Braze(BRZE) - 2024 Q2 - Quarterly Report

Item 1. Financial Statements This section provides the company's condensed consolidated financial statements and comprehensive notes, detailing financial position, performance, cash flows, and significant accounting policies Condensed Consolidated Balance Sheets The company's balance sheet as of July 31, 2023, shows an increase in total assets to $732.1 million from $705.4 million at January 31, 2023, primarily driven by the acquisition of North Star Y, Pty Ltd, which introduced $28.0 million in goodwill. Total liabilities also increased to $291.0 million from $258.6 million Consolidated Balance Sheet Summary (in thousands) | Indicator | July 31, 2023 | January 31, 2023 | | :------------------------------------------- | :------------ | :--------------- | | Cash and cash equivalents | $77,302 | $68,587 | | Marketable securities | $394,946 | $410,083 | | Total current assets | $574,035 | $583,171 | | Goodwill | $28,045 | $— | | Total assets | $732,140 | $705,406 | | Accrued expenses and other current liabilities | $56,261 | $37,415 | | Deferred revenue | $176,803 | $166,092 | | Total current liabilities | $248,468 | $217,303 | | Total liabilities | $291,041 | $258,648 | | Total stockholders' equity | $440,371 | $445,303 | - Goodwill increased significantly to $28.0 million as of July 31, 2023, from zero in January 2023, primarily due to the acquisition of North Star Y, Pty Ltd[459][609] Condensed Consolidated Statements of Operations The company reported strong revenue growth for both the three and six months ended July 31, 2023, with gross profit and gross margin also improving. Despite this growth, the company continued to incur net losses, though the magnitude of these losses decreased slightly compared to the prior year Key Financials (in thousands, except per share amounts) | Indicator | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :----------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $115,107 | $86,131 | $216,887 | $163,626 | | Gross profit | $79,633 | $58,779 | $148,726 | $110,368 | | Net loss | $(32,049) | $(33,413) | $(70,875) | $(73,046) | | Net loss per share, basic and diluted | $(0.33) | $(0.35) | $(0.72) | $(0.77) | - Gross margin increased to 69.2% for the three months ended July 31, 2023, from 68.2% in the prior year, and to 68.6% for the six months, up from 67.5%, primarily due to economies of scale and optimization of tech stack costs[629][89] Condensed Consolidated Statements of Comprehensive Loss The company reported a comprehensive loss for both the three and six months ended July 31, 2023, which was lower than the prior year. This was influenced by changes in foreign currency translation adjustments and a shift from unrealized losses to gains on marketable securities for the six-month period Comprehensive Loss (in thousands) | Indicator | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(32,049) | $(33,413) | $(70,875) | $(73,046) | | Other comprehensive income (loss), net | $(566) | $(1,357) | $947 | $(3,114) | | Comprehensive loss, net | $(32,615) | $(34,770) | $(69,928) | $(76,160) | - Unrealized gains on marketable securities for the six months ended July 31, 2023, were $0.8 million, a significant improvement from unrealized losses of $(2.4) million in the prior year, contributing to a reduced comprehensive loss[478] Condensed Consolidated Statements of Redeemable Non-controlling Interest and Stockholders' Equity Stockholders' equity increased slightly to $440.4 million as of July 31, 2023, primarily due to increases in additional paid-in capital from stock-based compensation and common stock issuances related to an acquisition, partially offset by the accumulated deficit from net losses. Redeemable non-controlling interest decreased Stockholders' Equity Changes (in thousands) | Indicator | Balance at April 30, 2023 | Stock-based compensation | Issuance of common stock from acquisition | Net loss attributable to Braze Inc. | Balance at July 31, 2023 | | :-------------------------------------- | :------------------------ | :----------------------- | :---------------------------------------- | :---------------------------------- | :----------------------- | | Total Stockholders' Equity | $435,149 | $25,396 | $6,000 | $(31,694) | $440,371 | - The company issued 190,283 shares of Class A common stock valued at $6.0 million as partial consideration for the acquisition of North Star Y, Pty Ltd[9][396] - Stock-based compensation expense was $25.4 million for the three months ended July 31, 2023, and $49.0 million for the six months ended July 31, 2023[481][569] Condensed Consolidated Statements of Cash Flows The company generated positive net cash from operating activities of $5.0 million for the six months ended July 31, 2023, a significant improvement from the prior year. Investing activities primarily involved marketable securities and the North Star acquisition, while financing activities were driven by common stock option exercises Cash Flows Summary (in thousands) | Cash Flow Activity | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $5,032 | $1,600 | | Net cash used in investing activities | $(3,488) | $(403,799) | | Net cash provided by financing activities | $7,333 | $5,411 | | Net change in cash, cash equivalents, and restricted cash | $8,582 | $(398,056) | - Cash paid for the North Star acquisition was $16.3 million during the six months ended July 31, 2023[95] - Stock-based compensation was a significant non-cash adjustment, totaling $49.0 million for the six months ended July 31, 2023, contributing to the reconciliation of net loss to operating cash flow[94] Notes to Condensed Consolidated Financial Statements These notes provide comprehensive details on the company's accounting policies, revenue recognition, financial instruments, equity, employee stock plans, commitments, contingencies, income taxes, related party transactions, business combinations, and subsequent events, offering crucial