Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part I, Item 1A within this Annual Report on Form 10-K.
This section of this Annual Report on Form 10-K discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section within our Final Prospectus under the Securities Act, and are incorporated herein by reference. The period‑to‑period comparison of financial results is not necessarily indicative of future results.
Overview
We founded Klaviyo in 2012 to provide businesses of all sizes with powerful technology that captures, stores, analyzes, and predictively uses their own data to drive measurable, high-value outcomes. Klaviyo enables businesses to drive revenue growth by making it easy to bring their first-party data together and use it to create and deliver highly personalized consumer experiences across digital channels.
Our platform combines our proprietary data and application layers into one vertically-integrated solution with advanced machine learning and artificial intelligence capabilities. This enables business users of any skill level to harness their data in order to send the right message at the right time across email, SMS, and push notifications, more accurately measure and predict performance, and deploy the specific actions and campaigns that drive the highest impact. Our reviews add-on allows our customers (as defined below) to collect product reviews within our platform to provide a seamless experience across the customer lifecycle, and our CDP offering gives customers user-friendly ways to track new types of data, transform and cleanse data, run more advanced reporting and predictive analysis to drive revenue growth, and sync data in to and out of Klaviyo at scale. We focused on marketing automation within eCommerce as our first application use case, and we believe our software is highly extensible across a broad range of functions and verticals. As of December 31, 2023, our platform had efficiently scaled to over 143,000 customers. Today, our customers primarily operate within the retail and eCommerce vertical. Due to the flexibility and adaptability of our technology, we also see organic demand
66
Table of Contents
growth from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies. Based upon our available data today, we estimate verticals outside of retail represented less than 5% of our revenue for the year ended December 31, 2023. See the section below titled “Key Performance Metrics – Customers” for additional information on how we define customers and customers outside of retail.
We generate revenue through the sale of subscriptions to our customers for the use of our platform. Our subscription plans are tiered based on the number of active consumer profiles stored on our platform and the number of emails and SMS messages sent. We currently permit our customers to send unlimited push notifications, which are included as part of our email subscription plan. Active consumer profiles are identified profiles that can be reached via at least one enabled marketing channel in Klaviyo; this means the profile is not suppressed, either by revoking consent or being rendered undeliverable. The vast majority of our subscription plans today are monthly.
Our land-and-expand strategy is designed to align our success with that of our customers. As our customers’ businesses grow, they utilize more active consumer profiles and send more emails and SMS messages, which naturally increases their usage of our platform. Our revenue also expands when our customers add additional channels, such as SMS, and additional use cases, such as reviews and our CDP offering, or when their other brands, business units, and geographies start using the platform.
Initial Public Offering
On September 22, 2023, we completed our IPO of 19,200,000 shares of our Series A common stock at a price to the public of $30.00 per share. We sold 11,507,693 of such shares and existing stockholders sold an aggregate of 7,692,307. Our shares of Series A common stock began trading on the New York Stock Exchange on September 20, 2023. We received net proceeds from the IPO of approximately $320.1 million, after deducting approximately $17.7 million in underwriting discounts and commissions, and $7.4 million in offering-related expenses. On October 19, 2023, the underwriters for the IPO exercised their option to purchase additional shares granted in connection with the IPO, with respect to 2,764,066 shares of Series A common stock of a possible 2,880,000 shares. The Company received no proceeds from this transaction, as the option was an option to purchase additional shares of Series A common stock from the existing stockholders.
Immediately following the effectiveness of the registration statement relating to our IPO, we filed our Amended and Restated Certificate of Incorporation, which authorized a total of 3,000,000,000 shares of Series A common stock, 350,000,000 shares of Series B common stock, and 100,000,000 shares of undesignated preferred stock. All shares of common stock then outstanding were reclassified as Series B common stock.
Factors Affecting Our Future Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including the following factors:
Growth in New Customers
Attracting new customers to our platform is a key driver of our revenue growth strategy. We have successfully grown our retail and eCommerce customer base and believe we have significant room to expand within this vertical as well as expand into other industries, including education, events and entertainment, restaurants, and travel as well as from B2B customers. Our ability to attract new customers will depend on a number of factors, including our ability to innovate, the effectiveness and pricing of our new and existing products and capabilities, and the success of our selling and marketing efforts.
67
Table of Contents
Expansion of Revenue From Our Existing Customer Base
We believe our product-led growth strategy enables us to efficiently expand penetration within our existing customer base. We focus on expansion in three primary ways. First, as our customers increase their usage of our platform through the number of active consumer profiles they have and email and SMS messages they send, they move to higher subscription tiers. Second, we cross-sell additional communication channels, such as SMS to customers who started on our platform with our email offering, as well as add-ons, such as reviews and our CDP offering. Finally, we sell our platform to our customers’ other brands, business units, and geographies. Going forward, our ability to increase sales to existing customers will depend on a number of factors, including our customers’ satisfaction with our solutions and the ability of our customers to attract new consumers. We expect these three forms of revenue expansion to continue in the future.
Growth with Larger Customers
When we first launched our platform, we intentionally focused on serving entrepreneurs and SMBs based on the need we saw for a simple and easy-to-use, yet powerful solution for customers in this category, and the large market opportunity within this group of customers. As our customers have scaled and become mid-market companies and larger enterprises themselves, their success with Klaviyo has attracted more interest from similarly sized businesses that are looking to drive better engagement with their consumers. Our ability to continue to move up market is dependent on a number of factors, including our ability to further adapt our platform to the needs of larger accounts, the effectiveness of our sales team, and pricing.
