The story of Klaviyoโ€™s success

$15 million in funding has been utilized to generate an impressive $658 million in Annual Recurring Revenue (ARR)!

๐Ÿš€ Klaviyo, which recently declared its intent to go public, has revealed remarkable Software as a Service (SaaS) Key Performance Indicators (KPIs). The company is experiencing a 50% annual growth rate and achieving a commendable 60 on the Rule of 40!

Klaviyoโ€™s growth and efficiency figures are exceptionally impressive, but the question lingers: are they sustainable?

Klaviyo, specializing in Small and Medium Enterprise (SME) marketing automation (email, SMS, and push notifications) within the Shopify ecosystem, boasts an Annual Contract Value (ACV) of approximately $5,000. Its primary go-to-market strategy involves a Product-Led Growth (PLG) approach with land and expand motions.

๐—•๐—ฟ๐—ฒ๐—ฎ๐—ธ๐—ถ๐—ป๐—ด ๐——๐—ผ๐˜„๐—ป ๐—š๐—ฟ๐—ผ๐˜„๐˜๐—ต:

โ€“ The September 22 price increases significantly contributed to growth, evident in the Net New ARR spike of $104 million in December 22.

โ€“ The impact of these price increases on ARR was immediate, as Klaviyoโ€™s customers predominantly operate on monthly contracts.

To gauge the effect of these price increases, clues lie in the filings:

โ€“ The S1 document states that price increases constituted a โ€œmid-teensโ€ percentage of incremental revenue over the Last Twelve Months (LTM), equating to $33 million of the total LTM Net New ARR ($222 million).

โ€“ This implies a contribution of +8% to the Year-over-Year (YoY) growth of the company ($33 million / $436 million June 22 ARR).

โ€“ When normalizing this impact, considering one-off nature of price increases, the YoY growth falls to 43%.

Additionally, the customer base grew by only 24%.

๐—ช๐—ต๐—ฎ๐˜ ๐—ฑ๐—ผ๐—ฒ๐˜€ ๐˜๐—ต๐—ถ๐˜€ ๐—บ๐—ฒ๐—ฎ๐—ป ๐—ณ๐—ผ๐—ฟ ๐˜๐—ต๐—ฒ ๐—ด๐—ฟ๐—ผ๐˜„๐˜๐—ต?

โžก๏ธ Considering that price rises are typically one-off, and sustaining such high levels of ACV growth may be challenging, the prediction is that growth will trend towards the 35-40% range in the coming 12 months. (Management has not provided guidance, so the accuracy of this prediction remains uncertain until the roadshow!)

๐—›๐—ผ๐˜„ ๐—ฎ๐—ฏ๐—ผ๐˜‚๐˜ ๐—ฝ๐—ฟ๐—ผ๐—ณ๐—ถ๐˜๐—ฎ๐—ฏ๐—ถ๐—น๐—ถ๐˜๐˜†?

Cash flow margins have remained robust over the last two quarters, reaching a Last Twelve Months (LTM) margin of 10%. This is driven by a consistent Sales and Marketing (S&M) spend over the last four quarters and an improving gross margin (due to higher overall ACVs). However, achieving 40% growth next year would necessitate adding around $263 million in net new ARR, likely requiring an investment in S&M spend, considering the declining magic ratio observed in the last two quarters.

โžก๏ธ Nevertheless, given the minimal cash consumption since inception, Free Cash Flow (FCF) margins are estimated to be maintained in the 0-10% range.

๐—ก๐—ผ๐˜๐—ถ๐—ป๐—ด ๐—ฎ๐—น๐—น ๐˜๐—ต๐—ฒ ๐—ฎ๐—ฏ๐—ผ๐˜ƒ๐—ฒ, ๐˜„๐—ต๐—ฒ๐—ฟ๐—ฒ ๐—ฑ๐—ผ ๐—œ ๐˜๐—ต๐—ถ๐—ป๐—ธ ๐˜๐—ต๐—ฒ ๐—ฐ๐—ผ๐—บ๐—ฝ๐—ฎ๐—ป๐˜† ๐˜„๐—ถ๐—น๐—น ๐—ฏ๐—ฒ ๐˜ƒ๐—ฎ๐—น๐˜‚๐—ฒ๐—ฑ?

Given the substantial Total Addressable Market (TAM) and top-tier metrics, itโ€™s challenging to envision this not being priced at the upper end of SaaS company valuations (10-13x ARR).

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