KVYO - NYSE

Good afternoon, and welcome to Klaviyo's Second Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] With that, I would like to turn the call over to Andrew

Good afternoon, and thanks for joining Klaviyo's Second Quarter 2025 Earnings Call. Our earnings press release, investor presentation, SEC filings and a replay of today's call can be found on our IR website at investors.klaviyo.com. With me on the call today are Andrew Bialecki, Co-Founder and CEO; and Amanda Whalen, CFO. As a reminder, our commentary today will include non-GAAP measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials, which can be found on our Investor Relations website. Additionally, some of our comments today contain forward-looking statements that are subject to risks, uncertainties and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risks, uncertainties and assumptions and other factors that could affect our financial results are included in our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. Except as required by law, we do not undertake any responsibility to update these forward-looking statements. With that, I'll now turn it over to Andrew.

Thanks,

Thanks, Andrew. Our second quarter results were very strong as we are delivering efficient growth at scale. Revenue grew 32% year- over-year to $293 million. Non-GAAP operating margin was 14%, and free cash flow was $59 million. These results demonstrate another quarter of strong, consistent top and bottom line performance. Our vertically integrated AI-driven data platform is the only CRM built for consumer businesses. And we are expanding the functionality as we add features across marketing, service and analytics. Customers are responding well to this vision, which drove strength in the second quarter as we added new customers, expanded with our existing customers, grew internationally and expanded upmarket. We ended Q2 with more than 176,000 customers, up 17% year-over-year and up 7,000 from Q1. This strength was driven by momentum in entrepreneurial customers with support from SMB, mid-market and enterprise, affirming Klaviyo's value in every market. We delivered a Q2 NRR of 108%, in line with the last 2 quarters, driven by consistent gross revenue retention, improvement in e-mail expansion and while a smaller contributor, returns from our newer product offerings. We are advancing our cross-sell motion as evidenced by more of our larger customers adopting multiple products and the growing SMS penetration in our SMB and mid- market cohorts. We are also very pleased with the early adoption of our marketing analytics product and the success of our Klaviyo Service beta. Our success in serving larger customers is evident as we ended the quarter with 3,291 customers with over $50,000 in ARR, up 38% year- over-year. This was a record quarter of net adds into this cohort as we drove strength in both new customers to Klaviyo landing in this cohort and existing customers who are growing their businesses with Klaviyo. As you heard from Andrew, our investments towards expanding internationally on both the go-to-market and product front are delivering returns as our outstanding international growth continued in the second quarter. EMEA revenue grew 47% year-over-year, and APAC revenue growth accelerated for the second quarter in a row as our international expansion strategy is driving strong results. This broad-based strength drove the revenue outperformance in Q2 as we execute on our growth priorities. As we mentioned last quarter, we incorporated some additional prudence in our guidance due to the uncertain macro environment. However, we continue to hear from customers that Klaviyo is more critical than ever to driving their growth, and we did not see an impact from the macro during the quarter. Our results against guidance, therefore, were slightly higher than they would have been in a normal environment. Moving on, second quarter non-GAAP gross margin was 76%, down approximately 2 points year-over-year primarily due to increased infrastructure costs and the continued growth of our SMS product. We are beginning to see efficiencies from these infrastructure investments, and our non-GAAP gross margin was flat to Q1 due to infrastructure optimizations offset by our growing SMS mix. Turning to non-GAAP operating expenses. We saw leverage in R&D and G&A. Sales and marketing as a percentage of revenue increased year-over-year as a result of continued investments in sales capacity and timing of marketing program spend. For the second quarter, our non-GAAP operating income was $41 million, representing a non-GAAP operating margin of 14%. This came in better than our guidance, primarily as a result of the revenue upside we saw in the quarter and to a lesser extent, due to operating expense leverage. We generated strong free cash flow of $59 million during the quarter due to higher collections and the timing of payments. This result excludes the impact from Andrew's option exercise, hence, the related share sale for tax payments, which took place during the quarter. Before I turn to guidance, let me quickly touch on our revenue seasonality. As a result of the profile enforcement changes we made in February, we expect our revenue to be less volatile quarter-to-quarter as profiles tend to grow consistently throughout the year compared to the seasonal increases that can happen from sending volumes. As a result, we expect that our fourth quarter revenue will experience less of a quarter-over-quarter spike in growth than it has in prior years. Additionally, with the strength in Q2, we are reducing the amount of incremental prudence incorporated into our guidance for Q3 and the full year, but not removing it completely as the environment remains dynamic. Turning now to guidance. For Q3, we expect revenue of $297 million to $301 million, representing year-over-year growth of 26% to 28%, driven by continued strength across the business. We expect third quarter non-GAAP operating income of $32.5 million to $35.5 million, representing a non-GAAP operating margin of 11% to 12%. As a result of our strong first half performance and robust customer demand signals, we are raising our full year guidance by $24 million at the midpoint from $1.195 billion to $1.203 billion for year-over-year growth of 27% to 28%. We expect non-GAAP operating income of $144 million to $150 million, representing a non-GAAP operating margin of 12%. This guidance reflects our confidence in the resilience of our business and the value that we provide to our customers, who continue to rely on our platform to drive results even in uncertain times. In a dynamic environment, our business is more relevant than ever. In closing, our performance in the first half of the year reinforces that we are executing well on our growth strategies. We are delivering on our goal of achieving sustainable, efficient, long-term growth through adding new customers, expanding with existing customers, international expansion and moving upmarket. Our single unified platform for marketing, service and analytics positions us well to deliver unmatched value to our customers and establishes a solid foundation for continued innovation and growth in the future. I look forward to discussing more about our business at our upcoming Investor Day in September. And with that, I'll open up the call for Q&A. Operator?

