I'm DJ Hynes. I'm the Senior Software Analyst here at Canaccord. Thank you all for being here. This is the 44th year we've done this conference. We couldn't do it without the support of the companies that bring the growth and the content that makes the investors show up. And thank you to all the investors who come and kinda ask smart questions and make all this work. So, we're thrilled to have Klaviyo here, Founder, CEO, Andrew Bialecki. We're gonna do this as a fireside chat. I have a bunch of questions that'll get us through a half hour, but if there's anything in the audience at any point that you guys want to address, raise your hand, we'll work it into the conversation.
But I think with that, we can kinda get right into it.
Let's do it.
A.B., let's talk a little bit about the founding of the business.
Mm.
Right? Maybe as part of that, like, a little bit on your background, your history, kinda what you set out to do with Klaviyo, and, and how it's evolved to get to where we are today.
Yeah, sure. So for folks that don't know, Klaviyo's business is about, what? 12, 13 years old. And we started because we thought for consumer businesses, there ought to be this, like, central data warehouse, central database, that connects to all the front of office applications, that power, you know, the experience between a, a business, an organization, and end consumers. You know, my Co-Founder and I met, at an enterprise software company in the mid-2000s. And we were we were building basically this technology for, you know, the Fortune 100s. So we were doing things like, how does Bank of America or PNC, how they decide who are their best consumer accounts and make sure they retain them?
You know, we did a lot with companies like Starbucks, and helping them design their, like, loyalty programs and get folks coming back. And what's fascinating to us is, a lot of these companies had a lot of first-party data that they were storing in their own databases, but they weren't really doing anything with it. And then, more importantly, there was this huge division of, like, there was one side of the house, it was all, "We're the data, and analytics, and ops folks." There was another side of the house that was all the, "Well, we design the customer experience, the products, the marketing," and those two things just didn't work together.
You know, I remember we were working with a large bank, and they said, "Hey, look, we are trying to figure out which of our customers are at risk of moving their deposits elsewhere. Can you help us, you know, build some regression models, do some machine learning on that?" And so we, so we did, and we shipped them back a file of, I think, like, 100,000 accounts, and we're like: "Hey, look, you, these are, you know, billions in assets that you're about to lose if you don't do something about it in the next, you know, in the next few months." They said: "Okay, that's great. Well, we're gonna, we're gonna give it over to our marketing team, our client experience team, and they'll hopefully do something with it in the next year." And we said, "No, no, they'll, like, be gone by then.
Like, that's what the models say." So there was this clear disconnect, and we felt like, you know, obviously, that existed for enterprise companies, you know, Fortune 500, Global 2000, but also it existed for everybody else. So we started Klaviyo out as, "Okay, well, how do we help a business get all their data in one place?" And so we're known very much as this, like, customer database, the system of record for consumer businesses. And then we very quickly layered on top of that, marketing as our first application, as a way to say, like: "Okay, what are you gonna do with this data? Let's put it to work." And when you think about what we've built so far, we've done three things, you know.
We think about the applications you could build on top of a database management in a business, and we try to build applications that allow businesses to do three things. The first is do deep personalization. Everybody knows, consumers engage more when the experience is tailored to them. The second is, we've built in attribution and measurement. So when we started in marketing, the status quo was, "Well, gosh, what's your open rate on that campaign? What's your click rate?" We're like, "Well, who cares? What about dollars?" And so now, when you use our software, you know, marketers, business owners, are just focused on revenue, and that's something that the CEOs and CMOs we work with care about.
And then the third piece was, well, if we can help you tailor experiences and experiment, and we can then attribute that, we ought to be able to use that as a machine learning signal. We can actually just do all of the marketing for you. So, our teams are, you know, hard at work, have been, on building technology where we think in the future, you know, you just plug your business into Klaviyo, and we will just grow it for you. And not only does that, like, competitively differentiate us, but also it, you know, I think that opens up new monetization strategies. So anyways, today we're, as you say, the business today, you know, we're about, we work with over 150,000 businesses around the world, primarily in retail and e-commerce, although growing in other verticals.
