Non-GAAP net income attributable to Braze shareholders in the quarter was $17 million or $0.15 per share compared to $9 million or $0.09 per share in the prior year quarter. The OfferFit acquisition increased Braze's deferred tax liability balance by approximately $8 million. This resulted in a commensurate reduction in the company's valuation allowance, which generated a onetime $8 million benefit to non-GAAP net income in Q2. Now turning to the balance sheet and cash flow statement. We ended the quarter with approximately $368 million in cash, cash equivalents, restricted cash and marketable securities. This includes the impact of the cash portion of the OfferFit acquisition of $181 million. Cash provided by operations during the quarter was $7 million compared to cash provided by operations of $12 million in the prior year quarter. Including the cash impact of capitalized costs, free cash flow in the quarter was $4 million compared to free cash flow of $7 million in the prior year quarter. Free cash flow includes the impact of approximately $6.9 million in cash payments related to the OfferFit acquisition. 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. As a reminder, we closed the OfferFit acquisition on June 2. And as such, our third quarter forecast includes a full quarter contribution from the transaction, while our full year forecast incorporates only an 8-month impact from the transaction. For the third quarter of fiscal 2026, we expect revenue to be in the range of $183.5 million to $184.5 million, which represents a year-over-year growth rate of approximately 21% at the midpoint. Third quarter non-GAAP operating income is expected to be in the range of $3.5 million to $4.5 million, which implies a non-GAAP operating margin of approximately 2% at the midpoint. As a reminder, third quarter operating income includes the impact of expenses related to Forge, our annual customer conference, as well as several other global events scheduled during the quarter. Third quarter non-GAAP net income is expected to be in the range of $6.5 million to $7.5 million, and third quarter non-GAAP net income per share in the range of $0.06 to $0.07 per share based on approximately 113.5 million weighted average diluted shares outstanding during the period. For the full fiscal year 2026, we expect total revenue to be in the range of $717 million to $720 million, which represents a year-over-year growth rate of approximately 21% at the midpoint. Consistent with commentary we provided on our fourth quarter and first quarter conference calls, we expect OfferFit to contribute approximately 2 percentage points to year-over-year growth for the full fiscal year. Fiscal year 2026 non-GAAP operating income is expected to be in the range of $24.5 million to $25.5 million. At the midpoint, this implies a non-GAAP operating margin of 3.5%, a roughly 350 basis point improvement versus fiscal year 2025. Non-GAAP net income for the same period is expected to be in the range of $45.5 million to $46.5 million, and net income per share is expected to be $0.41 to $0.42 per share based on a full year weighted average diluted share count of approximately 112 million shares. I'll close my remarks by expressing my enthusiasm for the future of Braze. We are steadfast in our commitment to providing leading customer engagement solutions and remain well positioned 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] Your first question will come from Brent Bracelin with Piper Sandler.

You beat Q2 by $8 million. You're raising the full year by $14 million. You're raising full year operating profit by $15 million. CRPO growth accelerated 300 basis points. Bill, what's changed here with the demand environment and appetite to lean into Braze now? And then Isabelle, what's behind your confidence that you can drive higher growth and higher operating leverage here for the rest of the year?

Yes. So high level, as we mentioned, I don't think we've seen a meaningful change in either the macro or the demand environment, but we've been really happy with our execution globally. As we referenced, historically high competitive win rates, it means that our late-stage pipeline is operating very efficiently for the business. We also -- as we've been talking about for the last several quarters, looking at the attenuation of downsell activity, and we're starting to see that materialize as well. And so generally, seeing great momentum around the world. We're seeing, I think, solid performance across verticals and across geos with everyone contributing within the verticals. We've mentioned in the past that our focus verticals for this year on retail and e-commerce and financial services have been an area where we've been aligning investments across marketing, product and sales. And those have been working out very well, increasing the efficiency, specifically of our pipeline generation and our win rates within those categories. So just a lot of the investments that we've been making to improve execution have been synchronizing with each other around the world. It's still a challenging demand environment, but we're working with what we've got. And I think we've been happy with the performance, and we've got good line of sight to where that strength will continue through the back half of the year.

