2023-04-20 04:37:29 ET
Summary
- Braze is a customer engagement tool that enables businesses to create real-time interactions across multiple channels.
- The company's recent 4FQ23 results showed a 40% YoY increase in revenue, with subscription revenue growing by 44%.
- Management's focus on value-based selling and vendor consolidation, as well as their guidance for achieving profitability in FY24, are promising for future growth.
Summary
Braze ( BRZE ) is a tool for engaging with customers, empowering businesses to create customized, real-time interactions across multiple channels. With BRZE's all-encompassing platform, businesses can acquire and onboard new customers, engage existing ones, and push for greater customer retention by sending them timely, relevant, contextual messages via the channel of their choosing. I think BRZE's niche market position has helped it grow revenue rapidly without committing extravagant amount of capital, resulting in a very strong growth and improving margin profile. Of which, I believe the underlying support for such growth is the acceleration of digital transformation around the world which has made this sector increasingly important. For the most recent quarter , BRZE reported excellent results, surpassing expectations in both revenue and profit. In terms of guidance, I find the guide to be rather conservative, especially in terms of rooms to beat. Although the company has not experienced a worsening of conditions through Q1 so far, management is preparing for the worst case scenario by assuming that macro headwinds will not only persist but worsen throughout the year. With regards to making a profit, the implied FY24 operating margin guidance is -13.5 percent. This is bolstered by constant cost discipline, which is forecasted to bring about a -7% exit rate for in FY24 and, by some point in FY25, positive quarterly operating margin and FCF margin. As a whole, I believe Braze is doing a good job of executing in spite of the uncertain macro environment, and I am recommending a buy rating on BRZE stock.
4FQ23 results takeaway
Total revenue rose by 40% year over year to $99 million, with subscription revenue growing by 44%. As a result of higher-than-anticipated revenue, the company was able to achieve a higher operating margin of -17% than was anticipated. Cash flow from operations and free cash flow both exceeded expectations as well.
Vendor consolidation
During the call, the management emphasized two instances where they won over their competitors. I believe that this shows that BRZE is taking advantage of vendor consolidation, as customers are seeking to streamline their customer engagement approach by using a single platform. Management also shared their thoughts on the value they place on value-based selling. At the recent FY24 sales kickoff in February, sales representatives were trained and enabled to better inform potential buyers of BRZE's products about the product's ROI and quick time-to-value. As the sales rep at the key touch point, I see this as an important step toward future value creation, and I put a lot of faith in these sales reps to drive growth at BRZE. But I believe the full effects of this "new learning" won't be apparent for some time. If these training sessions are successful, I anticipate a rise in sales per employee over the next few quarters. In addition, I think that the current macroeconomic climate would lead to fewer opportunities in general. Therefore, the impact of these training sessions may not be immediately noticeable in the near future.
Path to profitability
The call's main topic, which has been on the minds of many investors, was BRZE's road to profitability. On the call, management assured investors that Braze would finish FY24 with operating margins of -7% or better, and that the company would post quarterly positive FCF and operating profit beginning in FY25. In my opinion, the impact of this messaging is not only reassuring investors, but also directly influencing consensus estimates (which impacts share price) because the sell-side can model the path to profitability with greater certainty. Once BRZE reaches profitability, I believe it will be maintained going forward, giving investors the assurance they need to model a steady increase in operating FCF margins. Since management has stated that they will not underwrite any growth acceleration in FY25 in order to meet these targets, and since this forecast already accounts for some additional headcount, I believe profitability could be achieved much earlier.
Guidance is conservative
Although the company has not seen a worsening of conditions so far in Q1, management is assuming for macro headwinds to persist and further deteriorate throughout FY24 to account for the uncertainty around the banking sector. As such, revenue growth is guided at 22.5% y/y for FY24, and operating margin is expected to be between -13.5 and -15% for FY24. Management noted that while growth expectations for FY24 are lower, messaging volumes and product usage are holding steady. In addition, they are reaping the benefits of rising demand in the tourism and hospitality sectors. It's also crucial to consider the company's long-term potential for BRZE while assessing FY24 guidance, which management reiterated that they are only in the preliminary stages of a long runway of growth.
Conclusion
BRZE recent quarterly results have exceeded expectations, and management's guidance for profitability in the near future is reassuring. Management team's focus on value-based selling and vendor consolidation highlights the potential for future growth. Additionally, the conservative guidance for FY24 takes into account potential macroeconomic headwinds, which sets the possibility for a beat if macro headwinds are less than expected. Overall, I recommend a buy rating on BRZE.
For further details see:
Braze: Brace Well For Possible Guidance Beat