International Expansion
We believe we have significant expansion opportunities in international markets. We started by serving customers in North America and, in 2019, we expanded our operations to London, England to penetrate the European region. In 2022, we opened our office in Sydney, Australia to capitalize on the opportunities in Asia Pacific. Although we only recently expanded to these regions, we have already experienced significant growth with international sales outside of the Americas accounting for 31.0% of our revenue for the year ended December 31, 2023. We believe that the introduction of additional languages and currencies to our platform will increase our efficacy and ease of use in other regions, as our platform is currently only available in English and US Dollars.
Investment in Innovation and Product Development
Since our inception, we have been focused on product innovation, seeking to create what we believe is the best software solution for our customers. We originally launched our platform with email messaging as our first channel. Since then, we have successfully added other channels, such as SMS and push notifications, as well additional use cases, such as reviews and our CDP offering. Our continued success depends on our ability to sustain product and technology innovation to continue delivering value to our customers. As technology and consumer preferences change, we believe that our ability to drive continuous product innovation will be critical to attract and retain customers and drive revenue growth.
Increased Adoption of Our SMS Offering
We have seen notable success in the expansion of our platform with our SMS offering, which launched in 2021. Once customers adopt our SMS offering, they typically grow their usage over time as they gain comfort and confidence in the new channel. Our SMS offering has higher associated communication sending costs, and as the number of SMS messages sent by our customers increases, we expect our gross margin to decline modestly. SMS messaging is particularly concentrated in the fourth quarter of each year due to the holiday shopping season, resulting in our gross margin being most heavily impacted in that quarter. This gross margin impact could be partially offset by our continued work on data storage architecture and gaining further leverage on costs with our increased scale. We believe we will see our overall gross profit dollars increase as customers send more SMS messages if our SMS offering continues to gain traction.
68
Table of Contents
Expansion into New Industry Verticals and Use Cases
As more customers use our platform, we are seeing organic demand from customers in other verticals, such as education, events and entertainment, restaurants, and travel, as well as from B2B companies. While we started with consumer engagement as our initial use case in the retail and eCommerce vertical, we see a large opportunity into other products and verticals. Without an active sales motion, we have attracted customers from verticals other than retail and eCommerce, which indicates the strong interest and applicability of our platform to new verticals. We have begun to explore ways to serve these new verticals more intentionally. For example, we launched Klaviyo for Wellness in June 2023, which is tailored for fitness studios, salons, and other client-based services within the vertical. In the future, we intend to more actively invest in addressing new industry verticals and product use cases.
Key Performance Metrics
Customers . We define a customer as a distinct paid subscription to our platform. A single organization could have multiple discrete contracting divisions or subsidiaries or brands each with paid subscriptions to our platform, which would, in general, constitute multiple distinct customers. In some cases at the customer’s request, we allow subscriptions under the same parent organization to be consolidated into a single paid subscription in which case such consolidated paid subscriptions would constitute a single customer. We measure our total number of customers as a point-in-time calculation measured as of the end of a particular period. Customers do not include persons or entities that use our platform on a free trial basis. We define customers outside of retail as those customers who have an identified industry outside of retail, either through in-product selection or as part of the sales process.
Customers Generating Over $50,000 of ARR . We calculate our number of customers generating over $50,000 of ARR as those customers that have an average ARR of greater than $50,000 over the prior twelve months (or the entire duration of the customer’s paying relationship, if it is less than twelve months) as of the date of determination. We believe the number of customers generating over $50,000 of ARR is a key performance metric to help investors and others understand and evaluate our results of operations in the same manner as our management team, as it is an indicator of our ability to grow the number of customers that are exceeding this ARR threshold, both from our existing customers expanding their usage of our platform and from our sales to larger customers. We believe this is an important indicator of our ability to continue to successfully move up market.
As of December 31, 2023, we had 1,958 customers generating over $50,000 of ARR, compared to 1,085 customers generating over $50,000 of ARR as of December 31, 2022, representing growth of 80% year-over-year.
Dollar-Based Net Revenue Retention Rate. We calculate our Dollar-Based Net Revenue Retention rate (“NRR”) by first identifying the cohort of customers as of twelve months prior to the date of determination. We then calculate the Annualized Recurring Revenue (“ARR”) from this customer cohort as of twelve months prior to the date of determination (the “Prior Period ARR”) and the ARR from this customer cohort as of the date of determination (the “Current Period ARR”). ARR, for any date of determination, is the annualized value of existing paid subscriptions, which we calculate by taking the amount of revenue that we expect to receive in the next monthly period for our existing paid subscriptions, assuming no changes to such subscriptions in the next month, as of that date of determination, and multiplying that amount by twelve. Current Period ARR includes any expansion, price increases, and customer subscriptions that are deactivated and subsequently reactivated during the applicable twelve-month period and reflects contraction or attrition over the last twelve months from this customer cohort, but excludes any ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time NRR. We then calculate the weighted average point-in-time NRR as of the last day of each month in the current trailing twelve-month period to arrive at the NRR, with the weightings determined by the total ARR at the end of each period. We believe NRR is a key performance metric to help investors and others understand and evaluate our results of operations in the same manner as our management team, as it represents the expansion in usage of our platform by our existing customers, which is an important measure of the health of our business and future growth prospects. We measure dollar-based net revenue retention rate to measure this growth.
69
Table of Contents
As of December 31, 2023 and 2022, our NRR was 117% and 119%, respectively. We implemented a price increase in September 2022, which positively increased revenue growth in 2022. This price increase also impacted the various measures we use to assess our usage and subscription levels based on revenue, such as NRR and our revenue growth rate, and following its implementation, those measures experienced corresponding increases as a result. As we have reached the one year anniversary of this price increase, these measures have seen a corresponding decrease.