Yes. And just specifically on some of the numbers, I think on our ability to better manage and have visibility on improved outcomes on downsells, you're seeing that in the dollar-based net retention. I did provide a little bit of added color there on where in-period is trending and where that has been trending over the last several months. And so I think the sustained performance that we're seeing there is giving us greater confidence in -- through the back half of the year. OfferFit is also performing as expected. And we've got some events now behind us. The OfferFit integration is performing extremely well. We've onboarded Ed McDonnell, which is going very, very well. And so we know these were some sources of some uncertainty over the last few months. That's now behind us. And we're really pleased with our plan for capital deployment through the back of the year. And so when you combine that visibility and transparency with some of the upside that we're seeing on the revenue piece, that's how you come up with the improved profitability, and we're excited to be on that path.

Our next question comes from Siti Panigrahi from Mizuho.

Great to join the call. So I want to ask about the OfferFit. It's -- you talked about strong start with OfferFit. Help us understand a little bit more what are you hearing from your customer base after this integration? And what kind of ACV uplift we see from your customer base with OfferFit? And I have a follow-up.

Yes. So first of all, as I mentioned, we were excited to tally a post-acquisition OfferFit win within all three of our Americas, EMEA and APAC regions. Those are all executed in line with our full deal desk, pricing and contracting practices, which were obviously important early milestones for the integration. These are still enterprise deal cycles. They've got six-figure price tags and the sales cycles that they're typically measured in months, not weeks. But we are encouraged by the pipeline generation in the quarter and the pace of the integration so far. I think the pattern that we're seeing is at the high levels of trust, in particular, in our enterprise category that our customer base has with Braze's ability to deliver and really just the integrity and the pragmatism that we've always incorporated into the Braze AI road map and really looking at the defensible and provable performance uplift from the technology of OfferFit has combined together to create a really compelling offering that people are really interested in. And so we're very excited about the potential there. We continue to think we're going to see very high attach rates, in particular, in the high end of our customer base for the full OfferFit offering. And as a reminder, the full OfferFit offering is priced around $300,000 annually. There are other flavors of that offering, and we are looking at definitely providing a full spectrum of reinforcement learning offerings. We're going to share more about that at Forge at the end of the month, so that we've got different price points and different deployment mechanisms so that we can definitely sell, especially as we get further down the product development -- the combined product development road with the existing Braze AI investments alongside the OfferFit road map and the synergies of those coming together, we think is going to be able to provide a robust kind of fully fledged offering. We're going to share more about that at Forge, and we're going to share more about that in the coming quarters. And so I think that all of our assumptions leading into the acquisition have so far been vetting out not only positively, but also we're moving a pace, and we've been really happy with the urgency and the velocity of the integration and continue to be really excited about it.

And then specifically on your question around the top line impact, just to reiterate that we talked about a 2% uplift to year-over-year revenue growth. And so I think the rough range is sort of an $11 million to $12 million contribution in the year, and we are perfectly on pace for that contribution.

That's a great color. And then I have a follow-up in terms of margin. It's great to see that you raised your margin for the year. I wanted to specifically ask about OfferFit. I know it has a lot of service. And how do you plan to scale OfferFit business and further drive even margin expansion there with OfferFit?

Yes. So there's two pieces to that. I think on gross margin, the OfferFit numbers today mix in pretty much exactly as our business is structured. So there's no dilution right now on a gross margin basis. They are an earlier stage company, and so we do see opportunities to improve that gross margin over time as we mature their delivery operations. So that -- we do see opportunity for that to improve and to actually exceed Braze's overall average gross margin over time. On operating income, obviously, they mixed in a little bit negatively. And what we've been doing is just aggressively looking for ways to ensure that there are appropriate synergies between the two as we have completed or as we continue to complete the integration. And so we want to continue to invest in that business to make it as successful as possible, but we're being extremely disciplined and diligent about how that is being executed, and you're seeing some of that in our ongoing plan to improve profitability.

Congrats on a good quarter.

Our next question comes from Brett Huff with Stephens.

Congrats on a nice quarter and lots of great stats here given lots of different thesis going on in the market. To that end, I feel like I need to ask the AI question. Can you talk a little bit or just remind us again how the usage is trending for your AI products, maybe in a little more detail to sort of provide some meat on the bone on the defensibility of what we think is Braze's position? And then talk a little bit maybe also about the forward deployment of folks you have, I think, around OfferFit. And then I have a follow-up as well.