[Operator Instructions] Your first question comes from Gabriela Borges with Goldman Sachs.

Congratulations on the quarter. Andrew and Amanda, I wanted to ask you a little bit about your progress in the mid-market in particular. Amanda, I remember it was a handful of quarters ago where you talked about seeing the pipeline be really good and stepping up the level of investment to go after that opportunity. And now if I look at your unit economics on an LTV to CAC standpoint, you're seeing really nice improvement on LTV to CAC. So my question for both of you is give us a qualitative overlay of what you're seeing in the mid-market in particular and if there's anything else you can add to quantitatively on what you're seeing with sales productivity and how you're thinking about the scale of investment in the mid-market in particular, that would be great as well.

Yes. Thanks, Gabriela. Happy to take those. So just qualitatively, why are customers turning to Klaviyo in the enterprise? We see that the Klaviyo data platform plus this consolidation story of taking not just all the channels of marketing, but now marketing and service together is really resonating. And then as we talked about, I think there's this trend of all of the -- the entire CRM stack is about to go autonomous. And every enterprise is looking at, hey, who is their partner that they're going to work with over the next 5, 10 years on making the customer experience really an autonomous auto-optimizing thing. So I think that story is really resonating. The fact that we have the data platform at the core and the only one to do that, that's what's setting us apart. Now on the unit economics, yes, we've been investing in building out our mid-market enterprise, demand gen and sales motions, and we continue to refine those. I think we still have work to do, as we always do, but we're very excited about the trend in the unit economics [ especially ].

Yes. And just a couple of examples to bring that quantitatively to life. You saw the growth in the 50,000 cohort, 14% year-over- year growth this quarter in average revenue per customer. And we're continuing to see strong growth in the average revenue that we generate from our top 10 customers. So all of them are really demonstrating that progress. And one of the examples that I really appreciated this quarter in the mid-market was Mejuri, who is a prominent jewelry brand, they chose us because of our robust integrations, our ease of use and the reliability of the platform, especially after last year, they had some issues with their prior provider and heading into Black Friday Cyber Monday, they wanted to know they had a brand who can scale with them and support their business. And Klaviyo is that partner.

