Klaviyo, Inc. (NYSE:KVYO) Q4 2023 Earnings Call Transcript

Klaviyo, Inc. (NYSE:KVYO) Q4 2023 Earnings Call Transcript February 28, 2024

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 Fourth Quarter of Fiscal 2023 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.

Jack Grant: Thanks, operator. I'm excited to welcome you to Klaviyo's fourth quarter and full year 2023 earnings call. We will be discussing the results announced in a press release issued after the market close 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 first quarter and full year 2024.

These forward-looking statements are subject to numerous 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 the new information, future events or changes in our expectations except as required by law. For a discussion of 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 September 30, 2023, filed with the Securities and Exchange Commission or SEC and in subsequent filings made by us with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023, to be filed with the SEC, which may be obtained on the SEC's website at www.sec.gov and on our Investor Relations website.

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In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation 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 are excited to share our fourth quarter and full fiscal year results as well as update across the business. The fourth quarter is critical to our customers and we delivered for them. I want to thank both our partners and the Klaviyo team for ensuring our customers had a great holiday season. On today's call, we'll go through some of the highlights from the quarter, followed by some updates on products, our market and I'll wrap up with our fiscal year 2024 focus areas. I'll then turn it over to Amanda to cover our financial results in more detail and provide our outlook for the first-quarter and full-year 2024, before we open up the call for Q&A. We measure our success by our customer success.

We helped our customers generate well over $50 billion in Klaviyo Attributed Value KAV in 2023. Whether a business is just getting started or is already a household name like Mattel, we help them power smarter digital relationships and drive revenue growth. This was another strong year for our business as we grew our revenue 48% year-over-year and drove over $100 million in free cash flows. The fourth quarter marked the first quarter that we generated over $200 million in quarterly revenue. We're continuing to see our strategy resonate across key growth initiatives. We're adding more customers, expanding with those customers, growing internationally and scaling into the mid-market. Amanda, will cover our progress on these growth areas in more detail.

I'd like to call out a few notable moments from the past quarter. We know the holidays are very important for our customers and we helped power their growth. At the peak hour, our customers generating nearly $60 million in KAV. One of my favorite stories from the Black Friday Cyber Monday or BFCM weekend was Jones Road Beauty. Jones Road is a nine-figure cosmetics company started by Bobbi Brown. The Jones Road team use Klaviyo helped drive our record-setting BFCM for their brand, with their KAV during BFCM up by over 150% year-over-year. Jones Road use many of the best practices, we see working more broadly across the industry. They leaned into their loyal customer base with more personalization driven by their segmentation strategy to execute those.

We continue to provide our customers with an efficient channel, drive revenue, and complement and amplify their marketing spend on advertising networks. We're proud of stories like these, where we're able to drive growth for our customers and empower them to own their destiny. Collectively, our customers did a lot of marketing and we were there for them to meet their demands. Our systems delivered 11.6 million messages per minute at peak times and 14.7 billion total messages during the BFCM weekend. We delivered almost two times the number of total messages this Black Friday Cyber Monday, compared to 2021. We're continuing to improve our product to ensure we are providing excellent deliverability for our customers. One of the recent focuses of our R&D team has been adding to our own lower-level email infrastructure to give us more control and visibility on how we deliver our customers' messages and reduce costs.

We delivered over 1 billion messages through Klaviyo's mail transfer agent during the BFCM weekend. We're ensuring our platform can scale efficiently, while providing customers with the tools they need to focus on driving revenue. We're continuing to turn the success we are powering for our customers into growing our own business. We're proud of the fact that some of the fastest-growing brands out there, including eight of Numerator top 10 fastest-growing CPG brands in 2023 and seven of Retail Dive's top eight DC brands to keep an eye on in 2024 rely on Klaviyo to power their growth. 2023 was a banner year of brands choosing Klaviyo for expanding their business with us. Leading companies like Stanley 1913, Dollar Shave Club, Khloe Kardashian's Good American, Sugarfina and HUM Nutrition all chose to drive their revenue growth with us.

