Klaviyo Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 12 speakers on the call.

Operator

Afternoon, and welcome to Klaviyo's Third Quarter of Fiscal 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. With that, I'd like I'll turn the call over to Jack Grant, Senior Director of Investor Relations and Strategic Finance.

Speaker 1

Thanks, operator. I'm excited to welcome you to Klaviyo's Q3 2023 earnings call. We will be discussing the results announced in the press release issued after the market closed today. Please refer to our Investor Relations website at investors. Klavio.com for more information and a supplemental presentation related to today's earnings announcement.

Speaker 1

With me on the call today are Andrew Bialekki, Co Founder and Chief Executive Officer and Amanda Whelan, Chief Financial Officer. During today's presentation, 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 as amended, including statements concerning our outlook for the Q4 of fiscal year 2023 and the full fiscal year ending December 31, to 2023. These forward looking statements reflect management's current beliefs, expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. These risks include, among others, our ability to achieve future growth and sustain our growth rate, our ability to successfully execute our business and growth strategy, our relationships with third parties, our ability to attract new customers, retain revenue from existing customers and increased sales both from new and existing customers. Success of our marketing and sales strategies and business outlook, including our financial guidance for the Q4 and full fiscal year of 2023.

Speaker 1

For a discussion of the material risks and uncertainties that could affect our actual results. Please refer to the risks identified in today's press release and our SEC filings, both available on 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 and posted on our Investor Relations website and our SEC filings, which are also available on our Investor Relations website.

Speaker 1

With that, I'll now turn it over to Andrew. Thanks, Jack. Thank you for

Speaker 2

joining us today on our first earnings call as a public company. We are excited to share our Q3 results as well as an overview of our business. We delivered a strong quarter on both the top and bottom line. I'd like to start by thanking all of our customers, partners as well as both our long term and new shareholders for supporting our mission. I also want to extend a special thank you to all the Klaviyos out there, that's what we call Klaviyo employees, who work hard to deliver for our customers every day.

Speaker 2

We believe the best businesses are built by teams who get in the weeds with customers and deliver products and experience that customers bring about. As this is our first quarterly earnings announcement as a public company, in case you are new to our story, I'll spend a few minutes introducing Klaviyo and then I'll provide some of the highlights from the quarter. Later, I'll turn the call over to Amanda Whelan, our Chief Financial Officer, to cover our financial results in greater detail. She'll also be providing you with our Q4 and full fiscal year 2023 outlook before we open the call for Q and A. Klaviyo is a platform that powers smarter digital relationships for businesses.

Speaker 2

Palladio gives our customers the tools they need to activate their first party data and connect with customers through personalized experiences across email, SMS and mobile apps. We are able to measure the revenue driven by those messages and we use artificial intelligence and machine learning to guide our customers on how to improve their marketing. We're giving businesses a scalable brain and voice to connect with each of their end consumers personally and treat them like they're the most important person in the world. And because the light consumers come back more often, for revenue engine for businesses. Our revenue engine powered by data those businesses own and systems and algorithms we've developed that show them how to put that data to work.

Speaker 2

Ed Hallen and I founded Klaviyo in 2012 to empower builders and creators to own their destiny. Whether a business is creating a product or service, we aim to maximize the experience they can offer consumers and their growth. Ed and I came from enterprise software, but we both love design and making really approachable products. Klaviyo was architected and designed for any company, big or small, to drive outsized outcomes. We started by building a database to house and explore customer data and that was the first product we sold.

Speaker 2

We soon realized a lot of our customers wanted to use our database for marketing, so that became the first application we built. This vertical integration of the data and marketing layers gives our product advanced capabilities and makes them easy to use. The foundation of our product is our underlying customer data store, which is optimized for storing, processing and analyzing large volumes of first party consumer data. Our data store has a flexible set of APIs for developers to build against as well as more than 300 native integrations. We process more than 2,000,000,000 events per day, all of which are accessible to our marketing applications and third party applications built on top of Klaviyo.

Speaker 2

We believe our software shouldn't just make customers more productive. It should improve their ideas and help them generate new ones. As an example, we offer our customers benchmarks that use artificial intelligence to provide comparison to an anonymized set of similar peer businesses that they can use to identify opportunities to enhance their marketing. In addition, we use generative AI to suggest specific text and images for marketing campaigns and other artificial intelligence techniques to generate individual product recommendation marketers can embed in their messages. As our customers use Klaviyo to create compelling content for their consumers, we aim to make sure they always have an AI assistant by their side, both to improve their ideas and help them when they're stuck.

Speaker 2

Klaviyo ended the Q3 with over 135,000 customers. With a large percentage of our customers being small businesses in e commerce and retail. While many of our customers started with us when they were small, We're really proud that we have helped power their rapid growth. We've built our infrastructure to scale with them well into the mid market and enterprise. At the end of the Q3, we had 1699 customers generating ARR of over $50,000 per year, which was up 89% year over year.

Speaker 2

This growth has been fueled by both expanding use of our platform by our customers and landing new larger accounts. We are seeing customers consolidate more of their marketing software spend onto Klaviyo, with some of our largest customers over $500,000 in ARR. As of the end of September, Over 7,300,000,000 consumer profiles are stored in our data platform. These profiles represent a complete history of the relationship between a business and a consumer and are updated in real time. Inclavio often becomes the single system of record for our customers.

Speaker 2

While we started with marketing via email, in 2021, we added SMS as a second marketing channel And this year, we've added mobile app notifications. In addition, we launched the Reviews product, building out our suite of marketing products. We believe all of these applications and channels are better on the same platform that they should work together and Klaviyo should be the platform where a business build smarter digital relationships. We allow our customers to meet consumers where they are with the right content at the right time and through the right channel. By combining easy implementation, rapid time to value and clearly attributable outcomes, which we measure and refer to as Klaydio attributed value or abbreviated KAV.