context to the financial statements - Braze, Inc. is a cloud-based customer engagement platform that delivers customer-centric experiences across various messaging channels[490] - The company adopted ASU 2021-08 prospectively during the second quarter of the fiscal year ended January 31, 2024, which did not have a material impact on its consolidated financial statements[546] Summary of Significant Accounting Policies This section outlines the company's key accounting policies, emphasizing management's judgment in estimates and the annual goodwill impairment testing process - Management's estimates and assumptions, particularly regarding rapidly changing market and economic conditions, require increased judgment and carry a higher degree of variability and volatility[540] - The company operates as one reporting unit and performs its annual goodwill impairment test on November 1, with no goodwill impairment charges recorded for any period presented[496] Revenue from Contracts with Customers This section details the company's revenue breakdown by type and geography, highlighting subscription services as the primary revenue driver and the significant portion recognized from deferred revenue Revenue by Type (in thousands) | Revenue Type | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscription | $109,711 | $81,727 | $206,857 | $154,563 | | Professional services and other | $5,396 | $4,404 | $10,030 | $9,063 | | Total | $115,107 | $86,131 | $216,887 | $163,626 | Revenue by Geography (in thousands) | Geography | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $65,114 | $49,875 | $123,617 | $95,227 | | International | $49,993 | $36,256 | $93,270 | $68,399 | | Total | $115,107 | $86,131 | $216,887 | $163,626 | - Revenue recognized during the three and six months ended July 31, 2023, from amounts included in deferred revenue at January 31, 2023, was $51.1 million and $128.2 million, respectively[551] Variable Interest Entity and Redeemable Non-Controlling Interest This section explains the establishment of Braze KK for Japanese market expansion and the classification of its non-controlling interest as redeemable mezzanine equity due to investor put rights - Braze KK was established to expand business in the Japanese market, with investors purchasing common stock for a total of $10.0 million in two tranches[530] - The non-controlling interest in Braze KK is classified as redeemable mezzanine equity due to a put right available to investors, though it is not currently probable that it will become redeemable[531] Fair Value Measurements This section presents the fair value hierarchy for financial instruments, noting that contingent consideration is estimated using Level 3 unobservable inputs and reassessed quarterly Financial Instruments Fair Value (in thousands) as of July 31, 2023 | Financial Assets/Liabilities | Level 1 | Level 2 | Level 3 | Total | | :--------------------------- | :------- | :------- | :------- | :------- | | Cash equivalents | $38,391 | $— | $— | $38,391 | | Marketable securities | $304,113 | $90,833 | $— | $394,946 | | Contingent consideration | $— | $— | $1,593 | $1,593 | - The fair value of contingent consideration is estimated using Level 3 unobservable inputs and is reassessed quarterly[585] Marketable Securities This section details the company's marketable securities portfolio, noting a weighted-average maturity of less than one year and unrealized losses primarily due to interest rate volatility - The company's investment portfolio had a weighted-average remaining maturity of less than one year as of the periods presented[4] - Unrealized losses recognized on marketable available-for-sale debt securities as of July 31, 2023, were primarily related to continued market volatility associated with market expectations of aggressive interest rate increases[5][558] Marketable Securities by Maturity (in thousands) | Maturity | July 31, 2023 Amortized Cost | July 31, 2023 Estimated Fair Value | January 31, 2023 Amortized Cost | January 31, 2023 Estimated Fair Value | | :------------------------ | :--------------------------- | :--------------------------------- | :------------------------------ | :------------------------------------ | | Due within 1 year | $226,793 | $223,924 | $247,214 | $244,280 | | Due in 1 year through 5 years | $172,979 | $171,022 | $168,447 | $165,803 | | Total | $399,772 | $394,946 | $415,661 | $410,083 | Property and Equipment, Net This section provides a breakdown of property and equipment, net, highlighting a $2.5 million increase in capitalized internal-use software, reflecting ongoing platform development investments Property and Equipment, Net (in thousands) | Category | July 31, 2023 | January 31, 2023 | | :----------------------------------------- | :------------ | :--------------- | | Capitalized internal-use software | $9,919 | $7,344 | | Computer equipment, office equipment, and software | $7,669 | $8,111 | | Leasehold improvements | $10,128 | $9,410 | | Furniture and fixtures | $4,259 | $4,085 | | Total property and equipment | $31,975 | $28,950 | | Less: accumulated depreciation and amortization | $(11,295) | $(8,611) | | Total property and equipment, net | $20,680 | $20,339 | - Capitalized internal-use software increased by $2.5 million during the six months ended July 31, 2023, reflecting continued investment in platform development[591] Prepaid Expenses and Other Current Assets This section itemizes the company's prepaid expenses and other current assets, including prepaid software subscriptions, advertising, insurance, and investment interest receivable Prepaid Expenses and Other Current Assets (in thousands) | Category | July 31, 2023 | January 31, 2023 | | :-------------------------------------- | :------------ | :--------------- | | Prepaid software subscriptions | $13,548 | $12,574 | | Prepaid advertising | $707 | $833 | | Prepaid insurance | $1,574 | $2,795 | | Investment interest receivable | $2,532 | $2,013 | | Consumption