Q1 2024 Klaviyo Inc Earnings Call

Participants

Jack Grant; Senior Director, Investor Relations & Strategic Finance; Klaviyo Inc

Andrew Bialecki; Chairman, Chief Executive Officer, Co-Founder; Klaviyo Inc

Amanda Whalen; Chief Financial Officer; Klaviyo Inc

Arjun Bhatia; Analyst; William Blair

Rob Oliver; Senior Research Analyst; Robert W. Baird & Co Inc

Elizabeth Porter; Analyst; Morgan Stanley

Gabriela Borges; Analyst; Goldman Sachs

Brent Bracelin; Analyst; Piper Sandler

Presentation

Operator

Good afternoon, and welcome to Klaviyo's first quarter of fiscal 2024 earnings conference call. (Operator Instructions)
Thank you. With that, I'd like to turn the call over to Jack Grant, Senior Director of Investor Relations and Strategic Finance. Please go ahead.

Jack Grant

Thanks, operator. I'm excited to welcome you to Klaviyo's first-quarter 2024 earnings call. We will be discussing the results announced in the press release issued after the market close today. Please refer to our Investor Relations website at investors.klaviyo.com for more information and the supplemental presentation related to today's earnings announcement.
With me on the call today are Andrew Bialecki, Co-Founder and Chief Executive Officer; and Amanda Whalen, Chief Financial Officer.
During today's call, we will make statements regarding our business that may be considered forward-looking under applicable securities laws and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our outlook for the second quarter and full year 2024. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today.
We assume no obligation to update any such forward-looking statements as a result of new information, future events or changes in our expectations except as required by law. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the risks and uncertainties described under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2024 that is filed with the Securities and Exchange Commission or SEC and its subsequent filings made by us with the SEC, which may be obtained on the SEC's website at www.sec.gov and on our Investor Relations website.
In addition, today's call includes the presentation of certain non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials distributed after market close today, which are available on our Investor Relations website.
With that, I'll now turn it over to Andrew.