Speaker 2

We're able to show substantial ROI to our customers. We've shifted the mindset from generating opens and clicks to driving revenue. We pride and measure ourselves on the ROI that we help our customers generate. Turning to our ecosystem. Our success has been driven by building products that customers rave about.

Speaker 2

Our products and the ROI we generate for our customers has allowed us to build a very efficient product led model. 1 of the core parts of this model is our great ecosystem of partners, marketing agencies and system integrators. Over time, we've also built deep product integration and mutually beneficial partnerships with most major commerce platforms. These partners love working with us because we complete the product picture and provide the tools to make our mutual customers more successful, in turn driving more revenue for them. In addition, we have an ecosystem of over 5,000 marketing agencies and system integrators For experts at Klaviyo and help our customers get the most out of our platform.

Speaker 2

And finally, a large number of developers and software companies have integrated into and built on top of Klaviyo to extend our platform's capabilities. All of these partners Expand what's possible with Klaviyo in addition to introducing businesses to us. These product led and ecosystem led motions are the foundation of our efficient go to market engine. Most of our demand is inbound, largely from word-of-mouth, partners and other platforms. Our self serve and low touch sales model keeps customer acquisition costs low.

Speaker 2

As larger businesses have come to us, We built sales and customer success teams of experts to ensure businesses with more complex requirements are successful and to educate and attract more of those businesses to our platform. Our customers are buying both our products and the overall ecosystem we are building. We're very proud of the community of customers and partners that's grown around Klaviyo, and we will stay close to that community and continue to grow it. With that background on our business, I'll briefly cover some Q3 highlights. We delivered strong growth during the quarter with revenue of $175,800,000 growing 48% year over year.

Speaker 2

We are driving strong growth at scale while maintaining operating discipline with a 10% non GAAP operating margin. We continue to see the power of our product and ecosystem led model I mentioned and remain focused on driving durable efficient growth. Our strength in the Q3 was due to growing our customer base, Healthy net expansion with our customers and continuing to grow market share in the mid market. We're also very excited to release our first in We executed well this quarter and we are set up to deliver for our customers during the holiday season, the most important time of year for many of them. I'd like to highlight a few customer wins that illustrate these themes.

Speaker 2

In the Q3, we drove further momentum up market. A publicly traded enterprise with multiple brands in its portfolio decided to standardize the email and SMS marketing of its home and outdoor segment with Klaviyo. These brands collectively generated nearly $1,000,000,000 in revenue last year. They were looking for a platform that combines best in class functionality with an easy to use platform that would allow their marketing team to move faster, create more personalized experiences and deliver high quality revenue attribution. Our tight integration with their commerce platform and our ability to deliver multi region support were 2 of the reasons we were able to win.

Speaker 2

We're continuing to see customers of all sizes interested in consolidating their tech stack onto Klaviyo due to the combination of our advanced features and ease of use we provide to our customers. Existing customers are also coming to us to consolidate their tech stacks. During the quarter, Way, a brand within Procter and Gamble and a long tenured customer expanded their relationship with Klaviyo significantly by adding the SMS channel to their existing email footprint. This opportunity came to us because of our great relationship with a partner who manages Way's e mail marketing. Way was looking to consolidate their channels with 1 provider as they had a different provider for SMS.

Speaker 2

Wey wanted to better enable their team with a single source of truth on their customers and to minimize the amount of time they spend solving technical challenges. We're excited about the opportunity to keep partnering with Way as they grow their business. As we look beyond our core retail and e commerce market, We've begun to see more businesses take advantage of their first party data to build smarter digital relationships. One of these wins during the quarter was the San Francisco Marathon. They're looking to better segment potential participants to ensure they're reaching relevant audiences.

Speaker 2

This is one of the many examples of businesses across verticals wanting to better personalize experiences for their customers. Moving on to products, our team continued our rapid pace of delivery during the Q3. We have a few recent product announcements I'm excited to talk about. First, we continue to add more artificial intelligence features to our platform. During the quarter, we started to roll out a new natural language interface our segmentation builder.

Speaker 2

This allows customers to define queries into their data without specific knowledge of the underlying data structure. For example, a customer could ask, show me consumers who were previously frequent and loyal customers, but haven't bought anything in the past few months. We believe these kinds of features increase the accessibility of our software and the number of experiments a business can run. Another recent feature launch allows our customers to better take advantage of our data infrastructure and attribution is our launch of global holdout groups. This feature allows our customers to create control groups for measuring the incremental uplift their marketing activities are generating to more effectively understand their efficacy.

Speaker 2

In October, we expanded SMS coverage to Ireland. This marks the 6th country we've entered with our SMS offering and we're excited to roll out this channel across more countries. Finally, on the product front, During the quarter, we also announced the launch of our CDP products. It's early days and we're rapidly expanding the features that we offer. Our customers are particularly excited about 3 areas, governing their data, publishing normalized data to other systems and running customer analyses directly inside of Klaviyo.

Speaker 2

For example, one business use our CDP to natively build an RFM model, which is our recency, frequency, monetary value model and use that model to identify an opportunity to target lapsed and inactive customers. They use segments generated by our model to run new campaigns that drove an incremental 9% of KAV during the month of September. With our CDP, We're going to break down the barriers between data analysis and actioning those insights. Turning to our team. During the quarter, Jamie Domenici joined as our new Chief Marketing Officer.

Speaker 2

Jamie comes to us from Go to, formerly LogMeIn, and has a decade of experience at Salesforce in marketing leadership roles. Jamie is focused on expanding our ecosystem and community to drive more awareness and customers to Klaviyo. I'm very excited about the team we have and the talent we've been able to attract. While we're excited about these recent developments, as we like to say internally, we're only 1% done. We're focused on delivering for this holiday season and beyond, building a great business and driving returns for our shareholders.