Yes, for sure. So I think that when we look out across the Braze AI feature set, we obviously have a full spectrum of offerings, including some that we launched years ago. And they deploy a number of different AI technologies ranging from advanced data science and machine learning into reinforcement learning processes, transformer-driven recommendations and then Gen AI assistance and copilots and such. And so we're seeing rapid levels of adoption really across that entire feature set. Some of them are correlated with different verticals. Things like catalog recommendations tend to be more prominent in retail and consumer goods as well as media and entertainment, both of which are super strong verticals for us. We're seeing great usage of our assistance within the dashboard. I think arguably one of the few competitive weaknesses for Braze historically has not been a lack of raw capability, but rather apprehension from prospects on whether they can make full use of Braze. And I think our AI road map has tremendous promise to close that gap, both by lowering the barriers to entry for those more sophisticated features as well as decreasing the manual effort required to test and deploy both new use cases and run ongoing experiments. And so I think we've been really happy primarily with continuing to see that gap being closed where the differentiation that Braze has always been able to deliver due to our power and our flexibility is becoming more accessible to more of our customer base. And that's giving us both stronger differentiation in sales cycles, but also stronger usage and ongoing value creation for our customers, not just from the AI features, but from the existing differentiation that we already had, but that was maybe not as accessible or as usable and AI is helping really close that gap. We're also, as I referenced, super excited to share a lot more about the upcoming AI road map at Forge in just a few weeks. I don't want to scoop too many of those product announcements, but we're excited to be able to be investing both in enhancing the customer experience as well as the marketer experience. You heard me speak in the prepared remarks about this idea around composable intelligence, which is something that we're extremely excited about as we continue to build out more opportunity for configurable and tunable models as well as agents and operators within the dashboard, all of which help simultaneously actually improve marketer productivity, but also improve the high-level capabilities for these systems to act in more autonomous ways after being imbued with the creativity and the intelligence of the marketing teams and the brands that are utilizing them. And so I think really excited to see across the board, just the adoption of the AI features, the adoption of the existing features being helped out by AI and then a lot of excitement in the road map as well.

That's super helpful. And then second question is on sales execution. You all have been talking about this and I think showing results demonstrating that the sales execution has gotten better. I think we underestimated maybe just how much better -- how much of that contributed to it. I know you called it out or maybe Elizabeth did -- Isabelle did in the opening remarks, but any more to add there?

No. I think that as I referenced at the top of the Q&A here that what we're seeing is really a synchronization, I think, of just a lot of positive impacts from a lot of the operational changes, a lot of the investment that we've put into achieving high competitive win rates and really making sure that we've got strong qualification, in particular, of late-stage pipeline so that we can better prioritize our efforts. I've spoken in prior quarters about some of the sales efficiency downsides that came about from it being a very opportunity scarce environment for a while. That was a combination of the macro and also just a combination of pipeline and led to, in particular, some enterprise deal cycles where we were trying to force time lines that were just more difficult to execute on where we would either run out the clock and someone would be forced to renew or we were trying to force someone to kind of incur switching costs earlier when they still had another year, 1.5 years and some other contract. We're, I think, operating in a stronger pipeline ratio environment that's allowing for our sales team to be a lot more judicious about where and how they spend their time, how they sequence the opportunities that they have in their patches and how they execute on those deal cycles. And then, of course, I think our competitive strength is in a really great position, which is allowing for us to execute on that late-stage pipeline in a really positive way, and that's synchronizing together around the world.

Our next question comes from Raimo Lenschow with Barclays.

Perfect. At the moment, like the customer addition was really decent. And you talked about still challenging environments out there. But if you think about where are we in terms of customer understanding of your offering, but also customers kind of thinking about how they kind of are doing -- communicating with their clients in this new AI world, do you see a change in behavior or change in thinking there that kind of helps you kind of to have a better situation in the market -- position in the market?

