Good afternoon, and welcome to Klaviyo's Fourth Quarter of Fiscal 2023 Earnings Conference Call. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. With that, I'd like to turn the call over to Jack Grant, Senior Director of Investor Relations and Strategic Finance.

Thanks, operator. I'm excited to welcome you to Klaviyo's fourth quarter and full year 2023 earnings call. We will be discussing the results announced in a press release issued after the market close today. Please refer to our Investor Relations website at investors.klaviyo.com for more information and a supplemental presentation related to today's earnings announcement. With me on the call today are Andrew Bialecki, Co-Founder and Chief Executive Officer, and Amanda Whalen, Chief Financial Officer. During today's call, we will make statements regarding our business that may be considered forward-looking under applicable securities laws. And the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements concerning our outlook for the first quarter and full year 2024. These forward-looking statements are subject to numerous 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 as a result of the new information, future events or changes in our expectations except as required by law. For a discussion of material risks and uncertainties that could affect our actual results, please refer to the risks and uncertainties described under the heading Risk Factors in our quarterly report on Form 10-Q for the quarter ended September 30, 2023, filed with the Securities and Exchange Commission or SEC and in subsequent filings made by us with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023, to be filed with the SEC, which may be obtained on the SEC's website at www.sec.gov and on our Investor Relations website. In addition, today's call includes non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials distributed after market close today, which are available on our Investor Relations website. With that, I'll now turn it over to Andrew.

Thanks, Jack. Thank you to everyone for joining us today. We are excited to share our fourth quarter and full fiscal year results as well as update across the business. The fourth quarter is critical to our customers and we delivered for them. I want to thank both our partners and the Klaviyo team for ensuring our customers had a great holiday season. On today's call, we'll go through some of the highlights from the quarter, followed by some updates on products, our market and I'll wrap up with our fiscal year 2024 focus areas. I'll then turn it over to Amanda to cover our financial results in more detail and provide our outlook for the first-quarter and full-year 2024, before we open up the call for Q&A. We measure our success by our customer success. We helped our customers generate well over $50 billion in Klaviyo Attributed Value KAV in 2023. Whether a business is just getting started or is already a household name like Mattel, we help them power smarter digital relationships and drive revenue growth. This was another strong year for our business as we grew our revenue 48% year-over-year and drove over $100 million in free cash flows. The fourth quarter marked the first quarter that we generated over $200 million in quarterly revenue. We're continuing to see our strategy resonate across key growth initiatives. We're adding more customers, expanding with those customers, growing internationally and scaling into the mid-market. Amanda, will cover our progress on these growth areas in more detail. I'd like to call out a few notable moments from the past quarter. We know the holidays are very important for our customers and we helped power their growth. At the peak hour, our customers generating nearly $60 million in KAV. One of my…

Thanks, Andrew. Today, I will provide a brief overview of our fourth quarter and full year 2023 financial results and discuss guidance for our first quarter and full year 2024. As a quick reminder, today's discussion includes non-GAAP financial measures. Please refer to the tables in our earnings release for a reconciliation of GAAP to the most directly comparable non-GAAP financial measure. We are pleased with our financial performance. We continue to see rapid growth at scale in an efficient manner, in line with our financial framework. In the fourth quarter, we generated $201.6 million in revenue, representing year-over-year growth of 39%, and we delivered an 8% non-GAAP operating margin. The fourth quarter is seasonally strong for us due to the holiday shopping season and how our business model scales with our customers' growth. We delivered for our customers during their most critical time of the year and shared in their success. Our growth is powered by four main vectors, adding new customers, expanding with those customers, expanding internationally and growing into the mid-market. We continue to perform on each of these vectors. In terms of adding new customers, we increased our customer base 20% year-over-year and are proud to now serve over 143,000 customers. We are continuing to expand with our customers as evidenced by our dollar-based net retention rate or NRR of 117%. 16% of our customers now use our SMS offering, up 2 percentage points from last year, which highlights the value customers see in our platform capabilities. Internationally, our aggregate revenue from EMEA and APAC increased 46% year-over-year in Q4 as we continue to increase our global footprint. Finally, we're seeing more and more businesses in the mid-market turning to us. We ended the fourth quarter with 1,958 customers generating over $50,000 in ARR. This represented…

