Klaviyo Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 19 speakers on the call.

Operator

Good afternoon, and welcome to Clavio's Second Quarter Fiscal 20 24 Earnings Conference Call. Please note that this call is being recorded. As of right now, everyone is joined on mute to avoid any background noise. Thank you. With that, I would like to turn the call over to Andrew Zilli, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thanks. Good afternoon and thanks for joining Klaviyo's Q2 2024 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 Bialekki, Co Founder and CEO and Amanda Whalen, CFO.

Speaker 1

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 may 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 report on Form 10 ks and subsequent reports on Form 10 Q.

Speaker 1

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.

Speaker 2

Thanks, Billy, and thanks to everyone for joining us today. Palladia delivered very strong results in the Q2 with revenue of $222,000,000 growing 35% year over year. We believe we are a must have platform for more than 151,000 customers around the world as we help them easily and quickly transform their data into more valuable connections across every touch point. Our customers are at the heart of everything we do. We work to earn their trust every day and our model is built for joint success.

Speaker 2

So as our customers grow, Klaviyo grows. We power smarter digital relationships. Our vertically integrated platform enables customers to use real time first party data to create segments, orchestrate personalized omnichannel campaigns and measure every interaction. Most importantly, we've made it incredibly easy. Marketers no longer have to hire a developer to build and manage an API to connect to a new data source or write code to create a consumer segment.

Speaker 2

With Klaviyo, complex tasks are made simple, allowing marketers to be more efficient and focus more time on their consumer engagement. From entrepreneurs just starting their businesses to established internationally known brands, palladium is a revenue engine for our customers. Our unified platform across the data and marketing layer, our omnichannel orchestration, our fast flexible functionality and our more than 350 integrations drive companies to choose Klaviyo. Then they stay and grow with us, adding products like SMS, CDP and reviews and take advantage of our new AI features and advanced analytics across their entire consumer data set. As customers leverage all these tools, we can show the actual value of our platform is driving with Klaviyo attributed value or KAV, which measures the revenue generated through consumer transactions after engagement with any of our channels.

Speaker 2

When customers sign in to Klaviyo, KV is one of the first things they see, so they know how much revenue our platform is driving for them. Our ease of use and the direct correlation to revenue is a key reason why companies choose Klaviyo. A great example is our new relationship with a Fortune 1,000 global company. They wanted to build out their direct to consumer offering, engaging consumers with new content. They were previously using a legacy platform, but selected Klaviyo for our ease of use and the ability to integrate their data across all their core marketing channels.

Speaker 2

They also selected our SMS solution, a channel they'll be using for the very first time to execute their omnichannel strategy to fuel additional revenue growth. We also closed a deal with a multibillion dollar revenue national chain of grocery stores. They were using a homegrown solution to batch and blast communications. Each email had to be created from scratch and they couldn't do any segmentation. The CIO demoed Klaviyo and quickly realized the team would see big productivity gains from our out of the box segmentation, data orchestration and the flexibility of our campaign and flow creation.

Speaker 2

Companies of all sizes are building omni channel marketing strategies using email, SMS and push notifications to build personalized consumer relationships. But many use multiple point solutions, leaving them with disjointed consumer data and incomplete view of their consumers and a fragmented communication experience. If you've ever received an email from a brand asking you to review a product that you returned weeks ago and you've seen this breakdown in action. That's why we've integrated all of those channels on one platform, ingesting data from every touch point and giving our customers powerful insights that enable them to execute a differentiated omni channel strategy. Samsonite, the world's largest travel luggage company chose Klaviyo this quarter because we could bring all of their data into one place.

Speaker 2

Samsonite was using multiple point solutions for email and SMS. They had fragmented data and after 8 years with their email provider, had only built 4 automated workflows due to the difficulty of customizing the solution. They were impressed with the number of easy to build options that Klaviyo provides across our templates, forms and flows. Samsonite selected Klaviyo over a large legacy provider to unify all 7 of their North American brands, bringing email and SMS together onto our platform. SMS continues to be a key driver of growth for us as companies look to consolidate SMS capabilities with Klaviyo to better leverage our data platform for multichannel flows and campaigns.

Speaker 2

This quarter, we expanded our relationship with R School Sports, the sports digital media company with over 65 content franchises and 198,000,000 social followers. They've been a Kladeo email customer for 8 years and have seen tremendous success selling their merchandise and expanding their influence in the sports and entertainment communities. As their contract with a point solution SMS provider came to an end, they opted to consolidate with Klaviyo so that all of their consumer data will be housed on our platform, allowing them to better segment and orchestrate the data for more personalized communications across channels. We also started a new relationship with Boston Proper, a legacy fashion and apparel brand that historically has relied on selling via catalogs. The company's technology infrastructure was fragmented, integrating its ability to provide a seamless and personalized shopping experience for its consumers.

Speaker 2

They chose to consolidate from multiple point solutions to Klaviyo, centralizing all online and offline consumer data into our data platform. Boston Proper is leveraging our email, SMS and CDP solutions to build stronger relationships and to help grow their top line. The more first party consumer data you have on one platform, the stronger your campaigns will be. With help from our growing ecosystem, we built out an incredible third party integration library so our customers can pull in their data from anywhere. These integrations are both inbound and outbound, allowing customers to bring all of their data onto our platform as well as leverage Kladeo data on other platforms like Google and Meta.