Yes. So I think that there's aspects of this where even before we were referring to the concept of an AI-native software world, I think that Braze really arrived to the realities of a lot of what this thesis kind of has identified as changes in the software world. We've spoken about a number of these things in prior quarters. Our pricing, as an example, has always been outcome and consumption-oriented. And as you know, we've never charged for seats. Braze was designed from the beginning to enable small teams to perform massive scale work through a combination of both the deterministic automation that you see in things like the journey building in Canvas as well as machine learning-driven automated decision-making. And with AI and some of the new frontier capabilities, the scope of what's possible with that automated decision-making is increasing. And that's being supplemented also by our ramping investments in both reinforcement learning and Gen AI. But I think that, that actually strengthens our foundational thesis that small teams should be able to build, manage and optimize comprehensive customer engagement strategies. They need a system like Braze to be able to manage the complexity that's inherent in that problem space so that as a small team, they can grapple with the complexity of like all the different channels and all the different ways that customers are interacting with them across all the different touch points and the real-time changing of the context around them. But these goals remain the same, which is that you need to be able to generate insights in real time about customers using the real-time context that they generate, being able to make sense of the data as quickly as possible after it's generated, be able to harmonize that with what your business priorities and strategies are, drive great customer experiences that build strong relationships, right? These are fundamentals about humans, human relationships, our associations with brands, the way that we bring new products and services into our lives. And those things are not -- those, I think, are -- many of those are very timeless. And so a lot of these strategies, I think, when you connect them back to the more timeless truths about building strong relationships with customers and about building strong businesses on the backs of strong relationships, those things haven't changed. The practices and the tools and the technology that we have available to us and actually, I think the ability of the promise of its sophisticated automation and sophisticated capabilities like Braze to be able to allow a small team to deliver on those really complex and hard problems. That promise is being realized more and more because of the delivery of AI. And I think that, that's making these teams more important within companies. We talk about marketers moving on from the drudge work of babysitting campaigns to actually being able to engage in higher-level business strategy to be that high-level orchestrator of the -- both the creativity that comes out of the brand stories as well as making sure that the products and services of the brands that they work for are integrating themselves and attaching themselves to people's lives and habits and loyalties. And so I think we've been really excited to just see that a lot of those things continue to be provably timeless. AI shows up in order to bridge that gap between the promise and the reality of what's delivered. And when you bridge that gap, the teams that we work with become champions within their organizations. They're able to drive higher leverage impact, do so at higher levels of ROI. When you start to look at things like OfferFit coming in as well to be able to provide that high-end customizable offering where the reinforcement learning is providing provable performance edge over the best state-of-the-art, even like much more expensive like homebuild systems and things like that, that just serves to increase the level of leverage and ROI and really the status of those customer engagement teams within organizations. And so I think we're really happy about the overall arc of how that continues to develop. I think that within this demand environment, it's also still true that companies, in general, are still looking for ways to optimize costs. There's not a huge amount of expansionary investment, new greenfield product introductions and other geographic expansions and other big growth-oriented investments. And that still means that some of these effects we've talked about in prior quarters where switching costs are still costs and it's still hard for organizations to be prioritizing costs like that right now. We continue to see those as drags on deal cycles. But I think that in terms of the fundamentals of customer engagement in the space, the role of the marketer, the ROI that can be delivered by making sophisticated and advanced investments in the customer engagement space are more true than ever.

Yes. Okay. Perfect. And Isabelle, thanks for the extra disclosure on or the extra comments on NRR. If you think about it, obviously, it's a backwards-looking kind of metrics. If you think about it, like about a year ago, we had like kind of much higher numbers. How quickly does that come back once the world is changing? You have obviously OfferFit to kind of as a cross-sell upsell. What are the puts and takes to think about the changing of that number going forward? Congrats from me as well.

Yes. So I think just in terms of -- we also don't provide guidance on that number. But just if you think about the puts and takes, obviously, as the downsell environment continues to moderate and we continue to kind of get stronger in that area, that is going to help that metric. And then as the demand environment continues to stay strong and then continues to improve and when we continue to sell OfferFit as an additional tool in our toolkit, there's opportunity for that metric to reaccelerate at some point in time. We are not calling any time period on that. We are really pleased to see the stabilization and the uplift in Q2 versus Q1 and are excited to continue to provide that -- the trailing 12-month metric to you all going forward.

Your next question comes from Taylor McGinnis.