Your next question comes from Terry Tillman with Truist.

Congrats on the results. My question relates to the service suite of products. And I know that they're not actually generally available, I believe, but you're talking about releasing or putting into access Helpdesk and the Conversational Agent. I'm just curious, if you take a step back, and I think investors care about this is how do you size this opportunity to run your service suite versus some of the other products, whether it's mobile, e-mail or marketing analytics? And the second part of this is, would it be a similar playbook where maybe it starts with traction more downmarket? Or would this be more potentially actionable across all customer segments?

Yes. Great, Terry. So happy to talk about what we're doing in service. And I'll start with this. I think as -- what we traditionally thought of as customer service, as it gets more automated, more autonomous, our belief is every business is going to offer up to every one of their consumers their own personal AI, their own agents, their own concierge, that's there across all modalities. So we're starting with web and chat. We think it will be voice. We think it will be on your mobile app. It will be everywhere. Any time you have a question, whether it's something we traditionally think of about as customer service or something proactive, you need some advice. We already are seeing in our beta, questions that people are writing in and asking about things like, hey, I'm shopping and I'm wondering whether this outfit will work with this event that I have to go to. And that's not what we traditionally think of it as a customer service request. It's more -- it's almost [ the land ] between service and marketing. So this conversational piece, I think, is going to be critical. And to the question on, hey, how big is this market, I look at the marketing application, the marketing automation category, this conversational category, I think, is of an equal size. Now we're early into this. We're doing a great job of building out the product and working with customers to refine it and planning to launch it soon. But I think it's going to be a major accelerant. And we look at for a lot of businesses, I don't know why you wouldn't want marketing and then the conversations you have with customers all be driven off the same data set. So I think this is -- I mean, this is where the market is going, and it's going to get a lot more automated. Because of that, we obviously -- when Klaviyo was starting out, we focused more on SMBs and in recent years have started to shift our focus or more of our focus upmarket as well. I think there's a moment right now where for service, for conversations, whether you're an SMB or an enterprise, you're looking and saying, who's going to provide that personal agent, that personal concierge to every single one of my customers, and we want to be that. So we're already working with some larger businesses on using and adopting our Conversational Agent and our other products, the Customer Hub and soon Helpdesk. So I think here, we're not going to wait nearly as long to bring that into the mid-market enterprise because we're already seeing a lot of interest.

Your next question comes from Brent Bracelin with Piper Sandler.

AB, talking about the moment you're in right now and I was hoping maybe you could help quantify the opportunity. You have a good base of 50,000 customer cohort mostly using marketing today. What does that cohort look like when they layer in service, when they layer in marketing, when they layer in the AI-first Helpdesk, when they layer in this AI-first Conversational Agent? Any sort of sense of what the revenue capture or kind of cross-sell could look like as you think about the full bundle?

Yes, sure. I'll start -- begin with like where I answered the last question. We think the opportunity in service and all the products we're building there is large. And it's sort of equivalent size, pretty much something that is potentially larger than marketing because it's not just responding to customer service request. It also has an element of helping customers in generating incremental LTV. So the way to look at it is like every business is going to have to buy the entire CRM stack. They're going to want all those products to work together on one data platform, whether that's marketing, all of the various marketing channels, then service and conversation and then analytics. And then they expect all of that software to become more automated. We're really obsessed with this idea of what does the autonomous CRM look like. I think that's going to start with B2B businesses with consumer where every experience is already at scale. You need more automation, more personalization, more optimization there. And I think if we can deliver better LTV to our customers, if they engage their consumers better, those consumers are spending more, then that gives us the ability to share in that upside. So we're not putting numbers on it yet, but I'd say like compared to some of the products that we've launched around marketing that fit in that marketing category, service is a real expansion. And I think we're going to find that with AI and its ability to do more and generate better results automatically, that's a further revenue per customer expansion as well.

Your next question comes from DJ Hynes with Canaccord.

