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Klaviyo (NYSE: KVYO)
Q3 2024 Earnings Call
Nov 06, 2024, 4:30 p.m. ET

Klaviyo Reports Strong Growth in Q3 2024 Earnings

Summary of the Call

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Klaviyo’s third quarter fiscal 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] I would now like to turn the conference over to Andrew Zilli, vice president of investor relations.

You may begin.

Andrew Zilli — Vice President, Investor Relations

Thanks. Good afternoon, and thank you for joining Klaviyo’s third quarter 2024 earnings call. Our earnings press release, investor presentation, SEC filings, and a replay of today’s call are available on our IR website at investors.klaviyo.com. Joining me today are Andrew Bialecki, co-founder and CEO, and Amanda Whalen, CFO.

We will reference non-GAAP measures during today’s call; reconciliations to GAAP measures can be found in our earnings press release. Some comments may contain forward-looking statements that are subject to risks and uncertainties, which could affect actual results.

Robust Earnings Performance

Andrew Bialecki — Co-Founder and Chief Executive Officer

Thanks, Zilli, and thank you all for joining us today. Klaviyo delivered another strong quarter, reporting revenue of $235 million, a 34% increase year over year. Our platform supports over 157,000 customers, helping them boost revenue through personalized AI-driven marketing across email, SMS, and push notifications.

By utilizing real-time first-party data, our vertically integrated platform allows customers to customize segments, manage omnichannel campaigns, and analyze every interaction effectively. Unlike other services that require developer support, Klaviyo empowers marketers to work independently, enhancing both efficiency and creativity.

Key Partnerships and Market Expansion

During the third quarter, we announced our partnership with Authentic Brands Group, which owns over 50 major brands like Vince Camuto and Juicy Couture. They chose Klaviyo to modernize their marketing technology across selected brands in their portfolio. We look forward to strengthening our collaboration and enhancing consumer relationships for these brands.

Additionally, Rag & Bone, an established fashion brand, transitioned to Klaviyo to achieve a consolidated view of their consumers. Their previous marketing setup involved multiple solutions making it challenging to gain insights. By centralizing their consumer data, they aim to enhance customer lifetime value.

Pressed, a leader in cold-pressed juice, similarly turned to us to streamline their operations. They faced challenges with reporting and segmentation while utilizing various point solutions. By adopting Klaviyo, they have improved their personalized communication strategies, leveraging both email and SMS to engage customers more effectively.

Partnerships with companies like Spot & Tango, which offers fresh dog food delivery, further illustrate our expansion in the market. Originally an email customer, they integrated SMS to implement a cohesive omnichannel strategy for enhanced consumer outreach.

Conclusion and Future Outlook

As we continue to improve our products and expand our international presence, we’re excited about the opportunities ahead. The demand for efficient, scalable marketing solutions remains strong, and Klaviyo is well-positioned to meet these needs. Thank you for your continued support.

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Klaviyo’s Strategic Innovations Propel Growth and Customer Engagement

In a significant move to enhance its marketing solutions, Klaviyo has formed a new partnership with The Body Shop, a prominent global beauty brand from the U.K. The Body Shop, which boasts over 30 million consumers worldwide, faced challenges in delivering tailored communications due to the complexity of its previous vendor solution. With assistance from Absolute Labs, a Klaviyo partner, The Body Shop completed a strategic overhaul, consolidating nine tools into a single platform. This transition not only facilitates personalized communication but also simplifies their marketing technology infrastructure. Additionally, Klaviyo now supports SMS marketing in 18 countries, marking recent expansions to Norway, Denmark, Sweden, Finland, Italy, and Portugal.

After successfully launching French language products in the second quarter, Klaviyo introduced Flows AI and Segments AI in French, further enhancing its offerings for a broader range of customers. Recently, the company announced support for five additional languages: German, Portuguese, Korean, Spanish, and Italian. Klaviyo is now accessible in seven languages, including its customer health center, which provides extensive resources. As part of ongoing improvements, Klaviyo is continually working to make its platform smarter and more automated, introducing Klaviyo AI to elevate user experience.