Andrew Bialecki

Thanks, Jack. Thank you to everyone for joining us today. We're pleased to share our strong first quarter results. Consumer facing businesses of all sizes across the world are using our platform to power smarter digital relationships. This quarter, we had a number of exciting product launches, along with investments in our product engineering partner ecosystem and customer-facing role to provide the tools our customers need to drive revenue growth. I'll cover these topics then turn it over to Amanda to cover our financial results and provide our outlook for the second quarter and full year 2020 or later, we'll open up the call for Q&A.
This was a strong start to the year for our business as we grew our revenue 35% year over year to $210 million, while generating 14% non-GAAP operating margin and $23 million of free cash flow. We continued to make progress in the mid-market internationally and integrating artificial intelligence into our products. We just returned from our Flavio London conference known as a lender. We like to get close to our customers and partners, and it was great to see so many of them at the largest a London ever and our largest in-person event in 2019, I was inspired by the energy from our customers, partners, employees for what we are building. One of the people I spoke with at remark that clear deal with the standard on which they judge the quality of software and the ecosystem around it. This was a further validation of the opportunity we have with consumer facing businesses across the board, we're doubling down with our community. Our customers are trusting us with their most valuable asset, their consumer databases to power smarter digital relationships we continue to see retail e-commerce brands have all faced turn to Kadeos drive revenue. Bain & Company recently put out their 2020 for list of insurgent brands for a list of the fastest growing consumer brands, feed companies all have at least 25 million in revenue and are growing at least 10 times faster than their peers for proud to serve over 70% of these 97 brands with companies like Poppy liquid debt, some of them grew St. Louis ice cream and Dr. squash all relying on radio to drive the revenue growth during the quarter. We also closed new business with dealer, in particular from the hottest up-and-coming disruptors to the RH Dallas household name businesses are finding us to drive revenue we continued to drive momentum in the mid-market. During the quarter, we now have 2,157 customers, generating over $50,000 in ARR, which is up 59% year over year. These customers represent 31% of our ARR, up from 23% compared to a year ago. This quarter marks the first time this cohort represents over 30% of our business in the last 12 months. We've seen significant growth in the size of businesses like this that rely on us as of the end of the quarter, our top 10 customers have an average ARR of about 1.5 million, which is up over 70% year on year. This speaks to the value that we provide for our customers. During the first quarter, we landed one of the largest deals in our company history for the top online fashion store for women. This business came to us because of the quality of our Shopify integration enhancements to the platform we have made over the past few years taking advantage of our platform to consolidate their channel across e-mail SMS and push notifications. Since going live in the first quarter, they have sent over 1 billion push notification to their consumers. Once they fully rollout, they expect to be sending up to 13 billion e-mails per year because of our investments in the scalability and reliability of our platform. We help power smarter digital relationships for businesses of all sizes. Another new customer during the quarter was Perry Ellis International in our portfolio of brands, including Callaway for Original Penguin, Rafaella Perry Ellis was speaking a few key challenges with their existing tech stack of multiple e-mail providers for CLEO, they'll be able to have a single view of their consumers leading to better reporting ability to A/B test and improve their consumer journey. We'll also be able to replicate our successful strategies across brands and reduce the time to experiment with automated flow. We're excited to help Perry Ellis with their goal of driving more revenue growth. Our land-and-expand model continues to drive successful outcomes for both customers and for us after first becoming a customer in the summer of last year, Helen of Troy's home and outdoor brands, including Hydro Flask, OXO and Osprey have been driving success after consolidating e-mail and SMS with us. During the quarter, we expanded our business with them, which includes both an expansion in their SMS volume and adding on our CP. offering, the quality of our native integration has allowed them to free up developer hours and better harness their first party data on remarks we're seeing benefit of our strong partner ecosystem to help drive our bid. One expansion win during the quarter was it Andy swim, swim wear company that we co-sell with our partner Luckin Coffee Annie's when it dented e-mail customer of ours and now are consolidating their e-mail and SMS without consulting with clear DoD. Additionally allowing local code to grow their own business but any swimming in Canada. This is a great example of how we'd love to lean on our partners to drive fantastic customer outcome and help our customers power smarter digital.
Now I'd like to take a few minutes to speak about some of our progress internationally. As I mentioned, we just returned from our media focused conference, Flavio London, four k., London and we're really excited about our opportunity to grow that business. And the revenue grew 43% year over year during the quarter, and we see a strong opportunity to continue to grow there with more localized offerings during the quarter, we added nature as a fast-growing beauty brand based in France as a customer after running a trial of Flavio in some of their smaller geographies. Any tourist saw strong results in fast track their migration to cloud. You were excited to welcome them onboard and are a great example of the success we're seeing internationally, EMEA and A-Pac regions represented a little over 30% of our revenue in Q1, and we're excited for our opportunity to expand our global footprint in the future as well on the product front, we have a number of recent announcements that will help grow our international business. At K. London. We announced further progress on some of our efforts on internationalization and localization. We now provide SMS coverage in nine countries with more expected to come in the next few months. Our ability to extend our SMS capability across geographies has met our international customers need to more easily market to consumers across various geographies. Our intent is to add even more customers across Europe and allow them to connect with their consumers across channels. In fact, we recently announced our first localized French user interface with our France rollout going live later this month. This will be the first time our platform is offered in a local language other than English. So we began marketing locally in French. We saw a meaningful increase in our self-serve conversion rate. We'll be continuing to roll out new languages and localized web pages on a targeted basis over the coming quarters that came out today.
We also announced the upcoming general availability of Clio portfolio credit portfolio, streamlined multi account management with unified insights across brands, simplified operation that allows for efficient spend management and swift campaign execution by centralizing control and amplifying marketing success across diverse brands and retailers. Portfolio allows for better multi account management for our customer base is really geared towards two primary types of our customers International in those in the mid-market and both of these types of customers tend to operate across multiple markets and brands. One of our recent customer win liberated brand, which includes Volcom, Quiksilver, Roxy and Luca did using portfolio have a unified view of their digital relationships across their full brand portfolio. This quarter, we further built out our key differentiator of higher quality segmentation with our new segment preview feature. Now customers can view a preview of their segment count while building and improving speed of building the correct segment, reducing support load and improving mail segment processing fees.
Finally, on the product front, we continued our momentum in artificial intelligence with a new launch for holiday, healthy eyes use natural language processing to allow customers to ask questions directly and Claudio and get answers in a self-serve manner. We've seen healthy usage of our AI. based features. But more importantly, we're seeing proof points of AI driving real outcomes for our customers. We are seeing fast growing adoption with over 20% of our customers using artificial intelligence features, including segments, AIEAI. 40 I. and SMSs system during the quarter. In the last 12 months, our customers have created over 650,000 objects using those AI features because Additionally, help our customers generate hundreds of millions of dollars and clearly attributed value for KD. through segments.
AI. seven launch. For me, I is driving significant value as well. One of our customers, Tata Harbor, a natural luxury skincare brand used forms a I optimize the placement and timing of final form on the website. 20 different variations of two forms were automatically generated and tested in a period after the test compared to 30 days prior form submissions for both had jumped over 65%. We're continuing to invest across products to provide our customers, the tools to drive revenue. We're working to drive usage and adoption in our platform by improving our user interfaces and embedding artificial intelligence functionality.
On the go-to-market front, we're continuing to invest across sales and marketing to make sure we are reaching customers across the globe for further building out our sales capacity and partner network to expand our footprint internationally, we're improving our ability to articulate the value of our platform and close larger accounts.
On the international front, we'll be taking the learnings from France to be well positioned for further localized expansion.
Lastly, before turning it over to Marita, I'd like to provide a couple of updates on our key first, I want to announce that our CTO, Alan Chavez, has decided to step down at the end of this calendar year, spend more time with his family. I want to personally thank Alan for his significant contribution over the last 4.5 years to build Flavio into the company to today, we are enjoying yet fewer than 40 engineers, and he's helped us scale tremendously and build a world-class team and a strong leadership bench. We greatly appreciate all of his efforts and wish him well.
I'd also like to welcome Carmel Galvin as our new Chief People Officer. Carmel is going to be leading our global people, operations team and HR function, including talent, acquisition and retention, training and development, diversity, inclusion and corporate social responsibility. Our model has significant experience within the software industry, most recently serving as the Chief People Officer, Australia. We're excited to have Carmel onboard to help shape and guide our company culture as we build a world-class team for proud of our results and confident in the momentum our business has to drive strong efficient growth in 2024 and beyond. And with that, I'll turn it over to Amanda to cover the financials and our outlook. Amanda?

