Klaviyo, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Klaviyo’s First Quarter of Fiscal 2024 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. With that, I’d like to turn the call over to Jack Grant, Senior Director of Investor Relations and Strategic Finance. Please go ahead.

Jack Grant: Thanks, operator. I’m excited to welcome you to Klaviyo’s first quarter 2024 earnings call. We will be discussing the results announced in a press release issued after the market closed today. Please refer to our Investor Relations website at investors.klaviyo.com for more information and a supplemental presentation related to today’s earnings announcement. With me on the call today are Andrew Bialecki, Co-Founder and Chief Executive Officer; and Amanda Whalen, Chief Financial Officer. During today’s call, we will make statements regarding our business that may be considered forward-looking under applicable securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our outlook for the second quarter and full-year 2024.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements as a result of new information, future events or changes in our expectations, except as required by law. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks and uncertainties described under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2024, that is filed with the Securities and Exchange Commission, or SEC, and in subsequent filings made by us with the SEC, which may be obtained on the SEC’s website at www.sec.gov and on our Investor Relations website.

A software developer looking out a window while confidently typing away on their laptop.

In addition, today’s call includes a presentation of certain non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today’s earnings press release or earnings release supplemental materials distributed after market close today, which are available on our Investor Relations website. With that, I’ll now turn it over to Andrew.

Andrew Bialecki: Thanks, Jack. Thank you to everyone for joining us today. We’re pleased to share our strong first quarter results. Consumer-facing businesses of all sizes across the world are using our platform to power smarter digital relationships. This quarter, we had a number of exciting product launches, along with investments in our products, engineering, hardware ecosystem and customer-facing roles to provide the tools our customers need to drive revenue growth. I’ll cover these topics then turn it over to Amanda to cover our financial results and provide our outlook for the second quarter and full year 2024. Later, we’ll open up the call for Q&A. This was a strong start to the year for our business as we grew our revenue 35% year-over-year to $210 million, while generating 14% non-GAAP operating margin and $23 million of free cash flow.

We continued to make progress in the mid-market, internationally and integrating artificial intelligence into our products. We just returned from our Klaviyo London Conference known as K:LDN. We like to get close to our customers and partners, and it was great to see so many of them at the largest K:LDN ever and our largest in-person event since 2019. I was inspired by the energy from our customers, partners and employees for what we are building. One of the people I spoke with remarked that Klaviyo was the standard on which they judge the quality of software and the ecosystem around it. This was a further validation of the opportunity we have with consumer-facing businesses across the world. We’re doubling down with our community. Our customers are trusting us with their most valuable assets, their consumer databases to power smarter digital relationships.

We continue to see retail and e-commerce brands of all types turn to Klaviyo to drive revenue. Bain & Company recently put out their 2024 list of Insurgent Brands, the list of the fastest-growing consumer brands. These companies all had at least $25 million in revenue and are growing at least 10x faster than their peers. We’re proud to serve over 70% of these 97 brands with companies like Poppi, Liquid Death, Momofuku, Van Leeuwen Ice Cream and Dr. Squatch, all relying on Klaviyo to drive their revenue growth. During the quarter, we also closed new business with Fila and Fruit of the Loom. From the hottest and up-and-coming disruptors to the already established household names, businesses are finding us to drive revenue. We continue to drive momentum in the mid-market during the quarter.

We now have 2,157 customers generating over $50,000 in ARR, which was up 69% year-over-year. These customers represent 31% of our ARR, up from 23% compared to a year ago. This quarter marks the first time this cohort represents over 30% of our business. In the last 12 months, we’ve seen significant growth in the size of businesses like this that rely upon us. As of the end of the quarter, our top 10 customers have an average ARR of about $1.5 million, which is up over 70% year-on-year. This speaks to the value that we provide for our customers. During the first quarter, we landed one of the largest deals in our company history with a top online fashion store for women. This business came to us because of the quality of our Shopify integration and enhancements to the platform we have made over the past few years.

