KVYO - NYSE

Good afternoon, and welcome to Klaviyo's First Quarter of Fiscal 2024 Earnings Conference Call. [Operator Instructions] With that, I'd like to turn the call over to Jack Grant, Senior Director of Investor Relations and Strategic Finance. Please go ahead.

Thanks, operator. I'm excited to welcome you to Klaviyo's first quarter 2024 earnings call. We will be discussing the results announced in a press release issued after the market closed today. Please refer to our Investor Relations website at investors.klaviyo.com for more information and a supplemental presentation related to today's earnings announcement. With me on the call today are Andrew Bialecki, Co-Founder and Chief Executive Officer; and Amanda Whalen, Chief Financial Officer. During today's call, we will make statements regarding our business that may be considered forward-looking under applicable securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our outlook for the second quarter and full year 2024. These forward-looking statements are subject to a number 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 as a result of new information, future events or changes in our expectations, except as required by law. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks and uncertainties described under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2024, that is filed with the Securities and Exchange Commission, or SEC, and in subsequent filings made by us with the SEC, which may be obtained on the SEC's website at www.sec.gov and on our Investor Relations website. In addition, today's call includes a presentation of certain non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials distributed after market close today, which are available on our Investor Relations website. With that, I'll now turn it over to Andrew.

