Welcome to the Braze Fiscal Third Quarter 2025 Earnings Conference Call. My name is Megan, and I'll be your operator for today's call. At this time all participants are in listen-only mode. After the speakers’ presentation, we will conduct a question-and-answer session. I'll now turn the call over to Christopher Ferris, Head of Braze Investor Relations.

Thank you, operator. Good afternoon and thank you for joining us today to review Braze's results for the fiscal third quarter 2025. I'm joined by our Co-Founder and Chief Executive Officer; Bill Magnuson; and our Chief Financial Officer, Isabelle Winkles. We announced our results in our press release issued after the market closed today. Please refer to the Investor Relations section of our website at investors.braze.com for more information and a supplemental presentation related to today's earnings announcement. During this call, we will make statements related to our business that are forward-looking under federal securities laws and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements regarding our financial outlook for the fourth quarter and the fiscal year ended January 31, 2025, the anticipated development, release timing and performance and benefits of our existing and upcoming products and features, the potential impact and duration of our current macroeconomic trends, our anticipated customer behaviors, including vendor consolidation and replacement trends and their impact on Braze, our potential market opportunity and our ability to effectively execute on such opportunity, the expected effects of our social impact initiatives and our long-term financial targets and goals. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations and reflect our views only as of today. We assume no obligation to update any such forward-looking statements. For a discussion of the material risks and uncertainties that could affect our actual results, please refer to the identified risks in today's press release and our SEC filings, both available on the Investor Relations section of our website. I'd also like to remind you that today's call will include certain non-GAAP financial measures used by management to evaluate our ongoing operations and to aid investors in further understanding the company's fiscal third quarter 2025 performance in addition to the impact these items have on the financial results. Please refer to the reconciliation of our non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP included in our earnings release under the Investor Relations section of our website. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with U.S. GAAP. And now I'd like to turn the call over to Bill.

Thank you, Chris, and good afternoon, everyone. We are pleased with our third quarter results, which again proved the high ROI and long-term value of the Braze customer engagement platform. We generated $152.1 million of revenue, up 23% year-over-year, while driving continued efficiency across our business and improving non-GAAP operating margins by 580 basis points year-over-year. I'm also proud to announce that we passed $600 million of committed annual recurring revenue during the quarter, another testament to the strong demand for the ROI delivered by the Braze customer engagement platform. And for the second quarter in a row, we achieved positive non-GAAP net income and expect to maintain positive quarterly net income moving forward. As planned, non-GAAP operating income took a slight step back this quarter due to seasonal investments in marketing and we remain on track to deliver positive non-GAAP operating income and free cash flow in the fourth quarter and to sustain both on a go-forward basis. This is an exciting set of financial milestones on our way to becoming the leading customer engagement platform globally and we look forward to generating meaningful operating income while also thoughtfully reinvesting to grow our business in the coming quarters and years. During the third quarter, we continued to capitalize on the legacy vendor replacement cycle, securing a diverse set of new business wins where Braze is replacing legacy marketing clouds, including at a gaming company in North America, an airline and a financial planning company in APAC and a fashion brand in EMEA. We also continue to win against both channel-specific point solutions and homegrown tools across a diverse set of industries, geographies and use cases. Some notable takeaways included a leading North American party planning application, a QSR in EMEA and a traditional media company in APAC, we grew…

Thank you, Bill, and thank you, everyone, for joining us today. As Bill stated, we reported a solid third quarter with revenue increasing 23% year-over-year to $152.1 million, driven by a combination of existing customer contract expansions, renewals and new business. Subscription revenue remains the primary component of our total top line, contributing 96% of our third quarter revenue, while the remaining 4% represents a combination of recurring professional services and onetime configuration and onboarding fees. Total customer count increased 10% year-over-year to 2,211 customers as of October 31, up 200 from the same period last year and up 48 from the prior quarter. Our total number of large customers, which we define as those spending at least $500,000 annually, grew 24% year-over-year to 234 and as of October 31, contributed 61% to our total ARR. This compares to a 58% contribution as of the same quarter last year. Measured across all customers, dollar-based net retention was 113%. While dollar-based net retention for our large customers was 116%. Expansion was again broadly distributed across industries and geographic regions. Revenue outside the U.S. contributed 45% of our total revenue in the third quarter, consistent with the prior quarter of this year and up 1 percentage point from 44% in the prior year quarter. In the third quarter, our total remaining performance obligation was $717 million, up 28% year-over-year and up 4% sequentially. Current RPO was $458 million, up 24% year-over-year and up 5% sequentially. The year-over-year increases were driven by contract renewals and upsells and the signing of new customer contracts. Overall, our dollar-weighted contract length remains at just over two years. Non-GAAP gross profit in the quarter was $107 million, representing a non-GAAP gross margin of 70.5%. This compares to a non-GAAP gross profit of $89 million and non-GAAP gross…