They’re taking advantage of our platform to consolidate their channels across e-mail, SMS and push notification. Since going live in the first quarter, they have sent over 1 billion push notifications to their consumers. Once they fully roll out, they expect to be sending up to 13 billion e-mails per year. Because of our investments in the scalability and reliability of our platform, we help power smarter digital relationships for businesses of all sizes. Another new customer during the quarter was Perry Ellis International and their portfolio of brands, including Callaway, Original Penguin and Rafaella. Perry Ellis was facing a few key challenges with their existing tech stack of multiple e-mail providers. With Klaviyo, they’ll be able to have a single view of their consumers, leading to better reporting, ability to A/B test and improve their consumer journey.

They’ll also be able to replicate their successful strategies across brands and reduce the time to experiment with automated flows. We’re excited to help Perry Ellis with their goal of driving more revenue growth. Our land-and-expand model continues to drive successful outcomes for both customers and for us. After first becoming a customer in the summer of last year, Helen of Troy’s’ home and outdoor brands, including Hydroflask, OXO and Osprey, have been driving success after consolidating e-mail and SMS with us. During the quarter, we expanded our business with them, which includes both an expansion in their SMS volume and adding on our CDP offering. The quality of our native integration has allowed them to free up developer hours and better harness their first-party data for their marketing.

We’re seeing benefits of our strong partner ecosystem to help drive our business. One expansion win during the quarter was with Andie Swim, a swimwear company, that we co-sold with our partner, Luck & Co. Andie Swim had been an e-mail customer of ours and now are consolidating their e-mail and SMS with us. Consolidating with Klaviyo is additionally allowing Luck & Co to grow their own business with Andie Swim in Canada. This is a great example of how we love to lean on our partners to drive fantastic customer outcomes and help our customers power smarter digital relationships. Now I’d like to take a few minutes to speak about some of our progress internationally. As I mentioned, we just returned from our EMEA-focused conference, Klaviyo London, or K:LDN.

And we’re really excited about our opportunity to grow that business. EMEA revenue grew 43% year-over-year during the quarter, and we see a strong opportunity to continue to grow there with more localized offerings. During the quarter, we added Manucurist, a fast-growing beauty brand based in France, as a customer. After running a trial with Klaviyo in some of their smaller geographies, Manucurist saw strong results and fast tracked their migration to Klaviyo. We’re excited to welcome them on board, and they’re a great example of the success we’re seeing internationally. The EMEA and APAC regions represented a little over 30% of our revenue in Q1, and we’re excited for our opportunity to expand our global footprint in the future as well. On the product front, we have a number of recent announcements that will help grow our international business.

At K:LDN, we announced further progress on some of our efforts on internationalization and localization. We now provide SMS coverage in nine countries with more expected to come in the next few months. Our ability to extend our SMS capabilities across geographies has met our international customers’ needs to more easily market to consumers across various geographies. Our intent is to add even more customers across Europe and allow them to connect with their consumers across channels. In fact, we recently announced our first localized French user interface, with our France rollout going live later this month. This will be the first time our platform is offered in a local language other than English. When we began marketing locally in French, we saw a meaningful increase in our self-serve conversion rates.

We’ll be continuing to roll out new languages and localized web pages on a targeted basis over the coming quarters. At K:LDN, we also announced the upcoming general availability of Klaviyo portfolio. Klaviyo portfolio streamlines multi-account management with unified insights across brands, simplifies operations and allows for efficient spend management and swift campaign execution by centralizing control and amplifying marketing success across diverse brands and regions. Portfolio allows for better multi-account management for our customer base and is really geared towards two primary types of our customers, international and those in the mid-market, as both of these types of customers tend to operate across multiple markets and brands. One of our recent customer wins, Liberated Brands, which includes Volcom, Quiksilver, Roxy and RVCA, is using portfolio to have a unified view of their digital relationships across their full brand portfolio.

This quarter, we further built out our key differentiator of higher-quality segmentation with our new segment preview feature. Now customers can view a preview of their segment count while building it, improving speed of building the correct segment, reducing support load, and improving manual segment processing fees. Finally, on the product front, we continued our momentum in artificial intelligence with the new launch of Help AI. Help AI uses natural language processing to allow customers to ask questions directly in Klaviyo and get answered in a self-serve manner. We see healthy usage of our AI-based features. But more importantly, we’re seeing proof points of AI driving real outcomes for our customers. We are seeing fast-growing adoption with over 20% of our customers using artificial intelligence features, including Segments AI, Email AI, Forms AI and SMS Assistant during the quarter.