Speaker 2

With that, I'd like to turn it over to Amanda to cover the financials in more detail. Manav?

Speaker 3

Thanks, Andrew. Today I will provide a brief overview of our Q3 financial results and discuss guidance for our 4th quarter and full 2023 fiscal year. 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 measure. As Andrew noted, we are pleased with our solid Q3 financial performance.

Speaker 3

Consistent with our financial framework, we again saw rapid growth at scale in an efficient manner. Before I go into the details of our Q3, let me walk you through our business model. We generate revenue through tiered subscription plans that are based on the number of active consumer profiles that customers store in our platform, which reflects the amount of data they're storing with us and the number of email and SMS messages that they sent. We also currently allow for unlimited push notifications as part of our email subscription plans. Today, the vast majority of our subscriptions are monthly.

Speaker 3

As a result, metrics such as calculated billings, deferred revenue and remaining performance obligations are less relevant to our business model. Once we land a customer, there are several levers to expand our relationship with them. Our business model was designed to align our success with our customers' success. As our customers' businesses grow, expanding the number of consumers they're serving and the number of messages they're sending them, we've made it easy to expand their usage of our platform in a self serve manner. Our revenue also expands when customers add additional channels to their subscription such as our SMS offering or when new brands or business units within their overall portfolio start using our platform.

Speaker 3

The success of our land and strategy is evident on our net revenue retention rate, which has been at or above 115% for 10 consecutive quarters. On a quarterly basis, we do exhibit some seasonality. Historically, we have seen our largest sequential growth in the 4th quarter as a result of Black Friday and Cyber Monday. This is a critical time for our customers when they typically increase communications with their consumers. This drives increased usage of our platform, which results in more revenue in Q4.

Speaker 3

You'll also see this in our financial results, where historically our Q1 revenue appears more muted sequentially due to this seasonal pattern. With that backdrop, let me turn to our Q3 financial results. We saw total revenue during the quarter of $175,800,000 representing annual growth of 48% and non GAAP operating income of $17,800,000 representing a non GAAP operating margin of 10%. Our growth is powered by 4 main vectors: adding new customers, expanding with those customers, growing in the mid market and growing internationally. Our Q3 performance was strong on each of these factors.

Speaker 3

We now serve over 135,000 customers, up over 20% year over year. Those customers continue to expand their business with us, resulting in net revenue retention of 119% in Q3. We continue to drive strong growth in the mid market and finished the quarter with 1699 customers generating over $50,000 in ARR, up 89% year over year. Finally, international growth is outpacing the overall business. In Q3, EMEA and APAC represented 31% of our revenue, up from 30% in Q3 of last year.

Speaker 3

On the top line, as a reminder, late last Q3, we rolled out a price increase. This contributed high single digit 1,000,000 of dollars in revenue in each of the last four quarters. Q4 will be the 1st full quarter lapping the benefit of the price increase. The overall health of our customer base remains strong. Our gross retention remains consistent from Q2 to Q3, which we view as a testament to the value we provide to our customers.

Speaker 3

Moving down the income statement, I will be discussing results on a non GAAP basis, which excludes stock based compensation expense, amortization of non cash prepaid marketing expense associated with our Shopify partnership and restructuring expenses unless otherwise noted. Gross profit for the quarter was $140,300,000 representing gross margin of 80%. This marks a 7 point improvement compared to Q3 of 2022. We continue to see the benefits of our efforts around system and cloud engineering optimization. In recent quarters, we have migrated some of our infrastructure onto updated offerings, which provide enhanced reliability and scalability for our customers.

Speaker 3

This not only provides for better customer experiences, but also increases our efficiency. Turning to operating expenses. Sales and marketing expense was $56,200,000 or 32% of revenue for the quarter. As we discussed in our IPO roadshow, we will be investing in sales and marketing to drive durable growth. We're expecting to ramp up marketing spend and add sales capacity, particularly in the mid market.

Speaker 3

As we do so, We will continue to be focused on efficient unit economics. R and D expense was $35,000,000 or 20 percent of revenue. We're committed to investing in a number of initiatives here, including ongoing improvement of our products for customers, further developing our AI capabilities and launching new products such as CDP. Finally, G and A expense was $31,400,000 or 18% of revenue. During the quarter, we had roughly $6,000,000 in one time expenses related to the IPO.

Speaker 3

For Q3, our operating was $17,800,000 representing an operating margin of 10%. We also generated free cash during the quarter of $21,900,000 This marks our 4th consecutive quarter of generating both positive non GAAP operating income and free cash flow. This further supports our belief that we do not need to choose between growth and profitability. Finally, turning to the balance sheet. We finished the quarter with $724,000,000 in cash, cash equivalents and restricted cash with no debt.

Speaker 3

Turning to our outlook for both the Q4 and full fiscal year 2023. For the 4th quarter, we Tax revenue to be in the range of $195,000,000 to $197,000,000 representing growth of 34 to 36% year over year. As a reminder, due to the lapping of our price increase at the end of Q3 'twenty two that I discussed earlier, Our year over year top line growth rate will face natural headwinds moving forward as compared to the prior 4 quarters. We expect non GAAP operating income to be in the range of $14,000,000 to $17,000,000 representing operating margin of 7% to 9%. During Q4, with increased usage of our platform, we expect to see higher cost of goods sold due to both outbound spending costs and cloud computing costs.