Congrats on a nice quarter. So AB, look, you've always had this interface for brands for marketing and service and analytics use cases. But if I understand right, it now sounds like you also have more of a consumer-facing interface, right, with these personalized conversational AI commerce agents. You kind of talked about your long-term vision and why that's important. But does it create any conflict with e-commerce partners that I suspect maybe trying to do something similar on their own? Like how -- do those agents work together? Like help me understand how all the pieces kind of fit together.

Sure. No, I don't think it creates any real competition. In fact, we're collaborating with a lot of the platforms and partners that we have to help develop this technology and then help put it to work. So frankly, we're in a rush right now where we feel like every single one of our customers ought to be delivering to their customers their own personal agent. And right now, that doesn't really exist. If you go to the major e-commerce players, then like, yes, that technology is there. But for everybody else, it hasn't really been adopted yet. And when I talk to our customers about what's slowing them down, a lot of it is technically challenging. We're not sure what to do. We're not sure how to train these models, how to put them to work. And so actually, in that case, I think we've got a great team working on that. We're working with customers, and I actually think our partners are an accelerant there. We've actually worked with a lot of our agency partners on what -- how they can build up and see our practices and services around helping take conversational to all of our consumer businesses. So I look at our partners, the other -- and the platforms we work with, we all have the same shared mission, which is help our mutual customers be more successful, own their destiny. And I'm excited to work on it with them.

Your next question comes from Jackson Ader with KeyBanc Capital Markets.

Amanda, can we talk about the push and pull on gross margin? When -- I guess, with the launch of service and agents and kind of the new products that have a little bit more software gross margin, when should that be able to kind of outweigh some of the SMS headwinds? And then is there any impact from the smoothing of your revenue through the seasons? Would there be any kind of seasonal impact or a similar smoothing on gross margin?

Yes. Great question. Thanks so much, Jackson. In thinking about gross margin, I would probably think about 3 key drivers there. One is what's happening with growth in SMS, and we've spoken about that over time. The second is the investments that we've been making in infrastructure and the leverage that we're getting from those. And then the third is new products. Now new products, we are really excited about them, but I would not, at this point, build in meaningful revenue into this year's outlook for it, at least not to the extent that it would meaningfully shift gross margin. Now over time, it is exactly what you spoke about, which is we see some positive gross margin impact coming from those products, particularly marketing analytics, which leverages largely the same infrastructure as our existing e-mail plus data product. And then service, which is early days, and we're still working through the pricing, but again, have a positive view on the margins there. In terms of the infrastructure investments, which is a big benefit, we talked about in Q1 some of the investments that we had made and that we expected to get leverage for them over time as we continue to grow and scale with our customers. And sure enough, if you look at our gross margin in Q2, it was flat quarter-over-quarter. And what was going on within there, as we talked about in the prepared remarks, was the fact that we were getting leverage from those infrastructure investments, which offset some of the headwinds from SMS. So again, feeling good about where we're looking in terms of gross margin based on those trade-offs across the 2. Regarding the seasonality, I would not anticipate too much of a change because while e-mail revenue does tend to -- will be less seasonal with the profile enforcement and the fact that those grow more steadily, SMS is still a subscription that is based on spending volume. And we tend to see a higher portion of SMS in Q4, and that tends to be the biggest driver there.

Your next question comes from Derrick Wood with TD Cowen.

Congrats on a great quarter. Amanda, you had a nice seasonal rebound in both net new total customers and net new 50,000-plus customers. Just hoping you could double-click on this. Are you seeing more seasonality on the new customer side? Or did you see some sequential improvement? Or was there -- the change in pricing somehow factored? Just what would you chalk up to the sequential numbers being so strong and what that kind of means for seasonality looking into the second half on the customer side?