tax receivable | $1,302 | $1,045 | | Prepaid events | $3,193 | $657 | | Prepaid employee benefits | $548 | $811 | | Other | $4,877 | $5,435 | | Total prepaid expenses and other current assets | $28,281 | $26,163 | Accrued Expenses and Other Current Liabilities This section details the company's accrued expenses and other current liabilities, including compensation costs, software subscriptions, commissions, and tax liabilities Accrued Expenses and Other Current Liabilities (in thousands) | Category | July 31, 2023 | January 31, 2023 | | :------------------------------------------ | :------------ | :--------------- | | Accrued compensation costs | $24,285 | $12,644 | | Accrued software subscriptions | $10,693 | $8,454 | | Accrued commissions | $7,224 | $6,205 | | Accrued professional service fees | $1,731 | $1,779 | | Accrued advertising | $1,316 | $922 | | Accrued tax liability | $6,513 | $4,188 | | ESPP payable | $930 | $322 | | Other | $3,569 | $2,901 | | Total accrued expenses and other current liabilities | $56,261 | $37,415 | - ESPP payable, classified as accrued expenses and other current liabilities, was $0.9 million as of July 31, 2023[18] Employee Benefit Plans This section reports the company's 401(k) matching contributions for the three and six months ended July 31, 2023 and 2022 401(k) Matching Contributions (in thousands) | Period | 2023 | 2022 | | :------------------------- | :---- | :---- | | Three Months Ended July 31 | $1,200 | $1,200 | | Six Months Ended July 31 | $3,600 | $3,000 | Stockholder's Equity This section describes the company's dual-class common stock structure, which concentrates voting control, and details a $1.0 million stock donation made as part of its Pledge 1% commitment - The company has a dual-class common stock structure, with Class B common stock entitled to ten votes per share and Class A common stock to one vote, concentrating voting control[564] - The company donated 32,155 shares of Class A common stock, resulting in $1.0 million of expense for the three months ended July 31, 2023, as part of its Pledge 1% commitment[594] Employee Stock Plans This section details the company's equity incentive and employee stock purchase plans, including shares reserved, unrecognized compensation costs for stock options and RSUs, and total stock-based compensation expense - The 2021 Equity Incentive Plan automatically increases shares reserved for issuance annually, with an additional 4,798,771 shares added on February 1, 2023[567] Unrecognized Compensation Costs (in thousands) as of July 31, 2023 | Award Type | Unrecognized Compensation Costs | Weighted-average remaining recognition period (years) | | :------------ | :------------------------------ | :---------------------------------------------------- | | Stock Options | $36,581 | 2.08 | | RSUs | $178,464 | 2.92 | Total Stock-based Compensation Expense (in thousands) | Period | 2023 | 2022 | | :------------------------- | :---- | :---- | | Three Months Ended July 31 | $25,230 | $17,412 | | Six Months Ended July 31 | $49,856 | $34,615 | - The Employee Stock Purchase Plan (ESPP) authorized the issuance of 1,825,000 shares of Class A common stock, with an additional 959,754 shares reserved on February 1, 2023[17] Commitments and Contingencies This section addresses the company's legal matters, lease obligations, and a new sublease agreement, confirming adequate provisions for legal risks and detailing future lease liabilities - The company believes it has recorded adequate provisions for legal matters and does not expect material losses in excess of recognized amounts as of July 31, 2023[21] Total Net Lease Cost (in thousands) | Period | 2023 | 2022 | | :------------------------- | :---- | :---- | | Three Months Ended July 31 | $4,737 | $4,640 | | Six Months Ended July 31 | $9,348 | $9,273 | Future Operating Lease Liabilities (in thousands) | Fiscal Year | Amount | | :-------------------- | :------- | | Remainder of 2024 | $6,008 | | 2025 | $13,317 | | 2026 | $8,609 | | 2027 | $7,550 | | 2028 | $6,101 | | Thereafter | $19,569 | | Total future undiscounted lease payments | $61,154 | - The company entered a sublease for 92,300 square feet of office space in New York, New York, commencing October 1, 2023, with a fixed rent obligation of $0.6 million per month, offset by a $6.6 million rent abatement[56] Income Taxes This section explains the company's income tax expense and effective tax rate, noting the primary difference from the statutory rate is due to a full valuation allowance against net deferred tax assets - The primary difference between the effective tax rate and the statutory rate is the change in the valuation allowance recorded[25] - The company continues to maintain a full valuation allowance against its net deferred tax assets, concluding that it is not more likely than not that the deferred tax assets will be realized[25] Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense (in millions) | Effective Tax Rate | | :---------------------------- | :------------------------------- | :----------------- | | Three Months Ended July 31, 2023 | $0.5 | (1.7)% | | Three Months Ended July 31, 2022 | $0.0 | (0.1)% | | Six Months Ended July 31, 2023 | $0.9 | (1.3)% | | Six Months Ended July 31, 2022 | $0.0 | (0.1)% | Net Loss per Share This section presents the basic and diluted net loss per share and weighted-average shares outstanding, noting that both Class A and Class B common stock share in the company's net loss Net Loss Per Share (in thousands, except per share amounts) | Indicator | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss per share, basic and diluted | $(0.33) | $(0.35) | $(0.72) | $(0.77) | | Weighted-average shares outstanding | 97,180 | 94,103 | 97,023 | 93,668 | - The rights of Class A common stock and Class B common stock are substantially identical, except for voting rights, and both share in the company's net loss[26] Related Party Transactions This section details