Our ability to easily harness our customers' first-party data continues to be a differentiator in the mid-market. We're excited that Fresh Clean Threads, a mid-market apparel retailer and one of the fastest-growing women-owned businesses in the country, chose Klaviyo during the quarter. Our 350-plus native integration and APIs are allowing Fresh Clean Threads to better leverage all of their first-party data for a complete view of their customers and drive more revenue. We're excited about our opportunity to continue to serve large customers. And more and more customers are looking to consolidate their tech stack and looking to us as the one vendor for their digital relationships. During the quarter, we saw a European Wax Centers consolidate their SMS channel with their existing Klaviyo email subscription.

They are now able to create unified customer journeys across email and SMS from marketing and customer outreach to appointment reminders and updates. Finally, we are continuing to see success expanding beyond our core retail and e-commerce markets. During the quarter, we added F45 Training, a fitness and training center operator with more than 1,800 locations as a customer. With their previous provider, they were unable to build automations and flows into their customer journeys. They're now going to use our Mindbody integration to help incorporate more automation into their marketing efforts to drive increased targeting and personalization. It's early days in these new vertical offerings, but we are seeing an increasing number of proof points and our ability to scale beyond retail e-commerce.

Now, I would like to talk about a few things on the product front, particularly around artificial intelligence and our vision there. AI has changed the world in the way e-commerce marketers work. First, predictive AI made it easier to send the right message at the right time. Then generative AI set off the content creation process and made marketers more productive. At Klaviyo, we think the future of business-to-consumer marketing is autonomous. It's not just about AI that makes messages more personal and saves you time, it's about empowering you to generate and refine revenue-driving ideas effortlessly. Imagine a platform that not only creates tailored experiences for each individual consumer, but continuously learn and adapt, refining strategies for the best outcome in a fraction of the time.

The brand who will win won't just be using one type of artificial intelligence. They'll be using predictive, generative and autonomous AI to save time, executing today's vision and building tomorrow's strategy. That's why today, we're introducing Klaviyo AI, which empowers businesses to unlock revenue-driving opportunities and deliver exceptional consumer experiences across channels. AI has always been fundamental to powering Klaviyo, and today, it's getting better with features like Segments AI, which generates complex segments for you in seconds based on simple audience prompts, and Forms AI, which uses artificial intelligence to optimize web forms for conversion by testing multiple versions of your form to find the highest converting display time automatically.

And finally, you've been able to generate high-performing subject lines with AI, and now you can do the same for entire blocks of email content. Email AI is all about helping you work more efficiently, simply type your campaign's goals and Klaviyo will design an on-brand email session, et cetera. Our customers have already seen the value of our artificial intelligence tools. Proozy, which offers a wide range of clothing options, including activewear, outerwear and golf apparel for brands like Oakley, adidas and Reebok, started using our subject line in SMS AI to save time in early 2023. They called it game changer. In addition to saving about 45 minutes a day in subject line creation, engagement improved too. Their SMS unsubscribe rate dropped by over 20% year-over-year.

We're excited to continue to build on this as we enter this new phase of marketing. In addition to our new offerings, the early feedback on CDP has been promising. One of our early adopters, Aura Frames, was able to drive efficiencies across their data management and reporting, specifically exporting CSV files, manually editing and cleaning data and analyzing the data. As a result of adopting our CDP, they saved over 10 hours per week, consolidating their customer data under one roof and supercharged their retention strategy for their 8 million app users. We shipped hundreds of new features for our customers in 2023. Just this past quarter, a new feature our customers were particularly excited about with our updated UI for our core flows functionality.

This updated UI allows for improved editing, updated components and a more modernized approach for our users. We're going to pair new launches with improvements to our core to provide the tools needed for our customers to drive revenue through an evolving landscape. One of the recent changes to our industry was around updated requirements from Google and Yahoo! for large email centers. These focus on deliverability, spam and the overall consumer experience. As a business focused on enabling our customers to drive more personalized and relevant consumer experiences, we believe these changes are positive for the industry. We care deeply about our efforts to ensure excellent deliverability for our customers, and many of the requirements are in line with best practices of how our customers were already using Klaviyo.