The introduction of AI-driven content creation tools and simplified automation setups is designed to help customers operate more effectively and efficiently. During their latest quarterly feature rollout, Klaviyo introduced enhanced email AI, which can generate multiple new email versions from an existing template based on user prompts. This advancement reduces the need for manual editing, allowing brands to maintain consistent messaging effortlessly.

For enterprise customers, Klaviyo launched a portfolio feature earlier this year, enabling users to set custom metrics that span multiple brand accounts within a company. By integrating data from various platforms like Shopify and BigCommerce, brands can view unified revenue reports, streamlining their overall performance analysis. This flexibility empowers businesses to gain insights across all operations, resulting in more consistent reporting and stronger decision-making.

Over the last 18 months, Klaviyo has expanded its offerings beyond traditional email and SMS marketing, incorporating Reviews and Customer Data Platform (CDP) functionalities. Their Reviews product has proven beneficial, as Happy Wax, a long-time Klaviyo user, reported a 27% increase in review collection within just 100 days of implementing the Reviews feature. This growth reflects Klaviyo’s commitment to providing tools that foster customer understanding and drive strategic marketing decisions.

Klaviyo is enthusiastic about its CDP progress, noting its competitive advantage lies in vertical integration, which enhances implementation speed and scalability. Recently, they introduced a new action center within their RFM analysis report, making it easier for brands to automate key actions based on significant metrics found in RFM analysis. This capability helps brands quickly transition from insights to actionable strategies. Moreover, Klaviyo’s new product analysis feature allows brands to easily assess product performance and purchasing behaviors, offering deep insights that can refine merchandising strategies.

A prime example of this is Harney & Sons, a high-end tea company that utilized Klaviyo’s CDP for product and RFM analysis. The company successfully identified possible churn risks and executed a targeted win-back campaign that resulted in an average order value 29% higher than its year-to-date average. Their CEO remarked that this campaign alone covered their first three months of CDP costs.

As Klaviyo continues to innovate, it acknowledges the crucial role of its third-party partners, including marketing agencies and software developers, in driving success. Recent weeks have seen a surge in partner interest, adding 20 new applications to Klaviyo’s integration directory, along with over 40 new flow templates for quick customer implementation.

In Q3, Klaviyo launched an integration with Canva, which saw rapid adoption, becoming the fastest growing integration in the company’s history. This partnership allows customers to seamlessly utilize design assets from Canva within Klaviyo, impacting their marketing efforts significantly. A great example of this integration’s effectiveness is True Food Kitchen, which switched to Klaviyo for its superior compatibility with their existing tech stack, enhancing their marketing operations.

As we approach the busy holiday season, Klaviyo is prepared to support its customers in achieving their goals. Last year, the platform helped brands generate nearly $60 million in Klaviyo Attributed Value per hour during peak periods like Black Friday and Cyber Monday. This year, Klaviyo is set to launch its Black Friday, Cyber Monday hub, offering users a dedicated space to strategize and prepare for the upcoming holiday season.

In closing, Klaviyo recently welcomed Surabhi Gupta as its new chief technology officer and announced that Adil Wali will join as the chief product officer later this month. Together, they bring a wealth of experience that will undoubtedly propel Klaviyo’s growth and enhance its value to customers.

Klaviyo Reports Strong Q3 Growth Amid Market Challenges

Strategic Leadership Changes at Klaviyo

As Klaviyo transitions to a new Chief Strategy Officer, Ed plays an essential role in the company’s development. Andrew looks forward to Ed’s enhanced strategic influence in driving Klaviyo’s direction in the coming years.

Amanda Whalen: Financial Highlights

Thank you, Andrew. Klaviyo achieved impressive financial results in Q3, with revenue soaring 34% year over year to $235 million. Our non-GAAP operating margin stands at 14%, reflecting consistent performance on both revenue and profit fronts. This quarter, we successfully focused on four primary growth factors: attracting new customers, expanding in the midmarket, growing with existing customers, and increasing our international presence.