Speaker 3

In addition to higher sales and marketing costs due to the go to market investments I previously mentioned. For the full year, we are guiding revenue to be in the range of $691,500,000 to $693,500,000 representing growth of 46% to 47% year over year. We expect non GAAP operating income to be in the range of 75.9 to $78,900,000 representing non GAAP operating margin of 11%. At the midpoint, this represents an improvement of over keen points compared to our fiscal 2022 operating margin. Lastly, with Steve Roland and Jamie Domenici now on board, We're going to keep investing in a disciplined manner to grow our market share due to the large market opportunity that we have ahead of us.

Speaker 3

Looking ahead into 2024, on an annual basis, we expect that our non GAAP operating margins will remain relatively consistent with 2023 and you should not expect to see meaningful leverage. As the year progresses, we will also evaluate incremental go to market investments opportunistically. Before we close out, I'd like to share a few other notes to help with your models. During the quarter, we had an acceleration of stock based compensation expense related to the vesting of RSUs in connection with our IPO. This resulted in a charge of $300,000,000 during the quarter.

Speaker 3

For the Q4, we anticipate stock based compensation to be in the low $40,000,000 range. Lastly, from a share count perspective, we expect our basic weighted average shares outstanding to be approximately $61,000,000 in Q4 $243,000,000 for the full fiscal year. We expect our diluted weighted average shares standing in Q4 to be approximately $299,000,000 $283,000,000 for the full fiscal year. It is important to note that this does not include the full impact of issued but unvested securities. We've provided a table on the press release that shows this reconciliation and our fully diluted shares outstanding of 309,000,000.

Speaker 3

In connection with the Shopify agreement, We issued Shopify a total of $15,700,000 warrants, of which $10,200,000 have vested and $5,500,000 are currently unvested. The remaining warrants vest on a quarterly basis in equal increments of approximately 344,000 through July 2027. We closely monitor our new share and are focused on ensuring we maintain low levels of dilution. To summarize, we delivered strong results during the Q3 with rapid growth on the top line and a healthy bottom line. We are investing strategically behind our key growth initiatives, including investing in our products, Growing our market share in our core market internationally and in the mid market.

Speaker 3

We are excited about the long term opportunity ahead of us and we are focused on executing against it for our shareholders. Now I'll turn it back over to Andrew for some closing comments.

Speaker 2

Thanks, Amanda. A few final comments before we open it up for Q and A. I want to again thank the entire Klaviyo team. I'm proud of their work and their dedicated focus on delivering for our customers. We are executing against our mission of empowering creators to own their destiny.

Speaker 2

And that concludes our prepared remarks. Operator, please open the line for questions.

Operator

One question per analyst and re queue later if you have additional questions. Management wants to allow for time for everyone to ask questions. Your first question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open.

Speaker 4

Hi, good evening and welcome to the public market. Amanda, you may comment on the overall health of your customer base being strong. Is there fair amount of debate in the investor community about Health of the S and B ecosystem right now and the consumer spending environment overall. I'd love to hear about any nuances that you're seeing in the data.

Speaker 2

Yes. Thanks, Gabriel. Thanks for the question. So I'll touch on some of what we're hearing and seeing from customers. Generally speaking, we work with a variety of diverse set of businesses, right, like you said, across geographies, across business stages and increasingly across verticals.

Speaker 2

Overall, our customers are very healthy and their usage of Klaviyo is growing. We obviously spent a lot of time looking at net retention trends and drivers of that. We shared that NRR was 119% for the quarter and we're happy with that. There are a couple of key drivers out there that I would point to that are the reason that's so strong. The first is Our customers are growing the number of digital relationships that they have with consumers.

Speaker 2

And because that tends to just increase over time And we price our e mail product based on that number of customer profiles. As that increases, they tend to spend more. And then second is a lot of the businesses I talk with, they're looking to consolidate. This is one of the most consistent themes I hear talking to customers. They don't like the proliferation of software tools out there.

Speaker 2

So we're also seeing a lot of those folks choose to consolidate down to us. That simplifies their life. And so typically what that means is they may start with email, then they'll add SMS and then increasingly we're starting Customers are experimenting with our reviews and CDP products adopting those. So one of the things actually we're trying to do for those folks is as they're moving more of their spend to Klaviyo is making it easier for them to start with any of our products, so not just necessarily just email. So I think those are 2 big drivers of what we're seeing amongst our customers.

Operator

Your next question comes from the line of Keith Weiss with Morgan Stanley. Your line is open. Excellent.

Speaker 5

Thank you guys for taking the questions and congratulations on a really solid quarter. I wanted to dig into kind of one metric that really or 2 metrics actually that stuck out is really strong. One of them being the customer additions above 50 ks. It really kind of indicative of that move up market. My math, you added like 291 new customers in that Cohort and that's the biggest increase we've seen in sort of the history that we've been following you guys and up a lot from what you've seen historically.

Speaker 1

So I was wondering if you could

Speaker 5

dig into a little bit of What drove that? It seems a little bit early for like CDP to be driving it, but perhaps the consolidation is really starting to have a more positive impact on the overall results. So question number 1 is, can you dig in a little bit about what's driving there? Question number 2, the other Standing metric was gross margins up 7 percentage points. With SMS becoming a bigger part of the mix, I thought those are going to be going the other way.

Speaker 5

Talk to us a little bit about how durable that gaining gross margin is? Should we still be expecting incremental pressures from SMS, particularly as we go into Q4, which

Speaker 2

Great. Thanks for the question. I'll talk a little bit about Our growth in the mid market and then May will talk about gross margins. On the mid market side, yes, the reason we share that number, number of customers spending over $50,000 a year with us. We're really proud of that number, almost 90%.

Speaker 2

We're very happy with that. And there's a couple of things driving it. I think you've got it right. There are some smaller businesses that are consolidating more spend with us. We're just getting a greater share of wallet.