[Operator Instructions] Our first question will come from Ryan MacWilliams with Barclays.

Bill, we'd love to hear more about Project Catalyst. If -- well, this will be included as a part of Canvas or be separate add-on. And then maybe if you aren't charging for it discretely, how do you think this can be additive to Braze's results next year?

Yes. Great question. And we're obviously really excited to see Project Catalyst start to get into customers' hands as we release it into beta and then continue its progression next year. So we're expecting Project Catalyst to absolutely be a part of Canvas. And that's one of the things that I'm actually most excited about as this ushers in kind of a new era of Canvas design. Historically, obviously, we've done a lot with artificial intelligence machine learning to be able to automatically make decisions when it comes to orchestration or to targeting, we've been able to help optimize the content through things like personalization or localization or drive better results. But what this allows us to do actually is have the marketer come in and just tell us the goal. And then we optimize that on a one-on-one basis with the aid obviously, of generative AI content generation with hopefully, as we continue to see more of the reasoning capabilities of Frontier LLM models continue to improve throughout the year and in the years to come, [ought] to be able to make more and more comprehensive decisions throughout the journey, and then continuing to optimize that on a one-on-one basis. Now, I was talking about personal lines path quite a bit in the past because it's an exciting place where we already do one-on-one optimization. But the way that something like personalized path works, marketers still need to build different variants. And so that limits them both from the kind of productivity side of the house because they have to literally create more of those variants and build them out within Canvas, but it also limits our ability to do that full one-on-one optimization at scale with as many degrees of freedom as Project Catalyst is going to bring…

Excellent. And then one for Isabel. How should we think about the dollar-based net retention rate within the third quarter itself? And I know we're still going through some of the renewals, but any update on how we should think about the dollar-based net retention rate from here?

Yes. So we back in September, we gave an indication of where we thought the year would land around [110%]. And so when you think about where we are in Q3, that [113%], that number is actually sort of rounding up to [113%]. So it's actually landing pretty much where we would have anticipated it to land in the context of that visibility that we wanted to provide for that year-end number. So, we are encouraged by some of the in-quarter stability that we're seeing, but we do continue to see some pressure on this metric. And so that [110%] number will stick to that for the end of the year.

Our next question comes from Gabriela Borges with Goldman Sachs.

Bill, I wanted to ask about some of the improvements that you've been making with your go-to-market added sales and marketing productivity. Maybe just level set us on how some of your new initiatives are going? I remember you're talking about time credit -- not time credit the module credits. I remember you're talking about ways to improve engagement within the platform and customer success. So would love to hear taking a step back how some of those missions are going?

Yes, absolutely. So I'll start with the flexible credit just as a continuation from Ryan's question as well. And we actually already have over 450 customers that have purchased the flexible message sending credits across the Braze customer base. So rapidly approaching quarter of our legacy customer base, but it's also a very high percentage of all incoming customers. And that's already enabling a few exciting things. First of all, we launched LINE earlier this year. And all of those -- all of the early LINE upsells were done with flexible credits. And not only that, but actually the way that we price them is a pilot for how we're anticipating pricing things like WhatsApp's dynamic pricing -- dynamic message pricing in the future where a customer simultaneously has a billing relationship with LINE by the message volumes and then Braze is selling them a higher margin, kind of higher up in the software stack orchestration, personalization and reporting capability. And so, as we continue to push ahead on both the flexible credits, being able to sell existing channels, it's also unlocking great opportunities for new channels. Another great testament to that actually is that we announced earlier today to eligible customers in the U.S. and the UK, a pilot for early access to premium RCS messaging that is immediately available to those customers who have purchased flexible message credits already who are already sending SMS in the UK and the U.S., but it's something where they're not going to have to process a new order for them to buy a new message channel. And so we can already see the great benefits both from the flexibility of how we can bring new channels to market, but also being able to speed up the go-to-market side. And as we've discussed…