Amanda Whalen

Thanks, Andrew. Today, I will provide a brief overview of our first quarter 2024 financial results and discuss guidance for our second quarter at full year 2024. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation of GAAP to the most directly comparable non-GAAP financial measure.
As Andrew noted, we started the year with a strong first quarter. We continue to see strong growth at scale in an efficient manner in line with our financial framework. In the first quarter, we generated 210 million of revenue, representing year-over-year growth of 35%, and we delivered a 14% non-GAAP operating. We continue to perform across our four primary growth. I think new customers expanding with those customers expanding internationally and growing into the mix in terms of adding new customers, we increased our customer base 17% year over year, and I'm proud to now serve over 146,000. We're seeing consistent trends with regards to logo retention and a bit of softness on the new logo additions side, particularly amongst our smallest entrepreneur customers. As a reminder, while we continue to target entrepreneurs. We're doing it through continued investment in product, and we are intentionally shifting more of our go-to-market investments towards SMEs and the mid-market, while net new logo adds were down in the quarter, revenue dollars from the new logo cohort was up year over year. You'll see this reflected in our average revenue per customer, which continues to increase and was approximately 58 hundred dollars in Q1, up 15% year over year. We are continuing to expand with our as evidenced by our dollar-based net revenue retention rate or NRR of 114%. As discussed last quarter, we expected our NRR to decline from the prior period due to the impact of lapping our September 2022 price increase and the spending trends we discussed on our last call. Consistent with last quarter, we are not seeing Yahoo and Google's updated requirements impact our customers' upgrade behavior, and we have not seen any material changes in our answers. We are continuing to see our customers drive strong KAB. or Clay deal with Tribune about through our platform capabilities, particularly through the ability to personalize the segments Consumer internationally, our aggregate revenue from India and A-Pac increased 40% year over year in Q1 as we continued to increase our global business, we're seeing particular strength in Europe with strong growth in the UK, Germany, France. And then finally, we're seeing more and more businesses in the mid-market.
Turning to us, we ended the first quarter with 2,157 customers, generating over $50,000 in ARR. This represented 69% year over year growth. As Andrew mentioned, we hit an important milestone this quarter with over 30% of our ARR.
Now coming from these customers who may know the income statements, and we'll be discussing results on a non-GAAP gross profit for the quarter was 167.6 million, representing a gross margin of 80% this March for 2.5 point improvement compared to Q1 2023. We continue to see the benefits of our R&D team's efforts on system and cloud engineering optimization. We've continued to migrate volume to our ClearView mail transfer agent, KMT.
Looking ahead, we expect to see these efforts help to offset a portion of the higher costs associated with the SMS channel. For the full year, we continue to expect a couple of points of headwinds on our gross margin compared to last compared to Q1. We expect a couple points of headwind to gross margin over the next two quarters and a further decline in the fourth quarter due to the growth and seasonality of SMS.
Turning to operating expenses, sales and marketing expense were $66.7 million or 32% of revenue for the quarter. We continue to invest in marketing programs to generate demand and sales headcount to grow our capacity to serve our international and mid-market. Our new Criteo narrative that we rolled out in Q1 is resonating. We continue to closely monitor the unit economics of the different investments we are making, and we will continue to make investments where we see the right level of return. R&d expense was $41.7 million or 20% of revenue. We're continuing to invest behind our core products, AI capabilities and our new offerings. Many of which Andrew highlighted earlier.
Finally, G&A expense was 29.8 million or 14%. We are now lapping investments tied to public company readiness and expect to get more leverage from this line over time.
For Q1, our operating income was $29.3 million, representing an operating margin of 14%. We also generated free cash flow of $23 million during the quarter, up 65% year over year and leading to a two point improvement in free cash flow margin year over year and give some perspective on our ability to generate sustainable cash flow. Our trailing 12 month free cash flow increased by 123 million. We hedge them.
Finally, turning to the balance sheet. We finished the quarter with $756.9 million in cash, cash equivalents and restricted cash with no debt.
Next, I'd like to talk about our outlook for the second quarter and full year 2024. As a reminder, we experienced typical seasonality in our model. As we discussed last quarter. The second quarter typically has modest sequential revenue growth due to the lagging impact of downgrades after the holiday season. For the second quarter, we expect revenue to be in the range of 211 to 213 million, representing growth of 28% to 29% year over year. We expect non-GAAP operating income to be in the range of 19.5 to $22.5 million, representing a non-GAAP operating margin of 9% to 11. This sequential step down in operating margin is due to the timing of some investments made late in the first quarter, which have a greater dollar impact in the second quarter, particularly in engineering and go-to-market. For the second quarter, we expect fully diluted shares outstanding to be approximately 298 million for the full year, we are increasing our revenue guidance to be in the range of 899 to $907 million, representing growth of 29% to 30% year over year. We expect non-GAAP operating income to be in the range of 97 to $105 million, representing a non-GAAP operating margin of 11 to 12. As we spoke about last year. As the year progresses, we are making incremental investments across go-to-market and product opportunistically just that Clay, you up for long-term growth based on the timing of these investments, we expect to see some year-over-year operating margin deleverage in the third quarter as well with margin expansion in our seasonally strong fourth quarter. Finally, for the full year, we expect fully diluted share count to be approximately 290 to close out. We delivered strong results this quarter with healthy growth on the top line and strong operating income and free cash flow. We are excited for this year and for the long-term opportunity ahead of us and we are focused on executing against it for our shareholders.
And with that, we'll open up the call for Q&A. Operator?