During Q3, we added more than 6,000 new customers, bringing our total to over 157,000, an increase of 16% compared to last year. We’ve observed a decline in the SMB sector while entrepreneurs and high-end markets showed strength, enabling us to report robust results overall. Our go-to-market initiatives from last year are yielding positive outcomes in the higher market segments.

By the end of Q3, Klaviyo boasted 2,619 customers producing over $50,000 in Annual Recurring Revenue (ARR), a 54% increase from last year. This growth reinforces our success in pursuing high-end clients. Notably, we established a partnership with Lulus, a fashion brand seeking to enhance its tech infrastructure. They adopted Klaviyo for email marketing and are integrating SMS services to optimize their communication strategies.

The expansion of services among existing customers is evident, demonstrated by a dollar-based Net Revenue Retention Rate (NRR) of 110% for the quarter. While we anticipated a slight decline in NRR, it remains reassuringly stable. NRR is influenced by three components: gross retention, the introduction of new products, and growth of existing offerings.

We maintain strong gross retention, which shows how valuable our platform is to customers. The addition of SMS services has also strengthened our product offering, with over 80% of our top 50 customers adopting Klaviyo SMS. When we exclude the entrepreneur category, almost 25% of our combined SMB and midmarket customers utilize SMS services.

Despite these successes, some SMB customers continue to voice concerns about the economy, focusing closely on their software expenditures. However, many new customers are entering with multiple products from the outset, leading to significant advantages in larger deals.

Nevertheless, these larger multiproduct contracts limit further expansion opportunities, which negatively impacts NRR. We foresee that these expansion challenges will impact next year’s growth, as previously discussed.

Internationally, we are making notable strides. Our revenue in the EMEA region surged by 45% year over year, while APAC persisted in gaining momentum. Overall, international revenue increased by 41% year over year, consistent with last quarter. We are committed to improving product accessibility across diverse languages to attract more businesses globally.

Financial Metrics

Looking at our financials, non-GAAP gross profit for the quarter reached $183 million, resulting in a non-GAAP gross margin of 78%. This figure represents a slight annual decline of 200 basis points, influenced by the growth of our SMS product and the early preparations for Black Friday and Cyber Monday, which have added to our costs. Given the seasonality of our business, we anticipate that Q4 gross margins may decrease due to increased sending volumes during the holiday season.

For operating expenses, our sales and marketing and R&D ratios remained stable compared to prior quarters. General & administrative (G&A) expenses accounted for 12% of revenue, down 580 basis points year over year. This decrease results from an international tax reserve release, similar to what we reported last quarter, and an absence of IPO-related expenses from last year.

In Q3, our non-GAAP operating income totaled $34 million, yielding a non-GAAP operating margin of 14%. This exceeded expectations due to revenue outperformance and operational efficiencies. We generated $34 million in free cash flow during this quarter, demonstrating a 57% increase from last year, primarily due to higher profits and interest income.

Looking Ahead: Q4 Guidance

For Q4, we project revenue between $256 million and $258 million, reflecting a year-over-year growth of 27% to 28%. This forecast considers ongoing challenges in the expansion segment of NRR, particularly feedback from SMB clients about macroeconomic pressures. Our anticipated non-GAAP operating income for Q4 ranges from $7 million to $9 million, resulting in a non-GAAP operating margin of approximately 3%.

This forecast accounts for a new cash bonus program starting this fiscal year, which will incur costs in the low teens of millions. This initiative aims to align employee compensation more closely with market standards and enhance performance incentives. The Q4 performance will reflect a catch-up accrual for bonuses related to the previous fiscal year, and we will continue this accrual annually going forward.

For the fourth quarter, we expect fully diluted shares outstanding to be around 306 million. Overall, we are raising our full-year revenue guidance to a range of $923 million to $925 million, representing year-over-year growth of 32% to 33%.