Absolutely. I'll ask one follow-up on the go-to-market, which is specifically around the Braze for start-ups and the free trial programs for smaller companies? And maybe as part of that, maybe give us an update on the health of that small company ecosystem as a whole?

Yes. So I think that we're continuing to see the health metrics around the SMB sector. Our main -- they're maintaining the same challenges that we've seen throughout the year. Just as a reminder, we did lower our sales capacity in that category midway through last year. And so while our sales team there does continue to be productive and we've been kind of happy to see their progress with new business there. It's definitely a category that has still been challenged. On the free trial side, I'll remind everyone as well that our free trial goal is two-fold. First of all, is really helping with top of funnel awareness and those customers, in particular, that might participate in the Braze start-ups program or those that are in geographies around the world that we maybe don't have a direct sales presence in and just being able to give them an opportunity to have a more fulsome experience within a Braze trial environment right out of the gate, but also to be able to be there as a sandbox environment during enterprise sales cycles. And so we're seeing good early progress in both of those used cases. We're definitely learning and iterating as we go as we're seeing places where a product that had previously been gated by very deliberate onboarding, obviously, is going to have some rough edges and we're still working on smoothing out those when we find them and improving the on-ramp into Braze. We think that it's obviously a really exciting investment area for us as we continue to focus on product-led growth investments that are going to make our existing sales team more productive in the near-term and then also allow us to unlock a much larger opportunity over the long-term with a big customer -- addressable customer base.

Next question comes from Tyler Radke with Citi.

Bill, you talked a lot about Project Catalyst. And I'm wondering if you could just sort of frame how you're seeing the conversations just around agentic AI in front office evolve? Obviously, you have Salesforce out there talking a lot about agent force. I know you did talk about a lot of competitive takeaways being strong in the quarter. But what role are customers sort of viewing Braze in this context? And do you think the focus on agentic AI by kind of the incumbent front office provider sort of help or hurt your competitive win rates over time?

Yes. So there's a lot to unpack there. And I think that just to speak to Salesforce out of the gate and what we're seeing competitively, obviously, with their huge focus on agent force. I think that another consequence of that is that they've clearly taken their eye off the ball on the Salesforce marketing cloud. And it's not just their existing in particular, enterprise customers, but also the agency and analyst community they're noticing. We're excited that that's opening the door to a new generation of both ecosystem relationships. And specifically, a lot of businesses out there that built great agency practices on the back of Salesforce marketing cloud are now kind of picking up their heads and looking around and realizing that, that product has been by and large orphan by Salesforce in terms of future investment and they need to work out where to build practices. And I think that's really well timed for us continuing to mature our own ecosystem support and our own agency partnership work. And so, we're excited about that and seeing both previous Salesforce customers that may have been in the kind of late majority or in the laggard side who still haven't ever evaluated new modern solutions. This is giving them a good reason to start to pick up their heads and look at that. So we're excited about that competitive opportunity. I think from an agent perspective, and what we're seeing with the broader conversation to go back to the beginning of your question, there's definitely still a lot of noise out in the market. The underlying technology in the space continues to advance extremely rapidly. I think that we're -- and so therefore, we are also seeing, I think, a wide array of approaches to kind of testing or…

Follow-up for you, Isabelle, as we look at bookings in the quarter, both bookings and billings, they reaccelerated from about 15% to, call it, 22%, 23%, yet the implied Q4 guidance suggests something in the teens, 18%, 19%. So can you help us understand, was there any timing benefits in that bookings performance? Or how should we just think about the run rate of current RPO relative to that guide for Q4?