Question and Answer Session

Operator

(Operator Instructions) Arjun Bhatia at William Blair.

Arjun Bhatia

Perfect. Thank you so much, and congrats on the nice results here.
And just start with and maybe, Andrew, I just wanted to touch on, I think one of the disclosures that you had given which was around some of your larger customers, the top 10, I think that over a seven-figure average ARR, it sounds like the landing new customers that you're landing are also getting larger and larger. Maybe just help us frame a little bit your where are you targeting your go-to-market resources, especially those sales reps that you're investing in?
And actually, how do you view what the upper bound is of your target market? Or is there one as you look to move further into the into the mid-market?

Andrew Bialecki

Sure. Thanks, Arjun. Yes, we're and we're very happy with the results we're seeing there. And we've got we've shared that because to answer your question on up or down, we don't see a strong upper bound on the side of business that can be on Claudio. We continue to see that. There's a lot of legacy marketing platforms out there, a lot of folks running on those a lot of point solutions that just does just that email just as SMS just as one channel and the fact that we've built this great customer database and it's integrated with marketing and all of the channels in one place makes it much easier use. We integrate directly with both retail and e-com stacks. And all that adds up to better access to data and more personalization, which is what everybody is after.
So just to give you a quick example, a sporting goods store with over 100 locations. They run one of these legacy our e-mail marketing platforms with the points which for us and as they consolidate all, that's us for better access to data so they can experiment more quickly on you. They know that's going to lead to more engagement from customers and more revenue growth. So we think we can take that into the mid-market and beyond. And then for our sales team are going to be ramping up capacity in a very intentional way. And we've got that focus today really on that mid-market segment as well as expanding coverage internationally. So we're very excited about the growth that we've seen there, and we think there's a lot more to come.

Operator

Rob Oliver at Baird.

Rob Oliver

Thanks, Amanda. I wanted to just ask you a little bit. You talked a little bit about the seasonality in the SMS portion of the business and I just wanted to see if there had been any change, does that at all? And then maybe get an updated view from you relative to the macro lots of different investments that you guys are making and obviously quite a dynamic macro. So just wanted to get an update from you on what you guys are seeing in terms of the macro opportunity Sure.

Amanda Whalen

Thanks, Rob. Yes, in terms of the SMS and seasonality, what we see continues to be very consistent with SMS and generally with SMS, it tends to be more point in time, you know, high priority communication that tends to be linked to some of the peak holiday shopping periods that we see as some as peak during those holiday shopping periods of course, during Q4, Black Friday, Cyber Monday, being the natural one that we're all familiar with. Interestingly, there's a little bit of seasonality, which you can see in Q1 and into Q2 and some of what we are talking about in gross margin, that Q1 is a little bit lighter from a holiday period. Q2, you have more of those big shopping holidays coming back around again between Mother's Day, Father's Day Memorial Day, the lead up to the 4th of July. But again, all of that is very consistent with what we've seen from SMS SMS in the past. So no, no real change there in terms of what we're seeing on the macro, based on what we're seeing, what I would say is it's steady. It's not getting better, but it's also not getting worse. We do see some linkage in the macro to some of the trends that we called out on customer behavior on our last call. And we think that some of that is coming from the macro. And but again, what we see there is that those trends are consistent. They're steady and they're very stable and the other trend that we see that's interesting is our customers' GMV growth is pretty stable as well. And we continue to see the pattern that we have seen over time which is that their KAV. or Clave you have attributed value is growing faster than their GMV. And the reason it's growing passion, energy. And because we are a platform to drive revenue for them. We have built our software to be a must-have, not a nice to have because we are the software they can count on to help drive your top line. And so what we're continuing to focus on in this macro environment is focusing on helping our customers drive growth. So we're running plays and we're building content for our customers on what are the best practices that they can use to get the most out of Clio as possible. And a great example of that has come recently as one of our customers made in his in the co-brand space, say these segments AI. to generate over 30 segments. And those 30 segments are generating over $2 million in revenue for them. So great trends in terms of the way that our customers are relying on us to help drive there.

Rob Oliver

Great.

Operator

Elizabeth Porter and Stanley.

Elizabeth Porter

Great, thanks. This is Katie teaser on for Elizabeth border today. Congrats on the quarter.
I wanted to ask one on NRR. Can you provide more visibility into the expansion behavior of customers in the quarter appreciate that ours impacted by lapping the price increase, it would be helpful to better understand the health of customers' expanding spend and perhaps how we can think about the NRR trend over the next few quarters. Thanks a lot.

Amanda Whalen

Thanks so much. And as we look across our peer set and others who play in our space, we feel really positive about where we are with our NRR. I think 114% is a great expansion trend to have and we're pleased with where we are.
We did talk about last quarter that we expected NRR to tick down. And just as you mentioned, that's due to a couple of factors, and we expected it to tick down because we're lapping the price increase and also because we continue to see, as I just talked about when we're speaking about the macro, the customer behavior trends that we called out last quarter. And so as we look forward in our, I would anticipate that it will continue to decline a few more points over the next coming quarters. And as a reminder, another factor that is going on in there is that when you manage larger customers, some of those big deals who Andrew spoke about earlier, they tend to make larger purchases upfront that's reflected in their land and then not so much in the in our expansion as we think about NRR and where it is over time, one of the things that we're particularly proud of is how sticky our product is it's so important to our customers because of the high ROI that we're driving for them and also because of how foundational we are adding to their tech stack because we are the central source of customer data for them. So we think our gross retention, which is, of course, an important part of that NRR number is really best in class for the size of businesses that we serve.