Thanks, Jack. Thank you to everyone for joining us today. We're pleased to share our strong first quarter results. Consumer-facing businesses of all sizes across the world are using our platform to power smarter digital relationships. This quarter, we had a number of exciting product launches, along with investments in our products, engineering, hardware ecosystem and customer-facing roles to provide the tools our customers need to drive revenue growth. I'll cover these topics then turn it over to Amanda to cover our financial results and provide our outlook for the second quarter and full year 2024. Later, we'll open up the call for Q&A. This was a strong start to the year for our business as we grew our revenue 35% year-over-year to $210 million, while generating 14% non-GAAP operating margin and $23 million of free cash flow. We continued to make progress in the mid-market, internationally and integrating artificial intelligence into our products. We just returned from our Klaviyo London Conference known as K:LDN. We like to get close to our customers and partners, and it was great to see so many of them at the largest K:LDN ever and our largest in-person event since 2019. I was inspired by the energy from our customers, partners and employees for what we are building. One of the people I spoke with remarked that Klaviyo was the standard on which they judge the quality of software and the ecosystem around it. This was a further validation of the opportunity we have with consumer-facing businesses across the world. We're doubling down with our community. Our customers are trusting us with their most valuable assets, their consumer databases to power smarter digital relationships. We continue to see retail and e-commerce brands of all types turn to Klaviyo to drive revenue. Bain & Company recently put out their 2024 list of Insurgent Brands, the list of the fastest-growing consumer brands. These companies all had at least $25 million in revenue and are growing at least 10x faster than their peers. We're proud to serve over 70% of these 97 brands with companies like Poppi, Liquid Death, Momofuku, Van Leeuwen Ice Cream and Dr. Squatch, all relying on Klaviyo to drive their revenue growth. During the quarter, we also closed new business with Fila and Fruit of the Loom. From the hottest and up-and-coming disruptors to the already established household names, businesses are finding us to drive revenue. We continue to drive momentum in the mid-market during the quarter. We now have 2,157 customers generating over $50,000 in ARR, which was up 69% year-over-year. These customers represent 31% of our ARR, up from 23% compared to a year ago. This quarter marks the first time this cohort represents over 30% of our business. In the last 12 months, we've seen significant growth in the size of businesses like this that rely upon us. As of the end of the quarter, our top 10 customers have an average ARR of about $1.5 million, which is up over 70% year-on-year. This speaks to the value that we provide for our customers. During the first quarter, we landed one of the largest deals in our company history with a top online fashion store for women. This business came to us because of the quality of our Shopify integration and enhancements to the platform we have made over the past few years. They're taking advantage of our platform to consolidate their channels across e-mail, SMS and push notification. Since going live in the first quarter, they have sent over 1 billion push notifications to their consumers. Once they fully roll out, they expect to be sending up to 13 billion e-mails per year. Because of our investments in the scalability and reliability of our platform, we help power smarter digital relationships for businesses of all sizes. Another new customer during the quarter was Perry Ellis International and their portfolio of brands, including Callaway, Original Penguin and Rafaella. Perry Ellis was facing a few key challenges with their existing tech stack of multiple e-mail providers. With Klaviyo, they'll be able to have a single view of their consumers, leading to better reporting, ability to A/B test and improve their consumer journey. They'll also be able to replicate their successful strategies across brands and reduce the time to experiment with automated flows. We're excited to help Perry Ellis with their goal of driving more revenue growth. Our land-and-expand model continues to drive successful outcomes for both customers and for us. After first becoming a customer in the summer of last year, Helen of Troy's’ home and outdoor brands, including Hydroflask, OXO and Osprey, have been driving success after consolidating e-mail and SMS with us. During the quarter, we expanded our business with them, which includes both an expansion in their SMS volume and adding on our CDP offering. The quality of our native integration has allowed them to free up developer hours and better harness their first-party data for their marketing. We're seeing benefits of our strong partner ecosystem to help drive our business. One expansion win during the quarter was with Andie Swim, a swimwear company, that we co-sold with our partner, Luck & Co. Andie Swim had been an e-mail customer of ours and now are consolidating their e-mail and SMS with us. Consolidating with Klaviyo is additionally allowing Luck & Co to grow their own business with Andie Swim in Canada. This is a great example of how we love to lean on our partners to drive fantastic customer outcomes and help our customers power smarter digital relationships. Now I'd like to take a few minutes to speak about some of our progress internationally. As I mentioned, we just returned from our EMEA-focused conference, Klaviyo London, or K:LDN. And we're really excited about our opportunity to grow that business. EMEA revenue grew 43% year-over-year during the quarter, and we see a strong opportunity to continue to grow there with more localized offerings. During the quarter, we added Manucurist, a fast-growing beauty brand based in France, as a customer. After running a trial with Klaviyo in some of their smaller geographies, Manucurist saw strong results and fast tracked their migration to Klaviyo. We're excited to welcome them on board, and they're a great example of the success we're seeing internationally. The EMEA and APAC regions represented a little over 30% of our revenue in Q1, and we're excited for our opportunity to expand our global footprint in the future as well. On the product front, we have a number of recent announcements that will help grow our international business. At K:LDN, we announced further progress on some of our efforts on internationalization and localization. We now provide SMS coverage in 9 countries with more expected to come in the next few months. Our ability to extend our SMS capabilities across geographies has met our international customers' needs to more easily market to consumers across various geographies. Our intent is to add even more customers across Europe and allow them to connect with their consumers across channels. In fact, we recently announced our first localized French user interface, with our France rollout going live later this month. This will be the first time our platform is offered in a local language other than English. When we began marketing locally in French, we saw a meaningful increase in our self-serve conversion rates. We'll be continuing to roll out new languages and localized web pages on a targeted basis over the coming quarters. At K:LDN, we also announced the upcoming general availability of Klaviyo portfolio. Klaviyo portfolio streamlines multi-account management with unified insights across brands, simplifies operations and allows for efficient spend management and swift campaign execution by centralizing control and amplifying marketing success across diverse brands and regions. Portfolio allows for better multi-account management for our customer base and is really geared towards 2 primary types of our customers, international and those in the mid-market, as both of these types of customers tend to operate across multiple markets and brands. One of our recent customer wins, Liberated Brands, which includes Volcom, Quiksilver, Roxy and RVCA, is using portfolio to have a unified view of their digital relationships across their full brand portfolio. This quarter, we further built out our key differentiator of higher-quality segmentation with our new segment preview feature. Now customers can view a preview of their segment count while building it, improving speed of building the correct segment, reducing support load, and improving manual segment processing fees. Finally, on the product front, we continued our momentum in artificial intelligence with the new launch of [ Help AI ]. [ Help AI ] uses natural language processing to allow customers to ask questions directly in Klaviyo and get answered in a self-serve manner. We see healthy usage of our AI-based features. But more importantly, we're seeing proof points of AI driving real outcomes for our customers. We are seeing fast-growing adoption with over 20% of our customers using artificial intelligence features, including Segments AI, Email AI, [ Forms AI ] and SMS Assistant during the quarter. In the last 12 months, our customers have created over 650,000 objects using those AI features. We've additionally helped our customers generate hundreds of millions of dollars in Klaviyo attributed value, or KAV, through Segments AI since its launch. Forms AI is driving significant value as well. One of our customers, Tata Harper, a natural luxury skin care brand, used Forms AI to optimize the placement and timing of sign-up forms on their website. 20 different variations of 2 forms were automatically generated and tested. And then 30 days after the test compared to the 30 days prior, form submissions for both had jumped over 65%. We're continuing to invest across products to provide our customers the tools to drive revenue. We're working to drive usage and adoption in our platform by improving our user interfaces and embedding artificial intelligence functionality. On the go-to-market front, we're continuing to invest across sales and marketing to make sure we are reaching customers across the globe. We're further building out our sales capacity and partner network to expand our footprint internationally. We're improving our ability to articulate the value of our platform and close larger accounts. On the international front, we'll be taking the learnings from France to be well positioned for further localized expansion. Lastly, before turning it over to Amanda, I'd like to provide a couple of updates on our team. First, I want to announce that our CTO, Allen Chaves, has decided to step down at the end of this calendar year to spend more time with his family. I want to personally thank Allen for his significant contribution over the last 4.5 years to build Klaviyo into the company it is today. When Allen joined, we had fewer than 40 engineers and he's helped us scale tremendously and built a world-class team and a strong leadership bench. We greatly appreciate all of his efforts and wish him well. I'd also like to welcome Carmel Galvin as our new Chief People Officer. Carmel is going to be leading our global people operations team and HR function, including talent acquisition and retention, training and development, diversity and inclusion and corporate social responsibility. Carmel has significant experience within the software industry, most recently serving as the Chief People Officer of Stripe. We're excited to have Carmel on board to help shape and guide our company culture as we build a world-class team. We're proud of our results and confident in the momentum our business has to drive strong, efficient growth in 2024 and beyond. And with that, I'll turn it over to Amanda to cover the financials and our outlook. Amanda?

