All right, we're gonna go ahead and get started. Thanks everyone for joining. For those of you that don't know me, my name's Arjun Bhatia. I cover Klaviyo here at William Blair. For a full list of our disclosures, you can go to williamblair.com. And with that, it's my pleasure to introduce Amanda Whalen from Klaviyo. She's the CFO. Thank you for coming.
Thank you so much. Happy to be here.
All right. I think we're gonna have a few different levels of familiarity in the room. Your recent IPO, so you're near to the markets. Maybe it'll be good to just set the baseline here, and if you wanna give us a quick background on Klaviyo, what do you do, what's the problem you solve for customers, then we can go from there.
Sure thing. At Klaviyo, we power smarter digital relationships. We help B2C businesses bring together all of the data that they know about their consumers and use it to power personalized communication with those consumers, whether that be in the form of email, SMS, web, or reviews. Importantly, our customers count on us to drive their revenue. We are an important revenue driver for them, and there are over 146,000 businesses who use Klaviyo today to drive their revenue. Businesses like Mattel, TaylorMade, Stanley 1913, Liquid Death, SKIMS, and Poppi. An important thing to know about Klaviyo is that we started as a database company. Our origin was to help companies bring together their data and make it easier to use, and then later, we layered on the application layer of helping them put that data to use within one single platform.
What having the data layer and the application layer together means is it makes it really easy for companies to do things that are very sophisticated. It can sound really simple to do something, like one of our customers is a consumer company who has two main categories that they operate in: baby and beauty. Prior to working with Klaviyo, they would send you the same communication, whether you were buying lipstick or whether you were buying diapers. They came to work with Klaviyo. Now they're personalizing those communications, depending on what customers buy. It sounds simple, but it's actually really hard for a business person to execute these days, and what Klaviyo does is we make that easy. Another important thing to know about Klaviyo from a financial profile standpoint, our financial framework is three core tenets.
We are going to grow rapidly, at scale, and in an efficient manner. So for 2023, our revenue was close to $700 million. We grew 48% year on year and did it with a non-GAAP operating margin of 11%, and we're committed to that growth at scale efficiently going forward.
That's very helpful. If we can start just at the data layer, because I think that's such a big part of your competitive advantage. Where does the data come from? What kind of data are we talking about? Because certainly, it can be a huge help in helping customers personalize their communications, but is it first-party data? Is it third-party data? What kind of data do you help customers organize and make sense of?
Outstanding question. It is entirely first-party data. What we help customers do is, we like to say, own their own destiny. Use the data that they have from relationships that they have built directly with their consumers to power those relationships with their consumers. And with everything happening in the world around privacy, around tracking, it's becoming harder and harder to use third-party data efficiently. We believe that the companies who are gonna win are the companies who are going to build strong, loyal relationships with the customers who they have, and the information that they know about them, and that's what Klaviyo helps companies do, is use that first-party data to build strong relationships.
If we're just thinking about the types of customers that you're targeting, what is the ideal customer profile for you? Like, at what point in a business's journey does it start to make sense to use Klaviyo and stop doing whatever they were doing before, from a marketing perspective?
Yeah. Our customers are of all sizes. So they range from well-known, established household names, like I said, Mattel, Fruit of the Loom, Perry Ellis, to up-and-coming brands who are earlier in their journey, so those are the brands like Liquid Death and Poppi. We were quite proud, we then talked about on our last call, that, Bain released earlier this year a list of what they called insurgent brands, so brands who are growing 10x faster than their competitors in their space. When we looked at that list, there are 90 brands on that list, and over 70% of them are using Klaviyo. And those are brands that are each over $25 million in revenue. So if you are a fast-growing B2C business today, chances are you're using Klaviyo.
As to where do companies start, frequently, what we find is that a company needs to get to enough scale, that they have enough consumers, that it makes sense to start to segment. You know, if you have 10 consumers or, you know, 50 on your list, you can probably segment pretty easily by looking at a spreadsheet. Once you start to get to enough scale where segmentation becomes a little bit more complex, then Klaviyo makes a lot of sense. That being said, we see businesses every single day who start out from day one with Klaviyo, because what they see is, if you're serious about your growth, if you're serious about owning your own destiny, Klaviyo is where you wanna be.
And then, I think, you know, a big part of your, maybe where your customer base has come from historically has been Shopify, and you have a big partnership with, with Shopify. Can you just give us some, context and background for, for what you're, what that partnership looks like and what it means for Klaviyo as a, as a growth, from a growth driver perspective.