services purchased from Datadog, Inc., a vendor whose CFO joined the company's board, highlighting the financial impact of these related party transactions Services Purchased from Datadog, Inc. (in millions) | Period | 2023 | 2022 | | :------------------------- | :--- | :--- | | Three Months Ended July 31 | $0.4 | $0.4 | | Six Months Ended July 31 | $1.2 | $1.0 | - The Chief Financial Officer of Datadog, Inc., a vendor, joined the company's board of directors in May 2021[27] Restructuring This section reports a workforce reduction implemented in May 2023, resulting in approximately $0.6 million in severance and other termination costs - The company implemented a workforce reduction in May 2023, resulting in approximately $0.6 million in severance and other termination costs recognized in the three months ended July 31, 2023[59] Business Combination (North Star Acquisition) This section details the acquisition of North Star Y, Pty Ltd for $28.5 million, including the preliminary purchase price allocation to intangible assets and goodwill, and potential earn-out payments - The company acquired all outstanding stock of North Star Y, Pty Ltd on June 1, 2023, for a total purchase price of $28.5 million, providing a direct market presence in Australia and New Zealand[60][608] - The preliminary purchase price allocation included $3.8 million to intangible assets and $28.0 million to goodwill, which is not deductible for income tax purposes[609] - Sellers are eligible to receive cash earn-out payments capped at $10.0 million for the first period and $16.0 million for the second, based on qualified revenue performance metrics[29] Intangible Assets, Net This section provides a breakdown of amortizable and non-amortizable intangible assets, including customer relationships and technology licenses, and details future amortization expense Amortizable Intangible Assets (in thousands) as of July 31, 2023 | Category | Net Carrying Amount | Amortization Period | | :------------------------------ | :------------------ | :------------------ | | Customer relationships | $3,065 | 10 years | | Restrictive covenant relationships | $170 | 2 years | | Trademark | $387 | 1 year | | Total amortizable intangible assets | $3,622 | | Non-Amortizable Intangible Assets (in thousands) as of July 31, 2023 | Category | Net Carrying Amount | Amortization Period | | :---------------- | :------------------ | :------------------ | | Technology licenses | $500 | n/a | | Total intangible assets, net | $4,122 | | Future Amortization Expense (in thousands) | Fiscal Year | Amount | | :-------------------- | :----- | | Remainder of 2024 | $432 | | 2025 | $560 | | 2026 | $343 | | 2027 | $312 | | 2028 | $312 | | Thereafter | $1,663 | | Total | $3,622 | - Intangible amortization expense was approximately $0.1 million for the three months ended July 31, 2023, with no comparable expense in the prior year[639] Goodwill This section details the increase in goodwill to $28.0 million as of July 31, 2023, entirely attributable to the North Star acquisition Changes in Goodwill (in thousands) | Indicator | Amount | | :------------------------ | :------- | | Balance at January 31, 2023 | $— | | North Star Acquisition | $28,045 | | Balance at July 31, 2023 | $28,045 | - Goodwill increased to $28.0 million as of July 31, 2023, entirely from the North Star acquisition[64] Subsequent Events This section reports on post-period events, including a re-negotiated $25.0 million purchase agreement with a strategic vendor and the grant of 170,269 Restricted Stock Units to employees - In August 2023, the company re-negotiated a non-cancelable purchase agreement with a strategic vendor for a $25.0 million spend commitment through December 31, 2024[33] - In September 2023, 170,269 Restricted Stock Units (RSUs) were granted to employees, with a grant date fair value of $7.5 million, vesting over approximately four years[611] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, liquidity, and capital resources, analyzing key factors affecting operations and future outlook Overview Braze is a leading customer engagement platform that enables real-time, customer-centric interactions. The company achieved significant revenue growth in the three and six months ended July 31, 2023, while reducing net losses and improving cash flow from operations, demonstrating progress towards positive free cash flow - Braze's platform empowers brands to ingest and process customer data in real time to orchestrate and optimize contextually relevant marketing campaigns across multiple channels[643] Financial Performance Overview (in millions) | Indicator | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $115.1 | $86.1 | $216.9 | $163.6 | | Net loss | $(32.0) | $(33.4) | $(70.9) | $(73.0) |\ | Net cash provided by operating activities (6 months) | N/A | N/A | $5.0 | $1.6 | | Non-GAAP free cash flow (6 months) | N/A | N/A | $3.0 | $(9.0) | Factors Affecting Our Performance The company's performance is influenced by its ability to acquire new customers, expand usage within its existing customer base, grow geographically, and maintain technology leadership through innovation. However, macroeconomic conditions, such as inflation and interest rate increases, pose potential risks to business growth - Braze employs a 'land-and-expand' business model, increasing revenue from existing customers by adding new channels, increasing messaging volume, and purchasing additional products[67] - Monthly active users grew to 5.5 billion as of July 31, 2023, up from 4.8 billion as of January 31, 2023, indicating significant expansion within customer businesses[38] Dollar-Based Net Retention Rate (Trailing 12 months ended July 31) | Customer Segment | 2023 | 2022 | | :-------------------------------- | :---- | :---- | | All customers | 120% | 126% | | Customers with ARR of $500,000 or more | 123% | 130% | - Approximately 43% of revenue for the six months ended July 31, 2023, was generated outside