Company Overview
After an almost two-year drought of SaaS IPOs, Klaviyo, a leading marketing automation company, filed for an IPO. The amount the company plans to raise isn’t yet disclosed, and Goldman Sachs is leading the IPO. Klaviyo plans to list on the New York Stock Exchange under the symbol “KVYO” and is headquartered in Boston, MA. Assuming the IPO / roadshow schedule is on time, we can expect Klaviyo to start trading in 4-6 weeks. The company plans to raise primary and secondary and has two share classes: Class A (one vote) and Class B (10 votes). Andrew, the CEO, holds most of the Class B voting rights. Klaviyo was founded in 2012 to provide SMBs (small and medium-sized businesses) with a platform to use first-party data to create personalized marketing automation across channels, including email, SMS, and push. The product is easy to implement and enables users at any skill level to be proficient. This strategy is working for Klaviyo customers, and as of June 30th, 2023, the company had delivered $37B of “KAV” to their over 130,000 customers. KAV, short for Klaviyo Attributed Value, is a metric Klaviyo created and is defined as “the amount of revenue our customers generated through orders placed by consumers within a specified period of time after a message is sent using our platform, which in the case of email is five days from when the message is sent, and in the case of SMS is twenty-four hours from when the message is sent.” Klaviyo was founded as an email marketing automation company. On top of its core data model and application workflows, it has expanded across channels (to SMS and push) and released other modules like Reviews and CDP (customer data platform). Klaviyo has also continued to build out its integration library, which now stands at over 300. Today, Klaviyo is a leading all-in-one solution for marketing automation.
Klaviyo’s approach has been very successful thus far, and the company mentions efficiency has been a core part of their DNA, which is clear from looking at their numbers. Klaviyo has raised $454.8M in primary capital since inception, of which they have spent only $15M. Only a handful of SaaS companies have reached this level of scale and growth with such little burn – it is an exceptional metric. Today, Klaviyo is executing incredibly well even in a tough economic environment, especially for eCommerce and SMBs. The company doesn’t report ARR (annual recurring revenue) explicitly, but as of last quarter, the company has $658.3M of implied ARR (quarterly revenue * 4), growing 51% year-over-year. Klaviyo has 119% net dollar retention and 88% gross dollar retention, 13% non-GAAP operating margins, and 24% free cash flow margins. It is a Rule of 75 company, which is one of the highest Rule of 40 scores of all current public SaaS companies in today’s market. The company has even reached GAAP operating profitability in the past two quarters. This is all selling into mostly SMB customers; their most recent average ACV (annual contract value) was $5,100. According to Pitchbook, Klaviyo’s most recent round was a $100M round led by Shopify, Cross Creek, and W Ventures at a $9.5B post-money valuation. Klaviyo was co-founded by Andrew Bialecki (CEO) and Ed Hallen (CPO) and has 1,548 employees.
Source: S-1
Product Offering
Klaviyo’s SaaS marketing automation platform can be broken down into two layers – the data layer and the application layer. Their data layer contains their CDP (customer data platform) that synchronizes unaggregated historical profile data with real-time event data in a single system of record. This enables Klaviyo’s customers to have a unified view of their own customer’s actions inside their product, allowing for more efficient marketing campaigns. This layer also contains Klaviyo’s machine learning and AI capabilities. The application layer offers a comprehensive set of tools and features that enable their customers to turn all the insights gathered from the data layer into action to drive conversions and revenue growth i.e., marketing campaigns across channels. It does this without requiring Klaviyo’s customers to have in-house engineers or sophisticated specialists. Messages can be sent across digital channels, including email, SMS, and push notifications. Most of Klaviyo’s customers (95% of revenue) operate within the retail and eCommerce vertical, and the product is purpose-built for that segment, but they’re rapidly expanding into other verticals and B2B (business-to-business). Klaviyo has made their product very easy to use and onboard, evident in their ROI and KAV metrics. For example, the company disclosed that for customers who joined during 2022 (and configured their account to track KAV), ~90% of those customers had generated KAV as of March 31, 2023. Moreover, the median time to generate KAV was less than 30 days, and even for customers generating over $50,000 of ARR, the median was less than nine weeks. ROI is straightforward for customers. Klaviyo is a product-focused company that started with small customers and continually built features for larger businesses (and grew with their customers).