Klaviyo Updates Guidance Amidst Strong Growth Prospects

For the full year, we are revising our non-GAAP operating income guidance range to $104 million to $106 million, representing a non-GAAP operating margin of 11%. This aligns with the expectations we set at the beginning of the year. We plan to maintain our 2024 non-GAAP operating margins approximately flat compared to 2023. Additionally, for the full year, we expect the fully diluted share count to be around 299 million. We are pleased to report robust growth as we head into FY ’24.

Q4 Promises to Impact Future Revenue Trends

As Q4 is typically our strongest quarter in terms of revenue, it will significantly influence our outlook for 2025. Although we are not providing official guidance for 2025 at this moment, we anticipate that revenue growth will decelerate slightly based on current trends. Strength is evident in both the low and high ends of the market, but we’ve also faced some challenges in customer expansion, which we have addressed since the start of the year. Thanks to our go-to-market strategies and product investments this year, we plan to make thoughtful investments in 2025, particularly focusing on expanding our international presence. Consequently, we foresee operating margins remaining consistent with 2024 as we drive growth in our large addressable market.

Looking Forward

We will share formal guidance for fiscal 2025 during our Q4 call, along with further details about our investments. In summary, these positive results indicate that Klaviyo’s platform is effectively supporting our customers’ success. We believe we are well-positioned to continue attracting new customers, enhancing growth in the midmarket, deepening relationships with existing customers, and expanding internationally. As we gear up for the holiday shopping season, we are focused on facilitating a successful Black Friday and Cyber Monday for our clients.

Now, let’s open the call for questions. Operator?

Questions & Answers:

Operator

Thank you. We’ll now begin the question-and-answer session. [Operator instructions] Please limit to one question before returning to the queue. Your first question comes from DJ Hynes with Canaccord.

DJ Hynes — Analyst

Thank you, and congratulations on a solid quarter. Amanda, I appreciate the early insight into 2025. AB, could you update us on your customer acquisition strategies? Are there any channels performing particularly well?

Andrew Bialecki — Co-Founder and Chief Executive Officer

Certainly. We approach acquisition through various channels. Our marketing team concentrates on inbound methods, like raising awareness to encourage potential customers to try Klaviyo. Our freemium model enables businesses of all sizes to start using our platform for free, which helps set our sales team up for success. Partners, particularly digital agencies—several thousand being part of our program—along with major tech platforms like Shopify, play a crucial role in customer acquisition. Furthermore, as we target the midmarket and enterprise segments, we engage in direct sales efforts.

Our marketing primarily targets small to medium-sized businesses, while our sales approach focuses more on midmarket and enterprise clients. We’ve seen a strong performance across all three strategies. In the entrepreneur segment, particularly with smaller SMBs, we attribute growth to platforms like Shopify and our digital marketing efforts. At the higher end, with midmarket and enterprise brands, our sales team is finding a strong foothold. We intend to maintain focus on these three acquisition channels as we navigate the rest of this year and into the next.

DJ Hynes — Analyst

That makes sense. Thank you.

Operator

Your next question comes from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow — Analyst

Thanks, and congratulations. Amanda and Andrew, regarding the recent softness you mentioned, given the current economic climate, how are you managing? Do you believe the macroeconomic factors or election uncertainties are influencing this trend?

Amanda Whalen — Chief Financial Officer

Thanks, Raimo. The trends we see in our SMB segment remain consistent; while we are experiencing softness in acquiring new customers and expanding existing accounts, the macro environment hasn’t improved or worsened significantly. It has remained stable. Our customers are increasingly focused on the value they receive from software solutions. We consider ourselves essential to their success and are pleased with our performance in this kind of market.

Our diverse customer base—ranging from entrepreneurs to global enterprises—also mitigates dependency on a single market or region. In fact, this quarter, we observed strength among both entrepreneurs and high-end clients. Importantly, Klaviyo’s performance is based on the digital relationships our customers build, rather than being indexed to gross merchandise value. As we approach key retail events like Black Friday and Cyber Monday, facilitating effective consumer engagement for our customers becomes critical to their success.

Raimo Lenschow — Analyst

Got it. Thank you. That makes sense.

Operator

Your next question comes from Scott Berg with Needham. Please go ahead.