You know, we're growing internationally, and we started with small businesses, and now we're rapidly growing into the what we call the mid-market, this lower end of enterprise and true enterprise back to my Co-Founder and I's roots. So, we have a lot to do.
Yeah, that's an awesome foundation, and you really explained well kind of why that database at the center approach is so critical to the success that you're seeing. Maybe let's talk, like, high-level business stats.
Mm.
Just to give folks a sense for kind of where Klaviyo is today, and then dovetailing off of that, like, what's top of mind coming off of Q2?
Sure. So we just released our Q2 numbers. We did $222 million in Q2, which is up 35% year-over-year. And if folks aren't familiar, we're a software service business model, and 17% free cash flow margins. And so, well, just to color on those two things, like, it's been very important since our founding. You know, we were a bootstrap business to start, and that wasn't very popular when we started in 2012. There was a lot of, you know, "Go raise some cash and maybe get profitable at some point." We've always believed that if you build great products, that lowers, y ou know, it obviously increases retention, also lowers your cost of acquisition.
We believe you can be really high growth and be a cash flow generating business. So, we really like that mix of high growth plus profitability. And as we think about, like, what's driving those and for us going forward, a couple of major themes for us. The first is our core markets are with small and medium-sized businesses. So think of businesses that are in the, you know, they're either some of them are just starting out. We're the defaults for a lot of if you're starting, you know, somebody's starting a new business, a retail business, e-commerce business all the way up into tens of millions, we call those SMBs.
We still have, like, a lot of logo share to go there, so we are, you know, rapidly growing our market share there. In addition to that, I mentioned we're growing into the mid-market enterprise. That's a real growth area for us. That's outpacing the rest of the business, and we're seeing a lot of organic pull there. So in the last, you know, 12 months, you know, our leadership team, a lot of our sales capacity has been aimed at serving that part of the market and continuing to do it with the good unit economics that we were founded on. And then additionally, like with SMBs, we've done a lot of that growing domestically, U.S., Canada, a little bit in Europe, but now we're expanding rapidly into Europe and into Asia.
And so, you know, in the last quarter, we finally internationalized our product, so it's not available English only. I was talking to one of our, you know, partners in Japan, who was telling me, he's like: "Andrew, I can open up whole new markets for you if you could just make the product in Japanese and not just English." So we've added, you know, French as a second language, and we'll be adding a couple more over the next coming, over the next couple of months. And then we're starting to, you know, devote more of our partner and marketing resources towards growing in Europe and Asia as well. So, expanding our core markets, mid-market, international, and then finally, like I mentioned, you know, marketing is our first application.
I think there's, you know, if you think about, other CRM companies that are out there, there tends to be these like, you know, clouds or hubs or these suite of apps, suite of use cases that get used. You know, while a lot of those focus on B2B, we think about what are those applications that will define the way, you know, front office stack, for B2C, consumer businesses. And so we think marketing is just one piece of that, and so we're doing work on being the, you know, the analytics place that you do all of your data analysis and figure out which are your best customers, and then instantly action that in our marketing software. How do we then, you know, use our technology and put it on your website or into your mobile app, so it's not just messaging?
And then also into the customer service experience. So we think there's an opportunity to expand the product footprint. So we're doing a lot of work with that as well.
Yeah. I wanna talk a little bit about go-to-market and kinda how you price the software. But before we do that, and 'cause I think it's relevant to the conversation, maybe talk about Klaviyo Attributed Value, or KAV.
Yeah.
What that is and kind of why it's important to solidifying your relationship with your customers?
Sure. So I mentioned, you know, what, what do we allow businesses to do with the, you know, with our first through marketing and then additional applications? Talk about being able to tailor and personalize. Okay, you know, that's very important. How do we, how do we give people the tools to do that?
I see.
And then, how do we then measure that? Like, one of the things we found is, for a lot of businesses, they like this idea of, say, personalizing content or trying experimenting, but they don't actually know if it's working. And so this concept of Klaviyo Attributed Value, what we've done is we've built an attribution engine into our software, into our database.