[Operator Instructions] Your first question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Hey, congrats from me. Two quick questions. One, AB, like there's a big discussion in the industry going on at a moment about like how some of the internet providers want to limit spam. Can you talk a little bit about what you're seeing, how that's impacting your customer conversation and what customers are doing there? And then I had one follow-up for Amanda, please.

Yeah. Great. Thanks, Raimo. So first, on some of the changes from Google and Yahoo! and others. As we talked about in the prepared remarks, at this point, we haven't seen and we're not anticipating a meaningful impact to our business. We've been working with our customers to get them compliant with updated regulations. And -- well, actually, not all of our customers even qualify as bulk sender. They don't send enough email volume. We're actually working to get our entire customer base compliant, and a lot of that compliance is happening automatically through our product. We built it in directly. So actually, our customers don't have to do -- they have to do very little work. So on the partner side, we're feeling really good about where they're at. On the consumer side, we're also watching that as well, and thus far, we haven't seen any changes in consumer behavior. To give you like a couple of data points, we measure unsubscribe rates from email, and we've seen that increase by only 0.007%, so really small number. And then we also watch for things like spam rates. And while we don't have perfect visibility into that, when we talk to customers anecdotally, we're not hearing of any broad changes in the reports of SpamPort. And for some ISPs, we actually can get the data from them directly, and we're not observing material increase in reports there as well. So overall, we feel really good about our customers, consumers. And then just more broadly, I think it's a great thing for businesses in reducing the amount of spam and noise that consumers get in their inbox. I think product and platforms like ours that focus on delivering the right content, highly personalized, and that's what consumers find the most engaging, and that's what inbox providers love. And so we think as long as we stay true to doing that, the business that we serve will be in great shape.

Thank you. That's very clear. And then, Amanda, if you think about the investments in the first half, can you -- since you're a relatively new company in the public market, can you talk a little bit about the time between investments and returns? Like in terms of how long does it take to like, for example, sales guys to get productive, et cetera? Just to help us understand like the dynamic between investment and returns. Thank you and congrats from me again.

Thanks, Raimo. Yeah, as we think about the timing between investments and returns, we are always focused as we talk about the unit economics that we get when we make these investments. So as we think about it, we've always been -- going back to Andrew and Ed bootstrapping the business in the original days focused on investments that make a fast payback in terms of the CAC payback. So that's one of the beautiful things about a model focused on SMBs is that they tend to have shorter payback periods associated with them. In the mid-market, as we're making investments there, we do see a bit longer payback. Just the nature of those investments is that they are larger upfront. They take a little bit longer to payback, but they have really strong LTV to CAC. So as we're making these investments, we're watching that, and then we're managing across the portfolio to make sure that the balance across those two is healthy for the business. And it's important also to remember in our business, whether it is in the SMB section or in the mid-market portion of the business, that our sales cycles are pretty short relative to others. We measure our sales cycles in weeks, not in months. And so these investments tend to have a pretty nice payback period as they ramp up.

Thank you.

Your next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.

Excellent. This is actually Keith Weiss, sitting in for Elizabeth. Congratulations on a really nice quarter. Two questions, one on the $50,000 customer, at a really impressive number, up 80% year-on-year. Can you talk to us about what's driving that growth? And to the extent of like how much of that is coming from existing customers just growing to be a $50,000 customer taking on SMS, maybe taking on CDP, and just expanding their size, versus how much is like a net new mid-market customer motion of customers coming on in that mid-market realm, of that $50,000 plus realm? And then I have a follow-up for Amanda as well.

