10-Q: Braze Q3 Revenue Soars 25.5%, Cash Flow Improves

Braze, Inc. reported strong revenue growth of 25.5% for the third quarter, alongside improved operating cash flow, despite an increase in net losses and a decline in dollar-based net retention rates.

Summary

• Revenue for the three months ended October 31, 2025, increased by 25.5% to $190.8 million, up from $152.1 million in the prior year period.
• Subscription revenue grew by 24.2% to $181.7 million, while professional services revenue surged by 58.4% to $9.2 million for the quarter.
• Net loss for the quarter increased to $35.8 million, compared to $28.1 million in the same period last year.
• For the nine months ended October 31, 2025, total revenue increased by 23.1% to $533.0 million, with a net loss of $99.2 million.
• Operating cash flow for the nine months ended October 31, 2025, significantly improved to $52.1 million, up from $19.6 million in the prior year.
• Non-GAAP free cash flow also saw substantial growth, reaching $44.2 million for the nine months, compared to $4.4 million previously.
• The dollar-based net retention rate for the trailing 12 months ended October 31, 2025, was 108% for all customers and 110% for customers with ARR of $500,000 or more, a decrease from 113% and 116% respectively in the prior year.
• The company acquired OfferFit, Inc. on June 2, 2025, for a total consideration of $302.9 million, consisting of $195.3 million in cash and $107.6 million in Class A common stock, aiming to integrate OfferFit's AI decisioning engine.
• A material weakness in internal control over financial reporting related to IT general controls (user access and program change management) was identified, with a remediation plan expected to be completed by the end of the fiscal year ending January 31, 2026.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to strong revenue growth and significant improvement in operating and free cash flow, indicating healthy underlying business operations and strategic investments. However, the increasing net losses, declining dollar-based net retention rate, and the identified material weakness in internal controls introduce notable concerns and risks, preventing a higher score.

Positives

• Strong revenue growth of 25.5% for the quarter and 23.1% for the nine months, indicating continued market demand for the platform.
• Significant improvement in net cash provided by operating activities, increasing to $52.1 million for the nine months ended October 31, 2025, from $19.6 million in the prior year.
• Non-GAAP free cash flow saw substantial growth to $44.2 million for the nine months, demonstrating improved liquidity and cash generation.
• Customer base expanded to 2,528 as of October 31, 2025, up from 2,211 in the prior year, showing successful customer acquisition.
• Monthly active users (MAU) increased to approximately 7.8 billion as of October 31, 2025, from 7.2 billion as of January 31, 2025, reflecting increased platform usage.
• Strategic acquisition of OfferFit, Inc. is expected to deepen the integration of AI capabilities into the customer engagement platform, enhancing competitive advantage.
• International revenue increased by $16.7 million for the three months and $47.2 million for the nine months, indicating successful global market penetration.

Negatives

• Net loss increased to $35.8 million for the three months ended October 31, 2025, from $28.1 million in the prior year, and to $99.2 million for the nine months, from $87.0 million.
• Gross margin decreased to 67.2% for the quarter (from 69.8%) and to 67.8% for the nine months (from 69.1%), primarily due to acquisition-related expenses and increased tech stack costs.
• Dollar-based net retention rate declined to 108% (all customers) and 110% (customers with ARR $500k+) from 113% and 116% respectively, attributed to customer turnover and renewals at lower subscription levels due to macroeconomic conditions.
• Other income, net, decreased by 35.7% for the quarter and 18.3% for the nine months, primarily due to a decrease in investment income from marketable securities.
• Operating expenses increased across all categories (Sales & Marketing, R&D, G&A) in absolute dollars, outpacing gross profit growth for the quarter.