Speaker 2

This quarter, we added Toast and Bazaarvoice, new inbound integrations and TikTok and Pinterest outbound integrations, which allow customers to connect their Klaviyo profiles to the ad audiences, improving return on ad spend. We also announced a new integration framework that significantly reduces time to build on Klaviyo by up to 43%. We plan to open up this framework to 3rd party developers in the future to enable them to create both inbound and outbound integrations with Klaviyo more efficiently. Personal Supply Company, a global travel lifestyle brand chose Klaviyo in Q2 in part because of our 3rd party integration. They were frustrated with their prior point solution due to lack of innovation, poor integrations and reporting challenges.

Speaker 2

Following a competitive RFP process across point solutions and legacy providers, they chose Klaviyo because they felt that our massive integration library and functionality and AI features would give them the right edge for growth. Speaking to AI, we continue to enhance our AI suite. As I've mentioned previously, we think about AI 3 ways: productivity, optimization and creation of new marketing strategies. Marketers need artificial intelligence to be practical, effective and easy to use. But AI is only as good as the underlying data.

Speaker 2

Because our platform can ingest up to the 2nd first party consumer data, Klaviyo can provide more accurate benchmarks and drive actionable insights through our artificial intelligence tools. A few weeks ago, we announced several new features. Flow's AI allows marketers to build a flow in seconds with a simple prompt and ultimately drive more revenue. First slide campaigns take AB testing to the next level by determining the winning version of a campaign for each individual subscriber based on their likelihood to engage. And ReviewCentimate AI quickly analyzes product reviews at scale so brands can get insights and take action faster than ever.

Speaker 2

We also want our AI features to easily provide guidance. So we recently introduced a feature that gives recommended action and tailored next steps powered by artificial intelligence as soon as customers log into their Klaviyo homepage. Our customers are increasingly adopting our AI products as we've seen a 61% increase in accounts using one of our generative AI features. We're excited by Klaviyo AI's ability to help marketers move beyond what was previously possible, unlocking new growth strategies. As a customer first organization, we are focused on investing in areas that will help us support our customers and make them more successful across sales, product and support.

Speaker 2

We've been investing in our go to market efforts over the last few quarters with a focus on growing our sales capacity to address mid market and international opportunities. Additionally, we continue to invest in training for new sales hires and expanding our partner ecosystem to ensure we have the right agencies, system integrators and technology partners to help our customers succeed. Internationally, we are investing to expand our presence and platform offering. During the quarter, we continued to enhance our localization and internationalization with the expansion of our SMS capabilities into Austria, Switzerland and Spain, as well as adding MMS in Australia. We now provide SMS coverage in 12 countries, more than double the 5 countries we had coverage for this time last year.

Speaker 2

And we plan to continue to expand our international footprint going forward. This quarter, we launched our product in French and we saw a large increase in new customers and usage as a result. For example, we signed a new deal with Le Petit Palon, a French wine subscription company. And we're looking for a new solution to help them generate more revenue through email and to improve overall consumer retention. They chose Klaviyo because of our data platform and plan to start testing SMS in addition to their use of email.

Speaker 2

We are dedicated to continually improving our platform and product offering for our customers. Customers tell us that our product roadmap is a key differentiator. In Q2, we released a number of new features, including a bulk profile suppression tool, which helps our customers keep their active profiles clean by suppressing profiles and may have stopped engaging with their brand. Companies can now suppress those profiles with one click, so they can market to the right consumer and ensure good deliverability. Today, we also released Reputation Repair AI, which will determine when an account has poor deliverability, identify and segment out those accounts to create a clean list and ensure brands are sending to the highest quality profiles, leading to stronger deliverability in email performance.

Speaker 2

Deliverability is hugely important. You may have the best content in the world, but it only works if it gets delivered. We've been investing heavily in our deliverability infrastructure and systems and I want to thank our team who is focused day and night on ensuring the highest quality, deliverability and center reputations. Equally important is compliance. And our team is focused on preventing abuse of these channels, whether malicious or accidental.

Speaker 2

We're able to maintain strong compliance because we have insight into an enormous amount of data that allows us to see what's going on and how to stop it. As a result of these efforts, we've navigated the changes from the email service providers extremely well. And we're seeing the benefits from those efforts as companies turn to Klaviyo after negative experiences with other providers. A great example of this is Olive and June, a leading provider of at home manicure and pedicure products. They were using a lower cost provider, but were facing severe deliverability issues.

Speaker 2

They came to Klaviyo because of our strong reputation in the market, the power of our platform, our deliverability strength and our integrations with their other systems that will help them build better relationships with their end consumers. As we continue to add more features and functionality to the platform, we are committed to empowering our customers to get the most out of Klaviyo by making it easy to find answers about best practices, partners to work with and a community to engage with. To provide excellent customer support across all segments, we recently launched Klaviyo PowerUp, our new centralized customer resource center designed to bring all of these assets together in one place. PowerUp will help customers easily discover self-service resources and deliver curated content throughout their journey with Kalevia. We will continue to enhance PowerUp as part of our dedication to support our customers' long term success.

Speaker 2

I'm extremely happy with our 2nd quarter results and the strong first half of the year. We have a tremendous long term opportunity ahead of us as we help our customers power smarter digital relationships around the world. And we have even bigger plans for the future to unlock use cases beyond marketing for our customers. Before I hand it over to Amanda, I'm very proud to announce that Klaviyo was named an Inc. Best Workplace for the 6th year in a row and Newsweek listed us as one of America's greatest workplaces for 2024.

Speaker 2

Thanks to all the Klaviyos for keeping up the energy of our culture. And with that, I'll turn it over to Amanda.