Yes. Sure thing. Great question, Derrick. And on the net new adds overall, similar to what we've spoken about in the past, the primary driver of that was in our entrepreneur segment because they tend to be the highest number of customers. So we did see also strengthened ads across SMB and mid-market and enterprise. So really, it is further evidence that the value proposition is just resonating across customer sizes. And specifically in terms of what's driving that growth in entrepreneur, I would point less to seasonality and more to the changes that we have been making driven by both our marketing and our product teams, thinking about how do we get increasingly dialed in on how we attract those entrepreneur customers in a really efficient manner and then also how we bring them through the product usage curve, graduating them from free customers to highly engaged paying customers who are making great use of the platform. So a couple of things that we did in Q2 that helped to drive that. One, we put in an earlier payment step into the process for new customers just to reduce friction in the free-to-paid conversion process, and that helped to improve that conversion rate. And we redesigned our Klaviyo log-in page, which is one of our highest traffic pages by testing out various marketing messages and improving product and feature discovery. And as a result of that log-in page change, the new design has been really, really positive. So really proud of the great work that the team has done to drive the strength in those overall new ads. On the 50,000 side -- as we've spoken about before, 50,000 adds are a mix for us of new customers who land directly into that cohort and customers who expand into that cohort. And what we saw this quarter was a record number of net new adds across both of those. The new lands was near our record highs, and the expansion was a record high number there. So as we long or have talked about the fact that customers expand their usage with us is something we're really proud of because it shows that as their businesses grow, we can grow with them. And a great example in that 50,000 cohort this quarter of expansion was a household electronics company we work with, who started with Klaviyo a few years ago with just e-mail. They've been growing their profile steadily ever since. And then in Q2, they added marketing analytics. And the combination of the organic growth of their business and the addition of the new product moved them up into that 50,000 cohort. So we love it when our customers are successful, and they expand their business with us.

Your next question comes from Elizabeth Porter with Morgan Stanley.

Great. As customers are standardizing on Klaviyo and you go with more of this 1 brain, 1 Klaviyo data platform, how does the go-to- market motion need to evolve? Is it still the same buyer? Or do you need to target kind of more decision -- senior decision-makers? It'd be great just to get your perspective on how the go-to-market motion evolves just as the product portfolio expands? Is there anything tactical we should watch out for that can better unlock the opportunity and just overall where you are in the journey?

Yes. That's a great question. Thanks, Elizabeth. So I look at the portfolio expansion of product -- the expansion of the product portfolio as really opening up more doors, more ways to work with the businesses that we're -- want to partner with and especially in the enterprise. So to give you an example, with marketing, we've traditionally gone through the CMO and the marketing organization. Now with the expanded portfolio of B2C CRM, we're finding a lot of those conversations are getting up level. More increasingly, we're starting to talk to Chief Digital Officers, CIOs, heads of technology. Why? Because they see the shared data platform, the brain, as you said, and they say, "Hey, look, we can actually use this in a lot of ways." And the fact that we're bringing multiple applications to the table across analytics and now the different service products we're going to offer, it starts to become more of a company-wide conversation. Now in a lot of the cases, we still say, hey, look, it was great to be -- we'd start in one area, and often that's still marketing. But we definitely anticipate over time that we're finding more customers who want to buy the entire Klaviyo stack at once. So we see a bit of that trend. And I think with what we're doing with conversational and our Conversational Agent, we actually think that can open up a whole new angle for us. That's such a new market, didn't exist a few years ago. And we find -- we have such great respect. We've earned the trust of our customers. And so when we say, hey, we've got something for you to help you deepen your relationship with customers that goes way beyond just customer service, a lot of those folks say, okay, well, let me introduce you to our team because you know what, we're actually trying to explore this category and understand who we should be going with looking forward. So our current mental model is like now it's not just through marketing, we might be going -- in some cases, may be a little more cost down. In other cases, we may be going through other parts of the organization that own the customer experience. It's given us now multiple vectors, multiple ways to start the conversation.

Your next question comes from Rob Oliver with Baird.