More detail on Klaviyo’s platform is below:
Messaging Infrastructure:
Email: Core capability of the platform. Includes a range of drag-and-drop email templates, allowing customers to easily edit and customize pre-built templates; email campaigns and automations, generative AI for subject line creation, A/B testing tools, and advanced consumer list segmentation
SMS: Texting marketing capability that enables customers to send targeted text messages to their consumers and strengthen relationships through our conversational chat
Push: The push notification product used to send personalized push notifications on iOS and Android devices to engage consumers with timely and relevant mobile notifications
Klaviyo also offers a suite of other applications and features:
Reviews: A recently launched product add-on that allows customers to collect product reviews alongside their existing consumer data and messaging in Klaviyo
Customer Data Platform: Another recently launched product, their CDP offering, which allows customers to manage and deploy their data in Klaviyo more effectively. Their CDP is built on the same infrastructure as Klaviyo’s marketing application
Segmentation: Audience segmentation allows businesses to create consumer segmentation based on the consumer data stored in Klaviyo, including purchase history, engagement levels, and Klaviyo-powered predicted customer lifetime value
Automation — Campaigns and Flows: Flow Builder allows customers to set up automations that trigger messaging or actions in other systems via webhooks based on any consumer information in Klaviyo
Analytics and Benchmarks: Predictive analytics features that use AI and machine learning to drive valuable consumer insights related to consumer lifetime value, churn risk, and behavior forecasting. It also included anonymous benchmarking across industry peers
Integrations: Klaviyo’s platform is underpinned by 300+ pre-built integrations and open APIs to bring more data in and out of the platform
Below is an illustration of the company’s platform:
Source: S-1
GTM (Go-to-Market) and Summary Metrics
Klaviyo is an excellent example of a company that started with a product-led approach for SMBs that matured into a mid-market and enterprise multi-product outbound sales motion that is fed by the high-velocity PLG (product-led-growth) inbound motion. The company charges subscriptions based on tiers of consumer profiles stored, emails sent, and SMS messages sent. Land-and-expand is a critical component of the GTM as well. Customers see success with Klaviyo, grow their own business, and store more profiles, increasing Klaviyo usage while paying them more. Revenue also grows with new channels or products, such as SMS, and use cases, such as their CDP. Klaviyo attracts most new customers through inbound channels that include word-of-mouth, agency partnerships, and platform integrations – these channels were of equal weight last quarter. Most of Klaviyo’s 130,000 customers are on monthly contracts. The company has ~5K partners, but the most prominent channel is Shopify. Klaviyo has a strategic relationship with Shopify, who is also a major investor. At the end of 2022, ~78% of Klaviyo’s ARR was derived from customers on the Shopify platform, and ~11% of new ARR was from customers coming through the Shopify app store. This is not surprising, given most customers are in the retail and eCommerce verticals. However, they are looking to sell into other verticals such as education, events and entertainment, restaurants, travel, as well as B2B companies.
In terms of customer segmentation, Klaviyo buckets them according to GMV (gross merchandise value):
SMBs: $100K → $20M in GMV
Mid-market: $20M → $400M in GMV
Enterprise: $400M+ in GMV
The sales team has been very effective thus far at landing larger customers – Klaviyo has 1,458 $50K+ ARR customers as of last quarter, which is up 94% year-over-year. Assuming all were at $50K in ARR, that implies (at least) a $73M ARR business growing almost 100% year-over-year. It’s likely much larger than that, but that detail is not disclosed. For deals closed by the sales team, the median sales cycles were ~8 weeks, which is fast for that contract value. Efficiency is high across the business, and Klaviyo reports their own CAC (customer acquisition cost) payback of 14 months last quarter. In September of 2022, Klaviyo raised pricing, which led to increased revenue growth, but not all customers have renewed yet – the company calls it out as a risk factor that relatively more of those customers could churn upon renewal than in the past. Their entry-level SKU is $35/mo (pricing page here). Given the large customer base and product-led motion, Klaviyo’s top 10 customers represented only 1.4% of ARR as of last quarter; this implies ~$9.2M of ARR and an average ACV of ~$900K for those top 10 customers.