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Klaviyo Targets $1 Billion ARR with New Leadership and International Expansion

Scott Berg — Analyst

Hi, everyone. Thanks for taking my question. Nice quarter here. AB, I just wanted to ask about the two new hires you mentioned, the CTO and CPO.

Your platform has received substantial attention for its database-driven approach. How do you foresee these two new hires impacting your technology strategy moving forward?

Andrew Bialecki — Co-Founder and Chief Executive Officer

Absolutely. We’re thrilled to welcome Surabhi and Adil to our team because they share our ambitious vision. Leadership hires should have two key traits: humility and the capability to handle large-scale operations. The latter is especially vital for your inquiry.

Interestingly, Adil was a Klaviyo customer before joining us, as he was involved with one of our early client businesses. This experience gives him valuable insight into our space. Both Surabhi and Adil have also worked with large-scale infrastructures, and our goal with Klaviyo is to establish a reliable source of truth for consumer data. As we develop this system, it is crucial to ensure it remains elastic, scalable, secure, and dependable. Their experience will help us scale our engineering efforts significantly.

Scott Berg — Analyst

Wonderful.

Operator

Your next question comes from Brent Bracelin with Piper Sandler. Please go ahead.

Brent Bracelin — Analyst

Thank you. Good afternoon. AB, your Q4 guidance suggests that the company is on track to exceed $1 billion in ARR by the end of the year. Can you share your vision for achieving the next billion?

Wall Street consistently looks for growth. With new talent coming in, a strong balance sheet, and positive cash flow, do you plan to explore mergers and acquisitions (M&A)? Please outline your strategy for gaining that next billion.

Andrew Bialecki — Co-Founder and Chief Executive Officer

Yes, I’m optimistic that reaching our second billion won’t take as long as it did to reach the first. Amanda mentioned four key areas we are focusing on: growing our SMB customer base, penetrating international markets, expanding into mid-market and enterprise sectors, and enhancing our product portfolio.

On the product side, we prioritize creating best-in-class solutions. A few years back, Klaviyo primarily offered a database with email marketing capabilities. We’ve evolved to include essential messaging channels for businesses, which is why we’ve invested heavily in SMS, mobile applications, and social media platforms like WhatsApp.

Our future products also include customer experience solutions that will leverage our comprehensive database to personalize interactions and automate processes using AI. This approach is evident in our Customer Data Platform (CDP), which gained traction among analytics companies eager to comprehend their customer base and act swiftly.

We envision enhancing customer touchpoints across various platforms—websites, stores, and customer service. While we plan to develop some of these solutions internally, we are open to pursuing M&A opportunities. We value our partner ecosystem and will consider collaborations with them to address various use cases as we look to grow.

Ultimately, our goal is to be the definitive source of truth for businesses regarding their customers, enabling them to drive meaningful revenue through enhanced customer experiences.

Brent Bracelin — Analyst

Thank you.

Operator

Your next question comes from Michael Berg with Wells Fargo Securities. Please go ahead.

Michael Berg — Analyst

Hey, congrats on the quarter. I appreciate you taking my question. I want to discuss the opportunity in international markets. It seems thriving with recent announcements about language expansions and native capabilities.

How should we view your progress since these changes? While it’s still early, can you share insights about new languages and regions as you continue to expand? Thank you.

Amanda Whalen — Chief Financial Officer

Thank you for the question, Michael. We are genuinely excited about our progress internationally. This quarter, we reported a remarkable 45% revenue growth in the EMEA region.

Expanding language capabilities has positively impacted our new business in markets like France, Germany, Spain, and Finland. We are committed to hiring local language-speaking sales representatives in these regions to enhance our support for these product capabilities.

This quarter was also marked by significant international wins, including partnerships with The Body Shop, Minelli, and Passionata—all strong global brands.

Moreover, the importance of our partner network cannot be overstated. They play a crucial role in supporting our international growth strategy. We are thankful for partners like PrestaShop and Think Digital, which are helping us as we expand beyond the United States. While it’s still early in this journey, the initial customer feedback has been extraordinarily positive as we launched in five new regions.