Klaviyo Attributed Value. We define Klaviyo Attributed Value (“KAV”) 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. For email, the message also needs to be opened or clicked in order for the transaction to fall within our definition. KAV excludes orders placed with customers that do not opt-in to sharing data on placed orders, orders for which we cannot determine the currency or value, or unusual orders that appear to us to be anomalies. Since our definition of a customer does not include persons or entities that use our platform on a free trial basis, any revenue generated through orders placed with these persons or entities is also excluded from our definition of KAV. We do not net chargebacks or sales refunds from our calculation of KAV. If a customer leaves Klaviyo, we stop counting that customer’s KAV after their last contracted month. We believe KAV serves as a measure of the return-on-investment that we help generate for our customers and illustrates the value our platform can drive to our customers, which we believe enhances our ability to maintain existing customers and attract new customers. We use KAV as an internal estimate to track the value we drive to customers through our platform. KAV is an operational measure, does not represent revenue earned by us, and does not directly correlate to our pricing, revenue, or results of operations. Further, KAV is not a forecast of future revenue and investors should not place undue reliance on KAV as an indicator of our future or expected results.
Seasonality
Generally, demand for our services increases during the fourth quarter as our customers run more marketing campaigns and deploy marketing spend as a result of increased consumer spending patterns during the holiday shopping season. This is specifically prominent within the retail and eCommerce sector in which the majority of our customers operate today. Given our revenue model allows our customers to scale usage as needed, our sequential revenue growth has been historically stronger in the fourth quarter of each year compared to the revenue growth we see in other quarters. Our customers utilize the SMS offering in particular during the holidays; as such, to the extent that the SMS offering grows in proportion to our other channels, we expect that we would see further seasonality. We believe seasonality may continue to impact our quarterly results going forward.
Components of Results of Operations
Revenue
A significant majority of our revenues are derived from sales of subscriptions, which are comprised of fees paid by customers to access our cloud-based software platform for storing consumer’s first-party data and using it to create and deliver personalized and targeted email and SMS marketing services. A small portion of our revenue is currently derived from professional services. For more information on how we recognize our revenues, see Note 2. Summary of Significant Accounting Policies within the Notes to the Consolidated Financial Statements.
Cost of Revenue
Our cost of revenue primarily consists of cloud-based infrastructure costs, outbound communication sending costs, employee-related costs including payroll, benefits, bonuses, and stock-based compensation expense related to our customer support team, amortization of capitalized internal-use software development costs, and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology.
We expect our cost of revenue to increase in dollar amount as we continue to invest in our platform infrastructure and support, acquire new customers, and existing customers increase their usage of our platform.
70
Table of Contents
Gross Profit
Our gross profit represents revenue, less all cost of revenue.
We expect our gross profit to increase over time due to an increase in revenue. We expect our gross margin to decline modestly in the near term as the volume of SMS messages sent through our platform increases, and it could fluctuate in the long term due to timing of investments and expected increases in our cloud-based infrastructure costs and outbound communication sending costs, including email and SMS, as our customers increase usage of our platform and capabilities. We expect to continue to optimize inputs to our cost of revenue through continued work on data storage architecture and gaining further leverage on costs with our increased scale.
Selling and Marketing
Our selling and marketing costs primarily consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation; sales commissions, partnership expenses for revenue sharing agreements, including to Shopify Inc. (“Shopify”), other commerce platform partners, and agency partners; costs associated with advertising and marketing activities; and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. Sales commissions are considered an incremental cost to obtain contracts with customers and these costs are deferred and amortized over the expected benefit period. On July 28, 2022, we entered into a collaboration agreement and strategic partnership with Shopify pursuant to which we issued warrants to Shopify (and certain of its affiliates) (the “Shopify Warrants”), in exchange for promotion of our marketing services with customers within the Shopify ecosystem. In accordance with relevant accounting policies, we recognize a prepaid marketing expense in connection with the Shopify Warrants. This prepaid marketing expense represents the probable future economic benefit being amortized over a seven-year expected benefit period and is recorded based on the fair value of the warrants on the grant date.
We expect to continue to make investments in our selling and marketing organization, and expect selling and marketing expense to remain our largest operating expense in dollar amount. Selling and marketing expense may fluctuate from period to period depending on the extent and timing of our marketing initiatives. We expect selling and marketing expense to increase in dollar amount but decrease as a percentage of revenue over the longer term. In the short term, we expect selling and marketing costs to increase as we increase headcount in our go-to-market team, grow into new markets, and pay more in partnership fees to Shopify and other partners as we continue to grow.
Research and Development
Our research and development costs primarily consist of employee-related costs associated with research and development staff, including payroll, benefits, bonuses, stock-based compensation, and allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. We capitalize a portion of our research and development costs that meets the criteria for capitalization of internal-use software. All other research and development costs are expensed as incurred.
We believe continued investment and innovation in our platform, capabilities, and offerings are important for our growth and, as such, expect our research and development costs to continue to increase in dollar amount but remain consistent as a percentage of revenue for the foreseeable future. This percentage may fluctuate from period to period depending on the timing and amount of these expenses.
General and Administrative
Our general and administrative expenses consist of employee-related costs including payroll, benefits, bonuses, and stock-based compensation in general corporate functions; procurement, accounting and finance, tax, legal, project management, and human resources, as well as allocated overhead costs, including rent, facilities, depreciation, and costs related to information technology. Credit card processing fees are also part of general and administrative expenses.