Below are a few high-level metrics on Klaviyo’s financial performance, metrics, and other relevant disclosures:
$658.3M of implied ARR, up 51% year-over-year. LTM (last twelve months) revenue was $585.1M, up 57% year-over-year
2022 revenue was $472.7M, up 63% from 2021
Non-GAAP gross margin was 77% last quarter
Klaviyo is making money on a GAAP and non-GAAP operating income basis; they had a 13% non-GAAP operating margin last quarter and have been non-GAAP operating income profitable for the past 3 quarters
Klaviyo even had a 7% GAAP net income margin last quarter, which is an unusually positive attribute for a SaaS company of their scale and growth rate; they’re usually not generating per share profits or EPS
As of June 30, 2023, Klaviyo had 130,000+ customers, up ~24% year-over-year from 105,000 customers as of June 30, 2022
As of last quarter, Klaviyo’s ARR per FTE (full-time-employee) was $425K
Total RPOs were $48.5M last quarter, and the company is expected to recognize 94% of RPOs as revenue over the next 12 months
Net revenue retention was 119% last quarter and has been relatively stable for the 10 quarters of disclosure
Klaviyo’s implied months to pay back, which is the inverse of a CAC ratio (implied net new ARR multiplied by non-GAAP gross margin divided by non-GAAP sales and marketing spend of the prior quarter), was at an 18.6-month median over the past 9 quarters
Sales outside the U.S. represented 36% of total revenue for the first 6 months of this year. Klaviyo only bills in U.S. dollars and only offers its product in English, thus has more room to expand as they localize and offer other currencies
68,119 customers (52% of total) are outside the U.S. as of June 30, 2023. This implies that the ACVs of U.S. customers are almost double that of non-U.S. customers ($6.6K vs. $3.4K).
~15% of customers are using Klaviyo’s SMS offering as of last quarter, which is up from 8.5% as of December 31st, 2021
As of June 30, 2023, Klaviyo had 6.9B+ consumer profiles across their customer base and processed 695B+ events (consumer engagement) across the past year
Klaviyo ingested and stored 1.5B events every day on average during 2022
Over the past 12 months, Klaviyo delivered over 311B emails and over 2.8B text messages. During the last quarter, Klaviyo delivered on average 887M campaign messages per day
The company estimates that verticals outside of retail / eCommerce represented less than 5% of revenue in 2022
Seasonality exists, and revenue is generally stronger in the 4th quarter, which is no surprise given their customer base is mainly in the retail and eCommerce verticals
Klaviyo laid off 8% of their global workforce in March 2023
In October 2022, Klaviyo acquired Napkin.io, a platform that provides developers with an easy and secure way to write and deploy code
Klaviyo has 22 pending patent applications in the United States
The company has $439.8M of cash on their balance sheet
Market Opportunity
Klaviyo’s market opportunity is quite large, even just in the retail / eCommerce space where they currently operate. The company believes their current serviceable addressable market (SAM) opportunity within this vertical is over $16B based on data from Analysys Mason. They believe the opportunity outside their core verticals is $34B, and the global market opportunity is $68B. TAM (total addressable market) will not likely be a question mark for potential investors in Klaviyo. Yet their traction and growth outside of the Shopify ecosystem and core retail / eCommerce vertical will be a focus area. With that said, it’s very plausible Klaviyo’s product is extensible and can be successful outside of their core retail / eCommerce focus.
Competition
As with any huge market, Klaviyo’s end market in marketing automation is highly competitive. The company calls out other marketing automation platforms like MailChimp (owned by Intuit) and Braze*, the large marketing clouds in Adobe and Salesforce, and other data vendors, such as cloud data warehouse players. While the market is large, Klaviyo competes favorably in SMB, eCommerce, and in the Shopify ecosystem. As they broaden and focus on B2B customers, they’ll likely start competing with HubSpot.
Shopify Collaboration Agreement
As stated previously, almost 80% of Klaviyo’s ARR as of the end of 2022 was derived from customers who also use Shopify. In June 2022, Shopify invested $100M at a $9.5B valuation (per Pitchbook) and in addition, received 15.7M warrants which it can purchase at a price per share of $88.93, or ~$1.4B. The strategic relationship between Shopify and Klaviyo for the “purposes of creating greater interoperability between the Klaviyo and Shopify platforms” was formally agreed to last 7 years. There is also a revenue share agreement between Shopify and Klaviyo, and Klaviyo is a “Plus Partner” in the Shopify ecosystem. Shopify is a critical partner for Klaviyo, and Klaviyo also makes Shopify merchants more successful through the use of their product. This strategic relationship makes sense for both parties.
