Customer engagement software provider Braze (NASDAQ:BRZE) reported Q3 FY2024 results beating Wall Street analysts' expectations, with revenue up 33.1% year on year to $124 million. On top of that, next quarter's revenue guidance ($124.5 million at the midpoint) was surprisingly good and 3.8% above what analysts were expecting. It made a GAAP loss of $0.31 per share, improving from its loss of $0.35 per share in the same quarter last year.
Braze (BRZE) Q3 FY2024 Highlights:
- Revenue: $124 million vs analyst estimates of $117.3 million (5.7% beat)
- EPS (non-GAAP): -$0.05 vs analyst estimates of -$0.13
- Revenue Guidance for Q4 2024 is $124.5 million at the midpoint, above analyst estimates of $119.9 million
- Free Cash Flow was -$5.91 million compared to -$18.69 million in the previous quarter
- Net Revenue Retention Rate: 118%, in line with the previous quarter
- Customers: 2,011, up from 1,958 in the previous quarter
- Gross Margin (GAAP): 70.7%, up from 68.7% in the same quarter last year
Founded in 2011 after the co-founders met at NYC Disrupt Hackathon, Braze (NASDAQ:BRZE) is a customer engagement software platform that allows brands to connect with customers through data-driven and contextual marketing campaigns.
Braze’s co-founders were driven by two core beliefs - that new businesses would be born and built mobile-first and that changing consumer behaviors would force businesses to change how they deliver products and services. The Braze platform aimed to ingest consumer data and create multi-channel marketing campaigns in order to improve customer engagement.
Braze’s software is designed to listen, understand, and act. Listening involves collecting consumer data from websites and applications and building consumer profiles. Understanding involves building detailed audience segments (demographics, past behaviors, etc.) and generating messaging that speaks to these segments. Acting involves executing marketing campaigns across email, SMS, mobile push notifications or embedded content cards in a website or application that are relevant and effective.
Whether or not companies market their products through social media, all businesses need to meet customers where they are; and increasingly, that is social media. As more and more people use a greater number of social media platforms, social media management software become more valuable to their customers.Competitors addressing the customer engagement need include scaled platforms such as Adobe (NASDAQ:ADBE) and Salesforce.com (NYSE:CRM) as well as private companies such as Airship, MoEngage, and Leanplum.
As you can see below, Braze's revenue growth has been impressive over the last two years, growing from $63.97 million in Q3 FY2022 to $124 million this quarter.
Unsurprisingly, this was another great quarter for Braze with revenue up 33.1% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $8.85 million in Q3 compared to $13.33 million in Q2 2024. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter, Braze is guiding for a 20.7% year-on-year revenue decline to $124.5 million, a further deceleration from the 40.1% year-on-year decrease it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 19.6% over the next 12 months before the earnings results announcement.
Braze reported 2,011 customers at the end of the quarter, an increase of 53 from the previous quarter. That's a little slower customer growth than what we've observed in past quarters, suggesting that the company's customer acquisition momentum is slowing.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
Braze's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 118% in Q3. This means that even if Braze didn't win any new customers over the last 12 months, it would've grown its revenue by 18%.
Despite falling over the last year, Braze still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Braze's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 70.7% in Q3.
That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite improving significantly since the last quarter, Braze's gross margin is still lower than that of a typical SaaS businesses. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Braze burned through $5.91 million of cash in Q3 , increasing its cash burn by 78.9% year on year.
Braze has burned through $4.87 million of cash over the last 12 months, resulting in a negative 0.4% free cash flow margin. This below-average FCF margin stems from Braze's poor unit economics or a continuous need to reinvest in its business to penetrate the market.
Key Takeaways from Braze's Q3 Results
With a market capitalization of $5.62 billion, Braze is among smaller companies, but its more than $60.47 million in cash on hand, $407 million in marketable securities and near break-even free cash flow margins puts it in a stable financial position.
It was great to see Braze's optimistic revenue guidance and outlook for next quarter, which exceeded analysts' expectations. We were also excited its revenue outperformed Wall Street's estimates. On the other hand, its customer growth slowed and its net revenue retention decreased. Overall, this quarter's results still seemed fairly positive and shareholders should feel optimistic. The stock is up 2.5% after reporting and currently trades at $57.55 per share.
Is Now The Time?
When considering an investment in Braze, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although Braze isn't a bad business, it probably wouldn't be one of our picks. Its revenue growth has been exceptional over the last two years, though we don't expect it to maintain that historical pace. And while its customers are increasing their spending quite quickly, suggesting they love the product, the downside is that its customer acquisition is less efficient than many comparable companies. On top of that, its gross margins show its business model is much less lucrative than the best software businesses.
Braze's price to sales ratio based on the next 12 months of 10.4x indicates that the market is definitely optimistic about its growth prospects. We can find things to like about Braze and there's no doubt it's a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.
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