Operator

Gabriela Borges at Goldman Sachs.

Gabriela Borges

This is Kelly will ante on for Gabriela. Really nice to see the upside to revenue in the quarter. Just wanted to dig in a little bit what was the main driver of that? What was the biggest part of your business that surprised to the upside in the quarter?

Jack Grant

Sure. What we attribute I mean, I'll go back to what Amanda just talked about you think about like our growth levers. We think about adding more customers. We continue to see across SMB and we talk about midmarket, just great adoption folks. Moving off of, you know, older newsletter platforms or legacy marketing suites towards something that has a database of Davis as that's a central point and then consolidating marketing channels.
So continuing to add customers, we continue to see a lot of adoption of SMS and other products. We talked about that ticking up on and then you have been marketing internationally TouchNet before I'll just hit on international briefly. We're still very impressed by our growth there and we're making investments across product and sales to drive that from the portfolio release we just launched last week, internationalizing Flavio now in the French language and just continue to expand with partners and partners internationally. So across our four key drivers, I think we're seeing a lot of momentum there, and that's that's why we're very bullish about them. You're ahead.

Operator

Brent Bracelin at Piper Sandler.

Brent Bracelin

Thank you. Good afternoon. Avi, I wanted to take a step back. There are many 800 million ARR businesses with 70% SMB exposure that are still growing 35% of what we're seeing slowing growth across the broader SMB software category. But the claim you spend category feels different. It feels slightly more insulated Can you maybe just step back and walk through maybe why that customer may, but customer database, coupled with marketing, gives you maybe a little higher priority from a spend prioritization standpoint?
Any color there just given concerns that investors have around B spend would be super helpful.

Yes, absolutely. We often think about when we talk to our customers, what are the kind of nice to have pieces of software versus what are the must-haves. And from day one, we tried to position Flavio as a must have and really because we're driving revenue. Amanda talked about how our customers are greater or increasing percentage of their sales are coming through Flavio. And we think that there's two parts to make us a must have the first is being the central source of truth about all your customers and being able then to use that, not just with our marketing with our marketing products, e-mail, SMS, et cetera. But also then use that data and other applications. We've got hundreds of applications that plug into radio. So that centrality really matters.
And then the second part is we built in attribution the ability to really measure your results. I think if you're a product that can tie back usage of that product directly to real revenue real profit, that's a huge driver in fact like we think about what we're doing with artificial intelligence, and that's a big part of the story when we started cleaning out, the whole idea was to better more personalized experiences that would be more engaging and looking to drive more revenue. And as you stand now with our product strategy, is we invest in a I would think about that as a big driver of helping businesses, increase customer engagement and revenue by being able to run more experiments, being able to optimize the marketing campaigns that are running. So and I think when budgets get a little bit tighter, everybody kind of looks at which software is a must have, and I think because we're driving revenue, we benefit.

Our next question comes from Raimo Lenschow of Barclays.

Thank you.

Jack Grant

If you think about the amount that you kind of question already about the health of the SMB space and their geographic differences, if you think about it. If you listen to Shopify yesterday, Europe was not as strong as the US. Does that impact your do you see any of that from a geographic perspective? And does that impact your European buildout that you might kind of think about resource allocation differently?

Thank you and great question. So as we called out on the call, we're actually seeing strength in Europe and so in our European business was up over 40% in revenue year over year. And we're seeing particular strength. It's net France, Netherlands, Germany, UK in particular. So yes, I think we are a little bit earlier days in our penetration in Europe, particularly as we're just now starting to make that really important inroad in launching in a new language, starting with French. We're launching SMS in new markets. And you know, there's just so many SMBs who are out there. If you look at our and our customers and our customer count. We're continuing to see strength from Europe, and that's why we're leaning into expanding in new countries, adding new languages because we see lots of opportunity, not only great results there, but opportunity ahead.

Thank you.

We'll go next to Scott, can't, Needham.

Andrew Bialecki

Hi, everyone.

Jack Grant

Really nice quarter here.

Andrew Bialecki

Congrats and thanks for taking my questions. Avi, I wanted to ask a question on your AI functionality. You've been able to release several components of it over the last few quarters as you look at your customer base in terms of what they're using that functionality most frequently, where do they start? Would you see them maybe over the course of time, use maybe more often than others? Maybe just help us understand that a journey from what you've seen initially?