Congrats on the quarter and the strong results. Apologies if there's any background noise. But just maybe on -- going back to the outperformance in the quarter, it was a lot stronger than what we've seen in past quarters. So could you just talk about maybe what area really exceeded your expectations in particular? And as we think about the assumptions implied in the guide going forward, how have you adjust those accordingly and anything to keep in mind there?

Yes. So there's kind of two areas that kind of work together. So definitely on the downsell component, that came in better than anticipated. And obviously, our guidance went up for the full year. So our visibility and our expectations for the back half of the year improves there as well. So that had an in-quarter positive impact. And then just the general demand environment continue to be strong across geographies and across customer classifications, across industries. Bill mentioned some of the strength that we continue to see in our verticalization. And so across our breadth of products, we're continuing to see strong demand there and more limited downsell. So that's great. I will call out one point of the overachieve is related to two items that one can consider a little bit harder to predict and maybe a little bit more onetime in nature. Revenue reserves came in better than anticipated. So revenue reserves are taken when we have expectations of poor customer payment. And we've had very timely payments from our customers recently, and this has allowed us to not take as large revenue reserves. So that's been helpful in the quarter. But again, difficult to predict, but a nice leading indicator of customer health. So we're pleased about that. And then some overages were a little bit above expectations. And so taken together, those were about one point of the overachieve in the quarter.

Awesome. Super helpful on all that color. Just the second question is, if I look at CRPO growth, so on an organic basis, you've maintained growth in the mid-20s. And now we saw this inflection in organic growth to the low 20s. So we're starting to see a little bit of convergence there. I guess how can we think about those metrics in tandem going forward? Anything to keep in mind from a duration and linearity perspective?

Yes. So we are seeing those metrics kind of move a little bit in tandem here, and that's great to see. There's always the -- at any given point in time, some noise that can creep into that metric, but we are definitely encouraged even on an organic basis on the trajectory of the CRPO metric. So happy to see both the impact on more limited downsells is definitely playing into that as well as the strength in the overall just kind of core business and momentum that we're seeing in the business. So we're excited to see that positive trajectory.

Your next question comes from Brian Peterson with Raymond James.

I'll echo my congrats on the strong quarter. So Bill, I know you said the demand environment is fairly stable. If you kind of unpack the geos in the end markets, have you seen any changes over the course of the year that you would call out in terms of the demand environment from a net new perspective?

Yes. I think quarter-by-quarter, we have seen differences in country-specific performance around the world. But averaging over the last few quarters, I think we've been happy with performance globally. We've seen major contributions and strong win rates from each of our global regions and subregions. And that's inclusive of both our more mature areas where we've had established sales teams for years as well as some of the places that we've opened up more recently. We've also seen some great positive momentum from things like the data center that we deployed in Australia. We had across the board really strong performance from actually every single segment in our AN

Our next question comes from Brian Schwartz with Oppenheimer.

Bill, given that the sales productivity is improving, which we can see in the results, I think in your prepared remarks, you said conversions are normalizing, pipeline is at record levels and you have the CRO in place. Does that change at all the pace of hiring new sales reps in the second half of the fiscal year?

Yes. So we are expanding sales capacity in the second half of the year. I wouldn't say that there's any like major changes to that other than that, as Isabelle mentioned, certainly, we are on the other side of two major events that have -- that had uncertainty related to them, one of them being the OfferFit acquisition and the level of disruption and the pace at which we would be able to smoothly integrate that. And the second being Ed's onboarding. I think we're about -- we're just a couple of months into both of those events. And being on the other side of them, I think that we've been really happy with the pacing so far, both of Ed's onboarding and integration into the executive team and into the go-to-market functions as well as the OfferFit team integrating into the broader Braze organization and us being able to merge together both the product development as well as the different operational processes in the groups. And so that's all setting a stage to provide the right foundations for us to continue to execute on the investment plan for the second half of the year. As Isabelle mentioned, I think we simultaneously feel good about the investment path, our ability to drive those investment levels with the certainty that we want from the business. And you combine that with some great results on the top line as well as on the attenuation of the downsell pattern that we have been living with over the last few quarters, and that sets the stage for the guidance that you're seeing today.