the United States, with plans to increase market penetration in regions like Europe and Asia-Pacific[40] - The company is focused on investing in research and development to enhance its platform, including artificial intelligence capabilities and channel offerings, to sustain innovation and technology leadership[72] - Unfavorable macroeconomic conditions, such as instability in the banking sector, inflationary pressure, and interest rate increases, may negatively affect business growth and results of operations[41] Components of Results of Operations This section details the company's revenue sources, cost of revenue, gross profit, and operating expenses. Revenue is primarily from subscription services and professional services. Operating expenses, mainly personnel costs, are expected to increase with continued investment in sales, marketing, and R&D. The company maintains a full valuation allowance against deferred tax assets - Revenue is primarily derived from subscription services, recognized ratably over the contract term, and professional services, recognized over a period of up to six months[619][651] - Cost of revenue includes payments to third-party cloud infrastructure providers, application service providers, personnel-related costs, and overhead allocations[620] - Personnel costs, including salaries, cash-based performance compensation, benefits, and stock-based compensation, are the most significant component of operating expenses[45] - The company expects to increase investments in sales and marketing, and research and development, leading to increased expenses in absolute dollars[46][47] - The company maintains a full valuation allowance against its net deferred tax assets, as it has concluded that it is not more likely than not that the deferred tax assets will be realized[626] Results of Operations The company's results of operations for the three and six months ended July 31, 2023, show robust revenue growth, particularly in subscription services, driven by both existing and new customers. Gross profit and margin improved due to economies of scale, while operating expenses increased due to investments in personnel and platform development. Other income significantly increased due to higher investment income Revenue Growth (in thousands) | Period | 2023 | 2022 | Change | % Change | | :------------------------- | :-------- | :-------- | :-------- | :------- | | Three Months Ended July 31 | $115,107 | $86,131 | $28,976 | 33.6% | | Six Months Ended July 31 | $216,887 | $163,626 | $53,261 | 32.6% | - Subscription revenue increased by 34.2% for the three months and 33.8% for the six months, driven by growth from existing customers (51.7% and 55.9% respectively) and new customers[628][88] - Total customers grew to 1,958 as of July 31, 2023, from 1,599 as of July 31, 2022[628][88] Cost of Revenue, Gross Profit and Gross Margin This section details the cost of revenue, gross profit, and gross margin, noting that increases in cost were primarily due to higher hosting, infrastructure, and third-party messaging fees Cost of Revenue & Gross Profit (in thousands) | Indicator | Three Months Ended July 31, 2023 | Three Months Ended July 31, 2022 | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenue | $35,474 | $27,352 | $68,161 | $53,258 | | Gross profit | $79,633 | $58,779 | $148,726 | $110,368 | | Gross margin | 69.2% | 68.2% | 68.6% | 67.5% | - Increases in cost of revenue were primarily driven by higher hosting, infrastructure, and third-party messaging fees associated with delivering the platform and supporting overall revenue growth[52][108] Operating Expenses This section analyzes sales and marketing, research and development, and general and administrative expenses, attributing increases primarily to personnel costs, stock-based compensation, and platform investments Sales and Marketing Expense (in thousands) | Period | 2023 | 2022 | Change | % Change | | :------------------------- | :-------- | :-------- | :-------- | :------- | | Three Months Ended July 31 | $60,417 | $50,007 | $10,410 | 20.8% | | Six Months Ended July 31 | $117,679 | $96,051 | $21,628 | 22.5% | - Sales and marketing expense increases were primarily due to higher personnel and overhead costs, including $2.4 million (3 months) and $4.5 million (6 months) of stock-based compensation costs, and $0.5 million in restructuring costs[630][109] Research and Development Expense (in thousands) | Period | 2023 | 2022 | Change | % Change | | :------------------------- | :-------- | :-------- | :-------- | :------- | | Three Months Ended July 31 | $29,132 | $23,336 | $5,796 | 24.8% | | Six Months Ended July 31 | $58,877 | $44,956 | $13,921 | 31.0% | - Research and development expense increases were driven by higher personnel and overhead costs, including $3.0 million (3 months) and $6.7 million (6 months) of stock-based compensation costs, to support platform enhancement[104][110] General and Administrative Expense (in thousands) | Period | 2023 | 2022 | Change | % Change | | :------------------------- | :-------- | :-------- | :-------- | :------- | | Three Months Ended July 31 | $25,453 | $20,543 | $4,910 | 23.9% | | Six Months Ended July 31 | $49,436 | $44,117 | $5,319 | 12.1% | - General and administrative expense increases were due to higher personnel and overhead costs, a $1.0 million stock donation to charity, and increased software costs, partially offset by a reduction in the donation of shares of Class A common stock[631][111] Other Income, Net This section highlights a significant increase in other income, net, primarily driven by higher investment income from marketable securities due to strengthening interest rates Other Income, Net (in thousands) | Period | 2023 | 2022 | Change | % Change | | :------------------------- | :----- | :----- | :------- | :------- | | Three Months Ended July 31 | $3,865 | $1,729 | $2,136 | 123.5% | | Six Months Ended July 31 | $7,324 | $1,759 | $5,565 | 316.4% | - The significant