Awesome. Thanks, Keith. So to comment, I mean, yeah, we're also very excited about the progress we're making in mid-market. That 80% year-on-year growth for $50,000 customers is a great number, and I think it's emblematic, where it demonstrates the shift that we're seeing with mid-market enterprise brands as relates to their marketing. They're looking for one customer platform, one database to be that source of truth for their customer record, and they're looking to layered marketing and then additionally other applications on top of it. So just to give you an example, there's a large cosmetics company that we work with that initially used Klaviyo for our marketing products, email and SMS, but in fact realized, recognize that, gosh, Klaviyo is this central database for all of their consumer data. And now they're using our APIs to integrate that into other parts of the customer experience, for instance, the website, their mobile app as well as customer service. So that's what we're seeing play out there. And as it relates to like the mix, it's actually -- it's a healthy part of existing customers expanding, initially with SMS, but now increasingly with CDP and reviews as well as well as just net new lands. We've had some of our largest new logo land even in the last few months. So there's a lot more to do there. I mean, we're constantly working on future development, scalability of our platform, but we think we've got a really good product market fit. And this story around consolidation or really the different parts of your consumer tech stack integrating together, that's a really, really durable trend.

Got it. That makes a lot of sense. And then, Amanda, on the gross margin side of the equation, huge outperformance versus kind of where you guided to. I appreciate the clarity on the -- like a $4 million benefit from milestone credits. When we're thinking about the couple of points of pressure in gross margins from this year. I just want to make sure we're basing to the right number. So should we start at the 79% level or are those like milestone credits, that was like a point in time. So was like we just started 77% and then see a couple points of pressure from there. Like can you just help me anchor, like what's the right number that we should be starting from where we're going to see those couple of points of pressure?

Yeah, so I would think about the first-half of the year gross margin being in the high-70s range and I think you're thinking about it right, which is that over the course of the year, you're going to see two factors happening in our business that will somewhat counterbalance each other. On the positive side, we have the great benefits that we continue to see from the cloud engineering optimization that our R&D team has done combined with some pricing negotiations that we've had on our supplier side. And those are helping to support and to drive higher gross margins. The counter-balance to that as our SMS business grows and expands, that creates some pressure on gross margin. So the balance of those over the course year, we think we'll continue to have support from the engineering optimization, but it will be offset by the SMS expansion.

Got it, that's super helpful. Thank you so much, guys.

Your next question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open.

Good afternoon, and thank you. AB and Amanda, I wanted to follow-up on Amanda's comments on customers being more thoughtful versus prior years with their level of spending. Maybe a little more color on what you're seeing in the health of the installed base and what you think is driving what sounds like a little more muted outlook on the macro beyond just the typical 1Q seasonality. Thanks.

Sure. Thanks, Gabriela, and great question. So what we saw in Q4 with customers being more thoughtful was particularly true for customers who use our SMS product in addition to those who are using the email. And if you think about it, SMS costs more per message than email, so as customers mature in their usage of SMS, we're seeing a couple of things happen. First thing that we're seeing is that they're being more thoughtful and more targeted with the messages they send to make sure that they're driving high ROI from those messages. And then the second thing is that they're learning how to be more proactive in managing their subscriptions and managing our plans to make sure that the subscription size aligns with the size of their usage in any given month. Now if you remember, one of our operating principles as a business is that we align our business with the value that we provide for our customers. So we think that, that high ROI and the fact that we're able to help customers send really targeted messages that generate that high ROI creates stickiness in the platform, and that stickiness shows up in really strong retention. The other thing that, that stickiness and that high ROI does is it helps us earn the right over time to share in that value that we create for customers. Now as you think about this and how it relates to our guidance for the year, we've spoken before about the fact that as a company, we're a company who strives to provide a realistic view on our business. We're prudent in the way that we forecast so that we're confident in our ability to deliver. And it's also important to keep in mind, we're a scale business. We have over 143,000 customers. We have a decade plus of operating history. And all of that data gives us a really strong foundation for forecasting. So it is not our intention to be a company who is going to significantly over exceed the outlook that we provide. What we're really trying to do is share with you and with our investors a clearer view of the health and the trends that we're seeing in our business.

