Morning, everybody. I am Tyler Radke, Citi's Co-Head of U.S. Software. We are joined by Braze Co-Founder, CEO, Bill Magnuson. Bill, thank you for joining Citi's Tech Conference, I think the third or fourth year in a row, and shortly after earnings.
Yep. Absolutely.
Always appreciate it. There has been a lot of noise in the market, and maybe we can just sit on the earnings topic for a moment. To kick off, could you just walk us through how the quarter played out? I think there were a lot of questions on the dynamics specifically around CRPO growth. So maybe we could hit that just with how you are seeing underlying growth versus some of those metrics.
Yeah, absolutely. So yeah, I mean, overall, great quarter. As we mentioned, bookings was strong within the quarter, and it was also one of the most consistent global results that we have seen probably in the last five years, with all of our major regions contributing at a high level. Similarly, trends around our competitive win rates and sales force productivity all continued into the quarter, and so great to see that. The organic CRPO did take 2 percentage point downstep to 23% in the quarter. Part of that also contributed to by just seasonality of Q4 and Q1 of this year were really big-
Yeah.
-renewals quarters, which is great to get through more of the renewals for the year a little bit earlier on. Some seasonality contributing there. Overall, we were really happy with the continued bookings momentum from Q4 into Q1 into Q2, and looking at the pipeline and the setup for the second half. So, happy to flow through the beat and put a raise into the revenue forecast as well for the full year. We are looking forward to Forge here in a couple of weeks, which historically has always been a big accelerator pipeline for us. I think that our competitive positioning also continues to be in a really strong space, especially vis-à-vis the legacy marketing clouds.
The continuation of share gain within that part of the, primarily in the enterprise space, is something that certainly my sales leaders are looking forward to here through the end of the year and into the next few quarters. Our AI roadmap is really resonating out there in the market.
Yeah.
When you look at the pace at which we have been able to bring products to market, the acceleration of the roadmap this year, the fact that Agent Console and Operator got put into people's hands months ahead of schedule and now we have done the same with a lot of our work around our remote MCP server, our Headless Operator, and other work around things like Decisioning Studio Go, all of which you are going to hear a lot more about at Forge. All of those things have accelerated, and one of the really exciting things about a lot of the Forge updates this year is just how much of it is already in beta or already moving into general availability. This is definitely not a year where there is a bunch of slideware and future promises.
The build is all happening in real time, and that means that we are putting capabilities in customers' hands faster. It also means it is driving contributions to our growth more quickly as well. It is enhancing our competitiveness, too, because frankly, in the competitive landscape, I think that we are sprinting and everyone else is still standing still.
Yeah. It is great to hear. I definitely want to hit on some of the BrazeAI product stuff, but just a few more financial questions because they have been topical.
Yep.
How would you characterize just this reclassification of revenue from subscription into Pro Serv? I think you had talked about maybe that dynamic allowing you to progress through renewals faster. Just what happened, how should investors kind of think about that PS versus subscription mix-
Yeah.
-going forward?
Yeah. First of all, I will just take a step back. The motivation for the pricing and packaging change that is now playing out in the numbers, which I will explain in a bit more detail. But the motivation actually was to do a better job of aligning the Professional Services delivery with exactly where customers had a distinct willingness to pay for the different types of advisory services that we provide. You actually, if you go look at our post-sales headcount, you will see that our post-sales headcount is not swelling at this rate that the Professional Services revenue, obviously, it appears to be growing. That is because while there is this kind of accounting shift in terms of how this revenue is labeled, it is not like there has been a shift in business strategy towards services.
In fact, actually, the relative proportion of post-sales headcount is shrinking i n the business because we are achieving efficiency gains through Operator doing things like delivering technical support and customer success advisory and things like that.