Sure. So for the billings number, just keep in mind that that's obviously revenue plus change in deferred revenue. And there's a dynamic that occurred between Q3 of last year and Q3 of this year. Q3 of last year, we actually had a bit of a low trough in terms of the volume of annual upfront contracts that we signed. Q3 of this year, we actually had a bit of a peak in the annual upfront contracts that were signed. And so that leads on a deferred revenue basis. That will lead to sort of a year-over-year acceleration in the change in deferred revenue. Just by virtue of that dynamic that's happening year-over-year. So that's a bit of what you're seeing in terms of the reacceleration, so not necessarily directly tied to the evolution of the business, although we're encouraged to see our ability to kind of continue to move our customers more and more into the annual upfront contract. But that's a bit of the dynamic that you're seeing there. .

Our next question comes from Scott Berg with Needham.

Bill, I wanted to focus on something that you said earlier in your scripted remarks around existing Braze customers when they go to a new company, you're seeing them kind of rebuy. I guess when you look at those customers, do they purchase the platform any differently than the new customers? Just trying to understand with the buying trend or even embrace customer would be?

Yes. I think that the key thing that our sales team sees is just greater velocity because obviously, there's less education required and we usually have someone at the customers, helping be our champion and helping educate internally. Braze, we both differentiate via our interconnections into the data ecosystem and into the product environment. It provides us both with greater context and understanding of customers of stronger kind of wealth of first-party data to be able to optimize both journeys as well as content with as well as more interfaces to be able to interact with those customers. But on all of those fronts, it means that there are more stakeholders and it means that there's more kind of relationships to navigate within existing -- or within prospects. And there's often important architectural decisions that need to be made, both from a technical architecture standpoint as well as data flows and data governance. And so having preexisting Braze customers within the environment, I think just helps all of those things on a lot more smoothly. I wouldn't necessarily isolate a specific difference in buying like literally what they buy or like what their goals are at the end of the sales process. But I think that it definitely speed them up. And this is something I've been talking about for a few years, which is that as Braze came in to broadly call it this marketing automation space and we approach it with -- we approached it in a way that was more data driven. It was more experimental. It was tied tighter into the product and the first-party experience. What that meant is that there was -- there were new skill sets that were required that were new working relationships that we're going to need to be forged and…

Got it. Very helpful, Bill. And then Isabelle, if you look at your non-GAAP profitability in the quarter or non-GAAP operating margin that you've guided to in the fourth quarter, you're crossing over the chasm, how do we start thinking about profitability versus growth going forward? I know you all are very focused on growth now that you've hit this, and I know you're not guiding for fiscal '25, you were ‘26, obviously. But do we see this kind of like a plateau for a period of time? Or can we get further margin expansion for the growth and demand remains in the range you have given?

Yes. So thanks for the question. So if we go back to some of the comments that we made and the framework that we laid out at Analyst Day back in September, that -- the purpose of that framework was that to be sustainable for the next several years. And so I would think about as we start to guide for next year and we start to kind of work our way through the quarters, and you'll see kind of the results of kind of the growth, we would look for the expansion in operating income, non-GAAP operating income to be within the boundary conditions of the framework that we laid out. And so I think philosophically, nothing has changed today or our expectations for the future even relative to kind of where we've been in terms of never going to be growth at all costs. We're always going to be balancing growth with profitability. We are -- I am very focused on being able to reinvest available dollars back into the business. I've said this to the employees. I've said this to analyst, I've said this to investors. And so we are very disciplined with kind of having visibility and transparency into the financial path that we're on and ensuring that the capacity to reinvest is actually leveraged to the highest ROI potential possible.

[Operator Instructions] Our next question comes from Pinjalim Bora with JPMorgan.

Isabelle, just one for you. Any way to understand when does the last cohort of the Zirp kind of cohort renewals flushed through the system. It seems like you had a little bit of a stability in quarter, but trying to understand if [110% ], is the trough at this point? Can it go to a single-digit number?

Yes. So look, I'm not going to guide specifically on dollar-based net retention going forward, but one kind of indication that's encouraging is the -- at Analyst Day, we did highlight the performance of post-Zirp cohort relative to a few cohorts, a few years that comprise the Zirp cohort. And we identified kind of this 9 point differential between the two. And that differentiation actually a little bit improved going forward in this current quarter. So we're encouraged by the continued evolution of the post-Zirp cohort. And so we'll get -- we'll give you guys more transparency and visibility consistent with how we've approached the annual guide for the last three years of our public company life. So look for more visibility on overall revenue expectations in March of next year.

