Paul Tudor Jones (Trades, Portfolio) is a legendary investor and the founder of Tudor Investment Corp., an investment fund with $12 billion in assets under management as of 2022.
During the second quarter, the guru increased his firm's position in marketing tech stock Braze Inc. (BRZE, Financial) by a staggering 800%.
In this discussion, I will break down the possible reasons for the increase, the company’s high-retention business model and its valuation. Let’s dive in.
Business model
Braze is a customer engagement platform, which was ranked by Forrester as a leader in the cross-channel marketing hub category. At the time of writing, 1,866 customers use the platform, including big names such as Intuit (INTU, Financial), Pizza Hut, Canva, HBO and many others.
Its product “ingests” customer data to then enable personalized messages to be sent across various channels, from the web to email and SMS. The platform enables users to be easily segmented into different audiences based on purchase behavior, buying intent and other factors. The tool also allows multiple data sources to be easily connected to its platform via an API. This includes analytics platforms such as Amplitude and Mix Panel, as well as ad providers such as Alphabet's (GOOG, Financial) Google and Meta (META, Financial) and data providers such as Amazon's (AMZN, Financial) AWS and Customer Data Platforms.
The company recenlty launched new artificial intelligence tools such as Sage AI, which embed generative AI into the campaign messaging process to enable ad copy to be created easily. A customer can also apply A/B testing and experimentation in order to optimize the results.
Growing financials
Braze reported solid financial results for the first quarter of fiscal 2024.
Its revenue of $101.8 million rose 31% year over year. Subscriptions contributed to the vast majority (95%) of its revenue, while the remaining 5% was from professional services and integration fees.
The top-line growth was driven by a solid 24% increase in its customer count to 1,866, up 96 quarter over quarter. Its largest customers spending at least $500,000 per year also rose by a solid 27% to 164. Interestingly enough, these customers contributed to a staggering 57% of its total annual recurring revenue.
The beauty of a customer marketing platform is once a large organization has signed up, they are very unlikely to change vendors. This is because all of its data has been uploaded and employees have learned how to use the platform.
Therefore, it was no surprise to find its dollar-based net retention was 122%, which means customers are staying with the platform and spending more through upsells. Its average contract length is approximately two years.
Braze continues to expand globally with 43% of its revenue coming from outside of the U.S. The company is also expanding its Australia and New Zealand offices.
Its remaining performance obligation was $478 million, which rose 22% year over year, while its current RPO of $325 million was up 28% year over year. This metric helps to give a strong indication of future revenue to be realized.
Margins and balance sheet
Moving on to earnings, Braze reported a gross profit of $70 million at a non-GAAP gross margin of 68.8%. This was higher than the $52.5 million in gross profit reported in the prior quarter.
Its operating expenses were $111 million, which rose by a solid 22% year over year. A positive is less than half of this ($40.2 million) was spent on sales and marketing as the company continues to aggressively grow. The remaining $29.2 million was spent on research and development, which I believe is also necessary as the company needs to continually innovate to stay ahead of the curve. Its R&D expenses also include headcount to support the expansion, according to its earnings call.
Its non-GAAP general and administrative expenses were $17.1 million, or 17% of revenue. This compares to $15 million, or 19% of revenue, in the prior-year quarter.
Overall, the company reported an operating loss of $41.9 million, which was worse than the $39.6 million reported in the prior year. However, its non-GAAP earnings loss of 13 per share beat analyst forecasts by 5 cents.
Braze reported an operating cash flow of $22.5 million, which was higher than the $17.9 million reported in the prior year. In addition, the company reported $21.7 million in free cash flow, up from $15.7 million in the prior year.
Moving on to the balance sheet, Braze has a solid $507.4 million in cash, cash equivalents and marketable securities. In addition, its total debt is just $52.4 million, which is well covered.
Valuation
Braze trades with a price-sales ratio of 10.23, which is lower than its five-year average.
Guru interest
Jones' firm and Jefferies loaded up on shares in the second quarter of 2023. These stock traded for an average price of $34 per share during the quarter, which is slightly cheaper than where the stock traded at the time of writing.
Final thoughts
Braze is a leading marketing hub platform that has continued to grow at a solid clip despite the tough economic backdrop. I believe its high switching costs are a key advantage and should ensure sustainable growth moving forward. It is interesting to see that Braze is still aggressively investing in sales and marketing for growth. This may seem like a risky tactic given the longer buying cycles, but it also could pay off long term.