71
Table of Contents
We expect general and administrative expenses to increase in the near term as a result of operating as a public company, including expenses associated with compliance with the rules and regulations governing public companies, such as Section 404 of the Sarbanes-Oxley Act, and an increase in legal, audit, insurance, investor relations, professional services and other administrative expenses. Further, we expect an increase in dollar amount of credit card processing fees in line with the expected increase in revenue for the foreseeable future. As a result, we expect our general and administrative expenses to increase in dollar amount for the foreseeable future but to generally decrease as a percentage of our revenue over the longer term as we scale our business. This percentage may fluctuate from period to period depending on the timing and amount of our general and administrative expenses, including in the short term due to increased costs in connection with our initial public offering and heightened compliance requirements associated with operating as a public company. These expenses include increased professional service costs, the increased cost of directors’ and officers’ liability insurance, and costs associated with increasing our employee headcount in certain departments, such as accounting, internal audit, and investor relations.
Interest Income
Interest income consists of income earned from our cash deposits held in interest-bearing accounts and money market funds.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes related to U.S. states and foreign jurisdictions in which we conduct business. We maintain a full valuation allowance on our U.S. federal and state net deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Segments
We operate our business through one reportable segment, as well as one business activity, providing software that brings consumers’ first-party data together and uses it to create and deliver highly personalized consumer experiences across digital channels.
72
Table of Contents
Results of Operations
The following tables set forth our results of operations for the fiscal years presented and express the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Year Ended December 31,
2023 2022 2021
($ in thousands)
Consolidated Statements of Operations
Revenue
$ 698,099 $ 472,748 $ 290,640
Cost of revenue (1)
177,888 128,025 84,696
Gross profit
520,211 344,723 205,944
Operating expenses:
Selling and marketing (1)
394,369 213,848 156,342
Research and development (1)
262,177 104,077 65,599
General and administrative (1)
194,287 81,834 63,236
Total operating expenses
850,833 399,759 285,177
Operating loss (330,622) (55,036) (79,233)
Other income (expense):
Other income (expense), net
(470) 388 28
Interest income
24,051 5,538 139
Interest expense
— — (8)
Total other income (expense), net
23,581 5,926 159
Loss before income taxes (307,041) (49,110) (79,074)
Provision for income taxes
1,192 83 319
Net loss $ (308,233) $ (49,193) $ (79,393)
(1) Includes stock-based compensation expense as follows (in thousands):
Year Ended December 31,
2023 2022 2021
Cost of revenue
$ 24,973 $ 129 $ 960
Selling and marketing
107,954 985 29,713
Research and development
120,184 1,230 8,193
General and administrative
87,688 5,958 13,123
Stock-based compensation, net of amounts capitalized
340,799 8,302 51,989
Capitalized stock-based compensation expense
1,349 — 2
Total stock-based compensation expense
$ 342,148 $ 8,302 $ 51,991
73
Table of Contents
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue:
Year Ended December 31,
2023 2022 2021
Consolidated Statements of Operations
Revenue
100.0 % 100.0 % 100.0 %
Cost of revenue 25.5 27.1 29.1
Gross profit
74.5 72.9 70.9
Operating expenses:
Selling and marketing 56.5 45.2 53.8
Research and development 37.6 22.0 22.6
General and administrative 27.8 17.3 21.8
Total operating expenses
121.9 84.6 98.1
Operating income (loss)
(47.4) (11.6) (27.3)
Other income (expense):
Other income (expense), net
(0.1) 0.1 —
Interest income
3.4 1.2 —
Interest expense
— — —
Total other income (expense), net 3.3 1.3 0.1
Income (loss) before income taxes
(44.0) (10.4) (27.2)
Provision for income taxes
0.2 — 0.1
Net income (loss)
(44.2) % (10.4) % (27.3) %
Comparison of the Years Ended December 31, 2023 and 2022
Revenue
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Revenue $ 698,099 $ 472,748 $ 225,351 47.7 %
Revenue for the year ended December 31, 2023 increased by $225.4 million or 47.7%, to $698.1 million compared to $472.7 million for the year ended December 31, 2022. The increase was primarily due to expansion with existing customers driven by expanded usage of our platform as well as our SMS channel. For the year ended December 31, 2023, sales to existing customers accounted for approximately 68% of the increase in revenue. We estimate our price increase in September 2022 represented a low-double digit increase of incremental revenue dollars in 2023. For the year ended December 31, 2023, approximately 32% of the increase in revenue was related to new customers, particularly in the mid-market and outside of the Americas. Sales to new customers represent the revenue recognized from new customers acquired in the 12 months prior to the period end.
Cost of Revenue
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Cost of revenue $ 177,888 $ 128,025 $ 49,863 38.9 %
74
Table of Contents
Cost of revenue for the year ended December 31, 2023 increased by $49.9 million or 38.9%, to $177.9 million compared to $128.0 million for the year ended December 31, 2022. This increase was primarily due to an increase of approximately $24.8 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $17.4 million in outbound communication sending costs on behalf of our customers, and $7.3 million in salaries and personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program.
Gross Profit
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Gross profit $ 520,211 $ 344,723 $ 175,488 50.9 %
Gross profit for the year ended December 31, 2023 increased by $175.5 million or 50.9%, to $520.2 million compared to $344.7 million for the year ended December 31, 2022. This increase was primarily due to revenue growth and ongoing efforts to optimize our costs including (i) higher volume-based discounts and pricing improvements on our purchases of third party cloud hosting infrastructure and (ii) more efficient use of data storage and elimination of legacy storage architecture.
Selling and Marketing
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Selling and marketing $ 394,369 $ 213,848 $ 180,521 84.4 %
Selling and marketing expenses for the year ended December 31, 2023 increased by $180.5 million or 84.4%, to $394.4 million compared to $213.8 million for the year ended December 31, 2022. This increase was primarily due to an increase of approximately $107.0 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $30.9 million in amortization of prepaid marketing expense driven by the Shopify Warrants issued in connection with the Shopify partnership, $26.5 million in salaries and personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program, $14.1 million in partnership-related expenses across our ecosystem, $6.1 million in marketing expenses associated with our advertising campaigns across multiple channels of media, and $1.5 million due to restructuring expenses incurred in the first quarter of 2023. The increase was offset by a decrease of approximately $5.7 million due to a reduction in marketing professional services.