Yeah. So we have a very strong partnership with Shopify. The relationship goes back, goodness, almost to our beginning, 10 years ago. I think our companies are very philosophically aligned. We are very product-driven. We are very engineering and R&D-oriented. We believe in creating great experiences that really help the merchants who are on Klaviyo and Shopify drive growth. And so from a philosophical standpoint, we found early on that we worked very, very well together. What has happened over time is because our products and our companies work so well together, there is a high degree of overlap between brands who use Klaviyo and brands who use Shopify. And we cemented that partnership two years ago in 2022, with the form of an agreement, and as part of that agreement, Klaviyo is the officially recommended email provider for Shopify Plus merchants.
In addition to that, we go to market together, we do events together, we do joint product development, just to make sure that we're continuing to work together to drive our customers' growth. As you think about the Shopify relationship, there are probably two key numbers that I would keep in mind. The first is 78%, and what 78% represents is the overlap between companies who are Klaviyo customers, who are also customers of Shopify. So there is a high degree of overlap where we share customers in common. The second number to keep in mind is 9%, and what 9% represents is the portion of our new ARR that's coming to us from Shopify.
So it's important to keep in context that while we have a high degree of overlap, the Shopify App Store is actually sending us a relatively small portion of our new ARR. Most of the new ARR is coming to us through what we would call peers, partners, and platforms. Peers are merchants who recommend us to other merchants. Because we can drive such strong growth, merchants frequently recommend us to their peers, and that's a big source of inbound demand for us. The second is partners. We work with over 5,000 marketing agencies who are building their businesses, helping merchants grow. They, in turn, recommend Klaviyo to their customers because they know Klaviyo will help drive that growth. And then the last is platforms like Shopify.
The other wonderful thing for us about the Shopify relationship is not only is that partnership so incredibly strong, but it has served as a blueprint for us for how do we build relationships and partnerships with other platforms as well. So we have partnerships with platforms like Wix, WooCommerce, PrestaShop in France, where we are the default recommended marketing application. We've learned through Shopify how to work really well with the platform, how to integrate into that ecosystem, so it's been a great partnership in many, many ways.
One of the things you mentioned there was that, there's overlap in customers, but when it comes down to who has the customer relationship, who has the customer contract, that's still your relationship. Is that right?
It is still our relationship directly with those customers. In fact, many times what we see in our customer base is a customer who will start off as a Klaviyo customer and be on a different e-commerce platform, and then they'll decide that they will re-platform over to Shopify. They'll stay with Klaviyo and become a Shopify customer, so it is two separate relationships.
As you just think about your, your growth trajectory and where you want to take the business, how do you think now about balancing growth between, "We want to go deeper into the Shopify ecosystem," because it is a large, it is a large market of Shopify merchants, versus, "We want to diversify into other verticals, into other platforms," as you were, as you were saying? What's that balance look like for you?
Yeah, the short answer is we see huge room to grow in both. So there's a lot of headroom in the Shopify ecosystem for us, both in the, you know, what would be referred to as Shopify Core, so the smaller end of their merchant base, and in Shopify Plus and up into the enterprise. They are continuing to grow and gain share in the market, and as they continue to grow and gain share in the market, that presents a huge opportunity for us. So, you know, as we look at that Shopify opportunity, there's opportunity both to gain share within there, as well as to grow with them as they expand. That being said, retail and e-commerce is a massive market opportunity, and so, you know, there's lots of room to grow with these other platforms as well.
Then beyond retail and e-commerce, what we're seeing, interestingly, is increasingly brands start to come to us who may not be in the retail space, which is where we started. They're recognizing that if you have large numbers of consumers who you're trying to communicate with in a personalized way, at a massive scale, that Klaviyo is the best way to do that, regardless of industry. So we have brands who are restaurants, hotels, in the wellness space. We've launched Klaviyo for wellness. We have a lot of entertainers who work with Klaviyo to communicate with their fans on a personalized basis. And so I think, you know, there will be diversification as well, as we, over time, expand into new verticals.
Okay. If I look at your growth over the last couple of years, I think one thing sticks out is that your upmarket business, your larger customers, have been growing faster than the overall business, and I think you have some initiatives to move upmarket. Talk about where you are in that journey. Is it, and what you need to do to continue that growth. Is it go-to-market resources? Is it product development? How do you view that upmarket opportunity, and where can Klaviyo get to with larger customers?