Speaker 3

Thanks, Andrew. Pallavio delivered another quarter of strong financial performance in Q2 as we continue to drive efficient growth at scale. Revenue grew 35% year over year to $222,000,000 and we reported a 15% non GAAP operating margin, both exceeding our expectations. We're very pleased to deliver well above the rule of 40 with this performance. We continue to deliver across our 4 primary growth factors, adding new customers, expanding with those customers, expanding internationally and growing in the mid market.

Speaker 3

In Q2, we added over 5,000 new customers and now have more than 151,000 customers, up 16% year over year. We saw strength in entrepreneurs and in the high end of the market. However, we are seeing some of the softness in the SMB market that has been widely discussed across the industry over the last several months. Despite this, we delivered a strong quarter due to the diversity of our customer base across customer size and geography. Existing customers continue to expand with us by growing their existing usage and adding new products as can be seen in our dollar based net revenue retention rate or NRR, which was 112% for the quarter.

Speaker 3

And expected decline due to the lapping of our September 2022 price increase as well as the customer trends we spoke about earlier this year. We continue hearing from customers about macro pressures and they remain focused on the value they're deriving from their software. As a result, our expectations for continued decline in NRR in the near term haven't changed. It's important to note that despite this, we continue to see strength and stability in our gross retention rates, which confirms our belief that Klaviyo is a must have platform for our customers. Internationally, we continue to grow our global business.

Speaker 3

You'll recall that we announced the launch of our French language product in Q2 and we have seen extremely strong trends there as a result. France was our fastest growing country in new business in the quarter, up more than 65% Q1. We also saw strength in the UK, Ireland, Italy and Germany. In fact, our year over year revenue growth in EMEA accelerated to 45% in Q2 from 43% in Q1. In aggregate, our international revenue grew 41% year over year.

Speaker 3

Finally, the go to market initiatives we implemented last year are delivering great results. At the end of Q2, we had 2,386 customers generating over $50,000 in ARR, which was up 64% year over year. We're also seeing a healthy trend of landing new customers in this cohort from the start, adding the largest quarterly number in our history, evidence that our strategy is working and of the growing importance of our platform to our customers. Non GAAP gross profit for the quarter was $175,000,000 representing a non GAAP gross margin of 79%, up 140 basis points year over year. This came in slightly better than expected as we continue to absorb mix shift pressure from our growing SMS business through operational efficiencies across our infrastructure and support organizations.

Speaker 3

For the full year, we expect non GAAP gross margin to be down slightly from last year. Turning to non GAAP operating expenses. Sales and marketing expense was 32% of revenue for the quarter, up 140 basis points over last year as a result of our investments in sales head count and marketing programs that we've discussed the last few quarters. R and D expense was 19% of revenue, down 100 basis points year over year, primarily driven by an increase in capitalized software as a result of more development work on customer facing features that we'll be rolling out. Finally, G and A expense was 13% of revenue, down 170 basis points year over year, primarily as the result of the release of some international tax related reserves.

Speaker 3

We do expect more of these releases over the next few quarters, which may drive some fluctuation in G and A expenses. For the Q2, our non GAAP operating income was $34,000,000 representing a non GAAP operating margin of 15%. This was stronger than our guidance as a result of the revenue strength, the items I discussed earlier, as well as headcount coming in a bit lighter than expected for the quarter. We generated free cash flow of $37,000,000 during the quarter, down slightly from the prior year due to payroll and other operational expenses, as well as the timing of collections. Moving to guidance.

Speaker 3

For the Q3, we expect revenue to be 225 dollars to $227,000,000 representing growth of 28% to 29% year over year. We expect non GAAP operating income to be $21,500,000 to $24,500,000 representing non GAAP operating margin of 10% to 11%. This is a bit better than we had suggested last quarter due to a shift in the timing of some investments as well as the lower OpEx related to slower than anticipated headcount growth in Q2. For the Q3, we expect fully diluted shares outstanding to be approximately $300,000,000 For the full year, we are increasing our revenue guidance by $11,000,000 to $910,000,000 to $918,000,000 representing growth of 30% to 31% year over year. We are also raising our non GAAP operating income guidance by $6,000,000 to $103,000,000 to $111,000,000 representing a non GAAP operating margin of 11% to 12%.

Speaker 3

We continue to make incremental investments across go to market and product opportunistically and expect those investments to be spread across Q3 and Q4 as we set Klaviyo up for long term growth. Finally, for the full year, we expect fully diluted share count to be approximately 301,000,000. In closing, these strong results are a clear indication that Klaviyo's platform is driving success for our customers. We are excited about the remainder of 2024 and the coming years as we continue to build the foundation for durable and efficient growth going forward. And with that, we'll open up the call for Q and A.

Speaker 3

Operator?

Operator

We are now opening the floor for question and answer session. We do want to incorporate as many analysts as possible on the call. So please limit one question before returning to the queue. Our first question comes from Brent Bracelin from Piper Sandler. Your line is now open.

Speaker 4

Thank you. Good afternoon. I guess I wanted to start out here with the durability of growth. Clearly, the macro is pretty challenged out there, remains challenging for many. But it looks like growth for you is actually stronger this June quarter than it was a year ago.

Speaker 4

Growth accelerated a little bit on top line. You're guiding up for the year. Can you just double click into the demand drivers that's giving you optimism and underpinning this to strength here? It is surprising and just love to hear a little bit more around what's driving the optimism in the business and momentum? Thanks.

Speaker 3

Yes. Thanks, Brent. It's Amanda. I appreciate the question and we're very pleased with the results from the quarter. It was a really strong revenue quarter in Q2.