Research and Development
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Research and development $ 262,177 $ 104,077 $ 158,100 151.9 %
Research and development costs for the year ended December 31, 2023 increased by $158.1 million or 151.9%, to $262.2 million compared to $104.1 million for the year ended December 31, 2022. This increase was primarily due to an increase of approximately $119.0 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $34.2 million in salaries and related personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program, $3.0 million in technology expenses, and $2.5 million due to restructuring expenses incurred in the first quarter of 2023.
75
Table of Contents
General and Administrative
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
General and administrative $ 194,287 $ 81,834 $ 112,453 137.4 %
General and administrative expenses for the year ended December 31, 2023 increased by $112.5 million or 137.4%, to $194.3 million compared to $81.8 million for the year ended December 31, 2022. This increase was primarily due to an increase of approximately $81.7 million of stock-based compensation mainly due to the vesting of Double-Trigger RSUs upon and subsequent to the IPO, $15.5 million in salaries and personnel expenses as a result of increases in headcount and the implementation of a company-wide sabbatical program, $6.4 million in payment processing fees, $5.1 million in professional expenses, primarily attributed to the IPO and public company readiness efforts, and $2.7 million in technology expenses, primarily attributed to an increase in licenses as a result of the aforementioned increases in headcount.
Other Income
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Other income (expense), net $ (470) $ 388 $ (858) (221.1) %
Other income for the year ended December 31, 2023 decreased by $0.9 million or 221.1%, to $(0.5) million compared to $0.4 million for the year ended December 31, 2022. This decrease was primarily due to unfavorable foreign exchange fluctuations.
Interest Income
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Interest income $ 24,051 $ 5,538 $ 18,513 334.3 %
Interest income for the year ended December 31, 2023 increased by $18.5 million or 334.3%, to $24.1 million compared to $5.5 million for the year ended December 31, 2022. This increase was primarily due to an increase in interest rates, greater cash balances due to the IPO, and the volume of newly opened interest-bearing accounts, including money market funds, as part of our diversified cash management strategy.
76
Table of Contents
Provision for Income Taxes
Year Ended December 31,
2023 2022 $ Change % Change
($ in thousands)
Provision for income taxes $ 1,192 $ 83 $ 1,109 NM
______________
NM - Not meaningful
Income tax expense for the year ended December 31, 2023 increased by $1.1 million to $1.2 million compared to $0.1 million for the year ended December 31, 2022. This increase was primarily due to an increase in profits before taxes in our international entities.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. In doing so, we review and analyze our primary sources and uses of liquidity to include cash balances on hand and cash flows from operations.
Since our inception through December 31, 2023, we have financed our operations primarily through sales of equity securities and payments received from our customers. In September 2023, we completed our IPO which resulted in aggregate cash proceeds of approximately $320.1 million, after deducting approximately $17.7 million in underwriting discounts and commissions, and $7.4 million in offering-related expenses.
As of December 31, 2023, our principal sources of liquidity included cash, cash equivalents, and restricted cash totaling $739.7 million, with such amounts held for working capital purposes. Our cash equivalents were comprised of $314.5 million in money market funds.
Our primary cash needs are for personnel-related expenses, selling and marketing expenses, and third-party cloud infrastructure expenses.
Based upon our current levels of operations, we believe our operating cash flows provide sufficient liquidity to support liquidity and financing needs for at least the next twelve months. Our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow from operations, and our ability to manage costs and working capital successfully. Additionally, our cash flow generation ability is subject to general economic, financial, competitive, legislative, and regulatory factors, and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs.
The following table sets forth, for the periods indicated, our working capital:
77
Table of Contents
As of December 31,
2023 2022
($ in thousands)
Cash $ 738,562 $ 385,820
Restricted cash, current (1)
409 409
Accounts receivable, net of allowance for doubtful accounts
23,076 10,723
Deferred contract acquisition costs 15,198 11,215
Prepaid expenses and other current assets 26,244 19,336
Accounts payable 13,597 8,890
Accrued expenses 62,838 36,126
Operating lease liabilities 14,081 14,864
Deferred revenue 40,100 25,109
Total Working Capital
$ 672,873 $ 342,514
______________
(1) Restricted cash related to our required collateral to fund payroll and credit card obligations in the Australia entity.
Working capital consists of current assets (including cash, current portion of restricted cash, accounts receivable, current deferred contract acquisition costs, current prepaid expenses and other current assets), less current liabilities (including accounts payable, accrued expenses, current lease liabilities, and deferred revenue, all of which is current).
Statement of Cash Flows
The following table sets forth, for the periods indicated, our beginning balance of cash, net cash flows provided by operating, investing and financing activities, and our ending balance of cash. For additional detail, see our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
2023 2022
($ in thousands)
Net cash provided by (used in)
Operating activities
$ 119,371 $ (23,552)
Investing activities
(9,358) (18,745)
Financing activities
242,728 101,300
Net increase (decrease) in cash and restricted cash
$ 352,741 $ 59,003
Cash, cash equivalents, and restricted cash, beginning of period
386,916 327,913
Cash, cash equivalents, and restricted cash, end of period $ 739,657 $ 386,916
Operating Activities
Net cash provided by operating activities of $119.4 million for the year ended December 31, 2023 was primarily attributable to a net loss of $308.2 million adjusted for non-cash charges of $433.5 million and net cash outflows of $5.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $340.8 million of stock-based compensation expense, $52.9 million of prepaid marketing expense amortization, $15.8 million of deferred contract acquisition cost amortization, $13.7 million of depreciation and amortization expense, and $13.0 million of operating lease costs. Net cash outflows from changes in operating assets and liabilities primarily
78
Table of Contents
consisted of a $26.9 million increase in deferred contract acquisition costs related to increase in sales commissions resulting from our increase in revenues, a $15.2 million decrease in operating lease liabilities due to payments related to our operating lease obligations, and a $12.9 million increase in accounts receivable due to an increase in customer billings. The cash outflow was offset by cash inflows primarily from a $15.0 million increase in deferred revenue resulting from increased billings for subscriptions and a $31.2 million net increase in accrued expenses and accounts payable due to timing of vendor payments and the implementation of a company-wide sabbatical program.
