Summary
- Braze, Inc.'s net dollar retention consistently above 125% is outstanding.
- This shows the value of the company's products and its ability to innovate.
- However, given the macro headwinds, I'd prefer Braze, Inc. stock on a dip.
Braze, Inc.'s ( BRZE ) strong net dollar retention and growth have been impressive. However, I'd prefer to be a buyer on a dip, given the current microenvironment and its ties to consumer-oriented customers. Nonetheless, there is a lot to like about the direction in which Braze is headed.
Company Profile
Braze, Inc. offers a customer engagement platform that helps brands get to better understand and interact with their customers. The platform collects and processes real-time customer data that allows clients to better market to their customers. The company claims it processed over 9 trillion data points in fiscal year 2022. Data comes from customers' websites, apps, and back-end systems, and can include things like past purchases or shopping cart info.
Some of the examples of what the platform can help companies do include things like welcoming new customers or loyalty program members, offering birthday discounts or rewards, making product or viewing suggestions, encouraging usage, introducing new features, or sending customers reminders. This can be done through email, text, push notifications, or even via ads on Facebook ( META ) or Google ( GOOGL ).
Braze, Inc.'s platform offers products in several areas, including data ingestion (collects and imports data), classification (segments customers into groups), orchestration (when to send messages to customers), personalization, and action (in-product and out-of-product messaging and marketing tools). The products are sold as a subscription via a direct salesforce.
Braze, Inc. serves a number of verticals, including retail, restaurants, media, financial services, social media & gaming, health & fitness, utilities, and travel & hospitality.
Last Quarter
For fiscal Q3 , Braze, Inc. saw its revenue grow 46% to $93.1 million. Subscription revenue climbed 50% to $89.0 million, while professional service revenue of $4.1 million fell -13%.
Its dollar-based net retention rate was 126%, and it was 129% for large customers with annual recurring revenue ((ARR)) of $500,000 or more. It added 116 customers in the quarter to end October, with 1,715 in total.
Adjusted gross margins checked in at 69.7%, down slightly from 70.3% a year ago.
Adjusted EPS was a loss of -15 cents versus -16 cents a year ago.
Its total remaining performance obligation rose 34% to $409 million but was virtually flat sequentially. On its Q3 call , CFO Isabelle Winkles said:
"While total RPO was generally flat compared to last quarter, we did experience a modest decline in the RPO value beyond 1 year. This is attributable to slower new business growth, a higher percentage of shorter duration contracts than in the prior periods, and fewer renewable dollars available in the quarter. Overall, dollar-weighted contract length remains at approximately 2 years."
Operating cash flow was -$23.9 million, while free cash flow ("FCF") was -$28.1 million. FCF through its first 9 months was -$37.1 million.
The company guided for Q4 revenue of between $95-96 million. It forecast adjusted EPS of -18 to -19 cents.
Risks and Opportunities
Like other SaaS (Software as a Service) companies, BRZE is not immune from macro headwinds. Companies across verticals have become more cautious, both in their outlooks and with their spending. BRZE serves consumer-oriented companies, so it's not surprising that when looking at technology and marketing investments they are taking a more critical view and want the best ROI for their investment dollars.
As such, it's no surprise that on its December call that BRZE said it was seeing an elongated sales cycle, as this is what tends to happen during these periods. The company also noted it is seeing fewer multi-year contracts and a general slowing of new business.
The company has also decided to slow its recruitment for new hiring, which could impact revenue growth. This might not be the worst move, however, as the company's sales and marketing efficiency has had a payback (incremental gross profit dollars) of around 2.5 years in 2022. That's not terrible, but it's also not top-tier. I generally like to see a number under 2 years. Salesforce, Inc. ( CRM ) in its heyday would generally be able to get a payback in one year.
One area where Braze, Inc. has done well is with its land-and-expand strategy, as shown by its continued strong net dollar retention rate. This number has been very impressive and shows that BRZE has been able to upsell customers. Usually, I see numbers under 110%.
This also goes back to product innovation and demonstrates that Braze is creating new offerings that are resonating with customers. It also shows that the company's products are likely generating a solid return on investment for its customers.
Answering a question about its land-and-expand strategy on its FQ3 call , CEO William Magnuson said:
"Directionally, I think we have been seeing newer customer cohorts do expand more quickly. There's a variety of reasons for that. One of them was a sales organization, structural change that we made a couple of years ago where we switched from the traditional hunter farmer model across all of our account territories.…
"The other thing that drives side is there's just more options in terms of how you can expand your footprint on Braze now. We have more channels. We have more interesting ways to bring in new data sources...
"Another aspect of that has just been our internal focus on making sure that we're driving time to value results, making sure that customers are getting up and running, that they're sending their first campaigns, that they're sending their first canvases quickly. All the investments that we put into usability as well as the just kind of operational rigor and excellence that we've built out in our integration and onboarding teams over the course of the last couple of years have all sped up those things."
Valuation
SaaS companies are often valued based on a sales multiple given their high gross margins and the stickiness of customers, which incentivizes them to pump money back into sales and marketing to grow.
Braze, Inc.'s stock is valued at a P/S ratio of about 6.7x based on the FY 24 (ending January) consensus for revenue of $446.6 million. Based on the FY25 sales consensus of $563.5 million, it trades at a P/S multiple of ~5.3x.
The company is projected to grow revenue 27% in FY24 and 26% in FY25.
Conclusion
There are certain things to like about Braze, Inc., chief among them its top-tier net dollar retention. This shows that customers are benefiting from its products and that it's creating attractive new products that it's able to upsell to customers. And while I'd like to see its sales and marketing efficiency improve, it's at an acceptable level.
The multiples for SaaS names have certainly come down, and there is certainly more scrutiny around them, especially for ones that are burning cash, such as Braze, Inc. Given it growth projections, I don't think its valuation is out of line, and a few years ago a stock with its characteristics would have garnered a much higher multiple.
That said, given the macro headwinds, I'd be more comfortable being a buyer of Braze, Inc. around $27, which would be near a 4.5x multiple of FY25 revenue. So, I like the stock but would prefer Braze, Inc. on a pullback.
For further details see:
Braze's Net Dollar Retention Demonstrates Its Opportunities