Thanks, Andrew. Today, I will provide a brief overview of our first quarter 2024 financial results and discuss guidance for our second quarter and full year 2024. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation of GAAP to the most directly comparable non-GAAP financial measures. As Andrew noted, we started the year with a strong first quarter. We continue to see strong growth at scale in an efficient manner, in line with our financial framework. In the first quarter, we generated $210 million in revenue, representing year-over-year growth of 35%, and we delivered a 14% non-GAAP operating margin. We continue to perform across our 4 primary growth vectors, adding new customers, expanding with those customers, expanding internationally, and growing into the mid-market. In terms of adding new customers, we increased our customer base 17% year-over-year and are proud to now serve over 146,000 customers. We're seeing consistent trends with regards to logo retention and a bit of softness on the new logo addition side, particularly amongst our smallest entrepreneur customers. As a reminder, while we continue to target entrepreneurs, we're doing it through continued investment in product, and we are intentionally shifting more of our go-to-market investments towards SMEs and the mid-market. While net new logo adds were down in the quarter, revenue dollars from the new logo cohort was up year-over-year. You'll see this reflected in our average revenue per customer, which continues to increase and was approximately $5,800 in Q1, up 15% year-over-year. We are continuing to expand with our customers as evidenced by our dollar-based net revenue retention rate or NRR of 114%. As discussed last quarter, we expected our NRR to decline from the prior period due to the impact of lapping our September 2022 price increase and the spending trends we discussed on our last call. Consistent with last quarter, we are not seeing Yahoo and Google's updated requirements impact our customers' upgrade behavior, and we have not seen any material changes in our unsubscribe rates. We are continuing to see our customers drive strong KAV, or Klaviyo attributed value, through our platform capabilities, particularly through the ability to personalize and segment their consumer bases. Internationally, our aggregate revenue from EMEA and APAC increased 40% year-over-year in Q1 as we continued to increase our global business. We're seeing particular strength in Europe with strong growth in the U.K., Germany, France and the Netherlands. Finally, we're seeing more and more businesses in the mid-market turning to us. We ended the first quarter with 2,157 customers, generating over $50,000 in ARR. This represented 69% year-over-year growth. As Andrew mentioned, we hit an important milestone this quarter with over 30% of our ARR now coming from these customers. Moving down the income statement. I will be discussing results on a non-GAAP basis. Gross profit for the quarter was $167.6 million, representing a gross margin of 80%. This marks a 2.5-point improvement compared to Q1 2023. We continue to see the benefits of our R&D team's efforts on system and cloud engineering optimization. We've continued to migrate volume to our Klaviyo Mail Transfer Agent, KMTA. Looking ahead, we expect to see these efforts help to offset a portion of the higher costs associated with the SMS channel. For the full year, we continue to expect a couple of points of headwinds on our gross margin compared to last year. Compared to Q1, we expect a couple of points of headwind to gross margin over the next 2 quarters and a further decline in the fourth quarter due to the growth and seasonality of SMS. Turning to operating expenses. Sales and marketing expense was $66.7 million or 32% of revenue for the quarter. We've continued to invest in marketing programs to generate demand and sales head count to grow our capacity to serve our international and mid-market customers. Our new Klaviyo narrative that we rolled out in Q1 is resonating. We continue to closely monitor the unit economics of the different investments we are making, and we will continue to make investments where we see the right level of returns. R&D expense was $41.7 million or 20% of revenue. We're continuing to invest behind our core products, AI capabilities and our new offerings, many of which Andrew highlighted earlier. Finally, G&A expense was $29.8 million or 14% of revenue. We are now lapping investments tied to public company readiness and expect to get more leverage from this line over time. For Q1, our operating income was $29.3 million, representing an operating margin of 14%. We also generated free cash flow of $23 million during the quarter, up 65% year-over-year and leading to a 2-point improvement in free cash flow margin year-over-year. To give some perspective on our ability to generate sustainable cash flow, our trailing 12-month free cash flow increased by $123 million compared to the prior year. Finally, turning to the balance sheet. We finished the quarter with $756.9 million in cash, cash equivalents and restricted cash with no debt. Next, I'd like to talk about our outlook for the second quarter and full year 2024. As a reminder, we experienced typical seasonality in our model. As we discussed last quarter, the second quarter typically has modest sequential revenue growth due to the lagging impact of downgrades after the holiday season. For the second quarter, we expect revenue to be in the range of $211 million to $213 million, representing growth of 28% to 29% year-over-year. We expect non-GAAP operating income to be in the range of $19.5 million to $22.5 million, representing a non-GAAP operating margin of 9% to 11%. This sequential step down in operating margin is due to the timing of some investments made late in the first quarter, which have a greater dollar impact in the second quarter, particularly in engineering and go-to-market. For the second quarter, we expect fully diluted shares outstanding to be approximately 298 million. For the full year, we are increasing our revenue guidance to be in the range of $899 million to $907 million, representing growth of 29% to 30% year-over-year. We expect non-GAAP operating income to be in the range of $97 million to $105 million, representing a non-GAAP operating margin of 11% to 12%. As we spoke about last year, as the year progresses, we are making incremental investments across go-to-market and product opportunistically to set Klaviyo up for long-term growth. Based on the timing of these investments, we expect to see some year-over-year operating margin deleverage in the third quarter as well with margin expansion in our seasonally strong fourth quarter. Finally, for the full year, we expect fully diluted share count to be approximately 298 million. To close out, we delivered strong results this quarter with healthy growth on the top line and strong operating income and free cash flow. We are excited for this year and for the long-term opportunity ahead of us, and we are focused on executing against it for our shareholders. And with that, we'll open up the call for Q&A. Operator?

