$15 million in funding has been utilized to generate an impressive $658 million in Annual Recurring Revenue (ARR)!
๐ 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!
Klaviyoโs 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.
๐๐ฟ๐ฒ๐ฎ๐ธ๐ถ๐ป๐ด ๐๐ผ๐๐ป ๐๐ฟ๐ผ๐๐๐ต:
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 Klaviyoโs 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 โmid-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%.
๐ช๐ต๐ฎ๐ ๐ฑ๐ผ๐ฒ๐ ๐๐ต๐ถ๐ ๐บ๐ฒ๐ฎ๐ป ๐ณ๐ผ๐ฟ ๐๐ต๐ฒ ๐ด๐ฟ๐ผ๐๐๐ต?
โก๏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!)
๐๐ผ๐ ๐ฎ๐ฏ๐ผ๐๐ ๐ฝ๐ฟ๐ผ๐ณ๐ถ๐๐ฎ๐ฏ๐ถ๐น๐ถ๐๐?
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.
โก๏ธ Nevertheless, given the minimal cash consumption since inception, Free Cash Flow (FCF) margins are estimated to be maintained in the 0-10% range.
๐ก๐ผ๐๐ถ๐ป๐ด ๐ฎ๐น๐น ๐๐ต๐ฒ ๐ฎ๐ฏ๐ผ๐๐ฒ, ๐๐ต๐ฒ๐ฟ๐ฒ ๐ฑ๐ผ ๐ ๐๐ต๐ถ๐ป๐ธ ๐๐ต๐ฒ ๐ฐ๐ผ๐บ๐ฝ๐ฎ๐ป๐ ๐๐ถ๐น๐น ๐ฏ๐ฒ ๐๐ฎ๐น๐๐ฒ๐ฑ?
Given the substantial Total Addressable Market (TAM) and top-tier metrics, itโs challenging to envision this not being priced at the upper end of SaaS company valuations (10-13x ARR).