Braze IPO: New York Startup Scene Set for Boost

A Look at Braze's IPO Filing

The week has begun, and while much attention is currently on Facebook's upcoming earnings report, there are other important developments to consider.

Specifically, the initial public offering (IPO) filing from Braze warrants a closer examination.

Understanding Braze

Braze, headquartered in New York City, specializes in customer engagement software. This means the company provides tools to help businesses connect with their customers.

We will delve into the specifics of their operations shortly.

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Funding History

Prior to its IPO filing, Braze secured approximately $175 million in funding.

A significant portion, $80 million, was raised in September 2018, resulting in a post-money valuation of $850 million for the company.

Data from both PitchBook and Crunchbase confirm these figures.

Analyzing Braze's Performance

Our objective today is to gain a comprehensive understanding of Braze’s business model.

We will also analyze its financial results and assess a potential valuation for the company.

Does this plan sound agreeable? Let's proceed.

Understanding Braze’s Core Functionality

Braze functions by integrating with a company’s existing customer technology stack to gather data about individual consumers. This data is then utilized to automatically categorize consumers into distinct segments.

Subsequently, Braze’s platform facilitates the delivery of personalized communications to these segments. These messages are designed to be “contextually relevant,” meaning they are tailored based on the insights Braze has compiled regarding each consumer.

Delivery of these messages can occur both within the customer’s own applications and through external, third-party channels.

The Rationale Behind Braze’s Approach

The core principle driving Braze’s service is the modern consumer expectation of personalized experiences. The company posits that effective data management is crucial for achieving this level of customization.

Braze emphasizes the common issue of fragmented customer data, often residing in isolated silos within various applications. Its platform offers a solution by centralizing this data.

Centralized data enables a more comprehensive understanding of a company’s customer base. This, in turn, empowers businesses to make more informed marketing choices and deliver targeted messaging through Braze.

Service Model and Revenue Streams

Braze primarily operates as a software-as-a-service (SaaS) provider. However, the company also generates a small amount of revenue through on-demand services, which will be discussed further.

Braze’s Market Presence and Growth

The Braze platform boasts a substantial user base. According to the company’s S-1 filing, it facilitated 3.3 billion monthly active user interactions across its customers’ digital platforms as of July 2021.

This represents significant growth, with figures of 2.3 billion monthly active users in January 2020 and 1.6 billion in January 2019.

The following section will detail how this increasing platform usage translates into financial performance.

Evaluating Braze as a Business Venture

Braze demonstrates considerable potential as a viable business.

The company has publicly disclosed financial data through the quarter concluding July 31, 2021. Further insights into its performance during the October 31, 2021, quarter are anticipated in a subsequent S-1 filing.

Revenue Growth and Performance

During the first six months of the year, ending July 31, Braze generated $103.6 million in revenue. This represents an increase of nearly 53% compared to the $67.9 million recorded in the same period last year.

This growth rate, while substantial, indicates a slight deceleration from the company’s performance in the prior fiscal year. Specifically, the twelve-month period ending January 31, 2021, saw Braze achieve $150.2 million in revenue, a 56% increase over the $96.4 million from the preceding fiscal year.

Nevertheless, a 53% growth rate from a significant revenue base is a strong indicator for a potential public offering, even with a moderate slowdown in percentage growth.

Profitability and Gross Margins

As a software-based company, Braze benefits from robust gross margins. However, its gross profit margin as a percentage of revenue doesn't quite reach the highest levels observed among SaaS businesses.

For instance, in the six-month period ending July 31, 2020, Braze reported gross margins of 64%. This figure improved to 67% in the corresponding period of 2021, signaling a positive trend.

Examining Net Losses

Concurrently with rising revenues, the company’s net losses are also increasing. A review of the Braze income statement reveals this trend:

The increase in net losses is attributable to rising costs outpacing the growth in gross profit.

Operating expenses experienced a notable surge during the most recent two-quarter period when compared to the previous year’s figures.