Our next question comes from Arjun Bhatia with William Blair.

Bill, maybe one for you. Just as you're talking to customers and discussing plans with them for next year, what is your sense on the overall spending environment as it relates to marketing budgets. And I think you've highlighted a couple of times in your prepared remarks that the replacement cycle remains strong with the focus on AI and first-party data and cloud data warehouses. Why could that replacement cycle not accelerate further next year as more folks look to up-level their marketing stacks?

Yes. So I'll start off just reminding everyone that we haven't -- we're not expecting any sort of improvement in the demand environment in the forward guidance that we've provided. And as we've discussed, well, we are seeing great progress on the legacy replacement cycles. It's also the case that many of them have been harder to catalyze over the last couple of years as businesses have prioritized cost savings over value creation and expansion. But we feel really good about the comparative gains that we've made over these last two years. When we look at the competitive landscape and the broader partnership ecosystem. We look at the pipeline of, in particular, these enterprise takeaway opportunities that we've been able to build over the course of the last 12 to 18 months. And we're looking forward to a robust competition for these opportunities that, by definition, only come up every 5 to 10 years in the years to come. And so excited that the -- I think the pieces have moved around the board in a way that's favorable to us and we do think that those opportunities are certainly going to continue to show up in particular over the next 12 to 24 months due to some of the platform shifts at both Adobe and Salesforce and their focus shifts that I highlighted earlier in the call, but it does continue to remain a difficult environment. I think that consistent with the last few quarters, we've continued to see stability. Their marketing teams, they know what their priorities are for next year. They’re not worried that their teams are going to get cut or their projects are going to be canceled or their budgets are going to fall into next year. But that kind of full rotation back into a growth orientation where their business overall is looking at new regions, new product expansions, new customer acquisition efforts, et cetera, et cetera, all those things that kind of define a forward-leaning growth posture. We're not seeing robust signs of that yet. We're seeing it in pockets and that's great. But we are seeing strong stability, I think, across marketing teams and across strategies. And so we're making as much progress as we can from an ecosystem and a competitive standpoint as well as our own product robustness and improving our pricing and packaging flexibility. I'm just trying to be prepared for when that rotation back toward more of a broad growth posture to show up amongst marketing teams and across more of the business sphere. But for right now, having stability having great foresight into next year's budgets and being in the position that Braze's in is one where we're confident operating through this demand environment and that's something that we're -- in our early -- in our forecasting and our guidance, we're not assuming that, that's going to improve into next year.

Our next question comes from Derrick Wood with TD Cohen.

I'll direct it to you, Isabelle. Quarter, you guys saw some very large upside in operating income. This quarter was solid with about $2 million of upside, but the last quarter was like $11 million. So could you just talk about the puts and takes on margins and investment focus this quarter versus last quarter? Or maybe what were some of the variances you would flag including on the gross margin side?

Yes. So on the gross margin side, we're continuing to see -- on the headwind side, we're continuing good uptake of the premium messaging channel. So that is -- and that's been happening over the last several years. And even with that continuing to happen, we've been able to expand our gross margin over the last several years and commit to two rounds of increased long-term ranges with the most recent one being at 69% to 74%. And we expect that to continue because as the engineering team kind of continues to do work to improve the efficiency and performance of the overall platform. They're very, very focused on those initiatives across the board. And we've seen success there ongoing and there's more to do and more to come in that area. So from a gross margin perspective, we're pretty excited with the continued trajectory and we expect to operate within the range that we have provided over the long-term here. On the operating income, Q3 does have the impact of the Forge event and some other events, customer driven events that occurred in the quarter. And so that's some of the dynamic that you're seeing in terms of the volatility with being over the profitability line in Q2, then back under it in Q3. And then obviously, we've committed to being back over that line in Q4 and beyond. And so that's some of the dynamic that you're seeing is just specific to the seasonality around some of the events. And then leaders as they -- we're very disciplined as it relates to performance management and then the process of backfills and the timing and so I always want to make sure from a budgeting perspective that we have the capacity to hire at the pace that makes the most sense for the business. And sometimes what we find is leaders are extremely disciplined about going through the process to find the right person and that may result in head count adds that are a little bit behind what finance has budgeted for and that -- some of that dynamic you're seeing come through in the results. But again, I'm very focused on staying very close to that. And when we have capacity, which I can see intra-quarter, we work to find ways to put those dollars to good use.