[Operator Instructions] We'll go to our first question from Arjun Bhatia at William Blair.

Perfect. And congrats on the nice results here. To start with, maybe Andrew, I just wanted to touch on, I think, one of the disclosures that you had given, which was around some of your larger customers, the top 10. I think they had over a 7-figure average ARR, and it sounds like the landing -- the customers that you're landing are also getting larger and larger. Maybe just help us frame a little bit your -- where you're targeting your go-to-market resources, especially the sales reps that you're investing in. And how do you view what the upper bound is of your target market? Or is there one as you look to move further into the mid-market?

Sure. Thanks, Arjun. Yes, we're very happy with the results we're seeing there. And we shared that because, to answer your question on upper bound, we don't see a strong upper bound on the size of business that can be on Klaviyo. We continue to see that there's a lot of legacy marketing platforms out there, a lot of folks running on those. There's a lot of point solutions that just does e-mail, just does SMS, just does one channel. And the fact that we built this great customer database and it's integrated with marketing in all of the channels in one place makes it much easier to use. We integrate directly with folks' retail and e-comm stacks, and all that adds up to better access to data and more personalization, which is what everybody is after. So just to give you a quick example, we had a sporting goods store with over 100 locations. They were on one of these legacy e-mail marketing platforms with a point solution for SMS. They consolidated all that to us for better access to that data, so they can experiment more quickly. And they know that's going to lead to more engagement from customers and more revenue growth. So we think we can take that into the mid-market and beyond. And then for our sales team, we've been ramping up capacity in a very intentional way. And we've got that focus today really on that mid-market segment as well as expanding coverage internationally. So we're very excited about the growth that we've seen there, and we think there's a lot more to come.

We'll move next to Rob Oliver at Baird.

Amanda, I wanted to just ask you a little bit. You talked a little bit about the seasonality in the SMS portion of the business. And I just wanted to see if there had been any change to that at all and then maybe get an updated view from you relative to the macro, lots of different investments that you guys are making and obviously quite a dynamic macro. So I just wanted to get an update from you on what you guys are seeing in terms of the macro opportunity.

Sure. Thanks, Rob. Yes, in terms of SMS and seasonality, what we see continues to be very consistent with SMS. Generally, with SMS, it tends to be more point-in-time, high-priority communication that tends to be linked to some of the peak holiday shopping periods. So we see SMS peak during those holiday shopping periods, so of course, during Q4, Black Friday, Cyber Monday, being the natural one that we're all familiar with. Interestingly, there's a little bit of seasonality, which you can see in Q1 and into Q2, and some of what we were talking about in gross margin. That Q1 is a little bit lighter from a holiday period. Q2, you have more of those big shopping holidays coming back around again between Mother's Day, Father's Day, Memorial Day, the lead up to the Fourth of July. But again, all of that is very consistent with what we've seen from SMS in the past, so no real change there. In terms of what we're seeing on the macro, based on what we're seeing, what I would say is it's steady. It's not getting better, but it's also not getting worse. We do see some linkage in the macro to some of the trends that we called out on customer behavior on our last call, and we think that some of that is coming from the macro. But again, what we see there is that those trends are consistent, they're steady and they're very stable. The other trend that we see that's interesting is our customers' GMV growth is pretty stable as well. And we continue to see the pattern that we have seen over time, which is that their KAV or Klaviyo attributed value is growing faster than their GMV. And the reason it's growing faster than their GMV is we are a platform that drives revenue for them. We have built our software to be a must-have, not a nice-to-have, because we are the software that you count on to help drive your top line. And so what we're continuing to focus on in this macro environment is focusing on helping our customers drive growth. So we're running plays and we're building content for our customers on what are the best practices that they can use to get the most out of Klaviyo as possible. And a great example of that, that has come recently is one of our customers, Made In, who's in the cookware space. They use Segments AI to generate over 30 segments, and those 30 segments are generating over $2 million in revenue for them. So great trends in terms of the way that our customers are relying on us to help drive their growth.

We'll go next to Elizabeth Porter, Morgan Stanley.

This is Katie Keyser on for Elizabeth Porter tonight. Congrats on the quarter. I wanted to ask one on NRR. Can you provide more visibility into the expansion behavior of customers in the quarter? I appreciate that NRR is impacted by lapping the price increase. It would be helpful to better understand the health of customers' expanding spend and perhaps how we can think about the NRR trend over the next few quarters.

Sure. Thanks so much. As we look across our peer set and others who play in our space, we feel really positive about where we are with our NRR. I think 114% is a great expansion trend to have. And we're pleased with where we are. We did talk about last quarter that we expected NRR to tick down. And just as you mentioned, that's due to a couple of factors. We expected it to tick down because we're lapping the price increase and also because we continue to see, as I just talked about, when we're speaking about the macro, the customer behavior trends that we called out last quarter. So as we look forward in NRR, I would anticipate that it will continue to decline a few more points over the next coming quarters. And as a reminder, another factor that is going on in there is that when we land larger customers, some of those big deals that Andrew spoke about earlier, they tend to make larger purchases upfront. That's reflected in their land and then not so much in the NRR expansion. As we think about NRR and where it is over time, one of the things that we're particularly proud of is how sticky our product is. It's so important to our customers because of the high ROI that we're driving for them and also because of how foundational we are to their tech stack because we are the central source of customer data for them. So we think our gross retention, which is, of course, an important part of that NRR number, is really best-in-class for the size of businesses that we serve.