One thing that is happening, I mentioned this on the call, is that there are forms of advanced advisory services that we are seeing increased demand for because of some of the increases in the adversarial environment. Deliverability is harder than ever, and everyone in this room with an email inbox probably understands why. When you look at the amount of agentic marketing messaging and mail traffic that is out there right now, for brands that actually are trying to play this game the right way, with the right levels of consent and engaging with their loyalty programs and loyal audiences and things like that, simply getting that signal through all the noise is harder than it has ever been.
We are seeing incremental demand for things like our premium deliverability services. That is because your pipes cannot be dumped if you are going to actually drive revenue and get effectiveness out of your messaging and customer engagement strategies. Similarly, on the technical account management side, our TAMs really help customers with the architectural setup of the way that they set up their marketer workflows, and the way that they integrate their data flows and things like that. We are seeing increased demand for that too, because the AI models that are able to drive enhanced performance for customers need to be fed with the right data and context-
Yeah.
-in order for them to do their job. There is a ton of enthusiasm for marketers to do things like adopting our MCP server, being able to adopt and run Operator, and then additional more bespoke AI workflow work. We have got customers that are using Claude Cowork and then Headless Operator and our MCP servers together, where they are going from full brief to end-to-end strategy, and then actually Headless Operator can go and implement it in Canvas. They can actually work in a Claude Cowork workflow, if you will. Then go and see the results of all the programs that got built inside-
Yeah.
-the Braze dashboard. That is really cool, but requires also setting up those MCP servers and getting the right secure architectural setup in place and such. Those are places where our technical account managers help people with that. A part of this is that we are seeing increased demand for those advisory services. I will remind everyone that actually the way those advisory services are purchased from Braze is that they are always co-termed with subscriptions, and the revenue is recognized ratably. Like 90% of those services are recurring and they are tied to the exact same contract length as everything else.
Right.
That's kind of always been the case. Then the other thing, as I mentioned, that has been happening is that we started breaking out certain services that used to be bundled into the platform. That has caused them, from an accounting treatment standpoint, to move from being classified under subscription to under Professional Services. That means that when you do the year-over-year compare, that same revenue was in subscription in the prior period, and now it's in services, but it has traveled, and that is causing the relative growth rates to look out of whack.
I see.
If you want to do an apples-to-apples comparison, and we shared this on earnings night as well, but the apples-to-apples percentage of revenue from Professional Services, if we had not done the packaging change, would be about 4%-5% of the revenue would be in services. If you want to look at that as a comparison point to just get a better understanding of how the underlying subscription revenue has been growing, you can use that as a number to flow through.
Got it. Okay. No, that's helpful. Then on gross margins, typically Braze has seen some gross margin pressure in Q4 due to holiday messaging. How should investors think about the gross margin outlook this year?
Yeah. The seasonality will operate exactly the same as it has in prior years. As a reminder as well, as a consequence of our revenue being recognized ratably, which means that it is throughout the term, or throughout the multi-year terms, in most cases that customers have. The Q4 is just a higher activity level-
Sure.
-quarter across the board. It is not just SMS and WhatsApp. It is like literally, we have more servers online because there is more data flowing and everything else. So, it is a quarter with more activity and therefore higher infrastructure cogs. So, it will have the same seasonality in gross margin percent.
Yeah.
All that being said, gross margin definitely has been a big focus area for us. We were working on it on multiple fronts. The new products that we have been rolling out in the BrazeAI family are all priced to be accretive to overall gross margin. Similarly, there are certain workloads that we are able to monetize now for the first time. For instance, we do not charge for push notifications in Braze, we never have. And we send over 1 trillion of them every year. But as customers start to use our AI capabilities to optimize those push notification campaigns, we will actually start to make money on those workloads for the first time incrementally.
Yeah.
That is an exciting forward-looking opportunity as customers start to invoke our more advanced models in more and more of their existing messaging workloads as well. And a lot of that is on the foundation too of the work that we have done to move our whole, the vast majority at this point, of our customer base into our Action Credits model.
Right.