It's -- on the international strength, really strong numbers with the 42% year-over-year. And I think, Amanda, you called out accelerating growth in APAC. If you could just remind us, I know you guys have been rolling out languages at a really brisk pace. And where are we in terms of that language rollout? Are there major geos that still need to be rolled out? And then AB, I'd just be curious to hear from you. I'm sure mostly SMBs and entrepreneurs early on, but would love to get a sense from you of what kind of flavor of customer that could be. And if there's an opportunity for, say, multinational companies that now see an opportunity within the Klaviyo platform to do things multilingual and globally for you to really make a move upmarket via that path?

Sure. Thanks so much, Rob. Great to hear from you. Yes, we're very pleased with the results that we're seeing in international, overall 42% year-over-year growth outside of North America this quarter. And in particular, I would like to call out strength in 3 countries; Norway, Germany and Spain. Each of those countries, the new ARR that we landed in, in the quarter grew over 90% year-over- year. And we have rolled out new languages, and we will continue to roll out some new languages later this year. So look for more announcements coming there. In addition, an important part of what we've been doing in international is improving the product experience for international customers as well as rounding out the end-to-end customer journey across all of our go-to-market interactions with customers. So some examples of how that came to life in Q2, the release of WhatsApp, which was really important for our international customers where WhatsApp is much more prevalent as a mobile texting option. Simplifying multilingual e-mail campaigns. Many of our customers in Europe operate across multiple countries and multiple languages. And so we made it easier than ever for them to leverage their content across multiple languages. And then on the go-to-market side, we are rounding out the product offering in languages by supplementing it with things like the launch of new websites. So we rolled out German, Spanish and Italian website and hosted our big marquee customer events internationally this quarter, both K London and K Sydney. So looking ahead, what you should expect is we're going to continue to invest in that local language selling capability, continue to invest in growing our Dublin office and building out the partner network because as we build on those, it helps drive better -- even better returns and results from the language investments that we've made.

That's great. I'll add a little bit of color on the question around like, hey, is international unlocking new enterprise opportunities. And the answer is absolutely yes. I talked to a couple of customers in Europe and Asia where we're already working with them, their business in the U.S. And we started to have opportunities to say, hey, we've actually got a larger business outside the U.S., can you help? And we mentioned some of the accelerants, some of the investments that we're making in the enterprise. There's a lot of stuff we're doing. Amanda mentioned WhatsApp support in multiple languages. We're also doing a lot with data residency and data locality, spinning up new data centers outside of the U.S. to help address those needs. So I actually think that the enterprise growth we're seeing, it's not just within the U.S. I think we're going to see that it's also around the world internationally as well.

Your next question comes from Brett Huff with Stephens.

Congrats on the nice results. Early on when we picked you all up, we thought that international was going to be kind of the big Kahuna growth opportunity here in the near term. How do we define that? But it seems like now international kind of is accompanied by the AI conversational interaction, the service beta and then continuing upmarket growth. How do you all -- should we think about reshuffling how assiduously you're going after each of those? Or maybe can you rank them and kind of give us pros and cons on how you're approaching those?

Yes, sure. There's one takeaway here is that we very much believe that the future of CRM, and it's going to be led by consumer businesses, is going to be AI-driven -- going to be AI-first. Our belief is every company in the enterprise and the SMB in the next few years, they're going to adopt a CRM stack that is AI native from the start. And this means not just our data platform and some of the predictive analytics we do on top of that, but finding ways to make marketing more autonomous, self-optimizing, make customer service something where everybody gets their own agent. This, I think, is a massive opportunity that's right there. And it's all market segments. We see it in SMB. We see it in enterprise. It's global. It's not just here in the States. It's around the world. That is the number one opportunity that we see. And that's why I'm very excited about the work that we're doing with our service products, the work we continue to do with our marketing platform, expanding channels, maybe building on top of that the autonomy layer. So that's definitely number one. And then after that, I think we look at enterprise, a great area of growth, mentioned that's also global. And international, I mean, we still have a lot of runway there as well. So it maybe a little bit of the stack rank, but I'm very proud of what our team has done on the product side to really set the table for really being able to deliver this B2C CRM in one that is truly AI-first and can automate a lot of way a lot of the work, personalization, that end last-mile personalization to consumers.