Speaker 3

As we talked about on the call, we saw strength in the entrepreneur side of the market, driven by efficiency from our marketing investments as well as some investments we've made in product to increase our free to pay conversion. We saw strength in the upper end of the market and we added this quarter, as we said, our highest number of greater than 50 ks are our customers that we have in our company's history. And then we also continue to see strength in SMS. We're expanding our penetration and our usage with customers and we're seeing strong growth internationally. International had a terrific quarter growing 41% year over year.

Speaker 3

So really multiple drivers of the strength in the quarter. And I think what it is a testament to is the diversity of our customer base across customer size, across geography that shows that we can be durable and resilient across multiple operating environments.

Speaker 4

Helpful color. Thank you.

Operator

Our next question comes from Keith Weiss from Morgan Stanley. Your line is now open.

Speaker 5

Thank you guys for taking the question and congratulations on a really solid quarter in a uneven macro backdrop, if you will. I wanted to focus maybe one question on the top line, one question on the bottom line. On the top line, new customer adds were definitely highlighted, picked up a lot from last quarter. What's enabling that? Is it some of the like partner initiatives?

Speaker 5

Is it the expansion of products into international companies? Can you give us a little bit of color on, what's enabling you to sort of pick up that customer adds even with the weaker SMBs and the weaker backdrop? And then on the like the bottom line side of the equation, really good operating margin performance this quarter, But it does seem like our Q4 numbers are coming down a lot if we take the Q3 guide in the full year guide. Anything in particular that's going to be pulling down that Q4 or any like the different timing in investments or a ramp up in investments that explains that? Thank you.

Speaker 3

Sure. Thanks so much, Keith, and I appreciate your kind words. It was a strong quarter for net adds. We added 5,000 net new customers in Q2 and now we've got over 151,000 customers. As we talked about last quarter, increasingly we are shifting our go to market resources towards SMB and mid market.

Speaker 3

And in the entrepreneur group, we're putting more into product led growth. And this quarter, we saw the benefit of those efforts. We saw strength in that entrepreneur customer group that was really driven by efficiency from our direct marketing spend as well as improvements in free to paid conversion coming from our products led growth efforts. We talked a little bit just a minute ago about the strength that we saw at the upper end of the market as well. And that is as a result of the go to market investments that we've been making to really drive that strength in those larger customer lands as well.

Speaker 3

Now, I will say on the net adds, keep in mind, that is a number that might move around a bit over time. We're okay with that because our focus is really on adding high quality customers. We're really pleased this quarter that we added customers like Samsonite, Boston Proper, the Fortune 1,000 company Andrew spoke about and the national grocery retailer. And we're looking forward over time to helping even more customers grow. And then regarding your question on investments and the timing of investments and how those may unfold during the year.

Speaker 3

As we spoke about at the beginning of the year, as we are going through the year and see outperformance in the business, we're going to be reinvesting that back to continue to drive durable growth. We're reinvesting it incrementally across go to market and product. And 2 of the areas of focus for investment for us are mid market and international. Those investments are ongoing. We're continuing to build out the right team, the right infrastructure to capture those markets.

Speaker 3

And importantly, we're seeing strong returns. As we talked about on the call, international investments are leading to really strong growth in EMEA and APAC. As we look towards the back half of the year, we're going to be increasing our marketing efforts in the run up to Black Friday, Cyber Monday. And we're continuing to invest in our product team to enhance existing features, to launch new features. Some great examples of that this quarter were the new features that we launched AI that we announced recently.

Speaker 3

So, as always, as we make those investments, we're doing it with a really clear eye and a focus on unit economics to make sure that we're getting good returns to continue to drive that efficient growth in the future.

Speaker 2

Outstanding. Super helpful. Thank you, guys.

Operator

Our next question comes from Siti Panigari from Mizuho. Your line is now open.

Speaker 6

Thanks for taking my question and congratulation on a strong quarter. And my question about your new products, you guys talked about AI, even some of the integration as well and review some of that don't have the direct pricing. How do you monetize that to your base? And then as you are seeing large customers using your product, how does that influence your product strategy? How should we think about the upcoming products in next few years?

Speaker 2

Sure. Happy to answer that. So if you think about products that we've released, we started out with our core database and email products. We added on SMS. And in the last year, we've added both reviews and CDP, and those are both products that we're monetizing directly.

Speaker 2

We're seeing good adoption there. Very excited about the progress we're making with both of those. And then on the artificial intelligence, the AI side, one of the things we think about is AI in these 3 different use cases, productivity, optimization and expanding your marketing strategy. So for artificial intelligence, the productivity tools we're building, we expect that those will run monetizing that directly, but those do drive incremental usage. So there's an indirect mechanism there.

Speaker 2

And then for a lot of the stuff we're doing around helping you optimize marketing campaigns, figure out the right content, the right timing, shooting to who receives which message, as well as generating net new strategies. What products that customers often buy together, helping you come up with new marketing ideas. Those we think are going to be incremental to Klaviyo attributed value or the revenue that we help our customers create. And while we're not monetizing those today, we do think that there's an opportunity to monetize those over time. And what's great about them is they're not just for productivity.

Speaker 2

They really are they're directly revenue driving. So our customers really understand the value of those. So we're working with a lot of customers on building that functionality out. We don't have any timelines right now to monetize those, but we know there's an opportunity. And lastly, you talked about product strategy, how does as we drive more adoption, we have more customers that are multi products.

Speaker 2

How do we think about that? The core of Klaviyo is the data platform that we've built, the single source of truth for everything you need to know about your consumers. We want to help every business take advantage of that and use it so that for every interaction that the consumers have with that business, that it's personalized, that they can measure how much customers like it and then they can use artificial intelligence to optimize it. And we think we can take that well beyond just marketing and channels, but we can take that to other customer services. When you think about things like what it means to when somebody is trying to get educated or they have a question or to digital properties like people's websites and mobile apps.