Yep. So, you know, it's important context, which I think we talked about at the beginning. The majority of our business today is with small and medium businesses. That was an intentional choice. We were a bootstrapped company from the beginning. It's been very important to us, and we wanted to be in a market where we would see fast payback, so started out with SMBs. But because so many of those SMBs we were working with were fast-growing, successful brands, they grew up into the mid-market, and they brought Klaviyo with them. A great example of that, in the shapewear space, is a brand called Honeylove. We started with Honeylove many years ago when they were a very small brand. I think their initial Klaviyo subscription was less than $100 a month.
Now they're a multi-hundred million dollar brand and work with Klaviyo, both on email and on SMS. As brands like that have seen success, it's created proof points and created interest from other brands in the market. So others look around and say: "Wait, you're a really fast-growing brand. What are you doing? What's helping? You're on Klaviyo. I should come to Klaviyo." And that's where we've generated interest from these more established brands, brands like Mattel, like Fruit of the Loom, like TaylorMade, Callaway, Perry Ellis. And they can see that we can operate, our business has been built to be able to operate to support brands of all scale.
Does your go-to-market motion need to evolve as you move further upmarket? Or does this kind of, you know, inbound motion still work for those larger brands that you're, that you've been targeting?
Yeah. Because of the reputation we've built in the marketplace, we see a strong inbound demand for mid-market, and that's part of the reason why we've been investing behind quota-carrying capacity in the mid-market, is because we see that inbound demand coming in. In addition to inbound in that mid-market space, we've been building and strengthening our outbound motion, targeted at named accounts. And then we've also been strengthening the way that we go to market. And, you know, in an SMB, you usually have one decision-maker, in one of these categories. In the mid-market, the folks who we're working with want to hear from more of Klaviyo. They want to hear not only from our sales team, but also our deliverability team, our product team.
And so as we grow into the mid-market, we're learning, you know, working and evolving on how do we bring the power of Klaviyo. I would think of it, though, as more of an evolution in our go-to-market, rather than a revolution. It really is, building on the strength that we have.
And then just thinking about the competitive landscape, certainly, I think over the last decade plus, there have been a lot of vendors in the marketing customer engagement space, but you've been outgrowing the market. So as you think about your competitive advantage relative to some of these players in the market, what are the main drivers there? And have you seen any changes in the landscape over the last year or two years, either whether it's in your favor or otherwise?
Yeah. What we have seen in terms of our primary competitive advantage is what I spoke about earlier, that we make it both easy for customers to have really sophisticated personalization in the way that they're communicating at scale. And the other vendors in the market, generally, you have to choose between one or the other. There's two different primary types of competitors who we see in the market. One is what we refer to as the newsletter-type services. I'm going to send large number of emails to my consumers, but I'm not gonna necessarily do it in a highly targeted, highly personalized way or a highly automated way.
Those are the brands who switch over to Klaviyo because they say, "I like that it's easy, but I really need more sophistication in what I'm trying to do." At the opposite end of the market and the up, mid-market and above, what we see is tends to be more legacy providers, folks who have been around a long time, where you can personalize, you can automate, you can do all of these sophisticated use cases, so long as you have a team of developers who are at your disposal, and you're willing to wait through the development cycle for that to be built. Why brands love Klaviyo there is because we can have all of those sophisticated use cases, but we can set them up really, really quickly.
So back to my example earlier of the baby and beauty brand, if you were on a newsletter-type service, you would only be able to send one type of email. If you were on a more legacy provider, you'd be able to segment after you had done a lot of development work. With Klaviyo, you can do it right out of the box.
Can you just talk about your pricing model a little bit, and maybe in the context of just where you sit in the market? Do you view yourself as a kind of a premium-priced solution? Do you view yourself, you know, as a kind of a higher value—what's the pricing model, and where do you sit in the market relative to competitors?
Yeah. We sell today two primary SKUs. One is the original SKU that we started with, which we would call our data plus email SKU, and we price that based on the number of profiles that you store with Klaviyo, which is representative of the data that you have in our database, as well as the number of email messages that you send. So a subscription, it's all subscription, it's monthly. And a subscription gets you the right to, say, store 10,000 profiles and then 10 emails per month, per profile. Because what we want our consumer or our customers thinking about is not so much how many messages that I send. We want it to be the right number of personalized messages. On the SMS side, we price based on number of messages, and that's because SMS has a different cost structure.