Net cash used in operating activities of $23.6 million for the year ended December 31, 2022 was primarily attributable to a net loss of $49.2 million adjusted for non-cash charges of $61.1 million and net cash outflows of $35.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $22.0 million of prepaid marketing expense amortization, $9.0 million of depreciation and amortization expense, $10.6 million of deferred contract acquisition cost amortization expense, $6.8 million of stock-based compensation expense, and $11.8 million of operating lease costs. Net cash outflows from changes in operating assets and liabilities primarily consisted of $20.2 million increase in deferred contract acquisition costs related to increase in sales commissions resulting from our increase in revenues, $9.3 million decrease in operating lease liabilities due to payments related to our operating lease obligations, $5.2 million increase in accounts receivable due to an increase in customer billings, $5.2 million increase in prepaid expenses due to prepayments for cloud infrastructure and hosting costs, and a $5.7 million net decrease in accrued expenses and accounts payable due to timing of vendor payments. The cash outflow was offset by cash inflows primarily from a $10.0 million increase in deferred revenue resulting from increased billings for subscriptions.
Investing Activities
Net cash used in investing activities of $9.4 million for the year ended December 31, 2023 consisted of $3.7 million purchases of property and equipment and $5.7 million of capitalized software costs.
Net cash used in investing activities of $18.7 million for the year ended December 31, 2022 consisted of $15.8 million purchases of property and equipment, $2.4 million of capitalized software costs, and $0.5 million cash paid for an acquisition.
Financing Activities
Net cash provided by financing activities of $242.7 million for the year ended December 31, 2023 primarily consisted of approximately $320.1 million of IPO proceeds net of issuance costs and $4.2 million of proceeds from the exercise of stock options offset by $81.6 million used for the payment of employee tax obligations related to the net share settlement of stock-based compensation awards.
Net cash provided by financing activities of $101.3 million for the year ended December 31, 2022 primarily consisted of approximately $99.6 million of proceeds from the issuance of common stock net of issuance costs and $1.7 million of proceeds from the exercise of common stock options.
Cash Management
We manage our operating cash management activities through banking relationships with our domestic and international subsidiaries and all of our cash requirements were serviced by the operating cash flows of our business. We diversify our cash deposits across a variety of well-established financial institutions based on ratings from nationally recognized rating organizations to reduce our exposure to counterparty and concentration risk.
We expect a continued increase in our cash balances as our business continues to grow. We expect to continue to diversify our cash management strategy to primarily include money market funds, highly-liquid debt instruments
79
Table of Contents
of the U.S. government and its agencies, senior corporate bonds, and commercial paper to reduce our global exposure on banking deposits.
Lease Obligations
We enter into various noncancellable lease agreements for certain office space and equipment used in the normal course of business. Our noncancellable lease obligations as of December 31, 2023 were $56.9 million, with $14.4 million payable within 12 months.
Other Contractual Obligations
We enter into various noncancellable agreements with marketing vendors and various service providers. Our noncancellable obligations as of December 31, 2023 were $346.2 million, with $117.7 million payable within 12 months.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements included elsewhere in this filing, which have been prepared in accordance with GAAP. In preparing the consolidated financial statements, we make estimates and judgements that affect the reported amounts in the consolidated financial statements and related footnote disclosures included elsewhere in this filing. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We re-evaluate our estimates on an ongoing basis.
The accounting estimates we use in the preparation of our consolidated financial statements will change as new events occur, more experience is acquired, additional information is obtained and our operating environment changes. Changes in estimates are made when circumstances warrant. Such changes in estimates and refinements in estimation methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results could differ materially from the amounts reported based on these estimates.
The critical accounting estimates that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements included elsewhere in this filing include those noted below.
Revenue Recognition
We derive revenue from subscription fees and other related professional services. Revenue is recognized when, or as, the performance obligation is satisfied by transferring the control of the promised service to a customer. The amount of revenue recognized reflects the consideration that we expect to be entitled to receive in exchange for these services.
Our SaaS subscription agreements with customers offer personalized email and SMS marketing services through a cloud-based software platform, as well as add-ons, such as reviews and our CDP offering. Subscription fees are generated from customers accessing our hosted platform services and our subscription agreements do not provide our customers with the right to take possession of our software. Contractual subscriptions for customers generally auto-renew on a monthly basis and customers may elect not to renew by providing five days’ advance notice. Subscription pricing is determined based on a customer’s profile count and monthly messaging quantities based on a tiered pricing structure and is considered fixed. Variable consideration in our contracts is not material but represents the overage charges incurred by customers who exceed their allotments.
80
Table of Contents
We recognize revenue under the core principle to depict the transfer of control to our customers in an amount reflecting the consideration to which we expect to be entitled. We account for individual performance obligations separately if they have been determined to be distinct and we allocate the transaction price to the distinct performance obligations on a relative stand-alone selling price basis. The determination of stand-alone selling price uses judgments and estimates that are based upon the prices at which we separately sell subscriptions. If not considered distinct, the goods or services promised by us are combined and accounted for as a combined performance obligation. Determining the distinct performance obligations in a contract requires judgment. Typically, our SaaS subscription agreements consist of a single performance obligation, and revenue is recognized over time as the performance obligation is satisfied. Our single performance obligation primarily consists of access to our platform and professional services.