Speaker 2

So I think you'll see from us the use cases and therefore the products that can expand off on top of this data platform we've built. There's a lot of those and I'm very excited about the building we're going to do on that over the coming months and over the coming years.

Speaker 6

Thanks for the color.

Operator

Our next question comes from DJ Heinz from Canaccord. Your line is now

Speaker 7

Hey guys. Congrats on the really nice quarter and thanks for taking the question. So Shopify obviously reported this morning. I'm sure you saw that really strong merchant adds. Interestingly, they said about half of their new merchant adds in Q2 came from outside of core English speaking markets.

Speaker 7

So two questions there. A, do you see the same demand characteristics in those markets? And then B, how quickly can you guys move to localize the platform for those merchants?

Speaker 2

Yes. I'll start to give a little color on international, and Amanda can follow on. So, I think we're seeing strong international growth as well. So we mentioned earlier this year, in the last few months, we launched our product in French, along with local language marketing and that's gone very well. And I think that there's we can take that playbook that we've run-in France and take that to other languages and then other markets.

Speaker 2

And so you can see we've had some great wins there like with companies like Le Petit Belong. And more broadly internationally, I we're starting to invest in place to look like the documentation, the customer stories. Also, we're localizing now some of the digital marketing ad campaigns we're running. So I think you'll see those play out over the coming months.

Speaker 8

Thank you.

Operator

Our next question comes from Arjun Betzka from William Blair. Your line is now open.

Speaker 9

Perfect. Thank you. And I'll add my congrats on a nice quarter here. Andrew, maybe one for you. Just one of the things that we didn't touch on thus far is your mobile push capabilities.

Speaker 9

I'm curious how progress is going there and when you think about some of these upmarket momentum that you're seeing especially with new customers landing in that 50 ks cohort. How much is that the mobile capabilities contributing to it where customers might be buying all of your channels upfront as they look for a platform that they can scale on?

Speaker 2

Yes, absolutely. So I think when we as we start to reach into the mid market and the enterprise, I think folks again are coming to us primarily for our data platform and then all of the marketing channels in one place and that's that tight integration. So specifically on mobile, I think we talked about in the last call, we now have several customers that are sending high volume number of push notifications and using other mobile functionality. We obviously have a good chunk of our product team that's working on building out those capabilities. And what we're finding is similar with email and SMS, folks are interested in how the interplay between those channels and they want all of them in one place.

Speaker 2

They want great content creation tools. They want to use the data that Klayiyo provides to help personalize and measure the performance of each of those campaigns. So I think it's early for us. We're finding customers where that was a requirement for them. Now we're able to address that and I expect over time, enterprise, there's a mix of folks that either have mobile properties where they need that functionality and then those that don't, I think we're finding that we can now address those and within retail and e commerce is obviously folks that have mobile apps, but then even outside of that, that's opening up new use cases for us that we can start to address.

Speaker 2

So I think over the coming couple of quarters, we're going to make we're making more investments there, all this idea of any way you want to communicate with your customers, with your end consumers, you can do that with our products.

Speaker 9

All right, perfect. Thank you.

Operator

Our next question comes from Derrick Wood from TD

Speaker 10

Andrew, there seems to be talk that the AI wave is starting to drive more companies to invest in personalization in the marketing and customer engagement space. And certainly that sounds like what you're seeing with talking about AI driving new marketing strategies. But given that you've got this vertically oriented stack with a rich data layer to really help with personalization. How are you seeing how would you characterize demand and competitive positioning for Klaviyo today versus a few quarters ago now that there's been a lot more focus on AI related initiatives?

Speaker 1

Yes. So I'll say 2 things. I mean,

Speaker 2

the first is the importance of having allowing businesses to take use the data asset, the consumer data they have, the things they know about their end consumers and put that to work and have that so tightly coupled with applications where you actually take action on it. So marketing is 1. That integration between database and system of action is really important. So I think we're actually we've got a big like heads up, a bit of a lead on that. And then you can start to see that with some of the features that we're building.

Speaker 2

So for example, we talked about productivity as a use case. We've now released e mail AI, segments AI this past quarter. We launched flows AI. All of these are tools so that whether you're a small business, an entrepreneur just starting out or a large enterprise, you can build more marketing campaigns faster. And actually, those prompts can look into your data set and understand the kind of data you have to automatically create different segmentations or workflows for you.

Speaker 2

So on the productivity front, we're making a lot of progress. We're also able to also released personalized campaigns. If you think about what that feature is all about, it's this idea of if you have multiple variations of a campaign, for some businesses it could be dozens. Historically, what that meant was you just pick the best variance, the best version for everybody. What we're actually able to do because we have all data inside of our data platform, we can actually figure out on a consumer level basis for each person what's the right content for them.

Speaker 2

And there's incremental lift on that. So I think all of this is the thesis that we've had of help people pull all their data together that allow them to action it. I think with artificial intelligence and machine learning, we're now able to help them accelerate actually doing that. And what I'm excited about is our ability to now suggest strategies, more optimizations and folks to allow businesses to do that more autonomously. So we feel really good about where we are and we're very much full speed ahead on bringing us to life, because I think again it's not just productivity for us, this is about driving incremental revenue and that's even more important for these businesses.

Speaker 3

And that really is data building that it's important for customers of all sizes and we're absolutely seeing it come through in why provider of spa inspired hair products and they were working with a legacy cloud provider. They wanted to be able to have really strong customer engagement, but what they were seeing was poor open rates, ineffective segmentation, lack of insights, all of those brought them to Klaviyo. And they consolidated their email, their SMS, their CDP and reviews with us. And now we're excited to work together so that they can use

Operator

Our next question comes from Terry Tillman from Truist. Your line is now open.