Our next question comes from Taylor McGinnis with UBS.

Maybe just Isabelle for you. So just to clarify, think about the in-period NRR in the quarter and the stability that you mentioned, so was that, I guess, around like 110% similar to what it was last quarter and then as a follow-up, as we think about NRR in 4Q, could you just maybe walk us through the puts and takes of that? It sounds like on one hand, you guys are seeing good traction with messaging volumes from the holiday and obviously, it's your biggest renewal quarter. But on the flip side, maybe there are still some customers out there that are rightsizing or not expanding to the degree that you'd like to see. So I guess, one, what are the drivers behind some of the cautiousness near-term? And what do you need to see in the demand environment to get comfortable that we're closer to the bottom?

Yes. Thanks for the question. So I just want to clarify that things related to kind of near-term messaging activity or even in some cases, like a short-term, the renewal cycle doesn't necessarily play in directly to the NRR, because we don't -- the revenue isn't based on utilization. And so it's really more about continuing to manage the churn and continuing to improve that upsell motion and bringing us back to levels that we had ascended to in prior years. So that's really the dynamic that we are dealing with is continued management of both the churn on the downside and then continued push for more success on the upsell motion.

Our next question comes from Yun Kim with Loop Capital.

I have a quick question. Bill, can you just give us some update on the partner ecosystem, not just with global system integrators but also perhaps OEM opportunity with other ISVs out there?

Yes. So our strategy around sales continues to be direct sales. We do have some OEMs out there or OEM agreements, but it's not a big part of the way that we go to market. We will continue to expand on our indirect motion using more resellers over time as Braze -- the Braze community continues to expand into new geographies. But right now, when we look at the tech partner relationships, many of these are about making sure that we've got sales teams aligned. We've got technical architectures aligned and rationalized around bigger digital transformation efforts. And that we've got the right partner integrations and product integrations, which you can see a lot of examples of across the Braze data platform, but we've got lot of great interconnection points throughout our product that our partnership ecosystem takes full advantage of. And so, that's something that we're going to continue to invest heavily in. We know that having more partners involved in deals leads to faster deal cycles, leads to more usage of Braze. Entitlements by our customers and better expansion rates and better renewal rates. And so it's a part of our partnership portfolio that we continue to invest heavily in. But specifically, like OEM sales through them is not a key component of that strategy right now.

Our next question comes from Brian Peterson with Raymond James.

You gave some really healthy stats on activity for in-app and content cards. As we think about what's pushing that activity to those channels, how do we think about the balance of upsell via higher volumes or cross sell a new channel, any perspective there?

Yes. So I think that there's an interesting -- and there's an interesting impact that flexible credits will do, which is that I think that in terms of cross-sell, it's super supportive. And the way that we're doing pricing and packaging and expanding across both the optionality that marketers have to bring their strategies around the world. So for instance, if you are effectively running a U.S. SMS strategy, it is now very straightforward for you to expand that to WhatsApp in key markets where WhatsApp is dominant to then further expand that using something like LINE, if you're in Japan or Taiwan or Thailand. And looking at now the launch of RCS across Europe, and so but Braze has really been committed to, I think, across the messaging space is that we want marketers for anywhere in the world to be able to engage with global audiences across the messaging channels that are most important for them to really accomplish their goals and deliver their messages. And so the flexible credit model giving them the opportunity to try out these use cases, expand them globally and expand them to new channels in a way that's commercially flexible for them is really strong. It could potentially have an impact on the way that they purchase new volumes because before, if you were committed to a certain set of volumes across a certain set of channels and you wanted to try out a new one, you would have to make a net incremental commitment to Braze to buy that new channel. But we also saw that was slowing down deal cycles. It was making customers less likely to experiment with new channels. And as I alluded to earlier, in some cases, led to partial churns as people weren't able to forecast their consumption across these different channels or the -- with global SMS, the kind of cross-section of channels and countries, as accurately as they would hope to, and that would lead to unused entitlements, which they would then, in some cases, choose not to renew. And so there are some puts and takes as we think about moving into this new world. But we think overall, it's customer-friendlier, it's also speeds up deal cycles, helps with expansion across use cases. And ultimately, that will be of more revenue, but it does have a little bit of -- if you think about that mechanic with respect to how net new bookings would come about as a customer adopts a new channel, they're not forced to do that right away, which will have some -- a little bit of a headwind on that versus before. But when you -- we think that when you net it out against customer expansion that we're going to be better in the long run.