Which allows for them to more fungibly utilize those committed credits across different channel types, or using the same credits that they previously would purchase to send an SMS, they can now also use to invoke a reinforcement learning model that's going to enhance the performance of-
Right.
-their upcoming campaigns. I just got another data point yesterday of a customer testing out Content Optimizer in their SMS welcome flow, and they had more than an 80% increase in clicks in the welcome flow and similarly, I think it was like 81% on clicks and 83% on conversions, in terms of uplift from taking the workflow that they were doing before, where they were spending a good amount of money to run a welcome workflow through SMS as a channel. They ran a 90/10 test where they put 90% of the traffic on the new one that used Content Optimizer, and they left 10% on the prior strategy as a control. That experiment, of course, is dead simple to do in Braze, to be able to go from your old strategy to one that has an experiment branch on it.
The 90% path used Content Optimizer, and they achieved over an 80% increase in the performance of that. That's just a great example where there's a whole bunch of unoptimized workloads that have been previously programmed-
Right.
-into canvases in Braze, that we're really looking forward to customers being able to go back through, not just build with AI moving into the future, but actually also go back through all the abandoned cart campaigns, and the new user onboarding series, and the cross-sell messaging, and things like that, and put more advanced AI into the flows that actually generate that content in order to drive more performance for them. I think that there's a lot of performance enhancement opportunity for our customers as they go and work through that. The good news for them, from just the burden of doing those builds and modifications, is that Operator can now do it for them.
We have been rapidly advancing the capabilities of Operator. It now, even just over the last six weeks, we've added the capability for it to independently navigate to all different pages of the dashboard. It can now also build multi-step canvases for customers, so you can just give it, "Hey, I want to build a new welcome series," or, "I want to build a new abandoned cart campaign." For instance, within an abandoned cart campaign, it knows now, and we're going to continue to train it on these more advanced strategies, that an abandoned cart campaign should use an Agent Console step in order to enhance the content personalization that actually gets sent out. It's no longer just like a, here's the starting trigger and a time delay, and then send the message.
It's also going to include, and send the message based on the intelligent channel for that given customer. Take all the breadcrumbs that you got along the way around what else the customer maybe looked at recently, the last few products that they were considering between, et cetera, put all that in a context window and have the agent actually use that understanding from the breadcrumbs of the customer journey leading up to that to write a really compelling abandoned cart compare and contrast of everything that they were looking at recently, or something with inspiring ideas of a great recipe or a great fitness plan, or a great vacation that they might be able to go on, depending on what category or vertical you're operating in, right?
Those types of more dynamic content optimizing opportunities are now simple to build using Operator now. I think we're really excited as well that a lot of the advanced capabilities that, frankly, I think Braze has been on the leading edge of building advanced capabilities for our space for a long time now.
Yeah.
The adoption of those capabilities has always lagged behind-
Yeah.
-what I think the potential of them has been. That has left a lot of performance on the floor that frankly, people could have picked up. But for bandwidth and training, there are all these things that got in the way. But now, with Operator, it collapses down all the steps to be able to move from us building more advanced capability that can drive uplift to getting built and implemented-
Yeah.
-and tested and deployed.
In that customer example where they saw this massive increase in click-through and conversion rates, you also are benefiting from that, right? Because they are using more credits and the-
Yep.
-the AI capabilities.
Yeah, absolutely.
Yeah.
Because yeah, the Content Optimizer that's running as well as the fact that the- And then of course, when customers succeed and they engage their customers more, then that's more monthly active users, their business is stronger, right?
Sure.
You keep that customer engaged, so you continue to communicate with them more over the long term.
Right.
The higher quality, and the more effective messaging is, the better our customers grow their businesses, and that obviously results in increased growth for us.
Yeah, absolutely. Maybe the last financial question, and you're doing a good job with the CFO hat on these, but the beat in the quarter on operating profits was strong. I think some investors were a little underwhelmed by the raise for the full year. Can you just talk about how we're thinking about back half-
Yeah.