Operating Cost Breakdown

Here's a breakdown of the cost increases:

• Sales and marketing expenses increased by 67% in the six months ending July 31, 2021.
• Research and development costs expanded by 83%.
• General and administrative costs grew at a slower pace of 56% year-over-year.

It is worth noting that share-based compensation costs rose considerably, from $2.7 million in the two quarters ending July 31, 2020, to $12.6 million in the same period of 2021.

A substantial portion of the company’s increased net loss, therefore, stems from non-cash expenses.

Transparency in Financial Reporting

Braze distinguishes itself by avoiding the use of complex, adjusted profitability metrics. The company does not rely on aggressive adjustments to non-GAAP EBITDA to present a more favorable financial picture.

Instead, Braze prominently displays its net loss in its initial S-1 filing and maintains consistency with this metric (based on our initial review of the S-1). This approach suggests a level of maturity in both the company’s leadership and its underlying business model, bolstering its readiness for a public offering.

Understanding Braze’s Software Performance

Let's delve into the specifics of Braze’s Software as a Service (SaaS) model. While the company adheres to Generally Accepted Accounting Principles (GAAP) for its primary reporting, it also presents certain software-centric metrics that warrant careful consideration.

A key area of focus is the breakdown of the company’s revenue streams – specifically, the proportion derived from software versus services.

These figures are relatively stable and demonstrate positive trends.

It’s important to recognize that Braze’s software revenue is fundamentally recurring in nature. This is clearly indicated by its subscription-based model, but it’s a point worth emphasizing. Here’s how Braze characterizes its software revenue composition, with emphasis added to highlight why analyzing its on-demand revenues is less critical than its consistent, recurring income:

Since revenues generated from “usage” are insignificant, they can be largely disregarded. However, it will be interesting to observe whether Braze maintains its strong SaaS orientation as on-demand pricing gains traction in certain software segments.

Focusing on SaaS metrics, let’s examine net retention. Braze demonstrates a commitment to transparent metrics, employing a straightforward net retention calculation. Unlike some companies that manipulate figures by excluding churned customers – a practice that erodes investor confidence – Braze’s methodology encompasses both expansion and accounts for contraction or attrition. This is a positive indicator.

Here are the relevant figures:

The latter part of this statement is significant because Braze is experiencing increasing revenue concentration over time. However, given that net retention is higher among larger clients than smaller ones, shifts in revenue concentration are logical.

To what extent is the company’s revenue base concentrated? Moderately, but not to a dangerous degree:

No single client contributes more than 5% to Braze’s revenue, indicating a relatively low level of customer risk. Losing one or two major clients would impact a quarter’s results, but wouldn’t be catastrophic.

The company’s robust net retention among large customers, coupled with slower expansion rates in smaller accounts, is a primary driver of growth. Braze reports that 54.5% of its revenue growth during the six months ending July 31, 2021, compared to the same period the previous year, was “attributable to growth from existing customers.”

In summary, Braze is achieving solid growth at scale, with moderate net losses and transparent financial reporting. Its margins are average for a software company, but are showing improvement. Furthermore, its net retention rates are commendable, significantly contributing to its overall growth trajectory.

Now, let’s consider the company’s valuation.

Valuation Assessment of Braze

During the quarter ending July 31, 2021, Braze reported total revenues of $55.8 million. This translates to an annualized revenue run rate of $223.0 million.

Analysis of comparable market data suggests that businesses exhibiting growth rates in the 50% range frequently command revenue run-rate multiples in the mid-30s.

Revenue Multiples and Potential Valuation

Applying a 30x multiple to Braze’s run rate would result in a valuation exceeding $6 billion. This represents a substantial increase when contrasted with the company’s last privately assessed valuation, which was below $1 billion.

Further insights into Braze’s financial performance will become available with the release of their subsequent filings. These filings are expected to contain preliminary data for the third quarter.

• Key Metric: Revenue run rate of $223.0 million.
• Comparable Companies: Those with 50% growth rates.
• Potential Valuation: Over $6 billion with a 30x multiple.

The forthcoming financial reports will provide a more detailed understanding of Braze’s trajectory and solidify its current market position.