Investors and Ownership
Klaviyo states they have raised $454.8M in primary capital since inception. According to Pitchbook, that number is $778.5M, but that includes secondary capital. Investors include Summit, Shopify, Accel, Accomplice, Whale Rock, and others. 5%+ institutional investor shareholders include Summit (22.9%), Shopify (11.2%), and Accomplice (5.7%). CEO Andrew Bialecki holds a 38.1% pre-offering stake. The company’s last round was $100M led by Shopify in July of 2022 at a $9.5B valuation ($33.88/share), according to Pitchbook.
Major Shareholder Summary Cap Table Ownership % of Class B Shares (Pre-offering)
Source: S-1
Current Large Shareholder Value at Last Round Price ($M)
The below looks at the current value of disclosed shareholders at the last round price of $33.88 per share, the latest price per share from the Shopify led round ($9.5B post-money according to Pitchbook). Andrew, the CEO, is worth almost $3.5B at the last round price and will surely be a billionaire when the company starts trading in 4-6 weeks.
Source: S-1
Klaviyo Implied ARR Growth in Perspective ($M)
We decided to put Klaviyo’s top-line performance in the perspective of other relevant SaaS companies. The following chart looks at relevant comparables indexed from their first disclosure from ~$200 – $750M of implied ARR. As you can see, Klaviyo is around the middle of this comp set on implied ARR.
Source: S-1 and Company Filings
P&L ($’s in 000’s)
Klaviyo is a $650M+ implied ARR business, growing over 50% YoY and profitable on both a GAAP and non-GAAP basis. Gross margins are in line with the broader SaaS universe at 77%. The following charts dive deeper into the company’s business and metrics.
Source: S-1. Metrics shown in the table above are GAAP unless otherwise noted. Non-GAAP metrics are shown as reported and otherwise calculated as GAAP less SBC.
Implied Ending ARR and Year-over-Year % Growth ($M)
Klaviyo added $34M of implied net new ARR last quarter and $222M over the past year. It’s clear in the Q4 number there was a huge spike – this is likely related to the pricing increase the company disclosed last year as well as their new SMS product offering. Klaviyo stated, “We estimate our price increase in September 2022 represented a mid-teens percentage increase of incremental revenue dollars in the first six months of 2023”.
Source: S-1
Total Revenue by Quarter ($M)
Source: S-1
Non-GAAP Gross Margins and Operating Expenses as a % of Revenue by Quarter
Source: S-1
GAAP and Non-GAAP Operating Margins and Free Cash Flow Margin by Quarter
Gross margins have increased slightly over the last quarters from ~73% to 77%, but bottom-line margins have increased more dramatically. There are a number of factors at play here: Gross margins are higher overall, driven up by the price increase of the core email product, but offset lower somewhat by the launch of the lower-margin SMS product. That price increase has also driven more revenue (see the Q4 spike in net new implied ARR) on top of the same operating expense cost base. This impact is particularly pronounced given Klaviyo’s layoffs in early 2023 and a clear focus on containing operating expenses which have been largely flat for the last 4 quarters after growing substantially in prior years, especially sales and marketing spend.
Source: S-1
Cohorts and Net Dollar Retention
Klaviyo has strong net dollar retention for an SMB-focused business that has mostly monthly contracts. The company has also upsold their SMS product and moved customers into higher pricing tiers.
Source: S-1
Klaviyo’s land-and-expand strategy and pricing increases have contributed to their high net dollar retention is illustrated in the following chart. The following chart shows the ARR contribution by each customer cohort:
Source: S-1
Klaviyo also included more detail on each cohort:
The Q1 2022 Cohort expanded by 128% in the first 12 months
The Q1 2021 Cohort expanded by 123% in the first 12 months and 150% after 24 months
The Q1 2020 Cohort expanded by 133% in the first 12 months and 162% after 24 months, and 192% after 36 months
Sales Efficiency and Payback Periods by Quarter
Klaviyo has limited customer count disclosure, so the following analysis plots their implied months to payback using the inverse of a CAC ratio (net new implied ARR multiplied by non-GAAP gross margin divided by non-GAAP sales and marketing spend of the prior quarter). The magic number is defined as implied net new ARR divided by non-GAAP sales and marketing spend of the prior quarter. The median months-to-pay-back over the disclosure period is 18.6 months.
