The success story of Klaviyo

$15m of funding consumed to generate $658m of ARR!

🚀 Klaviyo announced last Friday its intention to IPO and has unveiled an enviable set of SaaS KPIs. The company is growing at 50% a year and hitting 60 on the rule of 40!

Klaviyo’s growth and efficiency numbers are super impressive. But are they sustainable?

Klaviyo is an SME marketing automation company (email, SMS, and push notifications) in the Shopify ecosystem with an annual contract value (“ACV”) of ~$5K. It primarily has a PLG go-to-market strategy with land and expand motions.

𝗕𝗿𝗲𝗮𝗸𝗶𝗻𝗴 𝗗𝗼𝘄𝗻 𝗚𝗿𝗼𝘄𝘁𝗵:
– Sep 22 price increases were a key driver of growth, visible almost immediately in the Dec 22 Net New ARR spike ($104m).
– The impacts of the price increases on ARR were almost immediate as Klaviyo’s customers are mainly on monthly contracts.

To estimate the impact of these price increases, the clue is in the filings:
– The S1 states that price increases accounted for a “mid-teens” % of incremental revenue over the LTM. i.e., 15% of total LTM net new ARR ($222m) = $33m.
– This implies it contributed +8% ($33m / $436m June 22 ARR) to the YoY growth of the company.
– Normalizing the impact of this (given price increases are typically one-off in nature), YoY growth falls to 43%.

In addition, the number of customers only grew by 24%.

So the 51% YoY growth in ARR = 24% from net new customers + 8% from a price increase + 19% from other ACV increases.

𝗪𝗵𝗮𝘁 𝗱𝗼𝗲𝘀 𝘁𝗵𝗶𝘀 𝗮𝗹𝗹 𝗺𝗲𝗮𝗻 𝗳𝗼𝗿 𝘁𝗵𝗲 𝗴𝗿𝗼𝘄𝘁𝗵 𝗼𝘂𝘁𝗹𝗼𝗼𝗸?

➡️ Given that price rises are usually one-off and such higher levels of ACV growth are going to be challenging to maintain – my guess would be that growth trends towards the 35-40% area in the coming 12 months. (Management has not provided any guidance, so it’s hard to know if my prediction is correct until the roadshow!)

𝗛𝗼𝘄 𝗮𝗯𝗼𝘂𝘁 𝗽𝗿𝗼𝗳𝗶𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆?

Cash flow margins have been strong over the last 2Qs, reaching an LTM margin of 10%. The driver is a flat S&M spend over the last 4Qs and an improving gross margin (due to higher overall ACVs). However, to hit 40% growth next year, the Company would need to add c. $263m net new ARR, which would likely require an investment into S&M spend, noting the declining magic ratio seen in the last 2Qs.

➡️ Nonetheless, noting how little cash has been consumed since inception, I estimate FCF margins can be maintained in the 0-10% area. As such, it’s likely the Rule of 40 will hover in the 40-50% area.

𝗡𝗼𝘁𝗶𝗻𝗴 𝗮𝗹𝗹 𝘁𝗵𝗲 𝗮𝗯𝗼𝘃𝗲, 𝘄𝗵𝗲𝗿𝗲 𝗱𝗼 𝗜 𝘁𝗵𝗶𝗻𝗸 𝘁𝗵𝗲 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝘄𝗶𝗹𝗹 𝗯𝗲 𝘃𝗮𝗹𝘂𝗲𝗱?

Given the significant TAM & top decile metrics, it’s hard to imagine this will not price at the top end of valuations for SaaS companies (10-13x ARR). Even if the growth and profitability reduce to the levels noted in this post over the coming 12-24 months, its metrics would still be in the top quartile of the BVP Index.