increase in other income, net, was primarily attributable to a $2.1 million (3 months) and $5.3 million (6 months) increase in investment income from marketable securities, driven by strengthening interest rates[87][112] Liquidity and Capital Resources The company's liquidity is primarily supported by cash, cash equivalents, and marketable securities, totaling $476.2 million as of July 31, 2023. Despite an accumulated deficit, operating activities generated positive cash flow, and the company believes it has sufficient resources to meet its capital requirements for at least the next 12 months - The company has financed its operations primarily through equity sales and cash generated from platform subscriptions, with an accumulated deficit of $424.1 million as of July 31, 2023[93] - As of July 31, 2023, the principal source of liquidity was cash, cash equivalents, and marketable securities totaling $476.2 million[113] - Deferred revenue, a substantial source of cash provided by operating activities, was $176.8 million as a current liability as of July 31, 2023[138] Cash Flows Overview This section summarizes the company's cash flow activities, highlighting positive net cash from operations, investing activities related to marketable securities and acquisitions, and financing from stock option exercises Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $5,032 | $1,600 | | Net cash used in investing activities | $(3,488) | $(403,799) | | Net cash provided by financing activities | $7,333 | $5,411 | - Net cash provided by operating activities for the six months ended July 31, 2023, was $5.0 million, primarily due to a net loss of $70.9 million adjusted for $70.0 million in non-cash charges (mainly stock-based compensation) and $5.9 million in operating asset/liability changes[94] - Net cash used in investing activities for the six months ended July 31, 2023, was $3.5 million, primarily consisting of marketable securities purchases ($121.4 million), North Star acquisition ($16.3 million), and capitalized software ($1.6 million), offset by marketable securities maturities ($136.3 million)[95] - Net cash provided by financing activities for both periods consisted solely of proceeds from the exercise of common stock options[117] Non-GAAP Free Cash Flow This section defines and reconciles non-GAAP free cash flow, noting its increase for the six months ended July 31, 2023, primarily due to higher collections from new contracts and renewals - Free cash flow is defined as net cash used in operating activities less cash used for purchases of property and equipment and amounts capitalized for internal-use software development costs[142] Non-GAAP Free Cash Flow Reconciliation (in thousands) | Indicator | Six Months Ended July 31, 2023 | Six Months Ended July 31, 2022 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $5,032 | $1,600 | | Less: Purchases of property and equipment | $(427) | $(9,844) | | Less: Capitalized internal-use software costs | $(1,640) | $(783) | | Non-GAAP free cash flow | $2,965 | $(9,027) | - Free cash flow increased for the six months ended July 31, 2023, primarily due to higher collections resulting from an increase in billings aligned with new contracts and renewals[119] Liquidity Outlook This section states the company's belief in sufficient liquidity for the next 12 months, while outlining significant funding requirements including employee compensation, purchase commitments, and operating lease obligations - The company believes its current cash, cash equivalents, and marketable securities will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months[97] - Significant funding requirements include employee compensation, non-cancelable purchase commitments ($356.3 million), and operating lease obligations ($61.3 million), primarily due over the next four years[120] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, including seasonality, interest rate fluctuations, inflation, and foreign currency exchange rates, and outlines critical accounting policies Seasonality The company experiences seasonality in its cost of revenue, with the highest sequential increase in messaging volume and compute/storage requirements typically occurring during the fourth quarter due to increased activity related to the holiday season and general customer engagement efforts - The company typically experiences the highest sequential increase in overall messaging volume and compute and storage requirements during the fourth quarter due to increased activity related to the holiday season and general customer engagement efforts[147] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies and estimates from those previously reported in its Annual Report, other than those referenced in Note 2 of this Quarterly Report - There have been no material changes to the company's critical accounting policies and estimates from those previously reported and disclosed in its Annual Report, other than those referenced in Note 2[121] Interest Rate Risk and Market Risk The company is exposed to market risk primarily from fluctuations in interest rates affecting its cash equivalents and marketable securities. However, a hypothetical 10% change in interest rates would not have a material impact on its consolidated financial statements, as investments are held for capital preservation - The company's cash equivalents and marketable securities portfolio are subject to market risk due to changes in interest rates[149] - As of July 31, 2023, a hypothetical 10% change in interest rates would not have had a material impact on the company's consolidated financial statements[149] - The company's investments in marketable securities are made for capital preservation purposes and not for trading or speculative purposes[125] Inflation Risk The company does not believe that inflation has had a material effect on its business, financial condition, or results of operations, beyond its general economic impact. However, an