Yes, absolutely. The tieback is I may have been a major focus of ours for the last five, six, seven years. So let me describe our strategy in three parts. The first part is all about productivity. When you look at Clayville AI, a big portion of the features there, segments AIEMLAIRSMS. assistance flows, et I formed AI, they're all about how to help you use more palladium, create more run more experiments. We have a heuristic internally that we believe we can help marketers businesses get twice as much done. That's going to lead to lots more of experiments, and that's going to lead to lift in KV. in usage. So on that front. We're seeing lots of adoption. We're very happy with how that's progressing. Sub-part one productivity. Part two is optimization then of those marketing strategies. So on we talk about an example, it forms a I in my opening remarks that by running more variations of, say, a form on our website that leads to a better sign-up rate that leads to more subscribers, which ultimately leads to more revenue offset Part two. And part three that I'm really excited about is how do we not just help people improve the marketing they're doing but actually come up with net new marketing strategies. If you're a business that has hundreds of thousands or millions of consumers, there are lots of opportunities for personalization for segments of your customer base, matching them up with just the right product at the right time. And our artificial intelligence can help find those campaigns and those are additive to the KV. and the revenue that folks are driving through clear today. So across those three things, productivity optimization and expanding your marketing strategy, we've shipped the most products on the first part on productivity, and that's where we're seeing the most usage. But I expect over the coming quarters, you're going to see more in buckets two and three on optimization, expand your marketing strategy and then I think for our customers, there's sort of all of those are valuable. But as you think about being able to think of net new marketing strategies, I mean those are extremely valuable. And so while we're not trying to monetize it a productivity tool and directly, we're building that into our doing that into our products as part of what makes us a best-in-class product. I think as we start to optimize the marketing folks are doing for can help them cope with net new campaigns. There's going to be opportunities there as we drive adoption for additional either products or different pricing and packaging. And so our thoughts around all that we built Flavio as this revenue engine for businesses when we started out it really took more of a sophisticated marketer. We've actually started to build a lot of that intelligence directly into our products. And I think we're still we're very early in getting our customers to shift overtime all really relying on us. I think that's coming on.

Andrew Bialecki

And I think that's that's a big opportunity for the whole the whole category and space next we'll go to Terry Tillman at Truist Securities.

Jack Grant

Yes, good afternoon, maybe Amanda and Jack. Thanks for taking my question as well. A be it actually relates to so you clearly have to go to market investments and being pulled upmarket. But I'm curious about from an innovation perspective, what do you see as more of an unlocking opportunity, whether it's the CDP. our portfolio with some of the AI capabilities that I think Scott asked about just curious a little bit more for them and what they need and maybe you even see RFPs. What is the more meaningful unlocked potential of some of these newer products?

Andrew Bialecki

Thank you.

Yes, thanks, Jerry.

I'll take this AMI, Greg. I think it's more for as we move up market on what we're seeing from folks. So I mean, the first is it all starts with a central source of truth, our CDP., this customer database on your just to touch on the CDP. and the progress we're seeing are really excited about the adoption and the pipeline, the demand, and we're seeing there. As we mentioned, Helen of Troy adopting our CDP. almost right away. I think you could think about that. Cdp has two opportunities. One is data governance and Federation. So one thing we're seeing from larger businesses. They want their consumer data in one place and they wanted to easily integrate us into marketing and advertising to customer service onto their website.

Andrew Bialecki

And we're providing for that.

And so that's a real differentiator.
The second thing that we're focused on is really rounding out the marketing stack for a lot of these bigger businesses, a lot of them still rely on point solutions for different channels. They want all of that to be orchestrated to be to work together. And we've been able to prove out with some of our larger customers that there's real lift and in doing e-mail and SMS and other channels altogether, not only to reduce complexity, but actually consumers like it better. It's a better consumer experience So adding all those marketing channels over time when things without DDE. is that it's not just about data governance, but there's actually an analytics play with part of our CDP. feature that allows our customers to run more advanced reports, some of it, some of which are out of the box to help them discover some new marketing ideas for example, we have large customers that have used our RFM analysis that out of the box to discover customers that used to be really loyal, Avocent's lapsed and quickly create marketing campaigns based on that. That's something that in the past was it was an idea folks had, but it would take months to actually implement and we've made it something you can do in hours or days. So you take all those things. You then it layer on some of the productivity boost, the ultimate optimizations with machine learning and artificial intelligence. I think that's the complete picture. I think for the larger business, they really want a complete stack that allows them to store customer data and then drive personalized consumer experiences all in one place.

Andrew Bialecki

And so we're trying to do that both of the products we offer, but then making sure that we integrate, but the other software they're using, we'll move next to city Panama, Korea, Amazys whole group.

Jack Grant

Hi, thanks for taking my question. It's great to see this our largest online fashion store deal that you talked about with Shopify integration. As you look at the opportunity in the Shopify Plus installed base with your partnership a kind of opportunity, how many you think you can further penetrate in that base? And when do you see this kind of opportunity? Is this mostly a displacement? Do they use some sort of service? Or is it a more of a greenfield opportunity?

Yes. So our we love working with Shopify, and we continue to partner really closely with Shopify Plus in particular, we mentioned that your Shopify integration on in our religious them is so strong. Our two products work really well together and that matters a lot for personalization. So I think as for Shopify Plus merchants, those businesses, we've got strong market share, but we still think there's a lot of room to go, not just in terms of adding additional customers, but also expanding how we can use data from Shopify in our customer database and then use it across more marketing channels and more parts of the consumer experience. And when I talk to customers and partners, they really like that vision and a lot of them are looking for us to give them that roadmap. And that's a lot of what our sales team I talked about, the customer growth team we have that helps our customers adopt more Flavio. So we're very happy with the progress that we've made to date in the Shopify Plus ecosystem. And we think there's a lot of room to grow there as well.

We'll move next to Derrick Wood at TV, Cowen.

Thanks, Amanda.