Costs to Obtain Customers
We capitalize incremental costs of obtaining revenue contracts, which primarily consist of sales commissions. We amortize these commissions on a systematic basis, consistent with the pattern of transfer of the expected benefit period or services to which the contract relates, generally up to five years.
Contract costs are amortized on a straight-line basis over a period of up to five years, which reflects the expected period of benefit of the performance obligation and may be longer than the initial contract period. We determine the estimated benefit period by considering both qualitative and quantitative factors, including the length of the subscription terms in our customer contracts and the anticipated life of our technology, among other factors.
Shopify Collaboration Agreement
We entered into a collaboration agreement on July 28, 2022 with Shopify to form a strategic relationship for the purposes of creating greater interoperability between the Klaviyo and Shopify platforms. In connection with the collaboration agreement, we entered into three separate agreements, including a revenue sharing agreement, common stock warrant agreement, and stock purchase agreement.
The revenue sharing agreement was entered into in connection with, and the Shopify Warrants were issued in exchange for, compensation for marketing services that we will receive from Shopify under the collaboration agreement. We have estimated the fair value of the Shopify Warrants on the date of issuance using the Black-Scholes option pricing model. The Black-Scholes option pricing model uses assumptions that are based upon estimates made by management. The key assumptions used to value the Shopify Warrants include the fair value of the common stock, a dividend yield of zero, contractual term of 10 years, volatility of 55.00%, and a risk-free rate of 2.85%. The determination of the fair value of the common stock is further discussed below. We estimate the volatility based upon an average historical volatility of several peer public companies over a period equivalent to the term of the Shopify Warrants. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of grant for time periods approximately equal to the expected term of the Shopify Warrants. Expected dividend yield is 0.0% as we have not paid and do not anticipate paying dividends on our common stock. We recognize a prepaid marketing expense asset associated with the Shopify Warrants over a straight-line five-year vesting period. Pursuant to the common stock warrant agreement, upon the Company’s IPO, 25% of the total number of warrants were accelerated, and the remaining unvested portion vests quarterly over the remaining vesting term. The prepaid marketing expense asset is amortized into selling and marketing expense on a straight-line basis over the expected benefit period, which we determine to be the seven-year term of the collaboration agreement as the core activities and deliverables of the collaboration agreement will remain in place for seven years and Shopify does not have the right to terminate the collaboration agreement for convenience.
81
Table of Contents
Under the stock purchase agreement, we issued and sold shares of common stock to Shopify Strategic Holdings 3 LLC (“Shopify Strategic”) and provided an Investment Option which allows Shopify Strategic to purchase additional shares of common stock at a fixed price, exercisable at any time at Shopify Strategic’s option until July 28, 2030. We determined that the purchase price equals the fair market value of the instruments issued as Shopify Strategic was an outside investor at the time we entered into the stock purchase agreement and the purchase represented an arms-length transaction. Further, the fair value of the instruments was substantiated through a probability weighted expected return method analysis as part of common stock valuations performed at the time the agreement was entered into. The common stock and Investment Option are classified as equity on our Consolidated Balance Sheets. We do not recognize marketing expense associated with these instruments as they are freestanding from the other agreements entered into with Shopify and were issued at fair market value.
Stock-Based Compensation
Compensation expense related to stock-based transactions, including employee, directors, and non-employee awards as well as secondary market transactions, is measured and recognized in the consolidated financial statements based on fair value. Pursuant to our 2015 Plan, we have issued stock options, RSUs, and restricted stock awards (“RSAs”); however, all equity grants issued subsequent to the Company’s IPO will be made pursuant to the 2023 Plan, which was approved by our Board effective as of September 19, 2023. During the year ended December 31, 2023, stock-based compensation awards issued were in the form of RSUs subject to both service-based and performance-based vesting conditions under the 2015 Plan and RSUs subject to only service-based vesting conditions under the 2023 Plan. During the year ended December 31, 2022, all of the stock-based compensation awards issued were in the form of RSUs subject to both service-based and performance-based vesting conditions.
Stock-based compensation awards that contain only service-based vesting conditions are recognized as expense, on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. In addition to service requirements, RSUs granted under the 2015 Plan prior to the Company’s IPO are subject to a liquidity-based vesting condition, which we have concluded represents a performance condition. Fair value of such awards is measured on the grant date and recognized over the vesting term when the performance condition is considered probable of being achieved. This performance condition was achieved when the Company’s registration statement on Form S-1 filed with the SEC in connection with the IPO became effective on September 19, 2023. Compensation expense for these awards with both a service and performance condition are expensed under the accelerated attribution method which includes a cumulative catch up recorded upon the IPO for services that had been completed as of the IPO. The remaining expense for these awards is being recognized using the accelerated attribution method over the remaining service period.
For option awards granted in prior years, we estimate grant date fair value using the Black-Scholes option pricing model. The grant date fair value of RSUs and RSAs is estimated based on fair value of the underlying common stock. Additional information regarding such estimates is provided below.
Common Stock and Redeemable Common Stock Valuations
Since September 20, 2023, our first day of trading on the New York Stock Exchange in connection with our IPO, there has been an active market for our Series A common stock. Accordingly, subsequent to our IPO, the fair value of our Series A common stock is determined by using the closing price of our Series A common stock as listed on the New York Stock Exchange on the date of grant. As our Series B common stock has identical rights to our Series A common stock, except with respect to voting and conversion rights, the active market for our Series A common stock is utilized to measure the fair value of the Company’s underlying Series B common stock. As all
82
Table of Contents
redeemable common stock was converted to our Series B common stock upon our IPO, no separate valuations were required for the underlying shares.