In terms of our pricing philosophy, our belief is we are a premium product, and therefore, we are going to be premium-priced. We are more expensive than our competitors, and we believe that we are worth it because of the value that we drive for our customers. I love reading reviews online. If you go onto, say, the Shopify app store, if you go onto some of the review sites, what you'll see is customers saying: "Klaviyo is more expensive than the alternatives out there, and it's worth it because of the revenue it drives for your business." And the way that we help our customers track that revenue is a metric we call KAV, Klaviyo Attributed Value.
KAV is unique in our space because it means that customers can see not only open rates and click rates, but the things that we think are most important for their businesses, which is how much revenue are they driving. We drive an outsized amount of revenue for our customers because we help them be targeted, personalized, automated in a way that other platforms can't.
I think in late, I believe it was late 2022, you had done a price increase across your customer base.
Yep.
What was the reaction to that amongst your customers? Did you notice any change in churn contraction? Was it relatively steady? How did customers react?
Yeah, customer reaction was pretty steady. So context on the price increase, it was a targeted price increase. It was aimed at the larger end of our SMB base and into the mid-market base. Our smallest customers, the entrepreneurs, didn't see any price change because there, we were happy with both, our pricing relative to competitors and the ROI that we saw customers generating. As we looked up into the SMBs and mid-market, we saw two things, that we were underpriced relative to competitors, and two, that our customers were generating extraordinarily high levels of ROI from their spend on Klaviyo.
And so, when we went through the price increase, which was our first one in eight years, the general reaction from customers was, "I get it." No customer loves a price increase, but they said, "I get it, and I still feel like Klaviyo is a great value." And because of that, if you looked at our churn or our retention trends over time, it has been very, very steady. So, you know, in a price increase, you would think about, do you see an inflection in the line at the price increase? We didn't see any inflection in that line. Customers stayed with Klaviyo because we drive great value.
Now, as you're just thinking about your pricing philosophy looking forward, do you still think there's pricing power left? Because I think the platform evolution certainly continues, and you're adding more capabilities. So how do you view pricing from here after you've done one price increase in the last couple of years here?
Yeah. As we look at pricing going forward, you know, we wanna maintain that philosophy. We're gonna be premium priced. We want to be fair, but we also want our pricing to reflect the value that we're creating for our customers. So we don't have any plans in the near term to make another list price change. But as the product continues to evolve, as we continue to add new capabilities, like some of the work that we're doing around generative AI, we will continue to keep an eye on what is that value we're creating and how do we make sure that we monetize it.
What I do think you'll see us do a little bit over the course of the next year is look at ways that we can make sure that the pricing mechanics of how our pricing programs work are consistent with our philosophy, which is we want our program to be easy to use, and we also want it to be easy to buy. And so that is one of the things that we're thinking about in pricing over the next year.
Switching gears a little bit to just, the near-term demand environment, I think as we look across software, and in particular some end markets of SMB retail, where you have particular exposure, we've seen a little bit of choppiness. What are you seeing out in the market from a demand perspective? Is it still steady? You just reported a Q1 recently, but talk about whether demand trends have changed and buying patterns have changed within your customer base.
Sure. You know, I think what we're seeing within our customer base is, folks are focused on "I'm in a choppy environment, I'm thinking through what things look like, and it's a little bit uncertain. Therefore, what is most important to me is how do I continue to grow and how do I do so efficiently?" And Klaviyo, in this environment, I think, has been particularly well positioned because we are a must-have software. We are not a nice-to-have software. Many of our customers are driving 20, 30, 40% of their revenue through communications through Klaviyo, which makes us a really critical part of their business. And importantly, that revenue that they're generating through Klaviyo is high-margin revenue because they're not paying to acquire those customers through a walled garden. They're communicating with and getting value from the customers who they already have.
That being said, what we're seeing from the SMBs, we spoke about a little bit on our call before last, there's a little bit of thoughtfulness in our market. So we're seeing customers be thoughtful, one, about the messages that they send, making sure that those messages are highly targeted, highly relevant, highly personalized. And since part of our pricing is based on the number of messages, that targeting has a little bit of a impact on our expansion. The other thing that we're seeing them be is very intentional about the way that they manage their plans. We give customers the ability to switch monthly if they have expanded usage needs or if their usage needs contract. And we're seeing customers be very intentional about the way that they manage it, which we think is related to the macro environment.