So when somebody gets sent, say, a marketing campaign, a marketing message, whether it's through one of the channels we support, email, text messaging, mobile, we're able to look at who's engaging with that, who's looking at it, clicking it, and then critically tying that back to actual conversions and transactions. So we can see, you know, how long and what messages cause somebody to convert, and then we use machine learning to then attribute that, attribute dollars back. So when folks are sending marketing campaigns through Klaviyo, rather than focusing on what we think of these kind of like simple metrics of, you know, open rates, they're actually saying: "Well, how many dollars did this create? Was it, this was a $100,000 campaign or a $150,000 campaign?
And what was the revenue for each person?" Actually, they're then using some of our machine learning to optimize, well, which campaigns go to which person based on expected value calculations. So this concept of, I think, you know, if you think about enterprise software, I think more enterprise software should have this concept of, like, what is the actual conversion or end results that matters? Then obviously, you can quantify that, put it in monetary terms, you know, dollars or whatever currency you're working in. That's very powerful. So we started this, that we introduced this concept of Klaviyo Attributed Value and put it on the homepage probably about 10 years ago. And it's been a cornerstone of how we think about our business.
In general, we think about if we are growing that number, which we, you know, which we share out stats periodically, that's a good sign that we're delivering value for our customers, and it makes us, y ou know, we actually are a premium product relative to the rest of the market, but folks are willing to justify that price point because they see incremental dollars to their business. And so what's actually fun is we show them not just how much they're growing their revenue through us, that Klaviyo Attributed Value, but also how that's beginning to be a larger and larger percentage of their overall revenue, especially for a lot of these digital and native businesses. So we'll often, you know, compare it with, you know, some of the other distribution platforms, be them ad networks or marketplaces.
Klaviyo is usually number one or number two in terms of revenue engines for a business, and I think that really solidifies it. It's not like a productivity software, not a nice-to-have, but a must-have, for the businesses we work with.
And maybe we could talk a little bit about kinda how you price?
Mm-hmm.
Beause there's some shared success, you know, dynamics to the business model. And it's part of that kind of go-to-market conversation. Maybe talk a little bit about the Shopify partnership as well.
Yeah, sure. So our business model, our pricing model, is based on the number of relationships that a business has with its end customers. So we think about it, you know, if you are a business and you have 100,000 or 10 million consumer relationships, great! Every single one of those is valuable, and we help you deliver a great experience, and then help you monetize those, and help you obviously measure that. So the, you know, the fee, our pricing model is, it ties to the size of the number of contacts folks have.
One of the questions we often get asked is: "Hey, you know, if a business is growing in terms of revenue, or is flat, like, how does that, how does that correlate with the size of the business in terms of number of contacts, number of, like, you know, relationships they have?" And the nice part is like, while businesses tend to go with economic cycles, the revenue per customer can go up or down. It tends to be that the businesses just grow the number of relationships they have over time. So that gives a really nice tailwind of organic growth. So that's what our core marketing platform, you know, email and marketing platform product is about. We then layered on top of that our other products, for some of our other messaging products, like text messaging.
We charge, you know, per message. So that's an add-on, additional marketing channels. And then as we add other applications, we're considering models where you either pay an incremental fee per, you know, contact, kind of like in your database, or other things that, you know, line up to the, you know, the value metrics of those applications. So but as we really, we really like finding things that align with, like I was talking about, like with customer value. And then, sorry, the second part?
The Shopify relationship.
Around Shopify, yeah.
Yeah.
So our go-to-market. So we've always centered our go-to-market around three principles. We call them our three Ps, which are, how do people find out about software? How do you make it really sticky with low cost of acquisition? The first is peers. We've tried to grow very much through word of mouth. Our customers, because they love us, that's what drives demand to us. So often when I talk to them: "Hey, why are you here?" A lot of them will say: "I'm bringing Klaviyo from a previous business." "Hey, I talked to folks in my, you know, peer group, and asked them what they like, and everybody said, 'Klaviyo,' that's why I'm here." So we think that creates a really, like a viral component.