Andrew Bialecki

You have a strong customer acquisition engine at the lower end of the market, but you're also investing more resources of markets. So I wanted to get a sense of how to think about the impacts on new customer generation levels in 2020 for especially in light of the macro and some of the comments you made, we did see that new customers drop down to three, three K. and D., what should we be thinking that's kind of the new run rate or are there other seasonal factors quarter to quarter that we should expect as we progress through the year?

Amanda Whalen

Yes.

Great question. Thanks, Derek. And as we discussed on the call, we did see a bit of softness in the new logo adds. And in terms of the count that was really focused at the lower end of the market, we think what's going on there is a combination of a couple of things. We think it's a combination of macro and the macro environment as well as the intentional investment decisions that you referred to, which is we are continuing to target entrepreneurs, but we're doing it really through products. And then we're intentionally shifting more of our go-to-market towards those SMBs and mid-market. But when you look at the net logo counts, those smaller customers. They have a disproportionate impact on the logo count and they have a smaller impact on total revenue.
Now an interesting trend that we are seeing in the business within there is that if you look across each of our customer groups, the entrepreneurs, the SMBs in the mid-market within each of those customer groups, we are closing higher ASP. customers. Customers are growing their businesses, they are turning to us to drive more of their revenue and that results in them signing up for larger plans. And so going forward, as you think about the balance of the rest of the year?
I would expect we're going to continue to grow new logos, but it's going to be more moderated growth on total number of new logos that we're adding and more of a balance there between the growth in logos and growth in ASPs.

And that's been I'll add one thing on top of what a manager shared on StaR proteins are obviously still very focused on delivering a great out-of-the-box experience regardless of the state of the business, whether you're just starting out or you're already a large enterprise in within we're talking about mid market within this kind of SMB is more established. As I said, we still think we have a long way to go in terms of market share on we talked about in our relationship with Shopify and Shopify Plus and growing there. There's also we continue invest in existing partnerships and platforms. There's other platforms in the retail and e-commerce space that we're doing more work with.
And then also internationally, we think there's a lot of met. I mentioned we're relatively early and growing internationally. We think there's a lot of SMBs, large, plenty of customers that should be running on palladium.

Next, we'll go to Tyler Radke at Citi.

Jack Grant

Yes, thanks for taking the question.

Andrew Bialecki

A similar question on on the go to market at a, I guess, a two-parter here. Number one, them looked like sales and marketing. It ticked down a bit sequentially. And could you just talk about kind of that the changes in spend that you're seeing there? And then where are you focusing the go-to-market investments here? Is that you talked about some international opportunities especially in France? And are there certain industries that you're leaning into more? If you could just talk about where you're targeting those investments?

I think I'll talk a little bit about our strategy and then Amanda can talk to the trend. And so the marketing spend. So I mentioned that on the sales side, we've been increasing sales capacity, very intentionally to focus on three core areas, the first being mid market where we're seeing strong growth. The second is internationally, where we think there's a big opportunity. And then the third is what we call, our customer growth team that works with existing Flavio customers help them adopt the full Flavio platform. And so that's going well and we think we're well positioned there on the marketing side, we're in some of these newer areas. We mentioned mid-market, you mentioned international. We're investing in brand and folks knowing who we are and also creating moments for folks to really attach to us. Eyes are clearly a launch a few months ago. We're big believers and customer events are clearly a London conference, bringing together both existing customers to use more palladium as well as net new customers to eat does not mean existing customers and learn from their experience. And so what we really like what we're seeing from those investments as well.
And finally, I mentioned it on the marketing side, we're doing a lot of educating the market and even some existing customers about all of our products, especially our newer products on. But just to give you a little example, I talked to a lot of customers were advanced e-mail users of ours, but they're still learning about what SMS can bring to their business or what other channels or CDD. can bring. And so we think there's a lot of upside upside there. So we're doing all of that still very much focused on retail and e-commerce on and off with strong commitments to good unit economics and experimenting and staying disciplined.

And then regarding the sequential step down in sales and marketing that you asked about that has to do with the seasonality of investments. So it's primarily marketing and marketing timing because we have a lot of marketing programs that are linked to the holiday shopping season. As Andrew said, we're continuing to invest in sales capacity. We'll be ramping up marketing programs, particularly through the second half of the year. And you can see the timing of that reflected in some of the comments that we had in our prepared remarks, talking about how we expect operating margins to unfold over the course of the year.

We'll take our next question from DJ Hynes at Canaccord guys.

Congrats, nice quarter. Maybe moving to go back to that large win with a women's online fashion brand. Curious with the RC look like there who else was involved? How long was the sales cycle?

Andrew Bialecki

Kind of what ultimately took the decision in your favor would be helpful color.

Sure. So in the mid-market and enterprise still is a lot of older tacked on. And that obviously doesn't include the back end customer database that we have, which limits the amount of personalization and the kinds of experiences you can build across e-mail, SMS and other channels on the legacy tact as well as just like points. Let's just say that just help with one mortgage on time on in that particular case, the actual customer on, you know, I've been on clearly a few years ago, and I had thought they had outgrown us, but then a date that's grown a lot. We have scaled up our systems on and they came back and they came back for a lot of reasons that I hear from a lot of our customers we are integration tightly with their back end back end retail and e-commerce systems as well as integration into their more consumer facing it with their website and things that sit outside of marketing. So those integrations combined with the ease of use, the ability to get a lot of things done. I think that the access to data and being able to use that personalized plus where we're going on talk to a lot of our larger customers, they're really excited about the idea of not just our customer database and consulting channel, but also what we're going to be able to do with artificial intelligence and the ability to take the data you have and plug it into every aspect of the consumer experience, a lot of our larger mid-market and enterprise brands. I think they still feel like they haven't been able to fully stitch that together. They don't have a single source of truth for consumer data, not all of the front office pieces of software that interfaces with the consumer. They don't talk to each other. I think with Flavio, we've really got a shot at being that company. And that's what we talk about is that we're going to move quickly to build products that both addresses what they want to do with data and marketing today. But also build out this broader CRM for consumer businesses. So I think where we are and where we're going on, yes, that's that's what makes it.