Risks

• Unstable market and economic conditions, including inflation, interest rate increases, and banking sector instability, may adversely affect business, financial condition, and share price.
• Rapid revenue growth may not be indicative of future growth, making it difficult to forecast future results and increasing the risk of not being successful.
• The company may require additional capital to support business growth, which might not be available on acceptable terms, if at all, potentially leading to dilution for stockholders.
• A history of operating losses suggests the company may not achieve or sustain profitability in the future, as costs and expenses are expected to increase.
• Estimates of market opportunity and forecasts of market growth may prove inaccurate, and the business may fail to grow at similar rates.
• Intense competition from well-established companies and new entrants could harm the ability to attract and retain customers and grow the business.
• Failure to adapt and respond effectively to rapidly changing technology, evolving industry standards, or changing regulations could make the platform less competitive.
• Substantial dependence on customers renewing subscriptions and expanding usage, requiring efficient scaling of platform infrastructure and business.
• Failure to effectively develop sales and marketing capabilities could harm customer base expansion and market adoption.
• Dependence on a single platform means failure to achieve continued market acceptance could cause results of operations to suffer.
• Platform failures, defects, or disruptions in updates could adversely affect reputation, market share, and lead to liability claims.
• The need to reduce prices or change the pricing model to remain competitive could adversely affect financial results.
• Long and unpredictable sales cycles with large enterprise customers require considerable time and expense without guaranteed sales.
• Customer dissatisfaction with integration, implementation, or services provided by the company or partners could harm business and reputation.
• Revenue recognition model means sales downturns or upturns are not immediately reflected in financial condition and results of operations.
• Failure to maintain and enhance the brand could impair the ability to expand the customer base.
• Ineffective management of growth could lead to inability to execute business plans, maintain service levels, or address competitive challenges.
• Dependence on senior management and inability to attract and retain highly skilled employees could adversely affect the business.
• Indemnity provisions in agreements potentially expose the company to substantial liability for intellectual property infringement, privacy violations, and data breaches.
• International operations and further geographic expansion create various operational challenges and risks.
• Limited history of operating with a substantial remote workforce, with uncertain long-term impacts on financial results and business operations.
• Acquisitions, strategic investments, partnerships, or alliances pose integration challenges, divert management attention, disrupt business, and dilute stockholder value.
• Dependence on third-party providers (e.g., Apple, Google, AWS, Rackspace) for consumer engagement messages and cloud infrastructure, with potential for service disruptions.
• Stringent and changing laws, regulations, and industry standards related to privacy, data security, and data protection (e.g., GDPR, CCPA) could impose restrictions and costs.
• Security breaches or unauthorized access to customer data, company data, or the platform could harm reputation, reduce demand, and incur significant liabilities.
• Changes in laws and regulations related to the internet or changes in the internet infrastructure itself may diminish demand for the platform.
• Future litigation could be costly and time-consuming to defend.
• Failure to provide services that customers can use in compliance with regulations and/or industry standards could harm revenue.
• Subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, with non-compliance leading to criminal or civil liability.
• Governmental export and import controls could impair ability to compete internationally and subject to liability.
• International operations may subject the company to potential adverse tax consequences.
• Ability to use net operating losses (NOLs) to offset future taxable income may be subject to limitations.
• Changes in the effective tax rate or tax liability may have an adverse effect on results of operations.
• Could be required to collect additional sales taxes or be subject to other tax liabilities.
• Reliance on third-party licensed software and open-source software, with risks of increased costs, reduced service levels, or litigation.
• Identified material weakness in internal control over financial reporting (ITGCs) could impair timely and accurate financial statements.
• Risks related to environmental, social, and governance (ESG) practices and disclosures, including potential for adverse investor sentiment or litigation.
• No intention to pay dividends for the foreseeable future, meaning investment return depends on stock price appreciation.
• Dual class structure of common stock concentrates voting control with executive officers, directors, and significant holders, limiting influence of Class A holders (though Class B conversion is pending).
• An active public trading market for Class A common stock may not develop or be sustained, affecting liquidity and fair value.
• Anti-takeover provisions in charter documents and Delaware law could make an acquisition more difficult.
• Future sales of Class A common stock in the public market could cause the market price to decline.
• The price of Class A common stock may be volatile, leading to potential investment loss.
• Issuance of additional capital stock in connection with financings, acquisitions, or equity incentive plans will dilute other stockholders.
• If securities or industry analysts do not publish research or publish negative reports, share price and trading volume could decline.

Future Outlook

The company anticipates continued investment in sales and marketing, research and development, and international expansion to drive future growth. It expects operating expenses to increase in absolute dollars but decrease as a percentage of revenue over the long term. The company also expects its free cash flow to fluctuate with changes in operating expenses and continued investment in growth, potentially influenced by macroeconomic factors affecting customer payments. The Class B common stock will automatically convert to Class A common stock in January 2026, which may impact voting control dynamics.