The larger that base is, the more folks we have feet on the street talking about Klaviyo. The second is partners. We work with, I think it's over, you know, a couple, couple thousand digital marketing agencies and system integrators that offer services around Klaviyo, and we've helped teach them, coach them up on how to deliver those services and so on. The third is really Shopify, is platforms. Because we're a database, you know, we want more data inside of Klaviyo that makes it more valuable. And so when we started, well, one of the first things we did is we said, we went to a lot of the, you know, transactional, we think of transactional systems of record, places where, you know, revenue is recorded.
And we went to them and said, like: "Hey, we should interoperate together." So way back in 2012, 2013, we built an integration into Shopify and a whole bunch of other e-commerce platforms, you know, payment providers. And what we found was with Shopify, there's this really, really very similar ethos in terms of, like, the customers that we were serving and the, and how we thought about, like, making them successful. So with Shopify, it started with, you know, how do we sync? How do we organize customer data, catalog data, so we can use it as content for marketing, revenue data, so you can segment customers based on what product affinities they have or what they've bought and what they've returned? So we made that, like, that data readily available in Klaviyo.
All of a sudden, we found out, like, we were a great, like, customer, you know, software that combined with Shopify's commerce stack. And, so it started out as a really deep product partnership. Over time, it, it evolved into a go-to-market relationship as well, where we were co-selling, co-marketing together. And then a few years ago, you know, Shopify made an investment, strategic investment in Klaviyo. You know, we think it's kind of like a, I think it was a, kind of like, you know, tying the knot in some ways, in a small way, formalizing our partnership we've kind of been working together.
So actually, that has served for us as a, you know, not only is Shopify a great partner that we love growing with, but it actually became a template for how we can go to other systems of record. So whether it's, and actually within, both within e-commerce, so different market segments, so in the enterprise or international, who are the partners we can work with there? To connect transactional data into our database and use that across various customer experiences. But it's also become a template for how we can use this in other verticals. So, you know, about a year ago, we talked about, you know, introducing Klaviyo and use cases around, restaurants and food service, around, like, wellness, so gyms and spas.
And we actually think there's, you know, if you look at those three ways we like to go to market: viral growth, word of mouth, going through partner service agencies, and then the technology platforms. We found if you add all those three and then layer in, you know, traditional sources of like, you know, demand generation through marketing, a really efficient sales motion, that's what adds up to a really scalable and efficient, you know, go-to-market cost of acquisition.
Yeah. Yeah. We've got a full house, standing room only here, so I'm gonna ask one more question and then open it up for folks in case there's audience questions. But look, you guys have been extremely consistent about the four key growth drivers here, right? It's new logos, expand with them, international, and upmarket, right?
Mm-hmm.
I wanna double-click on the last one, which is the upmarket opportunity. I'm curious, like, what, what are the product requirements as you go further upmarket, you know, that, as that sophistication increases? Like, how far up do you think you can go before competitive dynamics start to change, and, and how does that all kind of influence product strategy?
Sure. So I think because I'll start with, like, our kind of DNA, because when we started the business, both my Co-Founder and I, our early engineering talent, had come from enterprise. We sort of built systems to scale. You know, while our early customers had maybe, you know, tens of thousands of, you know, contacts, you know, customers in our orbit, we now have businesses that do tens of millions, and that's, you know, because you design systems well, you can meet some of those scale requirements. We're also used to a lot of the expectations around security posture, and we've talked for a long time about Klaviyo as this vault, as this, like, the place you store your most sensitive, most important assets, which is your customers.
You know, we also, as we've grown up, I think we found that our system, you know, scales well, it meets a lot of those requirements, and we've, a nother pattern we've had is we love co-developing with our customers. We've had a pattern of taking our biggest customers and talking about the use cases they want to solve for in working with them. We found that's actually a great way to build product and a great way to go to market. It builds a lot of trust in us that we can deliver. And obviously, the fact that we're, you know, we're a product and engineering-led company, you know, we win on the fact of how fast we can move in terms of product velocity.