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Klaviyo Reports on Growth Strategies and Future Prospects

October Developments Signal Exciting Future Growth

In recent discussions, Klaviyo analysts and executives highlighted the company’s international growth, particularly in SMS and product offerings.

Michael Berg — Analyst

Awesome. Thank you.

Operator

Your next question comes from Rob Oliver with Baird. Please go ahead.

Robert Oliver — Analyst

Great. Good evening. Thanks for taking my question. AB, mine is for you.

Earlier, Brent asked about reaching the $2 billion mark in revenue. I’m curious about additional products besides SMS, which is a leader in cross-sell opportunities. Amanda mentioned that cross-sell remains a strong area. Could you elaborate on what the company sees from Reviews and the Customer Data Platform (CDP) with recent changes to how the CDP is packaged? How is this strategy helping drive new business wins? Thank you.

Andrew Bialecki — Co-Founder and Chief Executive Officer

Absolutely. We aim to transition from a single product focus to becoming a multi-product platform over three years, allowing users to purchase various applications that work together seamlessly. Starting with SMS, we noted that 80% of our top 50 customers are leveraging this service.

This trend indicates a strong demand from small and medium-sized businesses as well as larger enterprises. We are excited about the interest in consolidating services on our platform, attributed to the valuable data we provide. Additionally, we’ve expanded SMS capabilities to six new countries primarily in Europe and are enhancing integrations with other platforms. For instance, when running advertising campaigns, users can now collect phone numbers alongside email addresses for a smoother SMS integration.

We continuously analyze customer adoption rates, striving to simplify the onboarding process through our sales teams and partnerships. We are optimistic that our progress in SMS will extend to future messaging channels such as mobile apps, WhatsApp, and other social platforms.

Regarding the CDP, we identified two key uses: analytics for understanding customer behavior and data governance. Our analytics feature is gaining traction as clients recognize its purpose. We’ve streamlined the process, enabling users to swiftly turn insights into marketing actions. This efficiency has proven beneficial, with our CDP product often paying for itself through immediate increases in revenue or KAV.

This analytics capability is poised to drive further growth, helping Klaviyo evolve beyond its email marketing foundation to a more expansive role.

Robert Oliver — Analyst

Great. Thank you for all the details. I appreciate it.

Operator

Your next question comes from Keith Weiss with Morgan Stanley. Please go ahead.

Keith Weiss — Analyst

Excellent. Thank you for taking my question, and congratulations on a strong quarter. I’d like to explore the Net Revenue Retention (NRR) figures a bit more, particularly their expected impact on growth next year. I’m surprised as the upsell and cross-sell initiatives seem to be performing well, especially with SMS and your expanding switch portfolio.

While previous macro pressures may not impact next year’s totals as severely, I wonder why NRR continues to decline. Are there insufficient offsets from cross-sell activities? Could you elaborate on this continuing NRR trend and its implications for future revenue growth?

Amanda Whalen — Chief Financial Officer

Thank you for your question, Keith. As we’ve noted, we do not provide specific guidance on NRR but anticipate a continued decline in the near term. The components of NRR include retention, expansion of existing products, and cross-sell activities.

Our gross retention remains strong, reflecting our status as a critical resource for customers. When considering product expansion, it primarily drives our NRR. Feedback indicates that as we serve SMBs, many are cautious with their spending and deliberate about their messaging.

Additionally, as we target larger customers who often opt for multiple products initially, it leaves fewer opportunities for expansion later on. While this approach benefits us in securing larger clients, it also affects our NRR expansion metrics. The decline we are projecting aligns with past trends, particularly since our NRR reflects a trailing 12-month calculation that began showing this issue last year. Despite these challenges, our cross-sell efforts are yielding positive results. Customers like Spot & Tango, who previously used Klaviyo for email, have added SMS services. We are observing similar successes in other sectors that aim to enhance their multi-channel messaging.