Speaker 2

But also a big part of that is we're just we're landing with larger and larger enterprises. And I think the reason we're seeing larger companies choose Klaviyo is 1st and foremost, we built a product that's flexible and scales. We're processing more than 2,000,000,000 events a day for those customers, even higher during peak periods. They're using that then to run lots of queries. We're updating Tens of billions of updates to the various analyses that folks have built on top of Klaviyo every single day.

Speaker 2

And then they're obviously actioning that data, They're sending over 150,000,000 messages. So think email, SMS and mobile notifications, 150,000,000 Millian, sometimes you start peak hours. So we definitely scale that combined with the underlying customer data store that we built that's very flexible. I mean we can cut for the larger businesses, we can cover pretty much any idea they have on how they want to treat their customers, we can do it. So Scale and flexibility really matters.

Speaker 2

We're seeing a lot of larger folks. They really like this idea of the integration of the data layer and the marketing layer. That's critical in the enterprise. It means that your entire tech stack is working together, which means you can do more personalization, you can measure what's happening better. I And you can actually get more out of the artificial intelligence algorithms that we've designed to help point you in the direction of like, hey, what's the next best action.

Speaker 2

So anyway, those are some of the things we're seeing in the market for why that number is so good and we're very proud of that.

Speaker 3

Yes. Thanks, Keith. And To your question on gross margin, the 2 biggest drivers of gross margin during the quarter were ongoing system optimization efforts and negotiating volume based discounts with some of our infrastructure providers. So we finished the project in Q3 that finished moving the last of our segmentation data over onto an updated infrastructure and we really did that to increase segmentation speeds in the product. It also helped our cost of goods sold.

Speaker 3

The other thing happening is that as we have grown, we've additionally been able to negotiate volume based discounts with our infrastructure providers, both in Cloud hosting and in sending costs. And this was our 1st full quarter where we saw the benefit of those recent renegotiations. As you mentioned, the counter to that is that SMS as a channel continues to grow in mix and there are higher costs associated with SMS as a channel. So we're cognizant of that both in Q4 where we tend to see higher SMS usage. So we have built it into our guidance for Q4 as well as over the long term.

Speaker 3

So the long term model that we provided at the IPO assumed continued penetration of SMS. That being said, we're going to continue as we grow to be really disciplined about unit economics. We can and do Walk away from business in that channel if we don't like the margin profile or the unit economics that it comes with. So over the long term, we're just going to continue making sure We are solving for customers, helping them to consolidate channels and growing businesses where we're really happy with the economics of them.

Operator

Your next question comes from the line of Tyler Radke with Citi. Your line is open.

Speaker 5

Check-in on some of the new products, obviously CDP's It's been out there probably one of the more recent products. But if you look out over the next 12 months, I was wondering if you could kind of stack rank or rank order. The key drivers that you see is driving that net retention rate, which I think held in here at 119%. Thank you.

Speaker 2

Yes. Thanks, Tyler. So, on the product front, I think expansion customers adopting more of our products and then using more of them, those are going to continue to be big drivers of net retention. And we're very focused I'll get to I'll talk about TV in a second, but we're still very focused on improving our email, SMS, In mobile notifications products, we think there's a big trend of businesses consolidating all those channels down to one marketing software provider. So we're very focused on that.

Speaker 2

Now I'm really excited about CDP and reviews. So I'll start a little bit with CDP. I mentioned during the opening remarks, there are 3 things folks are excited about. They want to govern data with us. They want to stick they want to publish that data out to other systems.

Speaker 2

For example, we have customers that are using the data inside of Klaviyo. They're publishing out the advertising networks Their customer service software also provide a better experience for end consumers. And then finally, they're using to explore and analyze their data. And the last one, this idea of like exploring and analyzing your data within Klaviyo, within kind of the same ecosystem, I'm really excited about that. I mentioned an example of figuring out how often customers buy, who's lapsed And then critically being able to create a marketing campaign or automation right away.

Speaker 2

We're very big believers that our marketing stack plus our CDP. This is going to break down those walls that exist between inside of a business, the folks that do analysis and then how you action that. And that's huge. It's huge for small businesses and for large enterprises. So we're working on with our CDP really tightening that cycle from insight to action.

Speaker 2

And then for reviews, it's again, it's one of those things where it works really well with our marketing product. It's an opportunity reviews are an opportunity for a business to learn more about their consumers and then use that data. So what's really great is you can use Klaydio's marketing software platform to then collect reviews and then that review data can be used to So this is real like kind of viral loop that's there. So as you think about it like we went from just email, we added SMS, We've added mobile and push notifications. We've now added reviews, which we kind of think was another marketing product that folks buy and now our 1st data infrastructure product CDP.

Speaker 2

I mean, we're building out the set of products that we think any retail consumer business can build and grow on top of. So we think that's going to be a tailwind for NRR for a long time to come.

Operator

Your next question comes from the line of Raimo Lenschow with Barclays, your line is open.

Speaker 6

At the moment, congrats from me as well. Great first quarter. At the moment, you have quite a bit of overlap on the Shopify customer base. But obviously, you talked about moving mid market as one of the options that you have here. Can you talk a little bit about the how do you think that move Higher in terms of how high can you go, what are the natural limits?

Speaker 6

Obviously, on the prepared remarks, you mentioned some very large customers. Like how should we think about That and what's potentially still needed on the product to kind of achieve that or is it more marketing setup? But yes, That would be great because it seems like a very interesting opportunity longer term. Thank you.

Speaker 2

Yes, sure. So as I mentioned when we talked about mid market, So on the product side, we feel like we've got a product that is competitive. And the fact that we're combining these two things larger enterprises really want to work together That's back end data platform with marketing software with their front of office applications. We think that's a winning combination. And so now as we move up market with Shopify, I mean, first I got to say thanks, they've been an amazing partner as we've grown Klaviyo.