And so as things have gotten more, you know, as we've started to bump into some of the more, you know, legacy marketing providers, I think what we've found is we move a lot faster because of the modern tech stack. We can actually handle a lot more data scale. Actually, the fact that we're built as a database is just a massive differentiator. You don't have to, you don't have to try to build syncs with, like, external data warehouses. So anyways, very excited about our progress there. And I think, you know, again, because of our backgrounds working with some of the largest companies in the world, I don't think there's a ceiling for us.
So as we think about growing into the enterprise, what we're trying to do is be very intentional about the way that we go to market. A lot of the demand to us today is coming to us, you know, organically. We intend to start to grow that. We talked about growing sales capacity, but we also are eyes wide open that, like, unit economics have been very important to us as we grow. And so I think because it's good product market fit, because of this intentionality, like, we can grow into the enterprise, do it with pace, but also do it with, like, good unit economics.
Yeah, yeah.
Yeah.
That's clearly important. Are there any questions from the audience that we'd want to address? I haven't even asked about AI yet. I gave you guys, like, the easiest one. Let's do it. Let's talk about AI.
Sure.
How do you see kinda AI influencing the opportunity, you know, what you're trying to do from a product perspective? And, and maybe you could bridge that into a conversation around, like, potential monetization opportunities.
Yeah. So it's interesting, you know, I had this experience where I was in New York probably six or seven years ago, and I was working with a large fashion company. And, you know, they had adopted Klaviyo maybe six months prior, and they had, t hey'd started, the conversation started, they'd brought us a spreadsheet of like: "Here's all these ideas we have for marketing campaigns we've never been able to execute." You know, it was somebody in the, you know, kind of men's apparel, clothing category, and they were, you know, they were known for their chinos, but they were, like, trying to branch into jeans, and they were. Anyways, they just had all these ideas on, like, how to drive adoption, cross-sell. They were starting a women's line.
We came back six months later, and they said, "Andrew, we have a problem. All the ideas we had in that spreadsheet, we tried them all, and some of them worked, and that's great, we're running those, and some of them didn't work, and so we're done. But, like, the cupboard is bare when it comes to new ideas." "So we have a new problem statement for you. What should we be doing that we're not thinking of?" And it always struck us that, like, you know, yeah, if you think about, like, how, let's take marketers, how they come up with ideas, a lot of it's like, you get in a room, you whiteboard things out, you brainstorm. But I mean, they're limited in their capacity. Like, well, they only have so much time to explore the data. They're colored by their past experiences.
I mean, the idea that algorithms should be able to run circles around, you know, our, you know, individual, like, human, even an experienced human's ability. Best digital marketers have maybe 20 years of experience. You know, collectively, across Klaviyo, I mean, we have literally hundreds of thousands of years of experience. So we started a team six or seven years ago that had the mission of, you know what? I think in the future, humans will still provide a lot of the creativity. They'll decide what their, what their brand stand for. But the idea that they should be the ones that have to come up with all the ideas, that doesn't make any sense. And so we talked about Klaviyo as, you know, playing the game of Klaviyo, doing marketing.
We ought to be able to build algorithms, agents, that are better at doing that than our marketing users, and at least can sit side by side with them and help them. So what we've done with AI, I know there's been a lot of, with, you know, language models, there's actually been a big acceleration for us in content generation, how we've done that. We've thought about our AI strategy in three parts. The first is just pure productivity. So we use some of the language model technology to just make it faster, easier to use Klaviyo. You know, what we pride ourselves on the UX. We're finding that a lot of our novice customers might say, is like: "Well, actually, I don't even know all the data I have. Can I just kinda ask you guys a question?
Hey, find me all my customers who are likely to buy soon." Well, what does the word soon mean? Well, actually, we can just translate that and figure out, you know, if you're a mattress company, soon might be in two years. You know, if you're an apparel company, it might be in the next few months. We can, we can figure that out for you. So doing a lot of work on productivity, help you use, which we indirectly monetize by using, you know, more usage of Klaviyo. The second part then is optimization. How do we take the marketing ideas you have? How do we help make them better? So tune the content, tune the timing, tune the audience. And then the third is we think about expanding your marketing strategy. I talked about this example of, like, we're out of ideas.