But as we spoke about on our last call, what we've seen is that that has been consistent since we spoke about it at the start of the year. It's not getting better, it's not getting worse. It's been steady and consistent.
Okay. And just as we—in that context, as we think about your net retention rate, how much you're able to upsell, cross-sell to existing customers, how might that trend over the next year or so as you're looking at the rest of 2024 here?
Yep. Our net retention rate, so if I break net retention rate into gross retention and then expansion, our gross retention has been strong and has been consistent. Back to this is an incredibly sticky product because customers are relying on it to drive revenue, so in good times or in bad, it's not one that a customer is wanting to turn off. So that gross retention remains very, very strong, and relative to what we see from other vendors with similar customer bases, we believe it's very strong on a relative basis as well. On the expansion side, what you'll see in NRR over the course of the next year is pressure that's coming from two places. One is the fact that we're lapping the price increase that you asked about.
Mm-hmm.
And because we calculate NRR on a trailing 12-month basis, it won't be until September of this year that we fully anniversary the impact of that price increase. So that will be a couple of points of headwind on NRR this year. And then the other thing that will impact NRR this year is some of the expansion trends that we spoke about, about customers in this macro environment being more thoughtful and more intentional. In our guidance, we're assuming that those trends stay steady, and because of that, you would see some downward pressure. So I would expect that this year, NRR will continue to trend down a little bit.
Okay. And the other part, I think of the equation certainly as I think about the last year, you've had quite a bit of platform expansion that's.
Mm-hmm.
... that you've introduced into the business. So you've launched SMS, you've launched CDP. How do you—what role do these new capabilities play in your growth and your ability to cross-sell, and when do you think those might be kind of ready for prime time products, particularly on the CDP side?
Yeah. So we launched SMS as our second product, roughly three years ago now. Since then it has grown to the place where we now are at 16% of our customers have SMS, and that continues to expand. Then last year, we launched two new products, CDP and Reviews. The role that each of those play is importantly, helping customers consolidate and helping make their lives easier. So if you are a marketer, you don't want to be toggling across multiple systems. You don't want to be communicating with one channel in one way and another channel in another way.
Having multiple channels in one product makes your life easier, it makes your attribution more reliable, it reduces the amount of development work required, it actually provides uplift to your business because now you can cross-compare across the two channels and make sure that you're communicating with customers on both lists. So, you know, that provides. It's a really important strategic benefit for our customers. CDP then helps them unlock the power of that data. Many of our customers are very sophisticated in the way that they use their customer data.
They want to not only understand the predictive capabilities that we have natively in Klaviyo around what is the predicted lifetime value of a customer or their predicted churn or their next predicted order date, they want to do sophisticated segmentation on recency, frequency, and monetary value, and they want to connect that into the way that they communicate on an automated basis. That's what the CDP helps them do. And so, you know, we're further along with SMS, and it is materially contributing to our ability to expand and cross-sell, and over the long term, provides a nice lift to NRR. And CDP and Reviews are early days, but we're really pleased with the progress that we're seeing.
As SMS in particular, as that grows, how should we think about the impact that'll have on your gross margins, and how do you view that internally as you're just trying to manage your gross margin profile?
Yeah, so SMS comes with a higher cost structure on a per message basis. There are sending costs associated with each SMS, and therefore, it also generally comes with a lower gross margin profile. We think it's important for the business because of all of the benefits that it provides for our customers and because generally, frequently, it's a cross-sell, so it's, you know, an efficient way to add gross profit dollars into that total customer mix. The way that we manage SMS and within the total gross margin of the business is, we are continually, on our core side, looking at ways that we can reengineer our, fundamental technology platform to become more efficient, more scalable, better over time. In the last couple of years, we've reengineered our segmentation engine, our flows engine.
Last year, we made an important step in launching our Klaviyo Mail Transfer Agent, where we've actually taken some of our sending volume in-house. Each of those things that we've done is to make the platform better for our customers, but by doing so, it's had a side benefit of helping gross margins, and that's helped us be able to maintain high gross margins while growing the SMS business. That being said, over the course of this year, I think we've, you know, tried to be clear with everybody. We do expect that as SMS increases, that it will create some headwinds to gross margin.
Okay. All right, perfect. Well, that's all the time we have. Amanda, thank you so much for joining.
Thank you.
Thank you, everyone, for listening in. We'll have a breakout upstairs in Mar, so if you have more questions for Amanda, please feel free to join us. Thank you.