-operating income and profitability?
Well, first of all, we did raise the operating income margin percent from 8% to 8.3% on the guidance for the full year. So, flowed through an increase in profitability for the year, both in absolute and in percentage terms. What we didn't do is we didn't flow through the entirety of the Q2 beat into the second half. The Q3 number and consensus, frankly, was a little out of position. Didn't take into account Forge, which has been there every year for the last several years.
Yeah.
And so we'll share responsibility on that one. But yeah, we're excited about the investment for Forge this year. Forge is going to be bigger and better than ever.
Yeah.
We're in a new venue in Vegas, with higher capacity under-
On the Strip, too, right?
Yep. This year it's a little bit, I don't know, north or south, but we're not right in the heart of it.
Yeah.
We are at the Fontainebleau this year. We are really excited to bring together that community. I think at this point, Forge is actually the largest focused gathering of marketers for any event in the world. You have events like Cannes Lions-
Yeah.
-the advertising festival, but it is kind of overrun by advertising and large tech companies or what have you. Forge really is a professional retreat for the most ambitious and creative marketers in the world. We are really excited about what it means for the business because it is always a big pipeline accelerator for us. It is time to build right now. We have put a lot of really exciting tools into the hands of our community. If you have not been to Forge, the entire first day is dedicated to learning and workshops. We anticipate doing in excess of 1,000 certifications on the first day of Forge, running a number of hackathon workshops that are going to bring hundreds of people through and introduce them to our new AI products in person, in a lab building, hackathon-like setting. Really excited about that investment.
When you look at the full second half, we held back about $500,000 of the Q2 beat in terms of the full year. The primary use case for that is actually that we are starting our ramping of recruiting for new sellers into next year earlier than we normally do. That is normally a Q4, kind of start that in Q4 so that they are here in time for kickoff in February.
Sure.
This year we are just starting now for a few reasons. One is that we have been really happy with the consistency of performance around the world. As I mentioned, within our verticalized teams as well as within all of our global regions, we have got strong leadership, strong programming, great momentum across the board. There is room to be adding capacity. Sales productivity also has been in a strong position. The last reason is also that there is, frankly, a talent war going on out there, right?
Yeah.
For people that are adept at selling AI software, there's a lot of competition for those people. We think that there's a great opportunity for us to start next year with an enhanced sales capacity relative to this year in a meaningful way. We got to get those butts in seats. We got to get them recruited and on-ramped, so we're spending to make sure that we're able to do that as we start next year. We did all that as well against the backdrop of increasing the full year operating income margin percent, as I mentioned, from 8% to 8.3%. I hope that people appreciate that that not only fulfills our prior commitment of 400 basis points year-over-year, but we're actually now pacing ahead of that.
We're pacing ahead of that even while we're investing more in building up capacity for next year. From my perspective, all pointed in the right direction.
Yeah. You brought up a good point earlier where I think historically Braze has built incredibly sophisticated products for marketers, but may be, in some cases, out of their technical depth. AI is making that easier to adopt, right?
Yeah.
Because agents can call on this. What are the big bottlenecks and still constraints that you have in terms of customers being able to adopt your AI solutions? I know you talked about some constraints on your side in terms of forward-deployed engineers, but just what are those big constraints that's limiting a faster AI rollout?
Yeah. It is not just use of BrazeAI. I think also when you look at what, for instance, cross-channel strategies are another big priority for us. Having customers who are implementing their marketing to take advantage of all the logic that we have to be able to mix and match and fall back to and utilize different channels tend to not get used as much as they should. Also, if you consider a global business, any strategy that a global business is implementing using, say, SMS or WhatsApp should also be implementing it using LINE and KakaoTalk and all of the above. If you have an SMS strategy and you are a global or a digital-first business, that strategy should also be being implemented using WhatsApp and LINE and KakaoTalk so that you can implement effectively the same strategy in every country around the world.
That does not happen very frequently, though.
Yeah.