Speaker 11

Yes. Thanks for taking my question. I guess I should say, bonjour, with the ramp you're seeing in the French market. It's a single question. It's got 2 parts though.

Speaker 11

First, I know you all have been evolving and kind of testing and learning with CDP, but what are you seeing after you've done some kind of packaging updates? Is that helping incrementally with adoption? And then the second part of this question is, I heard a lot in your prepared remarks around deliverability. As you're getting more of these kind of bigger customers in initially and kind of this world around TCO and maybe with bulk sender changes, is deliverability crediting kind of a new almost replacement cycle? Thank you.

Speaker 2

Hey, great. Thanks, Terry. So first I'll talk about CDP. So what we found with our customer data platform, our CDP product, there's really 2, 4 use cases. The first is storing all that data, creating a system of record, governing it, data hygiene, that's part 1.

Speaker 2

And then part 2 is allowing folks to do analytics on top of it, to figure out which customer segments they should be marketing to. So what we've actually started to experiment a little bit with is different ways to think about packing that. Do you put both of those together? Do you separate those out? And I'm really excited about both the products we're making on the product side, on the data tooling side.

Speaker 2

We've done a lot of work to improve both the speed of ingesting data as well as getting it out to other systems. We talked about at the top of the call about how outbound connectors are a big part of the integrations to Klaviyo and speeding that up as well. Then on the analytics side, as an example, we launched a new feature within the CDP around product analytics. So we can actually help brands with lots of SKUs figure out where there's affinities between products and they can instantly turn that into marketing campaigns that drive incremental revenue. So we're excited about the progress there.

Speaker 2

And then on deliverability, what I'd say is that's been at the core of it's been one of the things we focus on since we started. It's obviously what Collegiate stands for personalization and getting the right person, the right content. As we saw some of the changes roll through email service providers, those haven't had a material impact on us. In fact, we've seen some customers come to Klaviyo, they know the revenue engine, they know how important deliverability is and they've chosen us because of our dedication to email and SMS delivery. So both our customer teams and our entry teams have done a great job to ensure that deliverability is working for folks.

Speaker 2

So I think both the delivery front has become a big differentiator and on the CDP front, we're very excited about the progress that's there. I think there's we're starting to learn a lot about the use cases and potentially think about some packaging changes.

Operator

Our next question comes from Raimo Lenschow from Barclays. Your line is now open.

Speaker 12

Thank you. Could we I'm trying to go back to the health of the SMB and Amanda, your comments as well. Question is, if you think about the behavior of an SMB like clearly, you guys seem to be seen as more strategic for them because if you don't market, you can't sell, which basically means you can't survive. But like how do you see the customers stacking up in terms like fitting you in and seeing you as something that's kind of helps them versus something that is nice to be like we see at other solutions. Just help us understand as well like how that's kind of slightly more uncertain SMB market is playing into your thinking?

Speaker 12

Thank you.

Speaker 2

Yes. I'll add on top of what Amanda said a few minutes ago. So the first is, we're a must have revenue engine for each business. That's what makes us so essential. That's what we love to helping our customers to grow their businesses.

Speaker 2

I think within the SMB, it's a little nuanced. We actually divide SMBs into 2 groupings. The first is entrepreneurs, you can think about business that really just starting out very small teams and then we also think about like larger SMBs. So to speak to each of those two categories, when we talked about some of the softness, as Manu mentioned, we've seen relatively fewer ads in that larger SMP space. And we think part of that is attributed to slightly longer sales cycles.

Speaker 2

Now we still find folks are

Speaker 1

moving to those sales cycles are

Speaker 2

a little bit longer. And just as a reminder, we measure our sales cycles with those larger SMBs. I mean, it's still in days weeks, not months. Now for the smaller segment there, for the folks that are just more starting out, that's where we did see a lot of strength broadly across that customer group from that new logos and new folks that are new to Klaviyo. So I think that's we take that as a really good sign that when businesses are starting out and they're looking to grow their business, they're still choosing us in defaulting to Klaviyo as the place to store customer data and then message those customers and ultimately grow their business.

Speaker 12

Okay, perfect. Thank you.

Operator

Our next question comes from Scott Berg from Needham. Your line is now open.

Speaker 13

Hi, everyone. Really nice quarter here. I guess one question for me is on your go to market investments here kind of midyear. SMB, as Amanda pointed out, still a little on the softer side at the moment, but you both called out really good strength upmarket. Have you made any tweaks or changes to the investments that you're making across those different segments that might maybe favor some of those areas of strength upmarket that you're seeing today?

Speaker 2

Yes. So, we're very intentional about looking for where there's opportunities where we're seeing market pull and investing behind those. Maybe a little bit of color on the sales side, we've been increasing capacity in the areas where we're seeing growth. Amanda mentioned international as well as mid market. And then on the marketing side, we've seen like the results we're seeing from some of the marketing programs, digital programs we're running to try to drive growth and we're also investing in building more awareness for Klaydio in various markets.

Speaker 2

We're finding in some cases folks don't know about either Klaviyo writ large or our entire portfolio of products. So as Amanda said, we're very intentional about like investing behind things where we see great unit economics, but we do see a number of opportunities to invest.

Speaker 13

Excellent. Thanks. Congrats again.

Operator

Our next question comes from Rob Oliver from Baird. Your line is now open.