We'll take our next question from Gabriela Borges at Goldman Sachs.

This is Callie Valenti on for Gabriela. Really nice to see the upside to revenue in the quarter. Just wanted to dig in a little bit. What was the main driver of that? What was the biggest part of your business that surprised to the upside in the quarter?

Sure. Well, we attribute -- I mean, I'll go back to what Amanda just talked about. You think about like our growth levers, we think about adding more customers. We continue to see across SMB and then we talked about mid-market just great adoption, folks moving off of older newsletter platforms or legacy marketing suites towards something that has a data -- a customer database as that's a central point and then consolidating marketing channels, so continuing to add customers. We continue to see a lot of adoption of SMS and other products. We talked about that ticking up. And then yes, mid-market, international, we touched on that before. I'll just hit on international briefly. We're still very impressed by our growth there. And we're making investments across product and sales to drive that. From the portfolio release we just launched last week, internationalizing Klaviyo now in the French language, and just continuing to expand with partners internationally. So across our 4 key drivers, I think we're seeing a lot of momentum there, and that's why we're very bullish about the year ahead.

We'll move next to Brent Bracelin at Piper Sandler.

AB, I wanted to take a step back. There aren't many $800 million ARR businesses with 70% SMB exposure that are still growing 35%. What we're seeing, [ slowing ] growth across the broader SMB software category. But the Klaviyo spend category feels different. It feels slightly more insulated. Can you maybe just step back and walk through maybe why that customer database, coupled with marketing, gives you maybe a little higher priority from a spend prioritization standpoint? Any color there just given the concerns that investors have around SMB spend would be super helpful.

Yes, absolutely. We often think about, when we talk to our customers, what are the kind of nice-to-have piece of software versus what are the must-haves. And from day 1, we tried to position Klaviyo as a must-have and -- really because we're driving revenue. Amanda talked about how for our customers, a greater or increasing percentage of their sales are coming through Klaviyo. And we think that there's 2 parts that make us a must-have. The first is being the central source of truth about all your customers and being able then to use that, not just with our marketing products, e-mail, SMS, et cetera, but also to use that data in other applications. We've got hundreds of applications that plug into Klaviyo, so that centrality really matters. And then the second part is we built in attribution and the ability to really measure your results. I think if you're a product that can tie back usage of that product directly to real revenue, real profit, that's a huge driver. In fact, like when you think about what we're doing with artificial intelligence, that's a big part of the story. When we started Klaviyo, the whole idea was better, more personalized experiences that are going to be more engaging that are going to drive more revenue. And now if you extend that with our product strategy, as we invest in AI, we think about that as a big driver of helping businesses increase customer engagement and revenue by being able to run more experiments, being able to optimize the marketing campaigns they're running. So I think when budgets get a little bit tighter, everybody kind of looks at which software is a must-have. And I think because we're driving revenue, we fit in that [ nicely ].

Our next question comes from Raimo Lenschow at Barclays.

If you think about -- Amanda, you got a question already about the health of the SMB space. But there are geographic differences if you think about it. If you listened to Shopify yesterday, Europe was not as strong as U.S. Does that impact your -- do you see any of that from a geographic perspective? Does that impact your European build-out that you might kind of think about resource allocation differently?

Yes. Great question. So as we called out on the call, we're actually seeing strength in Europe. So our European business was up over 40% in revenue year-over-year, and we're seeing particular strength in France, Netherlands, Germany, U.K., in particular. So I think we are a little bit earlier days in our penetration in Europe, particularly as we're just now starting to make that really important inroad in launching in a new language, starting with French. We're launching SMS in new markets, and there's just so many SMBs who are out there. If you look at our customers and our customer count, we're continuing to see strength from Europe. And that's why we're leaning into expanding in new countries, adding new languages, because we see lots of opportunity. Not only great results there but opportunity ahead.

We'll go next to Scott Berg at Needham.

A really nice quarter here. Congrats. AB, I wanted to ask a question on your AI functionality. You've been able to release several components of it over the last few quarters. As you look at your customer base in terms of what they're using that functionality most frequently, where do they start? What do you see them, maybe over the course of time, use maybe more often than others? Maybe just help us understand that AI journey from what you've seen, at least initially today.