Your next question comes from Parker Lane with Stifel.

AB, you've added a lot of AI enhancements to core products this year, including things like automated campaign follow-up, automation and conversations in SMS. How would you assess the adoption and utilization by different customer cohorts, the size of those customers? And how is that correlating with message volume growth today?

Yes. That's a good question. So the AI features that we've rolled out so far, we track for each of them this adoption rate. And I think what we're finding is our more advanced users, which tend to maybe skew a little bit more towards the enterprise and SMB, tend to be faster adopters. It's actually something we're working on. We find that a lot of the AI features we're building. So imagine things we rolled out like channel affinity. A lot of questions I get from customers are how should I go about using this? When is it appropriate? We actually think that's something we can automate, too. So rather than just giving people tools, actually telling them exactly when to do it, to use it, recommending it so that they can just accept those recommendations and automatically embed it in their marketing. So that's what's happening on the adoption side. And then what was the second part of the question?

The message volume growth...

Message volume growth, yes. I think it's still early for that. But I think what we're finding is the quality of the messages that folks are sending has increased quite a bit. We have a lot of stories from customers that are now, for instance, using the channel affinity feature that we rolled out. And it's helping them prioritize e-mail versus SMS versus other channels. And it's leading to better consumer interaction. And that's why the key thing for us is it's actually how much lifetime value as we often talk about attributed revenue back to Klaviyo, how is that growing, that's ultimately the metric that our customers care the most about. So that's the metric that we measure as well.

Your next question comes from Siti Panigrahi with Mizuho.

This is Phil on for Siti. I just wanted to ask for all these new products like Helpdesk, Conversational Agent, the Customer Hub, how would you stack rank them in terms of revenue potential over the medium term? And then on the MCP server, what's the early feedback been? And any initial thoughts on how you'd price this?

Yes, terrific. So out of the 3, I think it's early, so I'll give you some rough thinking on this. We're very bullish on this idea of every business being able to offer their consumers a personal AI, a personal agent. And that's going to be driven, we think, primarily by our Conversational Agent technology. So I expect that there's going to be an enormous amount of value there. We're also very excited about what we're doing with Customer Hub. But the Customer Hub actually has the Conversational Agent embedded in it. So sometimes you can think of those 2 working together. So we see that as additional revenue opportunity. And then the Helpdesk piece, frankly, we talked to customers that have said, look, when we think about the customer experience and customer service, we know that, hey, there's still going to be moments where our Conversational Agent needs to -- it's been too challenging of a question for it as it exists today. And so that's what our Helpdesk helps solve for. But the thing I'm most excited about, I think consumers are most excited about, our customers are most excited about is the idea of extending customer service beyond just questions about where are my products, where are my orders, very tactical thing and into more forward-looking use cases, things that feel more like marketing, they feel more value-add to the end customer. And then MCP, on that, that actually -- we're not intending to price and package that right now. What's really cool about that is, I talk to customers, they're using that with the LLMs, their personal LLMs. And we're [ finding people ] just another way for people to ask questions about the data inside Klaviyo. And it's actually -- it's been really interesting. We're learning a lot about the patterns or the kind of questions that people want to ask. And that's -- we're using some of that feedback loop in terms of how we build kind of agentic technology inside Klaviyo. So for instance, we're seeing people use it to, hey, analyze my recent campaigns. Tell me which performed best and why. We love making that data accessible to our customers. It's also giving us great examples of things that we can build into our analytics products or into our recommendations. And this will all help power the recommendations that will ultimately make things like marketing more autonomous or help improve automatically those conversations that our Conversational Agent is having with customers.

Your next question comes from Arjun Bhatia with William Blair.

