Braze, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended October 31, 2022. Braze provides a cloud-based customer engagement platform, primarily through subscription contracts. All amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $93.1 | $64.0 | $256.8 | $167.6 |
| Gross profit | $64.0 | $44.8 | $174.4 | $113.9 |
| Gross margin | 68.7% | 70.0% | 67.9% | 67.9% |
| Operating loss | $(36.9) | $(10.4) | $(111.6) | $(35.6) |
| Net loss | $(33.9) | $(9.1) | $(106.9) | $(34.8) |
| Net loss per share, basic and diluted | $(0.35) | $(0.42) | $(1.12) | $(1.67) |
- Subscription revenue was $89.0 million in Q3, up 50% year over year; professional services and other revenue was $4.1 million, down 11%.
- Q3 gross margin declined 1.3 percentage points year over year. The company cited infrastructure spending and nonrecurring hosting-migration costs, partly offset by technology optimization and support efficiencies. Nine-month gross margin was unchanged.
- Operating expenses rose faster than revenue: Q3 sales and marketing increased 79%, research and development 101%, and general and administrative 73%. Stock-based compensation was $19.3 million for the quarter and $53.4 million for the nine-month period, excluding amounts capitalized.
- Other income was $2.6 million in Q3, mainly reflecting investment income. The company recorded small income tax benefits; it maintains a full valuation allowance on net deferred tax assets.
- At October 31, cash and cash equivalents were $45.4 million and marketable securities were $428.2 million, totaling $473.6 million in cash, cash equivalents and marketable securities. Current assets were $556.2 million; current liabilities were $181.7 million. Deferred revenue was $140.7 million.
- For the nine months, operating cash flow was $(22.3) million and capital expenditures plus capitalized internal-use software were $14.8 million. Company-defined non-GAAP free cash flow was $(37.1) million, compared with $(13.8) million in the prior-year period. Investing cash outflow of $416.5 million chiefly reflected purchases of marketable securities, partly offset by maturities.
- The balance sheet reports operating lease liabilities of $51.7 million. No borrowings or debt balance is presented in the supplied balance sheet.
Changes versus the prior comparable period
- Q3 revenue grew 45.6% year over year; nine-month revenue grew 53.2%. Q3 subscription growth reflected both existing-customer expansion and new customers; management attributed approximately 50.8% of the quarterly subscription increase to existing customers and 49.2% to new customers.
- Customers increased to 1,715 from 1,247 a year earlier. Monthly active users were 4.7 billion, versus 3.7 billion at January 31, 2022. Trailing-12-month dollar-based net retention was 126%, unchanged from a year earlier; for customers with at least $500,000 ARR, it was 129%, versus 136%.
- Losses increased substantially as operating expenses expanded. Q3 net loss widened to $33.9 million from $9.1 million; nine-month net loss widened to $106.9 million from $34.8 million. Loss per share was lower than the prior-year comparison, in part alongside a much larger weighted-average share count following the November 2021 IPO.
- Cash and cash equivalents fell from $478.9 million at January 31, 2022, while marketable securities increased from $35.2 million, largely reflecting investment of available funds. Combined cash, cash equivalents and marketable securities declined slightly, to $473.6 million from $514.1 million.
Outlook, risks and unusual items
- Outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management said existing cash, cash equivalents and marketable securities should meet working-capital and capital-expenditure needs for at least the next 12 months. It expects continued investment in sales and marketing, research and development, infrastructure and public-company operations, and expects free cash flow to fluctuate.
- Management reported slower growth from new customers amid macroeconomic uncertainty and warned that customer technology budgets may weaken. Other cited risks include competition and pricing pressure, reliance on third-party cloud and messaging providers, privacy and security regulation, foreign-exchange exposure, and the company’s history of operating losses.
- Non-cancelable business purchase commitments were $168.5 million and operating lease obligations were $62.9 million as of October 31, primarily due over the next five years. In November, the company entered into a separate three-year vendor spending commitment of $92.9 million; shortfalls against the agreement’s threshold may become payable.
- In November, Braze agreed to sublease approximately 92,300 square feet of New York office space beginning October 2023, with fixed rent of $0.6 million per month, subject to a $6.6 million rent abatement and third-party consent. In December, it granted employee RSUs covering 1.2 million shares with grant-date fair value of $29.3 million.
- The company recorded a $4.3 million expense for a charitable stock donation during the nine months. Marketable securities had $8.0 million of unrealized losses at October 31, primarily attributed to interest-rate volatility; the company reported no recognized credit losses and said it did not intend, and was not likely required, to sell before recovery.
- Disclosure controls were concluded to be ineffective because three material weaknesses remained unremediated: financial close policies and controls, revenue-recognition controls, and IT controls relevant to financial reporting. Management nevertheless stated that the financial statements were fairly stated in all material respects under GAAP and described ongoing remediation.
- The company expects to cease being an emerging growth company at the end of FY2023, increasing reporting and compliance requirements. It reported no litigation expected to have a material adverse effect and stated that recognized indirect-tax contingency liabilities were $0.5 million at October 31.
Important facts for investors to verify
- Whether customer acquisition, expansion and retention remain resilient, particularly given slower new-customer growth and the decline in retention among larger customers.
- Whether expense growth, stock-based compensation and cash burn moderate enough to improve the path toward profitability and positive free cash flow.
- The terms, timing and cash impact of the $92.9 million vendor commitment, existing purchase commitments and planned office sublease.
- Progress in remediating the three material weaknesses, especially revenue-recognition and IT controls, before the company’s transition out of emerging growth company status.
- How interest rates, marketable-security valuations, customer spending, infrastructure costs and third-party service dependence affect results and liquidity.