Yes, absolutely. To tie back, it's been a major focus of ours for the last 5, 6, 7 years, so let me describe our AI strategy in 3 parts. The first part is all about productivity. When you look at Klaviyo AI, a big portion of the features there, Segments AI, Email AI, our SMS Assistant, [ Flows AI ], Forms AI, they're all about how to help you use more Klaviyo, create more, run more experiments. We have a heuristic internally that we believe we can help marketers, businesses get twice as much done. That's going to lead to lots more of experiments, and that's going to lead to a lift in KAV and usage. So on that front, we're seeing lots of adoption. We're very happy with how that's progressing. So that's part one, productivity. Part 2 is optimization then of those marketing strategies. So we talked about an example of Forms AI in the opening remarks. That -- by running more variations, let's say, a form on a website, that leads to a better sign-up rate, that leads to more subscribers, which ultimately leads to more revenue. So that's part 2. And then part 3 that I'm really excited about is how do we not just help people improve the marketing they're doing but actually come up with net new marketing strategies. If you're a business that has hundreds of thousands or millions of consumers, there are lots of opportunities for personalization or segments of your customer base, matching them up with just the right product at the right time. And our artificial intelligence can help find those campaigns, and those are additive to the KAV and the revenue that folks are driving through Klaviyo today. So across those 3 things, productivity, optimization and then expanding your marketing strategy, we've shipped the most products on the first part, on productivity. That's where we're seeing the most usage. But I expect over the coming quarters, you're going to see more in buckets 2 and 3, on optimization and expanding your marketing strategy. And then I think for our customers, they sort of -- all of those are valuable. But as you think about being able to think of net new marketing strategies, I mean, those are extremely valuable. And so while we're not trying to monetize, say, the productivity tooling directly, we're building that into our product as part of what makes us a best-in-class product. I think as we start to optimize the marketing that folks are doing or can help them come up with net new campaigns, there's going to be opportunities there as we drive adoption for additional either products or different pricing and packaging. So to round it all out, we built Klaviyo as this revenue engine for businesses. When we started out, it really took more of a sophisticated marketer. We've actually started to build a lot of that intelligence directly into our products. And I think we're still -- we're very early in getting our customers to shift over to that model of really relying on us. I think that's coming. And I think that's the big opportunity for the whole category in the space.

Next, we'll go to Terry Tillman at Truist Securities.

AB, it actually relates to -- so you clearly have the go-to-market investments and being pulled upmarket. But I'm curious about from an innovation perspective, what do you see as more of an unlocking opportunity, whether it's the CDP or portfolio or with some of the AI capabilities that I think Scott asked about? Just curious a little bit more for them and what they need and then maybe you even see RFPs. What is the more meaningful unlock potential with some of these newer products?

Yes. Thanks, Terry. I'll take this. To clarify, I will take this more for as we move upmarket, what we're seeing from folks. So I mean the first is, it all starts with a central source of truth, our CDP, this customer database. Just to touch on the CDP and the progress we're seeing there, I'm really excited about the adoption and the pipeline, the demand that we're seeing there. We mentioned Helen of Troy adopting our CDP almost right away. I think you could think about that CDP as 2 opportunities. One is data governance and federation. So one thing we're seeing from larger businesses, they want all their consumer data in one place, and they want it to easily integrate not just into marketing but to advertising, to customer service, on to their website. And we're providing for that, and so that's a real differentiator. The second thing that we're focused on is really rounding out the marketing stack for a lot of these bigger businesses. A lot of them still rely on point solutions for different channels. They want all of that to be orchestrated to be -- to work together. And we've been able to prove out with some of our larger customers that there's real lift in doing e-mail and SMS and other channels altogether. Not only to reduce complexity but actually, consumers like it better. It's a better consumer experience. So adding on those marketing channels, over time, one of the things we found with CDP is that it's not just about data governance, but there's actually an analytics play. With part of our CDP feature set allows our customers to run more advanced reports, some of which are out of the box, to help them discover some new marketing ideas. For example, we have large customers that have used our RFM analysis that's out of the box to discover customers that used to be really loyal, but has since lapsed, and quickly create marketing campaigns based on that. That's something that in the past, it was an idea folks had, but it would take months to actually implement. And we've made it something you can do in hours or days. So you take all those 2 things, you then layer on some of the productivity boost, the optimizations with machine learning and artificial intelligence, I think that's the complete picture. I think for the larger businesses, they really want a complete stack that allows them to store customer data and then drive personalized consumer experiences all in one place. And so we're trying to do that both with the products we offer but then making sure that we integrate with the other software they're using.

We'll move next to Siti Panigrahi at Mizuho Group.

It's great to see this largest online fashion store deal that you talked about with Shopify integration. As you look at the opportunity in the Shopify Plus installed base with your partnership, what kind of opportunity -- how many do you think you can further penetrate in that base? And when you see this kind of opportunity, is this mostly a displacement? Do they use some sort of service? Or is it more of a greenfield opportunity?

Yes. So our -- we love working with Shopify, and we continue to partner really closely. With Shopify Plus in particular, we mentioned that our Shopify integration and our relationship there is so strong. Our 2 products work really well together, and that matters a lot for personalization. So I think as for Shopify Plus merchants, those businesses, we've got strong market share. But we still think there's a lot of room to go, not just in terms of adding additional customers but also in expanding how we can use data from Shopify in our customer database and then use it across more marketing channels and more parts of the consumer experience. When I talk to customers and partners, they really like that vision. And a lot of them are looking for us to give them that road map. And that's a lot of what our sales team -- I talked about the customer growth team we have. It helps our customers adopt more Klaviyo. So we're very happy with the progress that we've made to date in the Shopify Plus ecosystem. And we think there's a lot of room to grow there as well.

We'll move next to Derrick Wood at TD Cowen.