We have been working with our customers to make it easy to ensure they are compliant with the updated requirements. For example, one of the requirements is one-click unsubscribe, which we built into our product in January, so it is a frictionless experience for our customers. We also launched a deliverability score for our customers to provide a clear view on their deliverability health. The updated requirements from Google and Yahoo! went to effect in February and are continuing to roll out through April. To date, we have not seen material changes in consumer behavior as a result of these new requirements or seen anything that would indicate that they are materially impacting subscription sizes. At this time, we don't anticipate a meaningful impact to our business.

Over the long term, we believe that the companies that provide their customers with the ability to deliver personalized, targeted and relevant content will win the market. We have a few key priorities to continue to drive strong growth this year. We're continuing to invest behind our four near-term growth drivers, adding more customers, expanding with those customers, expanding internationally and growing into the mid-market and beyond while planting seeds for longer-term growth. Within R&D, we are building more tools for customers of all sizes across the globe to make it even easier to use Klaviyo. We'll be launching new features focused on the mid-market and continuing our internationalization and localization efforts. While doing this, we're going to keep building more artificial intelligence into our platform to make it even easier for our customers to build smarter digital relationships.

On the go-to-market front, we have a few focus areas. Within sales, we are growing our sales capacity across our teams, focused on mid-market and international new customer acquisition and cross-selling into our install base. For our larger customers, we are focused on supporting these customers with cross-functional teams to drive further adoption and expansion. Klaviyo is the marketing platform that powers smarter digital relationships. Marketing is focused on evolving our brand and narrative to better tell the story of our full platform capabilities for businesses. Finally, we're going to continue to invest behind growing our 5,000-plus partner ecosystem to ensure our customers have the right agencies, system integrators and technology partners to help them succeed with Klaviyo.

A great example of this is our recently announced partnership with L Catterton to enhance the marketing capabilities of their portfolio of companies. We'll be further building out our ecosystem the upcoming year and beyond. And with that, I'll turn it over to Amanda to cover the financials in more detail. Amanda?

Amanda Whalen: Thanks, Andrew. Today, I will provide a brief overview of our fourth quarter and full year 2023 financial results and discuss guidance for our first 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 measure. We are pleased with our financial performance. We continue to see rapid growth at scale in an efficient manner, in line with our financial framework. In the fourth quarter, we generated $201.6 million in revenue, representing year-over-year growth of 39%, and we delivered an 8% non-GAAP operating margin. The fourth quarter is seasonally strong for us due to the holiday shopping season and how our business model scales with our customers' growth.

We delivered for our customers during their most critical time of the year and shared in their success. Our growth is powered by four main vectors, adding new customers, expanding with those customers, expanding internationally and growing into the mid-market. We continue to perform on each of these vectors. In terms of adding new customers, we increased our customer base 20% year-over-year and are proud to now serve over 143,000 customers. We are continuing to expand with our customers as evidenced by our dollar-based net retention rate or NRR of 117%. 16% of our customers now use our SMS offering, up 2 percentage points from last year, which highlights the value customers see in our platform capabilities. Internationally, our aggregate revenue from EMEA and APAC increased 46% year-over-year in Q4 as we continue to increase our global footprint.

Finally, we're seeing more and more businesses in the mid-market turning to us. We ended the fourth quarter with 1,958 customers generating over $50,000 in ARR. This represented 80% year-on-year growth, and Q4 was the largest quarter in company history for net customer adds of this cohort. Success with our larger customers is evident in our annualized revenue per customer as well, which was $5,600 in Q4, an increase of 16% year-over-year. As expected, our NRR saw a slight decline from the prior period due to the impact of lapping our September 2022 price increase. Historically, our customers dial back their SMS spend after the holidays, which we experienced at the end of this year. In the last 2 weeks of December, we saw customers being more thoughtful compared to prior years with regards to the level of their overall spend, particularly among customers who use our SMS offering.