We need, kind of need this AI to sit in the room with us and help us ideate on, you know, what marketing campaigns should we be running? Those last two, optimization, taking your marketing campaigns and generate helping them generate more revenue, more KAVs, we'd say, and helping you find net new campaigns that maybe you hadn't thought of, that are just, you know, going from zero opportunity cost, just lost, to, you know, being positive. We've helped folks now generate, find those ideas, optimize their own thinking, and we're measuring the results of that. And we are actually able to show incrementality. Hey, if you, you know, it's a little bit like a car with, you know, say, autopilot or something.
Hey, you can drive the Klaviyo machine yourself, but also you can kinda just have us help run it for you, and here's how many incremental dollars that's driving. And we found is, like, the lift there can range anywhere from, like, 5%-50%, I mean, depending on how sophisticated somebody is. And so while we're not monetizing those latter two parts today, our belief is, and we've, you know, pressure tested this with customers, if we can help them drive better revenue, and because the revenue we're helping them drive is so profitable, you know, it's, it's, it's almost all- it's after, after, you know, obviously after their COGS, their, you know, ability to serve a customer, it's almost all profit because the ROI on Klaviyo is so good. They're willing to share more of that with us.
So we're, you know, we're starting to think through monetization models where if we can help a business generate an incremental $1 million in sales, are they willing to give us a percentage of that? Which is actually higher than if you kind of look at our, you know, Klaviyo Attributed Value and our overall revenue, our take rate from just the software itself. And I think this is gonna be a trend with enterprise software generally. I think we're in this great spot where we have this metric where we can really show the value. I think enterprise software of the future should be more outcome-oriented. It should be more about like, well, what is the value? How do you, you know, how do you show that and put it in dollars so people can understand the financial rewards?
Can companies either, you know, directly or indirectly index towards that?
Yeah.
So we're very excited about that.
Yeah. Yeah, that's a great explanation. Maybe we could end with a couple of just high-level questions on the numbers. For folks maybe who haven't known the Klaviyo story for long. You haven't been public for all that long. Just talk a little bit about, like, the seasonality of the business and how we should be thinking about kind of the shape of the second half, both top line and bottom line, given, you know, you're consumer-oriented, e-commerce driven, you know, there's some seasonality there.
Sure. Yeah, so we have, you know, as from a financial profile, we've, we have a big uptick in Q4. Q1 is relatively lower. So because we work with a lot of retail and e-commerce businesses that are very seasonal, we think about, like, you know, that Black Friday as being their Super Bowl, their Olympics. We do see a fair amount of seasonality there, over there, which I think is moderated somewhat over time. But yeah, we do see a spike in, you know, revenue growth, you know, on a relative quarter-over-quarter basis in Q4, and then a relative, you know, kind of softening in Q1. But I'll go back to this, like, because our.
What we find is a lot of our businesses, because they're establishing relationships with customers in Q4, and then those tend to persist and stick going forward. So it's a little actually less lumpy than you might think of a business that's purely based on, like, transaction volume.
Yep, yep. Look, the numbers are great, 35% growth, Rule of 50-ish operating metrics today. There's a lot you still wanna do, right? You laid that out, the bigger vision for what Klaviyo becomes. What's the trade-off between growth and profitability, and kinda how you think about managing the organization?
Sure. Well, we've always believed that being in, you know, we talk about our customers being in control of their destiny, giving them tools that help them drive their business. We believe the same for us. So, you know, we'll always be a, you know, cash flow generating business, but we're optimizing for growth. I think the opportunity in front of us to be the system of record for a consumer business, but then the applications that drive that business's performance to make that increasingly more autonomous, I think the future of, you know, CRM is, you know, autonomous. It doesn't require, like, as many human drivers of it. There's no company that's executing on that today, and we think that's a massive market. Every consumer company will be backed.
Every relationship that each of us has, you know, with, these organizations, you know, be it, it's like, you know, brands and retailers or the banking, financial services we use, or even healthcare, all of that will be addressed by systems like Klaviyo. And we plan on investing, to go be that, be that default. So I think that, market is, right there for the taking. You know, we'll do that, as we always.