Amanda, you have a strong customer acquisition engine at the lower end of the market, but you're also investing more resources up market. So I wanted to get a sense of how to think about the impacts on new customer generation levels in 2024, especially in light of the macro and some of the comments you made. We did see net new customers drop down to 3,000 in Q1. Should we be thinking that's kind of the new run rate? Or are there other seasonal factors quarter-to-quarter that we should expect as we progress through the year?

Yes, great question. Thanks, Derrick. As we discussed on the call, we did see a bit of softness in the new logo adds. And in terms of the count, that was really focused at the lower end of the market. We think what's going on there is a combination of a couple of things. We think it's a combination of macro and the macro environment as well as the intentional investment decisions that you referred to, which is -- we are continuing to target entrepreneurs. But we're doing it really through products and then we're intentionally shifting more of our go-to-market towards those SMBs and mid-market. But when you look at the net logo count, those smaller customers, they have a disproportionate impact on the logo count and they have a smaller impact on total revenue. Now an interesting trend that we are seeing in the business within there is that if you look across each of our customer groups, the entrepreneurs, the SMBs in the mid-market, within each of those customer groups, we are closing higher ASP customers. Customers are growing their businesses, they are turning to us to drive more of their revenue, and that results in them signing up for larger plans. So going forward, as you think about the balance of the rest of the year, I would expect we're going to continue to grow new logos. But it's going to be more moderated growth on total number of new logos that we're adding and more of a balance there between growth in logos and growth in ASP.

That's great. I'll add one thing on top of what Amanda just shared. So our product teams are obviously still very focused on delivering a great out-of-the-box experience, regardless of the stage of the business, whether you're just starting out or you're a large enterprise. And within -- we talked about mid-market. Within this kind of SMB, more established businesses, we still think we have a long way to go in terms of market share. We talked about our relationship with Shopify and Shopify Plus and growing there. There's also -- we continue to invest in existing partnerships and platforms. There's other platforms in the retail and e-commerce space that we're doing more work with and then also internationally. We think there's a lot of -- as Amanda mentioned, we're relatively early in growing internationally. We think there's a lot of SMBs, large quantity of customers that should be running on Klaviyo.

Next, we'll go to Tyler Radke at Citi.

Yes. Similar question on go-to-market. I guess, 2-parter here. Number one, it looked like sales and marketing ticked down a bit sequentially. Could you just talk about kind of the changes in spend that you're seeing there? And then where are you focusing the go-to-market investments here? Is it -- you talked about some international opportunities, especially in France. Are there certain industries that you're leaning into more? If you could just talk about where you're targeting those investments?

Great. I'll talk a little bit about like our strategy, and then Amanda can talk to the trend in sales and marketing spend. So I mentioned that on the sales side, we've been increasing sales capacity very intentionally to focus on 3 core areas. The first being mid-market, where we're seeing strong growth. The second is internationally, where we think again a big opportunity. And then the third is what we call our customer growth team that works with existing Klaviyo customers to help them adopt the full Klaviyo platform. So that's going well, and we think we're well positioned there. On the marketing side, we're in some of these newer areas, we mentioned mid-market, we mentioned international. We're investing in brand and folks knowing who we are and also creating moments for folks to really attach to us. You saw our Klaviyo ad launch a few months ago. We're big believers in customer events. Our Klaviyo London Conference brings together both existing customers to use more Klaviyo as well as net new customers to meet those -- meet existing customers and learn from their experience. So we also -- we really like what we're seeing from those investments as well. Finally, I'll mention that on the marketing side, we're doing a lot of educating the market and even some existing customers about all of our products, especially our newer products. Just to give you a little example, I talk to a lot of customers who are advanced e-mail users of ours. But they're still learning about what SMS can bring to their business or what other channels or CDP can bring, and so we think there's a lot of upside there. So we're doing all of that, still very much focused on retail and e-commerce, and with strong commitments to good unit economics and experimenting and staying disciplined.

And then regarding the sequential step down in sales and marketing that you asked about, that has to do with the seasonality of investments. So it's primarily marketing and marketing timing because we have a lot of marketing programs that are linked to the holiday shopping season. As Andrew said, we're continuing to invest in sales capacity. We'll be ramping up marketing programs, particularly through the second half of the year. And you can see the timing of that reflected in some of the comments that we had in our prepared remarks talking about how we expect operating margins to unfold over the course of the year.

We'll take our next question from DJ Hynes at Canaccord.

AB, maybe we can go back to that large win with the women's online fashion brand. Curious what the RFP looked like there. Who else was involved? How long was the sales cycle? Kind of what ultimately tipped the decision in your favor would be helpful color.