Management Comments

• We believe there is substantial opportunity to continue to grow our customer base.
• We intend to continue to invest in developing and enhancing our products and functionality.
• Our dollar-based net retention rate is influenced by macroeconomic factors that impact our customers purchasing decisions, who may choose to renew their contracts at levels more closely aligned with their current needs, rather than opting for larger commitments based on anticipated future demand.
• We expect to increase market penetration in regions including Europe and Asia-Pacific and to further capitalize on the greenfield opportunity in regions such as Latin America.
• We expect our cost of revenue to increase for the foreseeable future as we continue to grow our business.
• We expect our sales and marketing expenses will increase in absolute dollars as we continue to invest in sales and marketing activities to acquire new customers and increase sales to existing customers.
• We expect research and development expenses to increase in absolute dollars as we continue to invest in enhancing our platform.
• We expect that general and administrative expenses will increase in absolute dollars and vary from period to period as a percentage of revenue for the foreseeable future but decrease as a percentage of revenue over the long term.
• We believe our current cash, cash equivalents, and marketable securities will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

Industry Context

Braze operates in the rapidly evolving and highly competitive customer engagement platform market. The company is actively investing in artificial intelligence capabilities, aligning with broader industry trends towards enhanced data analytics and personalized customer experiences. The decline in dollar-based net retention rates reflects a wider macroeconomic trend where customers are optimizing spending and renewing contracts based on immediate needs rather than anticipated future demand, impacting many SaaS providers. The company's international expansion efforts are consistent with the global growth strategies of leading technology firms seeking new market opportunities.

Comparison to Industry Standards

• The dollar-based net retention rate of 108% (110% for larger customers) indicates that existing customers are expanding their spending, but the decline from 113% (116% for larger customers) suggests a slowdown compared to previous periods, potentially lagging some top-tier SaaS companies that maintain higher retention rates even in challenging environments.
• The acquisition of OfferFit, Inc. for its multi-agent decisioning engine positions Braze to compete more effectively with larger marketing clouds like Adobe and Salesforce, which also integrate advanced AI/ML capabilities into their platforms.
• Braze's revenue growth of 25.5% for the quarter is robust, comparing favorably to many established enterprise software companies, though some hyper-growth startups in niche segments might exhibit even higher rates.

Corporate Governance

Legal Proceedings

• The company is not presently a party to any litigation the outcome of which is believed to have a material adverse effect on its business, operating results, cash flows, or financial condition.

Related Party Transactions

• Purchased services from Datadog, Inc., a vendor whose Chief Financial Officer is on Braze's board of directors, totaling approximately $1.0 million for the three months and $2.7 million for the nine months ended October 31, 2025.

Stakeholder Impact

• Shareholders: Potential dilution from future equity issuances for acquisitions or growth, and the upcoming conversion of Class B to Class A common stock will alter voting power distribution. The stock price may be volatile due to mixed financial results and market conditions.
• Employees: Continued investment in research and development and international expansion may create new opportunities. Stock-based compensation remains a significant component of overall compensation. The hybrid work model may impact employee experience and retention.
• Customers: Enhanced platform capabilities through the OfferFit acquisition and ongoing R&D investments aim to improve customer engagement solutions. However, macroeconomic pressures are leading some customers to reduce commitments.
• Creditors: Improved operating cash flow strengthens the company's ability to meet its financial obligations. Non-cancelable purchase commitments and operating lease obligations represent significant future funding requirements.
• Regulatory Authorities: The identified material weakness in internal controls requires remediation, and ongoing compliance with evolving privacy, data security, and tax regulations remains a focus.

Next Steps

• Continue to invest in sales and marketing to drive new customer acquisition and expand sales to existing customers.
• Continue to invest in research and development to enhance the platform's features and functionality, including artificial intelligence capabilities.
• Expand international operations and market penetration in regions such as Europe, Asia-Pacific, and Latin America.
• Remediate the identified material weakness in internal control over financial reporting related to IT general controls by the end of the fiscal year ending January 31, 2026.
• Monitor the impact of the One Big Beautiful Bill Act (OBBBA) and other evolving tax legislation on future tax positions.
• All outstanding shares of Class B common stock will automatically convert into shares of Class A common stock in January 2026.

Key Dates

Recommendation

Braze demonstrates strong top-line revenue growth and a significant improvement in cash flow from operations, indicating a healthy core business and effective cash management. The strategic acquisition of OfferFit for AI integration is a positive long-term move. However, the increasing net losses, the decline in dollar-based net retention rates (suggesting customer spending caution), and the identified material weakness in internal controls present notable headwinds. While the growth trajectory is compelling, these challenges warrant a 'hold' recommendation, advising investors to monitor the successful remediation of internal controls and the stabilization of customer retention rates before considering further investment.

Keywords

Customer Engagement Platform, Cloud-based Software, Marketing Technology, SaaS, AI, Machine Learning, Mobile Marketing, Digital Transformation, SEC Filing, Financial Results, Quarterly Report, BRZE