Braze, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended October 31, 2021. Braze provides a cloud-based customer engagement platform; revenue is primarily subscription fees. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $64.0 million | $39.3 million | $167.6 million | $107.3 million |
| Gross profit / margin | $44.8 million / 70.0% | $24.9 million / 63.3% | $113.9 million / 67.9% | $68.0 million / 63.4% |
| Operating loss | $10.4 million | $8.8 million | $35.6 million | $21.6 million |
| Net loss | $9.1 million | $8.8 million | $34.8 million | $21.2 million |
| Net loss per share, basic and diluted | $(0.42) | $(0.47) | $(1.67) | $(1.21) |
| Cash used in operating activities | Not presented quarterly | Not presented quarterly | $10.9 million | $6.1 million |
| Non-GAAP free cash flow | Not presented quarterly | Not presented quarterly | $(13.8) million | $(9.8) million |
At October 31, 2021, cash and cash equivalents were $42.0 million and marketable securities were $34.9 million, totaling $76.9 million in cash, cash equivalents and marketable securities. Current assets were $130.6 million and current liabilities $122.4 million; deferred revenue was $98.4 million current. The filing reports no borrowings or funded debt. Accumulated deficit was $172.0 million.
On November 19, 2021, after the quarter-end, Braze completed its IPO, issuing 7.5 million Class A shares at $65 per share and receiving approximately $457.1 million net proceeds. Existing stockholders sold a further 1.3 million shares; Braze received no proceeds from those sales.
Changes and operating trends
- Q3 revenue grew 62.6% year over year; nine-month revenue grew 56.3%. Subscription revenue was $59.3 million in Q3 and $155.7 million for the nine months.
- Management attributed growth to customer expansion and new customers. At October 31, Braze reported 1,247 customers and 3.5 billion monthly active users. Existing customers generated 47.5% of Q3 revenue growth and 57.2% of nine-month growth.
- Dollar-based net retention was 126% for all customers and 136% for customers with at least $500,000 ARR, versus 124% and 134%, respectively, a year earlier.
- Gross margin improved, which management attributed to scale, infrastructure-cost efficiencies and customer-support efficiencies. Operating expenses continued to rise: Q3 sales and marketing grew 54.5%, R&D 71.9%, and G&A 81.1% year over year.
- Nine-month operating cash use increased to $10.9 million from $6.1 million. Deferred contract costs used $20.9 million of cash, partly offset by a $23.6 million increase in deferred revenue.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management expects continued investment and absolute increases in sales and marketing, R&D and G&A expenses; it expects free cash flow to fluctuate. Before the IPO, management said existing liquidity was expected to cover working capital and capital expenditure needs for at least 12 months.
- Management reported no material negative business impact from COVID-19 to date, but noted longer sales cycles for some prospects, customer spending concessions or delays, and uncertainty about future effects. Holiday-period messaging and compute requirements typically make Q4 the seasonally busiest period.
- Stock-based compensation was $18.0 million for the nine months, including $3.0 million tied to an April 2021 employee secondary transaction. The IPO satisfied performance conditions on certain RSUs; the company recognized $16.1 million of related compensation expense after quarter-end, in Q4.
- Three material weaknesses in financial reporting controls remained unremediated at October 31: the financial close process, revenue-recognition controls, and IT controls relevant to financial reporting. Management said the statements were fairly stated in all material respects, but disclosure controls were concluded to be ineffective.
- Key risks include competition and customer retention, reliance on third-party cloud and messaging providers, privacy and data-security regulation, foreign-exchange exposure, and the ability to scale while controlling costs. Management disclosed no material pending litigation and believed no material legal loss beyond recorded amounts was likely. It also identified $23.7 million of operating lease commitments as of October 31; subsequent Chicago and Austin leases added $11.9 million of minimum payments.
- The IPO established a dual-class structure: Class B shares carry ten votes each versus one vote for Class A. The filing warns of concentrated voting control, potential dilution and lock-up expirations.
Important facts for investors to verify
- Whether revenue growth, customer expansion and retention remain strong, and whether gross-margin gains persist as infrastructure usage grows.
- Cash burn, deferred contract-cost investment and the timing and scale of post-IPO compensation expense and public-company costs.
- Progress in remediating all three material weaknesses and the effectiveness of the new controls over revenue recognition, financial close and IT systems.
- How the $457.1 million IPO proceeds are deployed, and the effects of future equity awards, share sales and dual-class voting control.
- Exposure to privacy and data-transfer rules, third-party platform availability, customer budget changes and seasonal usage demands.