And the follow-up I had for Isabelle. In terms of thinking about the operating leverage, are the internal uses of AI that you're using at Braze and/or the low-cost labor arbitrage, is that moving the needle yet? Is that having an impact on the margin outperformance that we've seen so far? Or is that still ahead of the business?

Yes, I think it's more so -- we're seeing more of that leverage coming from the cost-optimized location. The internal use of AI tooling, I think we're still early days on that to really be at a point where you're kind of replacing human capacity to a more material extent.

[Operator Instructions] Our next question will come from Matthew VanVliet with Cantor Fitzgerald.

I guess first on the sales execution front, curious on how your average deal sizes came in relative to what was expected in the pipeline. Just are you seeing sales cycles drawn out or deals come in maybe at a smaller price point than you were anticipating, but the volume is sort of making up for it? And then secondarily, curious on where we're at on the average duration of sales reps maturation and how much maybe influence that did have on sales execution as well?

Yes. Overall, I would say there's a little bit of quarter-by-quarter noise when it comes to average deal sizes. But in general, I think that we've seen a pretty stable productivity. Like most of the inputs to sales productivity over the last few quarters have remained fairly consistent. Similarly, some of the mechanics around average durations and even things like annual versus multiyear deal terms, payment terms, et cetera. We're seeing some quarter-by-quarter noise on these things, but no major trend lines to support. I think that a lot of the environment from those dimensions has remained pretty consistent.

Our next question will come from Derrick Wood with TD Cowen.

Great. Congrats from me as well. Bill, with search and SEO getting disrupted by AI, are you seeing customers look to shift more marketing spend into first-party data and customer engagement solutions like yours? Just wondering how you see the market reacting to this AI disruption and how you guys are trying to capitalize.

Yes. So we've talked about this in the past. I do think that we will benefit from a need for more and more brands to be able to avoid some of the downsides to demand aggregators that will come about from people using more assistance and such. I think it's still early days in terms of understanding exactly what kinds of changes are going to be effective in order to navigate the AEO environment and the acquisition side of the house. But I think it's more true than ever that being able to -- once you've got a customer -- once a customer has discovered you as a brand and they're ready to engage in your product or your service ecosystem, that being able to kind of create a stronger first-party connection with them that is informed by first-party data and context and then rewarded with then the ongoing ability to communicate with that person over time. The importance of all of that stuff that's downstream from acquisition, I think, always increases whenever new demand aggregators enter into a given vertical or a given market. One of the things that is so important about the presence of tools like ChatGPT and changing user patterns around them is that it's a demand aggregator across a lot of verticals. Obviously, travel and hospitality, food and quick service restaurants and a number of other verticals have been dealing with the presence of demand aggregators for a long time. And that is now showing up in more and more of our life. But I think we should expect the marketing strategy response to be very similar across these newly impacted verticals as we have seen already across categories like restaurants and travel and hospitality, many of which are strength verticals for us because of the importance of running things like loyalty programs and building strong first-party branded connections with people. And so all of those things, I think, just continue to hammer home the importance of investing in those first-party data sets and establishing first-party connections with people and utilizing things like loyalty programs in order to enhance those connections, et cetera. And we continue to see those trend lines happening. I do think the specific questions around AEO, everyone should certainly be and are investing in and trying to better position brands to be able to capitalize on being able to be discovered in places like Gen AI chatbots and what have you. But it's still pretty -- it's still early days, I think, for a lot of those strategies to be cemented with convicted budget changes. And I wouldn't say that we're seeing any sort of massive changes there.

Your next question comes from Yun Kim with Loop Capital.

Congrats from me as well. If you can provide some color around any trend that you're seeing around different messaging channels, which specific premium channels performed well in the quarter? And is there any messaging channel you expected to get a boost from when a customer adopts OfferFit?