Thank you for the color.

Your next question comes from the line of Brent Bracelin with Piper Sandler. Your line is open.

Thank you. Maybe I'll start with you Amanda here. If I think about the growth algorithm, 20% customer growth. ARPC growth now that we've anniversaried the price increase was 16%. That was actually similar to what you saw prior to the price increase. Can you just talk about what is driving ARPC growth and how sustainable that is? Thanks.

Yeah. I think that you're thinking about the right things, which is that as our business grows, we have that installed base that's continuing to grow and that we're continuing to sell more products to them. So overall, as we think about the business going forward, we think about continued strong growth powered by new logos in combination with the expansion with those customers. In new logos, increasingly, we are moving upmarket. And as we move into the mid-market, you'll continue to see strong logo growth, but maybe with more of the mix driven by higher ASPs as opposed to being driven by higher logo count going forward. If you think about other drivers of expansion and what that expansion with our business looks like over time, as I just mentioned, our gross retention remains consistent. It remains healthy. We see customers sticking with the platform over time. And then we continue to see customers grow their subscriptions as they add new products. So net-net, I think what we'll see going forward is the balance and the healthy balance between new logo acquisition as well as the upsell and cross-sell that drives such strength in revenue per customer.

Helpful color there. And then AB, you mentioned that the email infrastructure investment, I think it was 7% of your Black Friday Cyber Monday volumes were sent through that infrastructure. Can you just double click into the benefits? Why are you doing that? And then how quickly should we see volumes ramp into that infrastructure? Thanks.

Sure. Yeah. That Klaviyo MTA, so kind of the underlying email infrastructure, really some excellent engineering by our R&D team. So the purpose of that is, if you think about it, we've done lots of verticalized stack, integrates the different pieces from how you store software data, how you design messages and then obviously just extend that into how you deliver, in this case, email messages. So one of the big benefits to us is we talked a little bit about deliverability. Owning that infrastructure, there are some cost advantages, but actually, the real thing for our customers, it gives us much more visibility into how their messages are performing. So bulk gives us more control on deliverability, but also visibility that we can then pass to our customers so that they can go get better results. So that's an example of where I think we're going to be aggressive on engineering our own solution to problems where we think we can do a job of basically vertically integrating different parts of the customer experience. So very excited about that. And then on the part of volume ramping, we're being judicious about how quickly we ramp up volume, but the fact that we had over 1 billion messages over Black Friday Cyber Monday is just testament to the quality of the engineering that we've done.

Helpful color. Thank you.

Your next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Perfect. Thank you. I'll add my congrats on the quarter. The -- Andrew, maybe I wanted to touch a little bit on the other side of some of the changes at Gmail and Yahoo! And maybe we'll combine that with cookies getting deprecated this year. Can you just talk a little bit about what that means for personalized messaging, email, text, et cetera? And what your kind of data segmentation and personalization capabilities, what kind of benefit, if any, that might accrue this year from a greater emphasis on first-party data over third-party data?

Absolutely. Well, I think at Klaviyo's core, our whole ethos is around giving businesses ownership of their consumer data. So we actually help business collect or use cookies, first-party cookies, and the emphasis on that to collect more of that data. So in this case, you can think about routing behaviors like what products that somebody's looking at, adding to their cart and then using that to build it back into some of the personalization algorithms that we have. So I think this is a -- it's a net good change for the industry. It's also for privacy. Wonder what that could change for our businesses? We're talking about, like in the mid-market, the same is true for SMEs, the most important data asset that any consumer business is building is their customers. So we look at our job is to, one, help them pull all that together. And so we've built a bunch of tooling to help with the sunsetting of some of the third-party equipment technology. But then also critically like how do you tie that central source of truth back to action? So embed it into marketing, and I gave you an example of some of our more sophisticated customers starting to use that data directly on the website. That's something actually we're very excited about starting to productize over the next coming months and coming years.