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Klaviyo’s Strategic Growth: Navigating the Competitive Landscape

As the digital marketing landscape evolves, Klaviyo’s focus on consolidation offers exciting opportunities for customer engagement and business efficiency.

Consumer Engagement Through Consolidation

Klaviyo has identified significant value in consolidating their services. This strategic move not only enhances consumer experiences by allowing effective engagement across various channels but also simplifies business operations for customers. By delivering a comprehensive view of performance and reporting all in one place, Klaviyo believes this trend will continue driving cross-sell opportunities.

Conservative 2025 Forecast Amidst Current Economic Conditions

When asked about the small-to-medium business (SMB) expansion, Chief Financial Officer Amanda Whalen acknowledged the challenging macroeconomic landscape, suggesting that Klaviyo’s future assumptions regarding growth remain cautious. The trends observed throughout the year indicate stability, leading to predictions of continuity as they head into 2025.

Upmarket Movement and Changing Competition

Analyst Arjun Bhatia inquired about Klaviyo’s traction in larger markets. CEO Andrew Bialecki responded by noting that they are successfully attracting larger clients. This shift brings unique competitive challenges, particularly against established vendors that initially focused on specific marketing channels. Klaviyo’s all-encompassing data engine provides a compelling advantage as customers move away from outdated technologies.

Anticipating Growth with Larger Clients

Bialecki also highlighted the potential for expansion beyond their initial offerings with larger customers, as they can begin with a single brand or region and scale from there. This reflects the company’s ongoing commitment to developing their product portfolio, which includes innovations in SMS and analytics. The expectation is that over time, as relationships establish, these larger clients will not only adopt more products but will also expand their overall investment in Klaviyo.

Managing Seasonality and Margin Changes

Analyst Derrick Wood raised concerns over seasonal impacts, particularly concerning operating margins. Whalen explained that Q4 typically sees pressure on gross margins due to increased sending volumes and the necessity of heightened marketing expenditures during peak selling seasons. She highlighted that this intensifies Klaviyo’s efforts to ensure they remain prominent in customers’ minds during critical business periods. Adjusting for the new cash bonus program, the Q4 margin guidance aligns with prior expectations, showcasing the impact of their seasonal strategy.

Customer Acquisition Trends During the Holidays

Terry Tillman from Truist sought clarifications on customer acquisition dynamics during the holiday season. Whalen noted that despite the challenges posed by the holiday rush, Klaviyo anticipates strong activity as companies adapt to shifting market needs and focus on value-driven decision-making.

In summary, Klaviyo is strategically positioned within the digital marketing landscape, leveraging consolidation to enhance customer experiences and streamline business operations. Their approach looks to create substantial growth despite competitive and economic challenges.

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Klaviyo Prepares for Strong Q4 as SMS Demand Grows During Holiday Season

Thanks so much, Terry. I’ll start by discussing customer additions, and then we can touch on SMS trends in Q4. Historically, Q4 is a robust quarter for us.

While we don’t specifically forecast net additions, we usually see an uptick in customers, particularly from the lower end of the market, as they gear up for the holiday season. It’s important to note that as we shift focus toward higher-tier markets, we may acquire fewer customers, but they will likely be of higher quality. This shift is a worthwhile trade-off, since one midmarket or enterprise customer can generate significantly more lifetime value compared to several smaller clients.

These factors may influence our Q4 numbers, but typically, this quarter shows strong performance. In our SMS offerings, we also anticipate a rise in volume during the holiday season. Brands are keen on utilizing SMS because it effectively captures consumer attention during critical shopping days such as Black Friday and Cyber Monday.

This year, we expect similar trends for SMS. Customers seem to be steadily adding subscribers and are experiencing healthy growth in their SMS base. They are also being strategic about the frequency of messages sent to each subscriber, a trend that aligns with our observations from previous quarters.

Overall, we see continued strong growth in this channel, albeit at a more moderated pace in terms of message frequency compared to earlier periods. A good illustration of customer behavior is seen with Lulus. They recently aimed to leverage our platform’s personalization features ahead of Black Friday and Cyber Monday, opting to migrate to Klaviyo even under tight timelines.