Because it requires building out four times as much content. A lot of it is shared, but they do have nuanced differences from channel to channel. You also have to have it all set up in advance, right? People might not have activated all those channels so far, et cetera. I think that is a big goal, because as Operator makes it easier to just implement the right cross-channel strategies, we are going to want to make sure that all of those channels are activated and set up and available to customers so that they can expand the reach of the strategies that they are already running, that they already know are running. On the other side, data is the answer, right?
These models are hungry for context, and that is why we built the Braze Data Platform in the first place, is to make sure that data can flow into Braze quickly, completely, and cheaply, right? That goal has not changed. The consumers of it now are voracious. The models would love to have even more signals and even more data. One of the amazing things that we are seeing with BrazeAI Agent Console in particular is actually how good it is at getting signal from sparse data points. We have actually had a number of use cases. We had one that I was talking to a customer about just a few weeks ago where they had an onboarding journey that they had optimized the performance of over time through a lot of experimentation.
They had a cohort of users that they really struggled with performance on, and the big reason was that they just didn't have a lot of data about them.
These were customers that didn't necessarily come in and immediately navigated to their favorite product category or to their favorite sports teams or whatever, right? Where you provide this really solid signal about what you're interested in. What they experimented with was just taking the sparse data that they had and putting it into the Agent Console context window and asking it to try to categorize those customers, and it worked super well. They actually got a really meaningful uplift out of it.
On the one hand, a big part of the answer to that is data. They're hungry for it. On the flip side, actually, being able to find those slivers of signal in a lot of noise is one of the things that these models are really, really good at, too.
Yeah.
It's about getting the right data into the system. What the right data is not necessarily an overwhelming comprehensive amount of it.
Right.
Making sure that the signal providing context is there and is available in real time-
Yeah.
-will continue to be a challenge, but that's been an important challenge forever.
Yeah.
Obviously, we invest heavily in making sure that customers can get that data into Braze quickly, completely, and cheaply.
Right. With all the progress in AI, both across the industry and the features that you've been releasing at Braze, how has that impacted customer buying cycles at all? How would you characterize the overall environment? It sounded like a pretty broad-based, healthy performance across regions-
Yep.
-in the quarter. Do you think we're coming out of this area of AI confusion that maybe we saw earlier this year? How would you characterize the overall tone of conversation?
Yeah, I think overall, Braze is the AI transformation bet for a broad array of our customers. The productivity gains available by people adopting Operator and adopting our MCP server are astounding. I would say it's involved in and critical in every single deal cycle. Every deal cycle that we do, we're demoing these marketer productivity and workflow acceleration enhancements. Similarly, differentiation for enhanced performance is becoming increasingly critical because, and this just goes back to the point I made in the prepared remarks, is that in an environment this adversarial, this difficult, you better not have dumb pipes, right?
You want pipes that are self-learning, self-optimizing, high performance. They've got great observability on them. That allows you to then bring a creative vision to life and have it actually get seen by customers and have it actually drive performance that enhances your revenue growth as a business. Those remain the goals for marketers, like higher engagement, higher cross-sell, higher LTV, higher subscription retention, et cetera. But they're now able to bring ideas to life substantially faster. One of the interesting things that we're seeing as well that you've seen in the software development world is that as coding sped up, you see this in GitHub's downtime history over the last couple of months as well, that it has led to this explosion in the number of pull requests and therefore, also in the demands for doing code review.
We're seeing the same effect happening at Braze, where as Operator has sped up the ability for customers to build new canvases and campaigns, the demand for the equivalent of code review, which is all the campaign QA, has skyrocketed.
That is why, I mentioned on the call the launch of Agentic Standards , which is us continuing to then also push forward on the whole workflow so that we have sped up the creation side of it enormously. But we now have these systems that are both being built rapidly, which requires more automation for things like QA in the first place. The other thing is that these systems are increasingly dynamic as well. The problem of the equivalent of QA is not a static process anymore where you check all the settings and you say, "Yeah, this is good," because these systems learn and evolve over time, and they interact with each other in various ways, right?