inability to offset potential higher costs through price increases could adversely affect the business - The company does not believe that inflation has had a material effect on its business, financial condition, or results of operations, other than its impact on the general economy[124] - Inability to fully offset higher costs through price increases, if the company were to become subject to inflationary pressures, could harm its business, financial condition, and results of operations[124] Foreign Currency Exchange Rate Risk The company's operating expenses, denominated in various local currencies, are subject to fluctuations due to changes in foreign currency exchange rates, potentially affecting consolidated results. However, revenue is not significantly exposed as most sales are U.S. dollar-denominated, and the company has not engaged in hedging activities to date - Substantially all of the company's sales are denominated in U.S. dollars, except for sales in Japan (Yen), meaning revenue is not currently subject to significant foreign currency risk[151] - Operating expenses are denominated in the currencies of countries where operations are located (primarily US, UK, Singapore, Japan), making consolidated results subject to fluctuations due to foreign currency exchange rates[151] - A hypothetical 10% change in the relative value of the U.S. dollar to other currencies would not have had a material effect on realized and unrealized gains (losses) on foreign exchange transactions during the periods presented[447] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, including the identification and ongoing remediation of a material weakness in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of July 31, 2023, due to an unremediated material weakness in internal control over financial reporting. Despite this, the unaudited condensed consolidated financial statements are deemed fairly stated in all material respects - The company's disclosure controls and procedures were concluded to be not effective as of July 31, 2023, due to a material weakness in internal control[129] - Notwithstanding the material weakness, management has concluded that the unaudited condensed consolidated financial statements are fairly stated in all material respects in accordance with GAAP[153] Material Weaknesses The company has an unremediated material weakness in internal control over financial reporting related to the lack of properly designed controls for revenue recognition under ASC Topic 606. This includes deficiencies in IT General controls, review of revenue-related information, and reconciliation of platform access, though it did not result in material misstatements in the current period - The material weakness is over the lack of properly designed controls related to accounting for revenue recognition in accordance with standards under Accounting Standards Codification Topic 606[130] - Specific control deficiencies include maintaining IT General controls over applications used for order management, provisioning, and revenue recognition; reviewing information generated from these tools; and reconciling platform stand-ready access with underlying accounting records[155] - The material weakness did not result in any identified material misstatements in the current period consolidated financial statements, nor in any restatements of previously reported results[130] Remediation Plan The company is actively working to remediate the identified material weakness by developing and implementing new processes and controls over the revenue process. This includes enhancing IT General controls, improving review procedures for revenue applications, and developing reporting to reconcile platform access with accounting records - Remediation efforts include developing user access, program change management, and computer operation controls for revenue applications and tools[178] - The company is enhancing review procedures over information generated from applications used in revenue schedules and controls[178] - The company is developing reporting to reconcile the provisioning of platform stand-ready access with underlying accounting records[178] Changes in Internal Control Over Financial Reporting No material changes in internal control over financial reporting occurred during the period covered by this Quarterly Report, other than the ongoing remediation efforts for the identified material weakness. The company acknowledges that control systems provide reasonable, not absolute, assurance against all errors and fraud - No material change in internal control over financial reporting occurred during the period covered by this Quarterly Report, other than the remediation efforts for the identified material weakness[179] - Management does not expect that disclosure controls and procedures or internal controls will prevent all error and all fraud, as control systems provide only reasonable, not absolute, assurance[131] PART II. OTHER INFORMATION This section covers additional information including legal proceedings, comprehensive risk factors, unregistered sales of equity securities, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is not currently a party to any legal proceedings that are believed to have a material adverse effect on its business, operating results, cash flows, or financial condition. However, defending such proceedings can be costly and divert management resources - As of the date of this Quarterly Report, the company is not presently a party to any litigation the outcome of which, if determined adversely, would individually or taken together have a material adverse effect on its business, operating results, cash flows or financial condition[160] Item 1A. Risk Factors This section details numerous risks and uncertainties that could adversely affect the company's business, financial condition, and results of operations. These risks span economic conditions, growth strategies, competition, technological