In the last 12 months, our customers have created over 650,000 objects using those AI features. We’ve additionally helped our customers generate hundreds of millions of dollars in Klaviyo attributed value, or KAV, through Segments AI since its launch. Forms AI is driving significant value as well. One of our customers, Tata Harper, a natural luxury skin care brand, used Forms AI to optimize the placement and timing of sign-up forms on their website. 20 different variations of two forms were automatically generated and tested. And then 30 days after the test compared to the 30 days prior, form submissions for both had jumped over 65%. We’re continuing to invest across products to provide our customers the tools to drive revenue. We’re working to drive usage and adoption in our platform by improving our user interfaces and embedding artificial intelligence functionality.

On the go-to-market front, we’re continuing to invest across sales and marketing to make sure we are reaching customers across the globe. We’re further building out our sales capacity and partner network to expand our footprint internationally. We’re improving our ability to articulate the value of our platform and close larger accounts. On the international front, we’ll be taking the learnings from France to be well positioned for further localized expansion. Lastly, before turning it over to Amanda, I’d like to provide a couple of updates on our team. First, I want to announce that our CTO, Allen Chaves, has decided to step down at the end of this calendar year to spend more time with his family. I want to personally thank Allen for his significant contribution over the last 4.5 years to build Klaviyo into the company it is today.

When Allen joined, we had fewer than 40 engineers and he’s helped us scale tremendously and built a world-class team and a strong leadership bench. We greatly appreciate all of his efforts and wish him well. I’d also like to welcome Carmel Galvin as our new Chief People Officer. Carmel is going to be leading our global people operations team and HR function, including talent acquisition and retention, training and development, diversity and inclusion and corporate social responsibility. Carmel has significant experience within the software industry, most recently serving as the Chief People Officer of Stripe. We’re excited to have Carmel on board to help shape and guide our company culture as we build a world-class team. We’re proud of our results and confident in the momentum our business has to drive strong, efficient growth in 2024 and beyond.

And with that, I’ll turn it over to Amanda to cover the financials and our outlook. Amanda?

Amanda Whalen: Thanks, Andrew. Today, I will provide a brief overview of our first quarter 2024 financial results and discuss guidance for our second quarter and full year 2024. As a quick reminder, today’s discussion includes non-GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation of GAAP to the most directly comparable non-GAAP financial measures. As Andrew noted, we started the year with a strong first quarter. We continue to see strong growth at scale in an efficient manner, in line with our financial framework. In the first quarter, we generated $210 million in revenue, representing year-over-year growth of 35%, and we delivered a 14% non-GAAP operating margin. We continue to perform across our four primary growth vectors, adding new customers, expanding with those customers, expanding internationally, and growing into the mid-market.

In terms of adding new customers, we increased our customer base 17% year-over-year and are proud to now serve over 146,000 customers. We’re seeing consistent trends with regards to logo retention and a bit of softness on the new logo addition side, particularly amongst our smallest entrepreneur customers. As a reminder, while we continue to target entrepreneurs, we’re doing it through continued investment in product, and we are intentionally shifting more of our go-to-market investments towards SMEs and the mid-market. While net new logo adds were down in the quarter, revenue dollars from the new logo cohort was up year-over-year. You’ll see this reflected in our average revenue per customer, which continues to increase and was approximately $5,800 in Q1, up 15% year-over-year.

We are continuing to expand with our customers as evidenced by our dollar-based net revenue retention rate or NRR of 114%. As discussed last quarter, we expected our NRR to decline from the prior period due to the impact of lapping our September 2022 price increase and the spending trends we discussed on our last call. Consistent with last quarter, we are not seeing Yahoo and Google’s updated requirements impact our customers’ upgrade behavior, and we have not seen any material changes in our unsubscribe rates. We are continuing to see our customers drive strong KAV, or Klaviyo attributed value, through our platform capabilities, particularly through the ability to personalize and segment their consumer bases. Internationally, our aggregate revenue from EMEA and APAC increased 40% year-over-year in Q1 as we continued to increase our global business.