Our next question comes from Nick Altmann with Scotiabank.

Thank you. I wanted to circle back to Tyler's questions around bookings. Isabelle, you historically talked about how roughly 1/3 of your net new ACV is typically booked in the fourth quarter. And so I was just wondering if you could provide, any update on whether that same linearity applies for this year?

Yes. This -- we're basically in a similar type of zip code for this year. And then keep in mind that, that from a linearity within the quarter is going to be about 50% of that is generally expected to be booked in the last month of the quarter. So that's -- I think that dynamic is largely still intact.

Our next question comes from Michael Berg with Wells Fargo.

I want to give one for Isabelle here. You talked about some strength in Black Friday, Cyber Monday period and also talking about the poster customers showing some stranger compressing the expansion relative to the zero interest rate customers. As we enter into the New Year where it looks like interest rates are coming back down and coming out of a period of a strong holiday shopping season, how we think about how end customers are thinking about their spending here? And is there a reason to believe the expansion rates could meaningfully accelerate as rates come down next year?

Yes. So I don't -- I wouldn't necessarily draw a huge parallel there and look at kind of activity around Black Friday, Cyber Monday. Remember, as it relates specifically to kind of retail, e-commerce that exposure for us is, call it, about 1/5 of our business. So we're very exposed on a global basis. First of all, there are a lot of companies that are not tied to that seasonality specifically, which is largely a U.S. phenomenon and also in a very different industries than retail and e-commerce. So I wouldn't necessarily look for any material upside related directly to that. And the interest rate environment, these are modulations around the theme. I think we're not seeing material enough moves there relative to kind of going back to serve environment, very different.

Our next question comes from Brian Schwartz with Oppenheimer.

I wanted to just ask you about the impact you're seeing in terms of either sales cycles or deal sizes from all the AI data and orchestration product enhancements that you've announced this year, I know you announced some of them earlier this year that you had a lot of new product enhancements announced at Forge. Are you seeing -- what is that doing the sales cycles? Is it -- are you driving more opportunities with them? Is it making the deals bigger? And then maybe just kind of a follow-up, the big question in Q4 because clearly, that is the biggest bookings quarter for the company. It sounds like the macro hasn't changed much at this point. But how are you thinking about that specifically in Q4 and kind of anticipating that type of selling season?

Yes. So I think the biggest impact of the Braze AI innovation so far has really been competitive differentiation and helping to stand out both in RFPs for new customers as well as be able to deliver on differentiated use cases for existing customers. And so, that's been -- that's a win-win-win, I think, across the board. And actually, when we look across the start-up landscape and our startup competitive landscape, we've spoken a lot about Salesforce and Adobe so far on this call. But I'd say, just to give an update there, we continue to see a fragmented landscape on the startup side, and it's against primarily regional competitors. But while there's been some noise on the margin, I think we've been really happy with our win rate and our take a trajectory against those competitors over the course of this year. And we feel really set up well set up for the medium and long-term, in particular, because of the investments that we've made in the brace data platform into Braze and in the Canvas where we see these some of the start-up competitors who have obviously kind of follow a copycat product strategy, just have not shown anywhere near the same ability to be able to mimic the features that we've been building into more advanced Canvas capabilities and across all the different Braze AI functionality. And so that's been, I think, great to see. I think that's been supportive of the improvement in competitive win rates that we've had against the start-up environment throughout the year, and we feel well positioned there. I think that -- in terms of product, the deal sizes and such, it would be hard to disentangle the effects of these against the broader backdrop of the demand environment, a lot of the other things that have changed in the way the deal cycles have been happening year-over-year. And so I won't try to kind of pull that apart, but looking at Q4, I think that also we started Q4 with a solid pipeline heading into it. We've been executing as expected against that pipeline so far. Our differentiation with Braze AI is a big part of that. And I think we feel really good about our ability to execute competitively and continue to see this improvement in win rates that we've enjoyed throughout the year.