Yes. So I think that across messaging channels, we've seen pretty consistent growth across our offerings. As Isabelle mentioned, we've seen more growth in some of the premium messaging channels, and we've also seen more growth in premium messaging channels outside the United States. I think some of those things are actually driven by a lot of the positive effects of the flexible credits model that we have been predicting and forecasting over the course of the last few quarters. As a reminder, as a Braze SMS buyer in the past, you used to actually have to contract on a country-by-country basis, the volumes that you were going to send. Now you're able to buy a basket of more fungible, flexible credits, which then allows for you to more dynamically test out new markets and new channels and be able to shift strategies as you see different -- differing levels of ROI or strengths and weaknesses in different markets in a way that people just couldn't contract before. And so I think as a result, we are seeing higher adoption of some of those premium messaging channels as well as they're spread across more countries and people testing out things like RCS and WhatsApp more flexibly than they were before. So we've been really happy to see all of the -- the impact of all of those. We did predict that a number of those things would be a consequence of the change toward the flexible credits model, and that's been coming into fruition. We've also been seeing great adoption of channels like landing pages and content cards as well as the banner cards extension to content cards, which are all areas where we've been putting investment into adding more depth and flexibility to those different channels and customers have been adopting them a pace. And we definitely have been excited to see that because one of the -- #1 correlators with customer growth and customer retention is the adoption and execution of multichannel strategies and being able to do so both in product and out of product and coordinating those strategies together. So that's exactly what we want to be seeing across the board with customers. With respect to OfferFit driving messaging channels, they tend to get deployed around e-mail as a primary channel. But as a reminder, the OfferFit decisioning engine is highly flexible and can be applied to strategies across not even just the channels that Braze is super strong in, but it actually has been used for performance marketing use cases and being able to do things like optimizing bid levels on ad buying strategies and such. And so we're very excited to see the OfferFit decisioning engine be able to be deployed not just on the first-party channels that Braze has pre-existing footprint and strength in, but actually be deployed more broadly across marketing organizations across all of their goals.

Our next question comes from Patrick Walravens with Citizens.

This is Kincaid on for Pat. We've seen customers in this over $500,000 cohort going up quarter-over-quarter, but we've seen the dollar-based net retention rate dropping. Are we going to see that reaccelerate at any point?

So we talked about the dollar-based net retention in quarter and the trends that we've seen there that are an indication of some of that stabilization. So over the last 7 months, we've seen some of that stabilization. And in particular, Q2 was slightly higher than Q1 on an in-quarter basis. And generally, it's a bit of a leading indicator on directionality. Also, the dollar-based net retention dropped only 1 point versus the prior quarter, and we've seen larger drops in recent quarters. And so we're encouraged by the direction of travel there and just point you to our comments about the in-quarter trajectory.

Our next question comes from Tyler Radke with Citi.

So I guess just going back to one of the comments this quarter, Isabelle, I think you talked about some better reserve dynamics just on some of the payment terms. You also talked about improving retention rates across the board. So would just be curious, like what's the underlying demand driver here? Is it -- are you seeing kind of improvements on the messaging or MAU side? Just any commonality across kind of the better payments and better retention?

Yes. I mean, look, on the better payments, there's no one particular product that's at play there. That's really more customer health and the fact that we continue to be Tier 1 vendors across the swath of our customers. And so certainly, our customers want to maintain us in good standing and have -- maintain the platform on and operational and avoid any disruption there. So I think that's a little bit of speaking to kind of the global health of the customer base. As customers run into their own financial troubles, they'll tend to be more delinquent with payments. So it's great to see that not only operationally, our own internal engine to collect payments continues to perform well, but also our customers are prioritizing us or actually having the ability to pay. And that's a great directional signal for us. And then just in terms of the overall kind of demand environment, all of the components continue to perform well. You're seeing -- we've had some growth in the monthly active user base. That has historically always underpaced the overall revenue growth. So nothing to shout out there in particular. The messaging continues to perform very well as we continue to sell on the credits basis. And so across the board, just the entitlements that we are making available to our customers, we're seeing kind of broad adoption and continued expansion of multiple SKUs across the board.

Our next question comes from Arjun Bhatia with William Blair.

I'm Willow Miller on for Arjun Bhatia. We appreciate the color on the down selectivity in the prepared remarks. But can you also comment on where you are in terms of

Yes. So we're not going to really untangle that any further. I think we're really happy to see the overall trajectory on downsell activity and the stabilization that we're seeing, as I've mentioned, on the in-quarter dollar-based net retention. And so that -- we'll talk more about kind of those metrics, and we're excited to kind of continue to report on the trailing 12 months over the next couple of quarters.

There are no more questions at this time. I'd now like to turn the call over to Bill for closing remarks.