We’re seeing particular strength in Europe with strong growth in the U.K., Germany, France and the Netherlands. Finally, we’re seeing more and more businesses in the mid-market turning to us. We ended the first quarter with 2,157 customers, generating over $50,000 in ARR. This represented 69% year-over-year growth. As Andrew mentioned, we hit an important milestone this quarter with over 30% of our ARR now coming from these customers. Moving down the income statement. I will be discussing results on a non-GAAP basis. Gross profit for the quarter was $167.6 million, representing a gross margin of 80%. This marks a 2.5-point improvement compared to Q1 2023. We continue to see the benefits of our R&D team’s efforts on system and cloud engineering optimization.

We’ve continued to migrate volume to our Klaviyo Mail Transfer Agent, KMTA. Looking ahead, we expect to see these efforts help to offset a portion of the higher costs associated with the SMS channel. For the full year, we continue to expect a couple of points of headwinds on our gross margin compared to last year. Compared to Q1, we expect a couple of points of headwind to gross margin over the next two quarters and a further decline in the fourth quarter due to the growth and seasonality of SMS. Turning to operating expenses. Sales and marketing expense was $66.7 million or 32% of revenue for the quarter. We’ve continued to invest in marketing programs to generate demand and sales head count to grow our capacity to serve our international and mid-market customers.

Our new Klaviyo narrative that we rolled out in Q1 is resonating. We continue to closely monitor the unit economics of the different investments we are making, and we will continue to make investments where we see the right level of returns. R&D expense was $41.7 million or 20% of revenue. We’re continuing to invest behind our core products, AI capabilities and our new offerings, many of which Andrew highlighted earlier. Finally, G&A expense was $29.8 million or 14% of revenue. We are now lapping investments tied to public company readiness and expect to get more leverage from this line over time. For Q1, our operating income was $29.3 million, representing an operating margin of 14%. We also generated free cash flow of $23 million during the quarter, up 65% year-over-year and leading to a two-point improvement in free cash flow margin year-over-year.

To give some perspective on our ability to generate sustainable cash flow, our trailing 12-month free cash flow increased by $123 million compared to the prior year. Finally, turning to the balance sheet. We finished the quarter with $756.9 million in cash, cash equivalents and restricted cash with no debt. Next, I’d like to talk about our outlook for the second quarter and full year 2024. As a reminder, we experienced typical seasonality in our model. As we discussed last quarter, the second quarter typically has modest sequential revenue growth due to the lagging impact of downgrades after the holiday season. For the second quarter, we expect revenue to be in the range of $211 million to $213 million, representing growth of 28% to 29% year-over-year.

We expect non-GAAP operating income to be in the range of $19.5 million to $22.5 million, representing a non-GAAP operating margin of 9% to 11%. This sequential step down in operating margin is due to the timing of some investments made late in the first quarter, which have a greater dollar impact in the second quarter, particularly in engineering and go-to-market. For the second quarter, we expect fully diluted shares outstanding to be approximately 298 million. For the full-year, we are increasing our revenue guidance to be in the range of $899 million to $907 million, representing growth of 29% to 30% year-over-year. We expect non-GAAP operating income to be in the range of $97 million to $105 million, representing a non-GAAP operating margin of 11% to 12%.

As we spoke about last year, as the year progresses, we are making incremental investments across go-to-market and product opportunistically to set Klaviyo up for long-term growth. Based on the timing of these investments, we expect to see some year-over-year operating margin deleverage in the third quarter as well with margin expansion in our seasonally strong fourth quarter. Finally, for the full-year, we expect fully diluted share count to be approximately 298 million. To close out, we delivered strong results this quarter with healthy growth on the top line and strong operating income and free cash flow. We are excited for this year and for the long-term opportunity ahead of us, and we are focused on executing against it for our shareholders.

And with that, we’ll open up the call for Q&A. Operator?

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