Speaker 2

We've worked with them since we start to move up into the mid market. We've also found like other partners, other agencies, we started to do more work with system integrators. All folks that are using Klaviyo can help connect us to customers. So I think that both with Shopify and with others, We love this ecosystem led model of growth. That's been a big reason why we've been able to be so efficient as we've grown.

Speaker 2

And we're going to carry that over as we move up into the mid market and then into the enterprise. And while we're really focused on the mid market today, There's no I mean, we definitely have the ambition to stair step our way up into the enterprise.

Operator

Your next question comes from the line of C. T. Panigaghi at Mizuho. Your line is open.

Speaker 6

Thanks for taking my question. As you are heading into your strong seasonally strong quarter and holiday season, what sort of visibility you have? What sort of trends you are seeing right now? Amanda, you talked about price lapped and that's what the guidance implies deceleration, but How much conservatism also baked into your guidance and what sort of visibility you have heading to this holiday trends?

Speaker 2

Great. So as I mentioned, I'll give you kind of the quality of what I'm hearing from customers and maybe I can speak a little bit about our guidance. We work with a diverse set of businesses. And so obviously there's some variation in how businesses are doing across those various variables, geographies, stage and even industry. Since so many of our customers are in retail and e commerce, what we're hearing is they're very focused on the holiday season.

Speaker 2

This is a very important quarter for them and we're working hard to support them and be that revenue engine for the months that matter most. We're feeling good about our ability to help them grow and have a great holiday. And then on the backs of that, we are still very big believers in these two long term trends Businesses, consumer businesses wanting to get closer to customers, build direct relationships with them. And then also this consolidation, this merging of their data stacks and their marketing stacks. So that's what we're seeing on the field.

Speaker 2

And Amanda, do you want to talk a little bit about that?

Speaker 3

As regards to our guidance, I would think about a few things. The first Is that just as you mentioned, it's important when looking at our Q4 to remember that we're lapping the price increase from last year, which contributed as we said high single digit 1,000,000 of dollars in each of the last four quarters. So as you see in our guide, it reflects the natural headwinds that lapping of that price increase creates when you look at our year on year top line growth. Also on the top line, exactly as you mentioned, Q4 is a really important quarter for our customers. It's absolutely critical for their business.

Speaker 3

It is also a big quarter for us and it's very important for our business. We are still a few weeks away from Black Friday and Cyber Monday, which is the big holiday for the quarter. But based on the trends that we're seeing in the business Now we are comfortable with where our guidance is. And then on the bottom line, we're mindful as we said of the higher costs associated with increased usage on the We have some of the sales and marketing costs, in the investments that we're making in Q4 and all of those are reflected in the guidance as well.

Operator

Your next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Speaker 7

Perfect. Thank you and congrats on a strong Q1 here. Andrew, if I can go back to just the CDP product and How you envision that playing out, but also maybe more near term the go to market for that? Do you see that replacing an existing solution that your customers have? Or is that more of a greenfield opportunity.

Speaker 7

And when you're looking across your customer base, what type of profile are you targeting in terms of customer to really drive initial adoption of the CDP solution. Thank you.

Speaker 2

Yes, great. So we've launched our CDP, it's in market. I'm very excited about the traction we're seeing from customers and the conversations we're And so we're really and we're working on really building out, broadening out the CDP feature set. In terms of customers, I think it's both. There's both greenfields in terms of some of our smaller businesses that We're working with Playvia, we might be the first time to really thinking about, well, gosh, what does it mean to have all my data in one place and how many Different systems, if I have that data on the spot, can I improve I can improve the customer experience?

Speaker 2

So a very common thing we see is folks coming to us, they may start with our marketing products. As they adopt CDP, they realize, gosh, I can use this to centralize all my data. I can do more analysis with it. And then like I mentioned, they're very eager to polish it out to other systems. And I mentioned some of the integrations we're seeing.

Speaker 2

You also use that data not just with marketing inside Klaviyo, but say marketing on other platforms and then also using it for other phases of the or experience. So for instance, like when somebody reaches out for support. So in that case, we're really it's maybe the first time somebody's really thought about this and we're able to educate them. So that's a real opportunity. And then I think about for some of our larger customers, honestly, it's less about replacing Existing data warehouse spend and it's more about making that data the data that may be there, you may be copied over into our CDP, but making it faster to action.

Speaker 2

And so there what we're finding is a lot of folks want to They want to bring data sets they have from various data sources into Klaviyo. And the fact that we can tighten up this loop between analysis and then doing something about That's really like the killer feature. So in that case, I think it's more an augmentation of the rest of their data spend.

Operator

Okay. Thank you. Your next question comes from the line of Brent Bracelin with Piper Sandler. Your line is open.

Speaker 8

Good afternoon. Thank you. I wanted to go back to the demand drivers. We're clearly seeing a more challenging environment in SMB Software. So far in September and October, It feels a little more challenging in B2B than the B2C retail vertical based on your strong numbers here and strong numbers from Shopify.

Speaker 8

I was hoping you could walk us through the business model sensitivity as we go into the holiday selling season. We're going to get numbers In the next month, around Black Friday and Cyber Monday sell through, how much of How much should investors read into whether those are strong or weak and how that might impact your business? I know you're Less tied to GMV and more tied to subscription bundles and volumes of messages, but just remind us Visibility in the business model and how we should interpret the holiday selling season here sell through when we get that data here in the next few weeks?

Speaker 3

Yes. Thanks so much Brent. As I said before, we're closely looking at these trends and watching them every day. And based On the trends that we are seeing in our business as of today, we feel really comfortable with where we're coming in with the guidance. Black Friday, Cyber Monday for many of our customers is one of the most important times of the year.