Sure. So in the mid-market and enterprise, we still -- it's a lot of older tech, and that obviously doesn't include the back-end customer database that we have, which limits the amount of personalization and the kinds of experiences you can build across e-mail, SMS and other channels. So legacy tech as well as just like point solutions, things that just help with one marketing channel all the time. In that particular case, the actual customer had been on Klaviyo a few years ago and had thought they'd outgrown us, but then they've since grown a lot. We've scaled up our systems and they came back. And they came back for a lot of the reasons that I hear from a lot of our customers. Our integration tightly with their back-end retail and e-commerce systems as well as integrations into their more consumer-facing with their website and things that sit outside of marketing, so those integrations, combined with the ease of use, the ability to get a lot of things done, I think that's the access to data and being able to use that to personalize plus where we're going. I talk to a lot of our larger customers. They're really excited about not just our customer database and consolidating channels, but also what we're going to be able to do with artificial intelligence and the ability to take the data you have and plug it into every aspect of the consumer experience. A lot of our larger mid-market and enterprise brands, they still feel like they haven't been able to fully stitch that together. They don't have a single source of truth for consumer data. Not all of the front-office pieces, the software that interfaces with the consumer, they don't all talk to each other. I think with Klaviyo, we've really got a shot at being that company. And that's what we talk about is that we're going to move quickly to build products that both addresses what they want to do with data and marketing today but also build out this broader CRM for consumer businesses. So I think both where we are and where we're going, that's what makes it interesting.

We'll go next to Nick Altmann at Scotiabank.

I wanted to build on Raimo's question on the international side. Andrew, just given you guys are coming off the EMEA event and you guys have rolled out a plethora of features geared at those international customers, I was wondering if you could just maybe talk about how those conversations with international customers are different from customers in the U.S. just in terms of buying propensity, where they're at with their martech journeys, interest in various channels, willingness to consolidate, et cetera. Just any other color you can provide and how those conversations differ with international versus U.S. customers would be interesting.

Yes, sure. Yes. It was a great event, and it's always great to get hands on with customers and hear from them directly about what really matters. So first, the sophistication level, both in Europe and in Asia, is excellent. I mean, these are businesses that are -- they're really driven. They know what they want to do. They know the data they should have access to, and they've got a lot of ideas on how to put it to work. The challenge for a lot of -- both in Europe and Asia, it's really about complexity. And because we're reducing that, that's really -- I mean, that's the winning value prop. I mean, to give you a quick story, we launched Klaviyo portfolio, a set of tools to manage multiple Klaviyo accounts, multiple regions, multiple brands, all in one place. When we were at the event, I asked a panel of customers. I said, hey, how many of you log in to Klaviyo at least once -- multiple accounts at least once a week? Almost everybody raised their hand. And I said, how many of you log into at least 10 different Klaviyo accounts every week? And not many hands went down. Still, the majority of folks were working either across brands or they had different stores, different websites for every single region in Europe. So we're launching features like that to help reduce the complexity. We did Klaviyo portfolio. We spent the last 12 months really building out all the plumbing so we could internationalize our product, both the actual like software itself as well as all of our technical documentation, all of our guides and tutorials. We just launched that with France. The team put in a huge effort to do that, but set it up in such a way that we're going to be able to quickly move from English to French to many other languages, which will help us address more of the international -- our international customers and who should be future customers. So you kind of add up all those pieces as well as we've got hundreds of partners over in Europe that are very sophisticated, very focused on a lot of great ideas, that plus our platform partners plus a growing number of customers, that's creating a flywheel that's allowing us to then overlay additional sales headcount, run marketing campaigns and grow internationally efficiently.

We'll go next to Jackson Ader at KeyBanc.

Great. This is Kyle Diehl on for Jackson Ader. Maybe just a quick clarifying question first. I think the mention of the thoughtfulness in spend in -- towards the back half of last year, particularly in December, and it sounded like SMS's side, it was kind of throughout the business. Did that thoughtfulness carry through the entire quarter here, when we talk about kind of a similar backdrop? And it was more so a quarter of just better productivity or execution up in the mid-market? And then secondarily, is there any color you guys could kind of provide for us on that $50,000-plus customer cohort? Is that growth primarily being driven by the larger lands? Or is there still a fair bit of mix that are coming from customers kind of growing up into that cohort?

Sure, great question. Thank you. So with regards to the thoughtfulness and the trends that we're seeing in customer behavior, the themes are very consistent with what we spoke about last quarter. So this quarter, it was less focused on SMS, but the overall magnitude of the trends that we're seeing in customer expansion remains very consistent. And generally, what we're seeing is that they continue to expand their plans with us. They're just doing it at a more moderated rate. And the reasons behind it when we talk to customers and look into the data is that they're being targeted in the e-mails and SMS that they send, and they're being more proactive in managing the plans to make sure that their plan size aligns to the usage that they're driving. And both of those things contribute really well to high ROI. And what we see when we look across our customer base is that customers with high ROI have high retention and that one of our key competitive differentiators is the fact that we let customers be very, very targeted, very intentional, build relationships with the data, and so that helps them be more effective in their marketing. So over time, we think both of those are very good trends in the business, and we've just got to figure out how do we continue to help them drive revenue and how we share in that value that we're creating. And then regarding the $50,000 customer mix, it's important to remember, I guess, first, the seasonality of our business. The second half of the year and, in particular, the fourth quarter, is the biggest expansion time for us, and expansion is a key driver of that number of $50,000 adds. So overall, we're really pleased with the progress that we're seeing there. We're really pleased with the continued adds that we have and proud of the milestone that we reached that we spoke about on the call, that over 30% of our ARR is now coming from this $50,000-plus cohort of customers.

And those are all the questions I have for today's call. With that, I'll turn the call back over to Andrew Bialecki for closing remarks.

Great. Well, thank you all for joining us on today's call. We want to again thank our Klaviyo team, our customers and our partners for a great start to the year. We're very excited for the year ahead. Have a nice evening, everyone.