changes, privacy and data security, legal and regulatory compliance, intellectual property, and public company reporting obligations - The company's business operations are subject to numerous risks, factors, and uncertainties, including those outside of its control, that could cause actual results to be harmed[134] - Investors should carefully consider the risks and uncertainties described, including those related to unstable market and economic conditions, growth challenges, competition, and internal control weaknesses[182][183] Risk Factors Summary This section summarizes key risks, including unstable market conditions, challenges in forecasting, the need for additional capital, a history of operating losses, and an unremediated material weakness in financial reporting - Key risks include unstable market and economic conditions, challenges in forecasting future results due to limited operating history at current scale, and the potential need for additional capital[183] - The company has a history of operating losses and may not achieve or sustain profitability in the future[183] - A material weakness in internal control over financial reporting remains unremediated, posing a risk to the accuracy and timing of financial reporting[184] Risks Related to Our Growth and Capital Requirements This section addresses risks associated with the company's rapid growth, including difficulties in forecasting, potential needs for additional capital, and the uncertainty of achieving future profitability given a history of net losses - The company's rapid revenue growth may not be indicative of future growth, and its limited history operating at current scale makes forecasting future results difficult[165][168] - Additional capital may be required to support business growth, which might not be available on acceptable terms, potentially leading to dilution for stockholders or restrictive debt covenants[167][188] - The company has experienced net losses in recent fiscal years, with an accumulated deficit of $424.1 million as of July 31, 2023, and future profitability is uncertain as costs are expected to increase[172] Risks Related to Our Business and Our Brand This section covers risks related to competitive market, customer retention, platform defects, long sales cycles, brand maintenance, and the challenges of rapid growth and remote workforce management - The market for customer engagement products is highly competitive, with established and emerging players, and the company may lack sufficient financial or other resources to maintain or improve its competitive position[196][203] - The company is substantially dependent on customers renewing and expanding their subscriptions, which requires scaling platform infrastructure and business quickly to meet growing needs[211] - The platform's inherent complexity means it may contain material defects or errors, which could result in loss of market acceptance, liability claims, and damage to reputation[218][221] - The sales cycle with large enterprise customers can be long and unpredictable, influenced by economic conditions, customer budgets, and the effectiveness of sales efforts[223] - Maintaining and enhancing the brand is crucial for attracting new customers and expanding sales, depending on marketing effectiveness, product reliability, and differentiation from competitors[227] - Rapid growth and organizational change, including operating with a substantial remote workforce, place significant demands on management and resources, potentially impacting company culture and operational efficiency[228][239][270] Risks Related to Our Dependence on Third-Parties This section highlights risks stemming from reliance on mobile operating systems, third-party cloud hosting providers like AWS, and strategic partners, where disruptions or changes could negatively impact platform functionality and business growth - The business depends on mobile operating systems (e.g., Android, iOS) and their infrastructures to send notifications, and any changes or disruptions could negatively impact platform functionality and customer interaction[273][306] - Substantially all cloud-based platform infrastructure is outsourced to third-party hosting providers, primarily Amazon Web Services (AWS), exposing the company to risks of disruption, security breaches, and service termination[274][276][277] - The company's growth depends on strategic relationships with third-party partners, and their failure to effectively market and sell the platform or consolidation with competitors could adversely affect business growth[278] Risks Related to Privacy, Data Security and Data Protection Laws This section details risks from stringent and evolving privacy laws like GDPR and CCPA, challenges to cross-border data transfers, and the potential for security breaches or unauthorized access to customer data - The company is subject to stringent and evolving privacy, data security, and data protection obligations, including GDPR and CCPA, with potential for significant fines and regulatory actions for non-compliance[281][282][315] - Challenges to cross-border personal data transfer mechanisms (e.g., 'Schrems II' decision, Meta decision) could increase regulatory exposure and impact the ability to transfer personal data from the EEA[283][285][317] - Security breaches or unauthorized access to customer data, whether by the company or its third-party service providers, could harm reputation, reduce demand for the platform, and incur significant liabilities[286][289] Risks Related to Other Laws and Litigation This section covers risks from changes in internet laws, anti-corruption regulations, U.S. export controls, adverse international tax consequences, and limitations on using net operating loss carryforwards - Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish the demand for the company's platform and negatively impact its business[291][357] - The company is subject to **anti-corrupt