Braze (BRZE)

Customer engagement software provider Braze (NASDAQ:BRZE) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 19.6% year on year to $162.1 million. Guidance for next quarter’s revenue was better than expected at $171.5 million at the midpoint, 1.6% above analysts’ estimates. Its non-GAAP profit of $0.07 per share was 50.8% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Braze grew its sales at an excellent 32.3% compounded annual growth rate. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

This quarter, Braze reported year-on-year revenue growth of 19.6%, and its $162.1 million of revenue exceeded Wall Street’s estimates by 2.2%. Company management is currently guiding for a 17.9% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.5% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is admirable and suggests the market sees success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Braze’s billings punched in at $186.6 million in Q1, and over the last four quarters, its growth was impressive as it averaged 18.8% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

Braze reported 2,342 customers at the end of the quarter, a sequential increase of 46. That’s worse than what we’ve observed previously, but we wouldn’t put too much weight on one quarter given its billings growth over the last year.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Braze to acquire new customers as its CAC payback period checked in at 74 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

One of the best parts about the software-as-a-service business model (and a reason why they trade at 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 112% in Q1. This means Braze would’ve grown its revenue by 11.7% even if it didn’t win any new customers over the last 12 months.

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.

For software companies like Braze, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Braze’s gross margin is slightly below the average software company, giving it less room than its competitors to invest in areas such as product and sales. As you can see below, it averaged a 69.4% gross margin over the last year. That means Braze paid its providers a lot of money ($30.56 for every $100 in revenue) to run its business.

This quarter, Braze’s gross profit margin was 68.6%, up 1.5 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Braze’s expensive cost structure has contributed to an average operating margin of negative 19.7% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Braze reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, Braze’s expanding sales gave it operating leverage as its margin rose by 8.5 percentage points. Still, it will take much more for the company to reach long-term profitability.

In Q1, Braze generated a negative 24.8% operating margin.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Braze has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5%, subpar for a software business.

Braze’s free cash flow clocked in at $22.87 million in Q1, equivalent to a 14.1% margin. This result was good as its margin was 5.7 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Braze’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 5% for the last 12 months will increase to 7.7%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

Braze is a well-capitalized company with $539.3 million of cash and $87.31 million of debt on its balance sheet. This $452 million net cash position is 11.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see Braze’s full-year revenue guidance beat analysts’ expectations. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. On the other hand, its full-year EPS guidance missed and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 8.7% to $33 immediately after reporting.

Updated: June 16, 2025 at 10:22 PM EDT

Before deciding whether to buy Braze or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We think Braze is a solid business. To kick things off, its revenue growth was strong over the last three years. And while its operating margins are low compared to other software companies, its expanding operating margin shows it’s becoming more efficient at building and selling its software. On top of that, its ARR growth has been splendid, showing it’s securing more long-term contracts and becoming a more predictable business.

Braze’s price-to-sales ratio based on the next 12 months is 3.9x. Looking at the software landscape right now, Braze trades at a pretty interesting price. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $45.89 on the company (compared to the current share price of $27.48), implying they see 67% upside in buying Braze in the short term.