Speaker 14

Great. Thanks. Good afternoon, guys. I guess it's kind of a 2 part question about SMS traction. AB, you talked about some of the consolidation wins you guys have seen.

Speaker 14

And I know that it sounds as if you're getting pretty solid traction quickly in some of your rollouts internationally with SMS. Just would love to hear, I know you don't break out on a quarterly basis, what percentage of your customers are on SMS, but would love to get a flavor for

Speaker 2

how that's progressing broadly for

Speaker 14

you relative to your expectations? And then, I guess, Amanda, a side part to that would be, we haven't seen the impact on gross margins that we might have expected with a commensurate ramp in SMS. I know there's other things driving that, but just wanted to reconcile those two things. Thank you very much.

Speaker 2

Yes, great. I'll speak to SRS products and Manikin talk about gross margin. So while we're not disclosing like penetration, we'll continue we're seeing good adoption and we'll share some milestones as we hit those. We are seeing good traction like you mentioned. I think the international expansion, adding Spain, Austria, Switzerland for SMS as adding multimedia messaging in Australia.

Speaker 2

As we think about our international strategy, a big part of it is making sure that SMS is available in those regions as well. And we are seeing good adoption there. A quick example of that is, there's a mattress manufacturer who was using our started using us for SMS, adopted started using us for email, adopted us for SMS. And then because of some of the things, not just the international features, but also some of the SMS specific functionality we're building. We built a feature around SMS SmartOptim that makes it easier to gain consent so that customers and consumers have to do less clicking to subscribe to an SMS list.

Speaker 2

That has dramatically increased our ability to grow their SMS program and that's a feature that we launched in the last few months that's now available to everybody. So excited about the progress we're seeing in SMS. I think there's still a long way to go in terms of penetration.

Speaker 3

Yes. And to your question on the gross margin front, on gross margin, it did come in slightly better than what we had expected. And that was primarily because we continue to see the benefits of the progress that we're making in infrastructure and support efficiencies. And those are offsetting the continued progress that we're seeing and the growth that we're seeing in the SMS business. So one of those infrastructure efficiencies that I would love to highlight is our KMTA, Klaviyo mail transfer agent.

Speaker 3

We expect to continue to get further leverage in COGS over the coming quarters as we transfer more of our mail volume on to our own mail transfer agent. As Andrew said, continues to grow very well. And so we do expect that as it continues to grow, it's going to become a bigger portion of our business that will create some pressure on our gross margins. We're proud of the fact that we've been able to largely offset that to this point and deliver what we see as some pretty best in class gross margins given our product and customer mix.

Speaker 14

Indeed. Great. Thanks, Amanda. Andrew, thank you.

Operator

Our next question comes from Tyler Radke from Citi. Your line is now

Speaker 8

Thank you for taking the question. Follow-up question just on the SMB side. I wanted to ask it more just as we think about behavioral habits of some of your SMB customers. I'm curious what you observed in the quarter as it relates to utilization rates of email volumes, message volumes and contracts list? Did that go up or down in relation to the SMB environment?

Speaker 8

Secondly, is it relates to if those SMB customers are seeing weakness in their consumer purchasing, do you find that that translates to higher email and message volumes in order to backfill that demand? If you could just kind of help us understand behaviorally what you're seeing on the SMB side? Thank you.

Speaker 3

Sure, Tyler. Thanks so much for the question. And overall, I would say that what we saw in terms of behavior in the quarter was pretty consistent with what we've spoken about on our prior earnings calls. We continue hearing from customers about macro pressures. They remain very focused on the value that they're getting from their software.

Speaker 3

In general, in terms of the macro and the changes in the behavior, we are not seeing it get materially better. We are also not seeing it get materially worse. And we think that we're continuing to revenue. We're a revenue engine for them and being a revenue engine means that when they're thinking about their business and thinking about the pressures that they're facing, they're thinking about how do I efficiently drive that growth and Klaviyo is a really important part of that.

Speaker 2

Maybe I'll add one more comment on top of Vanda. The other thing that we watch is the percentage of revenue that comes from Klaviyo. We've seen a number of customers where that percentage is increasing. And so they're look it kind of dulled down on Meta said, we're a revenue engine and I think folks are looking at, hey, existing customers are great. They've already got existing relationships.

Speaker 2

That's a great source of demand when there's more uncertainty.

Speaker 8

Thank you.

Operator

Our next question comes from Nick Altman from Scotiabank. Your line is now open.

Speaker 15

Awesome. Thanks guys. I wanted to ask another question on the international of the equation, just given the strength there. But so you guys added 3 new countries on the SMS side and spoke to growth acceleration in EMEA and kind of building off of Rob's question earlier, but can you just talk about how much of an unlock some of these international additions have been on the SMS side and how much pent up demand you're seeing from some of these geos as you look to add SMS in new countries? And then just as a follow-up, just given the outside strength on the international side, how do you think about potentially accelerating those international efforts and investments just given the strength you're seeing?

Speaker 15

Thanks.

Speaker 2

Yes. Abi, I'll talk about that. So when we talk about international, we mentioned a couple of things that we're doing, both from a product and a go to market side. So we talked about localizing in terms of language. We also talked about localizing some of the marketing and content we're putting in region.

Speaker 2

And as we build up larger customer base, more partners, that's becoming a bit of a flywheel. In addition to that, making sure all of our products are available. So obviously with SMS, that's very important. And so we're going to continue to invest on both of those fronts, both languages as well as SMS and channel availability. That's why we're also investing, thinking about WhatsApp and the role that plays in some markets outside of the Americas.