You can have, for instance, maybe a program over here that is in the early welcome series is then causing customers to be on a different early journey, and that early journey change might result in the cross-sell that you are trying to do when they have adopted their first product of yours and you are trying to move them to the second product. The nature of optimizing that might change because the welcome journey was more dynamic and adapted. Similarly, you might see deliverability changes happen over time, where maybe you make a mistake somewhere and you end up with more unsubscribes from email early on, and then you need to go and save that customer cohort later on through SMS as a channel and get them to reactivate. But that also has higher budget needs, right? Because those cost more.
Great example where you might have approved both of those campaigns in isolation, but then the way they interact with each other over time is going to lead to performance changes and budget changes, et cetera. You need the ability to monitor and observe that, too. We are thinking a lot about not. By the way, the answer to that right now is actually utilizing our MCP servers to be able to pull in the results and be able to automatically analyze that. You have got customers who are using things like Slackbot AI in their channels with their marketing teams, or like Claude Tag living inside of your Slack channel where your team hangs out, and being able to analyze results and pull in insights like that so that people can pay closer attention to how the system is evolving and adapting over time.
That is an exciting new world.
Yeah.
We're looking at capability that is not just for the single-player marketer trying to help them write copy faster, but actually having the entire system be able to be built out and dynamically monitored. QA being something that's not just a static concept, but actually being more like the wardens that live within the system and keep an eye on how they are dynamically evolving over time. All of that is not to mention also instances of fraud are going up out there, too, and things like traffic pumping attacks and all sorts of other anomalous behavior that might show up as various groups or different AI systems now are attacking your first-party infrastructure or your loyalty programs or whatever it is. Being able to have strong defenses and vigilance against activity like that is increasingly important, too.
Those are also areas where our TAMs are helping people with the secure design of a lot of their marketing infrastructure.
Yeah.
It's a difficult, adversarial world out there right now, too. We're making sure that we're bringing AI innovation to all sides of the problem.
Yeah. I'm sure it's topical with the Meta Muse and some of these consumer-facing chatbots that have exploded in popularity over the-
Yeah.
-last few weeks.
Yeah, for sure.
I guess just in closing, a lot of exciting things happening. It is kind of the accelerated go-to-market investments, the AI product innovation, which we will talk about at Forge. If you are sitting here next year, where do you want this company to be? Where are you aspiring to take it, if you had to break it down into two or three high-level goals?
Yeah, I think we are in a golden era of product advancement at Braze right now. The foundations that we have built over the last 15 years with our vertical integration, the Braze Data Platform, and the full stream processor and Canvas as a programming environment have come together in a way that we already had most of the pieces assembled for a full agentic harness for marketing technology, effectively. We have only seen that accelerate with the innovation that we have been driving through Operator. Man, watching Operator interface with Canvas as a programming environment is like magic in action.
We similarly have really exciting research going on across a number of different AI technologies to be able to drive these advanced models, to be able to do automatic optimization of content and decision-making across a number of different price points and different levels of sophistication. We're focused on building out an entire family of advanced AI. I think that it is the, you mentioned it upfront, it's the first time in our history, I think, where we are simultaneously advancing the power and capability of Braze, and making it easier to use and faster to use.
Yeah.
Advances have always, in the past, come with a higher education burden and more complexity and harder to build and everything else. Man, it's only upside now.
Yeah.
It's really great to see. I think that how advanced Braze is has, in the past, been both a blessing and a curse.
Yeah.
Nowadays, it's only a blessing.
Yeah.
It's just great to see.
Awesome. Great. Let's leave it there. I think we're out of time. Thank you everyone for joining. Bill, appreciate you joining us shortly after earnings and look forward to seeing you out in Vegas-
Yeah
-in a couple of weeks.
Absolutely. Thanks for having me.