We'll go next to Nick Altmann at Scotiabank.

Andrew Bialecki

Awesome.

Jack Grant

Thanks, guys.

Andrew Bialecki

I wanted to build on Raimo's question on the international side. And Andrew, just given you guys are coming off the Amea event and you guys have rolled out a plethora of features geared at those international customers. I was wondering if you could just maybe talk about how those conversations with international customers are different from customers in the U.S. just in terms of buying propensity where they're at with their martech journeys, interest in various channels, willingness to consolidate, et cetera. Just any other color you can provide and how those conversations differ with international versus US customers?
The interesting. Thanks, National.

Are yes, you had a great event. And I know, Greg, you had hands on with customers and hear from them directly. But what really matters on?
So first, the sophistication level, both in Europe and in Asia is excellent. I mean, these are businesses that are they're really driven. They know what they want to do. They know the data they should have access to. And they've got a lot of ideas on how to put to work on the challenge for a lot of both in Europe and Asia, it's really about complexity and because we're reducing that. That's that's that's really I mean, that's the winning value prop of it to give you a quick story. We launched Claudio portfolio, a set of tools to manage multiple accounts, multiple regions, multiple brands, all in one place. And when we were at you then IASDI. a panel of customers. I said a how many of you login Could you at least once multiple accounts, at least once a week, almost everybody raise their hands, how many of you logins released 10 different Flavio accounts every week and not many hands went down still. The majority of folks were working either across brands or they had different stores, different website for every single region in Europe. So we're launching features like that to help reduce the complexity, particularly of portfolio. We spent the last 12 months really building on all the plumbing so that we can internationalize our products, both the actual software itself as well as all of our technical documentation, all of our guys and tutorials. We just launched out with France. The team put a huge effort to do that, but set up in such a way that we're going to be able to quickly move from English to French to many other languages, which will help us address more of on the international, our international customers and who should be future customers. So you kind of add up all those pieces as well as we've got hundreds of partners over in Europe that are very sophisticated, very focused on. You have a lot of great ideas, yes, plus our platform partners plus a growing number of customers that's creating a flywheel that's allowing us to then overlay additional sales headcount on run marketing campaigns and grow internationally efficiently.

We'll go next to Jackson Ader Keith.

Great. Thanks. This is style deal on projects later on.

Jack Grant

Maybe just a quick clarifying question first, I think the mention of the thoughtfulness in spend in towards the back half of last year, particularly in December.

And it sounded like SMS aside, it was kind of throughout the business. Did that thoughtfulness carry through the entire quarter here when we when we talked about kind of a similar backdrop and it was more so a quarter of just better productivity or execution up in the mid-market. And then on secondarily, is there any color you guys could kind of provide for us on that 50 K plus customer cohort? Is that prime? Is that growth primarily being driven by the larger lands? Or is there still a fair a fair bit of mix there coming from customers kind of growing up into that into that cohort?
Sure.

Amit QUESTION, thank you. So yes, with regards to the thoughtfulness and the trends that we're seeing in customer behavior, the themes are very consistent with what we spoke about last quarter. So this quarter was less focused on SMS, but the overall magnitude of the trends that we're seeing in customer expansion remains very consistent. And generally, what we're seeing is that they continue to expand our plans. They're just doing it at a more moderated rate. And the reasons behind it when we talk to customers and look into the data is that they're being targeted in the e-mails and SMS that they send and they're being more proactive in managing the plans to make sure that their plan size aligns to the usage that they're driving. And both of those things contribute really well to high ROI. And what we see when we look across our customer base is that customers with high ROI have high retention. And that one of our key competitive differentiators is the fact that we let customers be very, very targeted, very intentional build relationships with the data, and that helps them be more effective in their marketing. So over time, we think both of those are very good trends in the business. And we've just got to figure out how do we continue to help them drive revenue and how we share in that value that we're creating.
And then regarding the 50 k. customer mix, it's important to remember, I guess, first, the seasonality of our business, the second half of the year and in particular, the fourth quarter is the biggest expansion time for us and expansion and the key driver of that number of 50 k. adds. So overall, we're really pleased with the progress that we're seeing there. We're really pleased with that continued adds that we have and it sold as a milestone that we reached that we spoke about on the call that over 30% of our ARR. It's now coming from this 15 K plus cohort of customers.

And those are all the questions I have for dates for today's call. With that, I'll turn the call back over to Andrew. Bye, I would like you for closing remarks.

Great. Well, thank you all for joining us on today's call. Phil, I again thank our Flavio team, our customers, our partners for a great start to the year. We're very excited for the year ahead. Have a nice evening, everyone.

And this concludes today's conference call.

Thank you.

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