Source: S-1
Cash Flows by Quarter ($M)
Source: S-1
Rule of 40 Composition
Klaviyo’s margins have come up dramatically over the past few quarters through a combination of price increases, new product sales, and containing operating expenses.
Source: S-1
U.S. vs. International Revenue Mix Percentage
International growth is an area of opportunity for the company, but they have not yet localized their software and only accept payment in U.S. dollars; thus, having 36% of revenue from the rest of the world today is impressive.
Source: S-1
Quarterly P&L Output ($000's)
Source: S-1
Klaviyo Valuation ($M)
Klaviyo will mostly likely trade like other high-growth SaaS companies: on a multiple of forward revenue. With that said, given the high free cash flow margins (that are growing), investors could start to apply operating and free cash flow margins to forward revenue in order to back into EBIT and/or free cash flow multiples. The output below uses the NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value)/NTM revenue multiples from other public, high-growth SaaS businesses. There are no projections in S-1’s. The table below also includes an implied ARR multiple range as well as the median multiple of the Top 10 highest multiple companies in the Meritech SaaS Index. Klaviyo is one of the largest, fastest-growing, and profitable SaaS companies in the market and will undoubtedly command a premium valuation. It’s also possible they exceed their last round price of $9.5B, as you can see from the output below.
Source: MCP data. Enterprise value ranges are illustrative.
Final Thoughts
Klaviyo Positives
Large and Growing Market: Klaviyo operates in the retail / eCommerce marketing automation for small and medium-sized businesses, a massive market opportunity. They’re also early in expanding outside their core verticals, so there is upside potential in the market size
Moving Up-Market: Klaviyo has shown they can move up-market and sell into larger companies as evidenced by the fast growth of $50K+ ARR customers, up 94% year-over-year, and their top 10 customers having implied average ACVs of ~$900K
Focus on User Experience: A key tenet of Klaviyo is they have clearly been a product-focused company. The ease-of-use yet high configurability and power of the product shows up in the quick time to value their customers see. This manifests itself in incredible efficiency across the entire business
Market Leader / Competition: Klaviyo has seemingly locked up the retail / eCommerce segment i.e. the Shopify customer. It’s likely they can sustain market leadership in this segment
Large Scale, High Growth, and Strong Efficiency: a rare occurrence and unique combination in today’s market
Almost $700M of run-rate revenue (implied ARR)
~55% LTM revenue growth
GAAP and non-GAAP profitable
24% FCF margins last quarter
119% net dollar retention as of last quarter
Only burned $15M in the lifetime of the company
Further Questions / Potential Risk Factors
Shopify: Klaviyo is tethered to Shopify and the Shopify ecosystem within their customer base. 80% of ARR from customers who also use Shopify. Can they expand outside of that ecosystem?
New Verticals, Products, and Segments: Related to the above, what is the progress of new verticals, and do they have the product to win in those? What is the new product roadmap and progress against them? The company discloses revenue is still <5% outside their core retail / eCommerce vertical. HubSpot has done incredibly well in SMB going multi-product; can Klaviyo do the same? Is the up-market motion repeatable in current and future segments?
Logo Growth: Klaviyo’s more recent revenue growth has been driven by new product adoption and increased pricing. Net customers are growing 24%, and that growth rate will have to sustain or increase to continue to deliver historical revenue growth
Pricing Increase / Change: It’s clear this had a large impact on new revenue and margins. Will churn show up, or were they just discounting too much before?
Sales Efficiency Trends and Future Profitability: In the last few quarters, even excluding the one-time spike in Q4, sales efficiency metrics like payback and magic number have trended downward as the company has held sales and marketing spend generally flat (likely to drive profitability ahead of their IPO). Will Klaviyo be able to stay profitable in the future as they look to maintain their top-line growth rate rather than see it decline as it has sequentially over the last few quarters?
Klaviyo is a large, fast-growing, and efficient company in a massive market. While there hasn’t been a SaaS IPO in almost 2 years, a company like Klaviyo is the type of business that can open the IPO window. There are questions and/or risk factors about the business, as stated above, but a company with their attributes and GAAP profitability should give investors confidence that Klaviyo is a name to be a part of – there will be strong interest in the offering.
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No investment advice. Meritech is a current or former investor in Braze (BRZE), Datadog (DDOG), and Salesforce (CRM).