Operator

Your next question comes from Nick Altmann with Scotiabank. Please go ahead.

John Gomez — Analyst

Hi. This is John Gomez on for Nick Altmann. Can you discuss your pipeline for acquiring higher-tier clients? Considering the seasonal dynamics, should we expect most of that strength to materialize in Q4, especially as it’s a key renewal period?

Andrew Bialecki — Co-Founder and Chief Executive Officer

Sure, let’s focus on our pipeline. Many of our enterprise clients, as Amanda pointed out, generally don’t make purchasing decisions in Q4; they often defer those until later. Occasionally, larger clients rush their decisions as holidays approach, but primarily, this quarter is about forging relationships that will pay off post-holidays. In January, many businesses are ready to upgrade or consolidate their tech stacks after the holiday rush.

John Gomez — Analyst

Great. Thank you.

Operator

Your next question comes from Mark Zgutowicz from The Benchmark Company. Please go ahead.

Mark Zgutowicz — Analyst

Thank you. Has Shopify’s recent success at the enterprise level begun to influence your pipeline, and how does your market approach compare to midmarket strategies?

Andrew Bialecki — Co-Founder and Chief Executive Officer

Our collaboration with Shopify continues to progress positively. As they expand into larger retail markets, we do the same, ensuring a synergistic approach. Klaviyo serves as a powerful customer platform, housing all necessary customer data while enhancing customer interactions. Our years of integration with Shopify have strengthened this relationship. We aim to replicate this model as we engage with more enterprise businesses, identifying other platforms that complement ours, ensuring seamless data flow and integrated experiences.

Mark Zgutowicz — Analyst

Excellent. Thank you.

Operator

Our last question comes from Carolyn Valenti with Goldman Sachs. Please go ahead.

Carolyn Valenti — Analyst

Hi. Thank you for taking my question, and congratulations on the quarter. Building on our earlier discussion about merging e-commerce and marketing, can you elaborate on how Klaviyo is connecting to advertising audiences? What use cases are emerging, and how might this evolve over time?

Andrew Bialecki — Co-Founder and Chief Executive Officer

Of course, Carolyn. When considering Klaviyo’s role in marketing, it’s essential to remember that a significant portion of marketing budgets is dedicated to advertising and demand generation. Our platform’s integration with major players like Google, Meta, and TikTok is crucial. These integrations are designed to assist customers throughout their acquisition funnel. For example, we help businesses capture visitor information through forms and other data collection methods, enhancing relationships with potential customers and reducing their dependence on retargeting advertisements.

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Klaviyo Enhances Customer Acquisition Through Targeted Messaging

The Role of Klaviyo in the Marketing Funnel

Klaviyo uses email, SMS, and mobile messaging to transform potential customers into first-time buyers. It plays a crucial role in the acquisition funnel.

Using Data for Better Targeting

The platform allows users to send insights back to advertising platforms. If a business maintains a list of top customers in Klaviyo, they can leverage this data to target similar potential consumers more effectively. This additional layer of data enhances marketing strategies, ensuring businesses find the right audience for their brand.

Klaviyo’s strengths extend beyond customer retention; it also addresses customer acquisition comprehensively.

Carolyn Valenti — Analyst

Great. Thank you.

Operator

Ladies and gentlemen, that concludes today’s call. [Operator signoff]

Duration: 0 minutes

Participants in the Call

Andrew Zilli — Vice President, Investor Relations

Andrew Bialecki — Co-Founder and Chief Executive Officer

Amanda Whalen — Chief Financial Officer

DJ Hynes — Analyst

Raimo Lenschow — Analyst

Scott Berg — Analyst

Brent Bracelin — Analyst

Michael Berg — Analyst

Robert Oliver — Analyst

Rob Oliver — Analyst

Keith Weiss — Analyst

Arjun Bhatia — Analyst

Derrick Wood — Analyst

Terry Tillman — Analyst

John Gomez — Analyst

Mark Zgutowicz — Analyst

Carolyn Valenti — Analyst

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