Our next question comes from Parker Lane with Stifel.

Bill, maybe just to follow-up on the last one. If we get into a better demand environment out there and budgets start to unlock a little bit what is the right balance of legacy vendor replacement versus more point solution consolidation or VC takeaways?

Yes. It's a great question. And I think a lot of it goes back to the posture that businesses are in and what they're prioritizing. We've seen a lot of these point solution consolidation instances over the course of the last couple of years are even just being motivated by cost savings or being motivated by operational, total cost of owner savings, ownership savings or a smaller team trying to grapple with hodgepodge of tools and realizing that consolidating their own software usage into Braze is going to make their lives easier now that their teams have shrunk, right? So those are some of the major dynamics that you've seen in terms of team resources and prioritization over the course of the last 12 to 24 months, and I think that we've seen Braze able to execute within that. When you shift gears over to a more expansionary posture that starts to create a lot more of the greenfield opportunities where we both have been able to go into enterprises that maybe had long-standing Salesforce or Adobe relationships and take down a new project that they're working on, and we use that to get our foot in the door. That's obviously a motion that utilized first crack in the enterprise and also to build up all three of those eight figure customers that we've celebrated throughout this year, and that has been a really robust motion for us over time that hasn't been very potent over the course of the last 12 to 24 months because there just hasn't been an expansionary footing for many of these businesses. And then similarly, making a kind of wholesale switch from one platform to another, does have change costs associated with it. And when businesses are not prioritizing value creation and they're stead very narrowly focused on cost reduction, paying a transition cost versus just delaying that transition a little bit ends up being less desirable for them. And so that other side of it, where just being able to go in and do wholesale replacements, which we are very capable of doing and we have great examples of those each quarter but we definitely think that a more expansionary environment where businesses are prioritizing value creation again, over certainly looking at cost optimization is one that's going to be conducive to them incurring those switching costs and us being able to convert more of the legacy marketing cloud installed base into Braze customers.

Our next question comes from [Austin Cole].

Just wanted to follow-up on some of the net retention questions from earlier. Can you remind us, maybe just asking this in a different way, can you remind us what are the fundamental reasons for the pressure on net dollar retention? And -- how much of that is pricing for this software. Gartner has some research out that shows marketing budgets as a percentage of total revenue expected to be less than 8% this year from 9% last year. Is that kind of a simple data point, accurate way to think about it?

Yes. So as we think about the dynamics that drive any sort of pressure on the dollar-based net retention, so on the upsell and we've talked about this a little bit in the past buyers, whether they're new buyers or existing buyers that are upselling are buying a lot closer to their known needs. And so they recognize that they can come back to the well, whether it's 6 months, 8 months, 12 months later and buy more volumes, more entitlements if they need them but in the moment, their levels of commit. So this is inclusive of upsell commits are going to be a little closer to the pin for them. And so that means that the size of the upsells maybe aren't in the same zip code as they used to be in this zero interest rate environment where people were really buying for levels of future growth. And so on the upside, it's -- that you have that challenge that's kind of working against you. And then there's the element of churn where there are still some customers who are going through some element of rightsizing their contracts. So contracts can't be down traded in size or value prior to a renewal date. But as they come up for renewal and they're recognizing that maybe they didn't quite grow into a level of entitlements that they had purchased and they're doing that rightsizing. And so you've got those two dynamics kind of that are working simultaneously that are driving some of the pressures that we see on dollar-based net retention.

Thank you. That was our last question, and there are no more questions in the queue. I will now pass it back to Bill for closing remarks.

Yes. Thank you, operator, and thanks, everybody, for joining the call today. We appreciate your continued interest and support and we're looking forward to seeing you at a conference or on the road soon.