Speaker 3

We have some of our customers We spend up to half of their customer communications during this Q4 period. So it's really, really important to them. But as you think about the impact that this has in our business, as Andrew mentioned earlier, we index not to GMV, we index to digital relationships and the digital relationships that our customers are building with their consumers. So when we think about the quarter, we think about How many customer relationships are they building and the frequency of communication with them. So certainly very focused on that.

Speaker 3

And for our team right now, We are entirely focused on making sure that we are there to deliver for our customers during this really important time for them.

Operator

Your next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Speaker 9

Yes, thanks. Good afternoon, Andrew, Amanda and Jack. Congrats on the first I will keep it the one question, Jack, but it may ramble and it might have a couple of parts. So that's just a heads up. You guys have this history and success with inbound and self-service motions.

Speaker 9

You brought in Steve Rowland, who definitely has a lot of enterprise selling experience.

Speaker 2

I guess I'd be curious, I'm

Speaker 9

sure it's still early days, but what are some of those early kind of outbound motions or anything you could share in terms of maybe investments in sales capacity Or just anything else you can share about kind of starting to evolve this as a new go to market motion? And the second part of this is, As we start to see some hopefully traction upmarket with some of these outbound motions, would we see it in 50 ks customer adds, Just overall greater productivity in new customers, maybe C2P attached, just how would we also see it manifest in the numbers? Thank you.

Speaker 2

Thanks, Harry. So yes, I'm really excited for both Steve and Jamie to join. And like we do with everybody, I mean, they're spending a lot of time right now with our customers and partners. And I mentioned that because Their mandate is really to invest across segments. So they're focused very much on continuing to grow our market share within smaller businesses as well as larger enterprises.

Speaker 2

So we're going to continue to invest in both. And then as Amanda mentioned, we're also going to continue we're really philosophically aligned. Great. Can you invest with discipline around strong unit economics? Now as we start thinking about that larger that mid market enterprise segment, There's a couple of things that I'm really excited about that we're working on.

Speaker 2

The first is, we're rolling out new messaging and starting to run some marketing campaigns Geared towards letting our customers, but also others in the market that aren't customers yet know that Klaviyo is way more than just marketing. The customers that I talked to, Steve and Jamie have talked to, they're really excited about that. And we're educating them both on the products that we have today, but also the products that We're adding and growing. So specifically, think about CDP, think about reviews, and some of the things we may hold in the future. So working on the messaging, And then as we're we are growing sales capacity, that is part of our strategy.

Speaker 2

We're also very invested in this ecosystem led model. And that means getting deeper relationships with the software platforms we work with, deeper relationships with the agencies and system integration partners that we have. We think that's going to be a big part of how we move up market. And I think it's going to be one of the things that helps keep our unit economics really good. What's worked for us With small business, we think it's going to work equally well with larger enterprises.

Speaker 2

We understand there's more of a sales driven motion there, But there's a big tailwind we get when we talk to customers or prospects and they've already heard about us from the other software that they're using. They've heard us about from partners they trust. So that's really that's a big part of how we're going to think about that. In terms of how you can watch that in our numbers, yes, we really like this 50 ks ads and continuing like to grow that. Madam Dina?

Speaker 3

Yes. I would building on what Andrew said, I think the 50 ks adds is a great metric to look at. That reflects both the new lands that we have In that 50 ks group, it also reflects expansion just like Andrew was speaking about as we are out increasingly telling the story of the Full Klaviyo suite of products. And as we add new products starting with SMS, now adding CDP and adding reviews, Expanding that into the mid market, I think you'll see growth in average revenue per customer. So those are the two main metrics that I would look at.

Operator

Your next question comes from the line of Rob Oliver with Baird. Your line is open.

Speaker 10

Great. Thank you guys very much for taking my question. AB, my question is for you. Just you mentioned kind of looking beyond the core The retail e commerce environment and the history of the company, which you articulated at the beginning of the call, I think was helpful for maybe for those who don't know. But That San Francisco Marathon deal is a pretty interesting one.

Speaker 10

Can you maybe talk about what the opportunities are there? What verticals might excite you Most and then how you go about prioritizing and resourcing those opportunities? Thank you very much.

Speaker 2

Yes, sure. Yes. So we shared that we shared San Francisco Marathon as an example. We're seeing really good momentum expanding beyond retail. It's still a small percentage of customers and revenue, but we really like the way it's growing.

Speaker 2

And actually one of the really interesting things, We're finding that a lot of service businesses, they tend to also have a retail component. So for example, an events business may sell tickets, They also may sell merchandise. So they're actually using Klaviyo across multiple business models and that's really interesting. So actually we're finding that we're expanding Beyond retail, in part because some of our retail customers are raising their hand and saying, oh gosh, I can use Klaviyo for the parts of my business that are not pure retail, as well as then just landing straight up with businesses that have a heavier service component. And then in terms of the verticals we're interested Because we've worked with smaller businesses, we're trying to use a lot of the same strategy that we've used with retail.

Speaker 2

Okay. Well, what industries have this long tail of smaller businesses? And then how can we have this partner ecosystem led motion? So I'm really excited about that. There's some partnerships that we're working on that should expand our footprint with other software platforms The power businesses that are outside of retail, they have a service sector.

Speaker 2

And then frankly, just as we move up into the mid market enterprise, We're just finding a lot of folks come to us saying they're looking for this combined data and marketing platform that they can standardize on. And they're actually really good at recognizing that even though we work with a lot of retailers, our software is totally applicable to their business. So we just see a lot of our mid market pipeline. It actually skews more outside of retail. And so I'm excited about those customers as well.

Operator

Your next question comes from the line of DJ Hynes with Canaccord. Your line is open.

