Braze, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Three and nine months ended October 31, 2023. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Braze provides a cloud-based customer engagement platform, with revenue primarily from subscriptions. Its land-and-expand model relies on new customer wins and increased usage, channels and products among existing customers. At October 31, the company reported 2,011 customers and 6.0 billion monthly active users, up from 1,715 customers and 4.8 billion monthly active users at October 31, 2022 and January 31, 2023, respectively.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Revenue | $124.0m | $93.1m | $340.8m | $256.8m |
| Gross profit | $87.6m | $64.0m | $236.3m | $174.4m |
| Gross margin | 70.7% | 68.7% | 69.3% | 67.9% |
| Operating expenses | $122.7m | $100.9m | $348.7m | $286.0m |
| Operating loss | $(35.1)m | $(36.9)m | $(112.4)m | $(111.6)m |
| Net loss | $(31.0)m | $(33.9)m | $(101.9)m | $(106.9)m |
| Net loss per share, basic and diluted | $(0.31) | $(0.35) | $(1.03) | $(1.12) |
Q3 revenue grew 33.1% year over year; subscription revenue rose 33.0%. Management attributed subscription growth approximately equally to existing-customer expansion and new customers. For the nine-month period, revenue increased 32.8%, with 62.6% of subscription growth from existing customers and 37.4% from new customers. International revenue represented about 43% of nine-month revenue, versus 42% a year earlier.
Q3 operating expenses rose 21.7% overall, slower than revenue growth. Sales and marketing increased 25.7%, research and development 16.8%, and general and administrative 17.9%. Nine-month expenses increased 21.9%. Stock-based compensation was $73.0m for the nine months, up from $53.4m; this is a significant non-cash expense and a source of potential dilution.
Other income, net was $4.5m in Q3 and $11.9m for nine months, driven largely by higher investment income as interest rates rose. The company remained loss-making; the nine-month operating loss was slightly larger than a year earlier despite improved gross margin and lower net loss.
Cash flow, liquidity and obligations
For the nine months, operating cash flow was positive $3.0m, compared with cash use of $22.3m a year earlier. Non-GAAP free cash flow was negative $2.9m, improved from negative $37.1m. The improvement reflected higher collections and billings, partly offset by $32.6m of increased deferred contract costs, primarily commissions. Free cash flow is a company-defined non-GAAP measure.
At October 31, cash and cash equivalents were $60.5m and marketable securities were $407.5m, for total cash, cash equivalents and marketable securities of $468.0m; the MD&A separately reports $471.9m including restricted cash. Current assets were $566.8m and current liabilities $248.3m. Deferred revenue was $178.6m. The filing reports no borrowings or other debt balance; lease liabilities were $91.0m, including $14.1m current. Undiscounted operating lease payments were $124.7m, and non-cancelable business purchase commitments totaled $359.0m, primarily for cloud hosting, infrastructure and software services.
Management said available cash, cash equivalents and marketable securities should be sufficient for working capital and capital expenditures for at least the next 12 months. It noted that inaccurate estimates could lead to a need for additional equity, debt or other funding, potentially diluting shareholders or adding obligations.
Changes, outlook and notable items
- Retention and contracted revenue: Dollar-based net retention for the trailing 12 months fell to 118% from 126%; among customers with ARR of at least $500,000, it declined to 121% from 129%. Remaining performance obligations were $560.1m at October 31, up from $408.7m a year earlier; $369.9m was expected to be recognized within one year. RPO is not a revenue forecast.
- Acquisition: Braze acquired North Star Y, its reseller in Australia and New Zealand, on June 1, 2023. Adjusted consideration was $28.4m, including cash, shares and contingent consideration. The acquired business’s results were not material to the reported period. The acquisition added $28.1m of goodwill.
- Management commentary: Braze cited improved personnel efficiency, scale and technology-stack cost optimization as drivers of higher gross margin. It expects cost of revenue and operating expenses to rise in absolute dollars as it invests in infrastructure, customer support, sales, product development and international growth. No specific revenue or earnings guidance is provided in the supplied filing text. Management expects free cash flow to fluctuate.
- Seasonality: Customer messaging, compute and storage usage typically rises in the fourth quarter due to holiday activity, which may affect cost of revenue.
- Accounting controls: Disclosure controls were assessed as ineffective because of an unremediated material weakness in revenue-recognition controls, including controls over revenue applications, system-generated information and reconciliation of platform access to accounting records. Management reported no material misstatement or restatement and is implementing remediation measures, but had not operated and tested them long enough to conclude the weakness was remediated.
- Other unusual items and exposures: Q3 general and administrative expense included a $1.4m charitable stock donation. The filing records $0.8m of probable and estimable indirect-tax contingencies. Management identified macroeconomic and customer-spending uncertainty, competition and pricing pressure, reliance on third-party cloud and messaging providers, privacy and cybersecurity regulation, and foreign-exchange exposure as risks. It reported no pending litigation believed likely to have a material adverse effect.
Key facts for investors to verify
- Whether revenue growth and RPO translate into recognized revenue, and whether retention-rate declines stabilize.
- Whether gross-margin gains persist as infrastructure, messaging and customer-usage costs grow.
- Progress in narrowing operating and free-cash-flow losses, including the impact of stock-based compensation and deferred contract costs.
- Remediation and testing of the revenue-recognition control weakness, and any subsequent changes to financial reporting.
- Liquidity relative to substantial purchase commitments, lease obligations and possible future funding needs.
- Acquisition earn-out obligations and the performance of the Australia and New Zealand business.