Speaker 2

The other thing I'll say the last thing I'll say too is, I think when we think about going to market with partners, we really like to make sure that we're tightly integrated with them and folks that really serve international markets well. So for example, Shopify talked about their markets product. That's something that we've built out a really tight integration with. So we've worked really well together. And so we've worked with a lot of other tech platforms, software platforms that are more prevalent in Europe and Asia.

Speaker 2

That's helping drive a lot of that's driving a lot of demand and good product market fit. And in terms of investment, we continue to invest in like in countries and regions where we're seeing good growth. And I think what we're finding with France and what we've the programs we've been able to run there through digital demand gen and through our go to market team, I think that's going to become a bit of a template for us in how we approach other markets. And so where we're seeing strength there, we're going to invest behind that. And I expect a lot of our customers, they'll increasingly they may adopt us for email first, but then we'll be able to address them, add on SMS, CDP and reviews.

Speaker 15

Great. Thank you.

Operator

Our next question comes from Jackson Ader from KeyBanc Capital Markets. Your line is now open.

Speaker 16

Great. Thanks. This is Kyle Deel on for Jackson Ader. Maybe just squaring some of the headcount commentary. I think Amanda you might have alluded to some of the increased margin this period just coming from a little bit lower headcount.

Speaker 16

Can you kind of help us think about that in terms of sales capacity and where you guys currently are in terms of your plans for the year? And then also on that same note, how quickly you can ramp some of the new folks given the quickly approaching holiday season here? Thanks.

Speaker 2

Yes, I'll take that. And so on the hiring front, I'll say a couple of things. One, we've always been very intentional since we started out of the business about hiring and making sure that headcount was proportionate to the demand and the products that we want to build. So headcount grew slightly from the end of Q1 to the end of Q2. Specifically on the sales side, we think we've got the right amount of capacity and we're also prepared to scale that as we see more demand.

Speaker 2

And then to the last comment on the holiday season, one of the great things is we do actually see an uptick in customers that come to us that want to use Klaviyo over the holiday season. But actually a lot of that growth is coming from our existing customers using more Klaviyo over the holiday season. So in that case, we think we're very well staffed across all of our customer teams to meet that demand when folks say want to increase their usage. One of our core products, email or SMS, we think we're well staffed to cover that demand.

Operator

Our next question comes from Gabriela Borges from Goldman Sachs. Your line is now open.

Speaker 17

Hi, this is Kelly Valente on for Gabriela. Thanks for taking my question and congrats on the quarter. I wanted to ask on the mid market. How much of the momentum that you're seeing do you think is attributable to the broadening of your product set with CDP reviews and any incremental AI functionality? And then also to what extent are you seeing customer lands today that probably would not have closed without these new features?

Speaker 17

Thank you.

Speaker 2

Yes. Thanks for the question. I think it's a bit of it's a mixture of both. I think it's a testament to the product that we've built, the fact that Klayiyo is a data platform and that we can store all that data and help you put it to work. I think we talked about artificial intelligence and its ability to allow you to do more personalization to better attribute that and then automatically optimize.

Speaker 2

One area that we talked about was related to SMS, availability and mobile is as we have more of these channels, all in one place with our CDP and some of these analytic capabilities, I think what we're finding really resonates with larger customers is this idea that all of those features, all those applications, all work together. As we continue to invest in our product roadmap and build out those capabilities, I think we're finding that that's I think it's an even better fit for larger enterprises.

Speaker 3

One example of who we had in the quarter, I think of some of the questions that you're asking was an organic food and home goods company who came to us this quarter. They wanted to consolidate their multiple brands onto one single platform, so that they could optimize their strategy and have a unified multi channel reporting. And they chose Klaviyo in part because of our portfolio offering. So that portfolio feature that we recently launched allowed them to easily do high level reporting across accounts to drive better insights and they're really excited to get launched with Klaviyo.

Operator

Great. Thank you. Our next question comes from Yoon Kim from Loop Capital. Your line is now open.

Speaker 18

All right. Congrats on the strong quarter. Question around go to market motion, around new customer acquisitions for mid market and enterprise customers, which I think you mentioned was a record quarter. So just curious on where is the biggest source of these new 50 ks plus customers? Is it still Shopify Plus merchants?

Speaker 18

Or are you specifically going after legacy displacement opportunities outside of the Shopify platform? And also how much of your incremental sales and marketing investments are focused on going after these large customers outside of the Shopify platform? Thanks.

Speaker 2

Sure. Happy to answer that. So it's again, there's a distribution. We've got a great partnership with Shopify. We have a lot of mutual customers, especially into that mid market and enterprise.

Speaker 2

And we have a number of customers that have grown up on other tech stacks. So we don't break out the distribution, but like I think it's fairly varied at those in the higher, the larger customer sizes. And I think the reason we're winning across all of them is because of our tight integration with their commerce stacks and the ability to store all that data and then put it to work. So our partnership with Shopify is excellent and then we're looking for ways that

Speaker 1

we can both help folks that

Speaker 2

are using other software platforms as well as those that have maybe homegrown solutions, how do you make sure that we can help them and their development teams integrate easily. So when we talk about the ease of use of Kladeo, sometimes that means the ability for these larger enterprises to plug all their systems in, but inevitably, we know that there's going to be some data sources that they need to use our developer APIs for. And we think we have a really, really strong product offering, a really strong functionality there as well.

Speaker 18

Okay, great. Thank you so much.

Operator

We have reached our closing for the question and answer session. Thank you so much again everyone for attending Klaviyo's Q2 fiscal 2024 conference call. We hope you have a wonderful day. You may now disconnect.

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Earnings Conference Call
Klaviyo Q2 2024
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