Looking ahead, we expect these trends and some price increase lapping to post headwinds to NRR in the coming quarters. Our customers continue to drive strong KAV through our platform's capabilities particularly through the ability to personalize and segment their consumer bases. This high ROI helps drive strong customer retention. Moving down the income statement, I will be discussing results on a non-GAAP basis. Gross profit for the quarter was $159.8 million, representing a gross margin of 79%. This marks a 5-point improvement compared to Q4 2022. During the quarter, we incurred a $4 million benefit or two of the five-point improvement from milestone-based credits related to our cloud hosting. We continue to see the benefits of our R&D team's efforts on system and cloud engineering optimization.

Our efforts around KMTA that Andrew highlighted are a great example of this. Through these initiatives, we are able to provide better customer experiences while simultaneously increasing our efficiency. Looking ahead, while we expect to see these help to offset a part of the higher costs associated with the SMS channel, we do expect a couple of points of headwind on our gross margin this year. Turning to operating expenses. Sales and marketing expense was $77.3 million or 38% of revenue for the quarter. As we said last quarter, areas we are investing in include marketing program spend and sales headcount to grow our capacity. We continue to closely monitor the unit economics of different investments we are making, and we will continue to make investments where we see the right level of returns.

Some of our investments in the mid-market take a bit longer to yield than SMB investments that drive strong overall ROI. R&D expense was $37.8 million or 19% of revenue. We're continuing to invest behind our product, AI capabilities and our newer offerings. Finally, G&A expense was $28.5 million or 14% of revenue. This is an area where we expect to continue to get more leverage over time. For Q4, our operating income was $16.2 million, representing an operating margin of 8%. For the full year, we finished with an operating margin of 11%, marking a 17-point improvement compared to fiscal '22. We also generated free cash flow of $34.7 million during the quarter and $110 million for the year. Our full year free cash flow margin was 16%, an improvement of 25 points year-over-year.

Our performance this year further supports our belief that we do not need to choose between growth and generating cash flow as we invest to drive long-term growth. Finally, turning to the balance sheet. We finished the quarter with $739.7 million in cash, cash equivalents and restricted cash with no debt. One note for your models is that during the quarter, we did net settle vested equity using $18.8 million of cash, which is reflected in our financing activities, and this activity is excluded from free cash flow. Now I'd like to talk about our outlook for the first quarter and full year 2024. As a reminder, we experienced typical seasonality in the business. As I mentioned earlier, Q4 is our strongest quarter as a result of Black Friday Cyber Monday and the holidays.

In turn, Q1 is our seasonally lightest quarter as customers traditionally pare back their spend in response to consumers tightening their belts after the holidays. Q2 and Q3 typically exhibit modest sequential upticks before picking back up again in Q4. Looking ahead, we assume the linearity of revenue by quarter in fiscal 2024 will follow the trends we experienced in 2023. Given the current macro environment, we're setting our guidance with prudence and factoring a continuation of the recent trends we've seen in customer spend into our guidance. For the first quarter, we expect revenue to be in the range of $201 million to $203 million, representing growth of 29% to 30% year-over-year. We expect non-GAAP operating income to be in the range of $22.5 million to $25.5 million, representing a non-GAAP operating margin of 11% to 13%.

In the first quarter, we are continuing to invest, particularly in our sales capacity. In addition, we expect Q1 free cash flow will be muted due to the timing of vendor payments. For the first quarter, we expect fully diluted shares outstanding to be 297 million. For the full year, we are guiding revenue to be in the range of $889 million to $897 million, representing growth of 27% to 28% year-over-year. We expect non-GAAP operating income to be in the range of $94 million to $102 million, representing a non-GAAP operating margin of approximately 11%. As we highlighted last quarter, in fiscal '24, we are making investments across go-to-market and product to set Klaviyo up for long-term growth. Based on the timing of these investments, we expect to see some deleverage year-over-year in operating margin in the first half of the year as we front-load investments.

We expect more leverage in the latter part of the year as we head into our seasonally strong fourth quarter. Finally, for the full year, we expect fully diluted share count to be 299 million. To close out, we delivered strong results this quarter with rapid growth on the top line and a healthy bottom line with strong free cash flow generation. 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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