AB, maybe for you. You started off, I think, in your prepared remarks, you mentioned that you guys are seeing some pretty good traction in terms of incumbent displacements. And obviously, we can -- it seems like we can see that in the net new customers. And I imagine some of those are also landing in that 50,000-plus cohort. But I'm curious as you look out at the market, where are we in the incumbent kind of replacement cycle? Where are the legacy players? Like how much opportunity is there still on that front? And when you look at that opportunity, is that mostly larger enterprises? Or do you still see a lot of room to go and the kind of longer tail of entrepreneurs and SMBs?

Yes. So if I could -- so I see a lot of room in both areas. And I'll kind of say there's a little bit of a difference in the opportunity. So amongst our entrepreneur and SMB customers, we still think that there's always a ton of businesses starting up in the retail and commerce category. But we see even bigger opportunities outside of commerce. That's why some of the partnerships and integrations that we shipped this quarter around Guesty, vivenu, I think those are -- they open up new markets for us. So we see a lot of opportunity even outside of pure retail or pure e-commerce. And then in enterprise, we've made a lot of progress in the last couple of quarters. But the more we look at it, we're just getting into really that enterprise segment, we see a lot of opportunity there. And the things I mentioned and Amanda talked about investments that we're making, both on the sales and marketing and product engineering side. So things like we talked about custom object, allowing for more bespoke or more custom enterprise data models, allowing that data to be inside Klaviyo really matters. The work that we're doing to better support mobile applications and mobile experiences and rounding out the true -- all of your marketing channels in one place. I feel really good about the progress we're making there. As we do that, what we're finding is that customers say, okay, great, you're meeting my requirements. Obviously, you've got the Klaviyo data platform. You have everything you're doing around AI and then obviously, the ease of use, everyday usability that comes with Klaviyo. That is turning into more social proof points that's helping drive our growth in the enterprise segment.

And an example recently of a customer who came to us from one of these legacy providers was a customer of ours who is in the food space. And with their legacy technology, what they were finding was that it was really cumbersome. And whenever they wanted to execute on even just very basic marketing tests, they needed developer support in order for the marketers to put their ideas into action. And the other thing that they were dealing with was that they had a totally separate data warehouse and maintaining the data integrations was a big burden on them. So they came over to Klaviyo. They actually replaced 4 different products and moved into Klaviyo not only for e-mail but also for our CDP, the advanced Klaviyo data platform. And as a result, 2 things happened. One is they saved over 50 developer hours per month because the Klaviyo system is just so much easier and self-enabled to use; and two, more importantly, it empowered their marketers. So now they can move faster and generate more revenue. And that's what we hear consistently from customers is that they want to reduce their reliance on development teams and increase their ability to move with speed and engage their customers.

Your final question comes from Scott Berg with Needham & Company.

This is Rob Morelli on for Scott Berg. Congrats on the quarter. Excited to see the addition of support for new channels like RCS and WhatsApp. I know it's still might be early days, but can you touch on customer feedback and interest so far? Is it just skewing more upmarket? Or is it relatively broad-based? And then additionally, apologies if this was touched on earlier, but any insight you can provide on the potential impact to gross margins with the increased adoption of these channels?

Yes. That's great. I'm happy to cover that. So with RCS, we think about this SMS 2.0, the future of text messaging and WhatsApp. WhatsApp is obviously opening up a whole new communication channel that's especially popular outside of the U.S. But for both, it's really -- it's allowing for a lot more enrichment of the end experience that a brand can deliver to a customer. So we're very excited about both. We're seeing adoption amongst SMBs and our larger mid-market and enterprise customers. Everybody is interested in that. And so I'm very, very happy about the work that we've done to support those channels and some of the new media type experiences offer. And then in terms of the gross margin impact, it's still early, but I think the gross margin profile is going to end up looking somewhat similar to what we see for SMS. For RCS, I think it was almost like -- will eventually be like a direct replacement for SMS in most places. And we think of WhatsApp as a messaging channel that's comparable to SMS, but it's more of the default in certain markets.