Until our IPO, in the absence of a public trading market, the fair value of our common stock and redeemable common stock was determined by our board of directors, the members of which we believe have extensive business, finance, and venture capital experience, with input from management, taking into account our most recent valuations from an independent third-party valuation specialist. The Company and the board of directors utilized various valuation methodologies in accordance with the framework of the American Institute of Certified Public Accountants’ (the “AICPA”) Technical Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation , to estimate the fair value of its common stock. Each valuation methodology includes estimates and assumptions that required our judgment. These estimates and assumptions include a number of objective and subjective factors in determining the value of our common stock at each grant date, including the following factors:
• prices paid for our common stock, which we have sold to outside investors in arms-length transactions and employees and investors have sold in secondary market transactions;
• valuations performed by an independent valuation specialist;
• our stage of development and revenue growth;
• the market performance of comparable publicly traded companies;
• adjustments necessary to recognize a lack of marketability;
• the likelihood of achieving a liquidity event, such as an IPO or sale of the Company, given prevailing market conditions; and
• the U.S. and global economic and capital market conditions and outlook.
Our board of directors determined the value of our common stock by probability-weighting different valuation approaches and methodologies, primarily based on the subject company transaction method under the market approach. The market approach considers prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities. Within the market approach, given that we had recent arms-length transactions in our common stock (including secondary market transactions as well as common stock sold in connection with the Shopify Collaboration Agreement), the subject company transaction method was used, which consists of examining prior transactions in our equity securities to determine an implied total enterprise value. The subject company transaction method takes into account the total consideration paid in such transactions as well as the rights and preferences of the stockholders of the various classes of equity outstanding. According to AICPA guidelines, under this method, recent securities transactions in our equity securities should be considered as a relevant input for computing the enterprise valuation.
Other variations of the market approach were considered, including the guideline public company and transaction methods. These methods estimate value by applying a representative revenue multiple from a peer group of companies in similar lines of business to our forecasted revenue. Our peer group of companies was selected based on operational and economic similarities to us and factors considered included but were not limited to industry, business model, growth rates, customer base, capitalization, size, profitability and stage of development. From time to time, we updated the set of comparable companies as new or more relevant information became available. This approach also involves the identification of relevant transactions and determining relevant multiples to apply to our revenue. The equity values implied by the various methodologies within the market approach reasonably approximated each other as of each valuation date.
83
Table of Contents
Once we determined an equity value, we used a combination of approaches to allocate the equity value to each class of our stock. We used the option pricing method (“OPM”). The OPM allocates values to each equity class by creating a series of call options on our equity value, with exercise prices based on the liquidation preferences, participation rights, and exercise prices of the equity instruments. Where relevant, we also considered an appropriate discount adjustment to recognize the lack of marketability and liquidity due to the fact that stockholders of private companies do not have access to trading markets similar to those enjoyed by stockholders of public companies. The discount for marketability was determined using various quantitative methods and assessed for reasonableness using relevant qualitative information, including review comparable marketability discounts provided in court case rulings, restricted stock studies and IPO studies.
For the portion of the fiscal year ended December 31, 2023 prior to our IPO, and for the fiscal year ended December 31, 2022, the Company calculated the allocable fair value of the Company’s underlying security by probability-weighting different valuation approaches and methodologies, primarily based on the subject company transaction method under the market approach, the Company utilized revenue multiples, which were determined by comparing the Company to guideline public companies based upon comparable revenue, operating margins, and products and services provided, along with the following assumptions:
Portion of Fiscal Year Ended December 31, 2023
Prior to IPO
Fiscal Year Ended December 31, 2022
Risk-free rate 3.87 % 2.85 %
Expected term 1.6 years 2.0 years
Volatility 63.3 % 55.0 %
Discount rate 13.3 % 13.5 %
• The risk-free rate was based upon the U.S. Treasury rate as of the valuation date;
• The expected term was calculated based on time until the liquidity event (i.e., time to exit);
• Volatility was derived from an analysis of the volatility of comparable industry companies and the Company’s capital structure and risk profile as compared to the peer group; and
• The discount rate employed to convert future cash flows to their present value equivalent is the rate of return expected by an investor for taking on the perceived risks of an investment.
The OPM used the following significant assumptions to allocate the fair value to the redeemable common stock (in thousands):
Portion of Fiscal Year Ended December 31, 2023
Prior to IPO
Fiscal Year Ended December 31, 2022
Underlying security $ 8,326,667 $ 8,070,000
Risk-free rate 4.55 % 4.51 %
Expected term 1.56 years 1.66 years
Volatility 63.3 % 65.0 %
Discount for lack of marketability 13.3 % 15.0 %
Expected dividend yield 0.0 % 0.0 %
• The risk-free rate was based on the U.S. Treasury yield curve with terms approximately equal to the redeemable common stocks’ expected term;
84
Table of Contents
• The expected term was calculated based on the term by which the redeemable stock will be exercised within the expected liquidity windows;
• Volatility was derived from the observed comparable public companies’ historical equity volatility over the period matching the term;
• The discount for lack of marketability was quantified through restricted stock studies, pre-IPO studies, and the put option pricing model to estimate the loss in value due to the security holders’ lack of access to an active market; and
• Expected dividend yield is zero as the Company has not paid and does not anticipate paying dividends on its redeemable common stock in the foreseeable future.
Application of these valuation approaches involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies in the notes to our consolidated financial statements included elsewhere in this filing for a discussion about new accounting pronouncements adopted as of the date of this Annual Report on Form 10-K.
85
Table of Contents