Speaker 7

Hey, guys. Congrats on a nice start here and thanks for taking the questions. Maybe just to dovetail off of Terry's question. I'm curious as direct sales investments are set to increase, can you talk a little bit about how the unit economics of a direct sales engagement compared to that of a customer that comes directly to Klaviyo through PLG. I mean, I would guess that the sales led relationships are probably bigger and stickier, but they also cost more.

Speaker 7

So we'd love to get Color on kind of how the economics compare?

Speaker 3

Yes. Thanks, Vijay, D. J, and great question. The unit economics across Both channels are still strong. And we certainly as we're looking at it, we're looking at unit economics.

Speaker 3

And when we look at them, We look at a couple of things. We look at the CAC payback period, which would include for the ones who are coming direct, more of a focus On marketing and other investments and for folks who are coming through direct sales includes the cost of that sales channel, But both of them still have really strong economics. As we move more up market, the CAC payback period maybe gets a little bit longer, but LTV to CAC is quite attractive in that mid market segment. So as we think about investments, we're certainly thinking about those.

Operator

Your next question comes from the line of Scott Berg with Needham and Company. Your line is open.

Speaker 11

Hi, Andrew and Amanda. Congrats on the great first start here and thanks for taking my question. I wanted to ask a little bit more about Shopify partnership because it's a perpetual question that I've been receiving over the last couple of weeks. But where are we in the opportunity cycle? How early or late Do we think that you are or how early or late do you think you are in the opportunity cycle knowing that this is still a 6 plus year agreement from today?

Speaker 11

And then how do we measure your success through that channel given the investment that Shopify made in the company? Is it purely because larger customers will see more of that larger customer cohort grow or is there some other characteristics we should be paying attention to? Thank you.

Speaker 2

Thanks for the question. I would say it's still very early. I've enjoyed working out with Shopify and are more product focused and customer obsessed partners. We have a Shopify and clearly we've got a very similar ethos. So I think on both fronts of as we release more product, build more products, I think there's a big opportunity to expand within the Shopify customers we have, as well as there's just a lot of growth to be had in terms of customers, merchants that are already building their business on Shopify and ones that aren't yet.

Speaker 2

So I think the key metric that we look at is how much revenue are we helping those businesses drive. That's what we measure around KV. As that increases, we think the value of Klaviyo increases. It increases to our customers, it increases to Shopify, it increases to us. And that's largely how we can better monetize those customers, right?

Speaker 2

As we increase the value of the revenue we're driving, we may sell them more products or they may just grow their usage of our core products today, right, email and SMS. So that I would Look at that metric and then maybe look at like customer count, those are kind of the key ones.

Operator

We have time for one more question and that comes from the line of Derrick Wood with TD Cowen. Your line is open.

Speaker 5

Great. Thanks and I'll echo my congratulations. Andrew, I wanted to ask about SMS adoption trends. You guys had this sharp curve of adoption Out of the gate starting a couple of years ago, over the last couple of quarters that's moderated a bit. So can you just talk about what demand levels look like today?

Speaker 5

How do you see adoption trends shaping over the next 12 to 18 months? And are there any kind of key feature functionality milestones you're looking to hit that May reaccelerate the adoption curve?

Speaker 2

Sure. Yes. I fully expect that this Believe that customers want to consolidate. Certainly, there are marketing channels all down to one platform. I hear that time and time again from customers.

Speaker 2

For instance, we referenced a customer this quarter that consolidated their SMS on to Klaviyo, It was a creator founded coffee company and they've seen amazing growth with email, that's what attracted them about SMS, but then actually the 2 combined performed even better. So it's examples like that where we're seeing customers that that's what they want to do. Now there's a couple of things that we're hard at work on. We always believe our SMS product can be better. In this case, we're always adding new functionality.

Speaker 2

We believe our SMS product needs to be best in class all by itself and obviously it's even better when you combine it with our email and other messaging products. But on top of that, I mentioned expanding coverage to Ireland. As we think about internationally, one of the common reasons folks can't move their SMS spend to us today and we see the big opportunity is literally just covered around the world. So that's a major focus for our team, expanding that coverage within North America, especially within Europe And then into Asia. So I think you're going to see customers want to move it all into one place.

Speaker 2

They want to manage it for one place. They want all the reporting to be combined. They want to be able to personalize content based on what's the right channel and have Klaviyo have our artificial intelligence help them figure out what that is. That's the big macro trend. And then we're hard at work making sure our product is awesome and we've provided a great experience.

Operator

Those are all the questions I have for today's call. With that, I will turn the call over to Andrew Bialekki for closing remarks.

Speaker 2

Great. Well, thank you all for joining us on our first earnings call. And to colleagues around the world, thank you for all your hard work. We're looking forward to speaking with everyone again next quarter. Thanks.

Operator

Thank you. That does conclude today's call. You may now disconnect.

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Key Takeaways

  • Klaviyo delivered Q3 revenue of $175.8 million (up 48% YoY) with a 10% non-GAAP operating margin, and guided Q4 revenue of $195–197 million (+34–36% YoY) and full-year revenue of $691.5–693.5 million (+46–47% YoY).
  • The company served over 135,000 customers, including 1,699 generating >$50,000 ARR (up 89% YoY), and achieved a 119% net revenue retention rate, driven by customer expansion and mid-market wins.
  • Klaviyo rolled out AI-powered features like a natural language segmentation builder and global holdout groups, and launched its new CDP and Reviews products to unify data analysis and marketing execution.
  • International momentum continued as SMS coverage expanded to Ireland (its sixth country) and EMEA/APAC revenue grew to 31% of total, underscoring global adoption.
  • A product-led and ecosystem-led go-to-market model—backed by 300+ native integrations, major commerce partnerships, and 5,000+ agencies—drove efficient, inbound customer acquisition and low CAC.
AI Generated. May Contain Errors.
Earnings Conference Call
Klaviyo Q3 2023
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