Okay. Super helpful. And then if I can touch on the AI capabilities that you're launching, those seem -- or the generative and autonomous AI capabilities, at least seem incremental and new. How are you thinking about kind of capturing some of that value -- additional value that you will deliver to customers over time, key pricing for those capabilities?

Yeah, great. So I am very excited today with our launch around Klaviyo AI. It's one of the launches I'm most excited about over the last couple of years. We've been investing in AI for the last four, five, six years. We've been iteratively building that into our core technology. And you can think about, when we talk about the future of marketing, really future like customer experience at CRM, it's autonomous. That means that we're thinking about using AI not just for productivity gains, but literally to drive better performance. And that means more revenue for our customers, and be able to do that autonomously, freeing up marketers to get back to like the core of marketing, coming up with ideas, thinking through strategy and then being creative working on the brand. So Klaviyo AI for us is if you think about the things that exist in AI features, bringing those into one tool kit and then adding a couple of really cool pieces. So we've talked a lot about generative AI, with segmentation clearing, finding interesting sets of customers. We've made that a lot easier by now allowing users to define those queries with natural language and return in seconds. We also talked about the creative side with email AI, being able to design whole chunks, whole pieces of an email just from a natural language prompt. You combine that, those generic capabilities, with also like some of the automatic optimization. We talked about Forms AI and the ability that you can create a form on your website, and we'll actually tune a lot of the variables for you to optimize its performance. So you add all that stuff up, and what it means for our customers is literally better results. To give you an example, one of our customers, Willow Tree, in the summer last year, they started using more of our predictive analytics and some of our segmentation capabilities. The way they do that is use machine learning and AI to find sets of customers that were hard to discover. They started sending email campaigns to those customers, and it literally grew their revenue from email by over 50% in the back half of last year. That's an example of the kind of lift in opportunities that are out there when you apply artificial intelligence to domain of marketing. And then when you think about monetization, we're not directly monetizing this today. It's a separate SKU. I will note that like our Forms AI capabilities do increase the number of profiles into Klaviyo, which we do monetize through our email product, but we're not really directly monetizing our AI toolkit as one. Now over time, we do think there's a real opportunity that as we add more of these capabilities, we make marketing increasingly more autonomous, put marketers in that kind of director's chair, there will be an opportunity to modify on the dollar uplift that we provide.

Your next question comes from the line of Tyler Radke with Citi. Your line is open.

Yeah, thanks for taking the question. Amanda, going back to the commentary around what you saw at the end of December. Can you just talk about -- did that have an impact on total customer additions as well? I think total customer additions in Q4 was a little bit below what you've typically seen in Q4. And then just curious, has that softness in the SMS side, does that continued into January or February? Or do you think that, that was just kind of end of December event? Thank you.

Yeah. Thanks, Tyler. Great question. So I would take them separately and think about them as two separate things. On the net customer adds and what we're seeing there, if you think about where is our sales and marketing engine pointed, our sales and marketing engine is largely pointed at SMBs in the mid-market. And so as we focus more of our sales and marketing efforts upmarket, we expect that we're going to see larger customer lands, which you see in the $50,000 customer and in the expansion in the average revenue per customer with maybe not as much expansion at the lower end of the market. At the same time, we are entrepreneurs at our roots. We think that we are a great place for businesses of all size to drive growth. And so the way that we think about continuing to drive those ads at the lower end of the market is really through products and building a great product that makes it easy for everybody to use. But as you think about building the models and as we think about our outlook going forward, we factored these trends, which would be maybe more moderate customer adds and more growth in revenue per customer into our algorithm and our financial outlook going forward. And then as for your question about what are we seeing in January and February, I would say the trends in January and February are similar to what we spoke about at the end of Q4. So given the macro environment, we just see customers being more thoughtful about their spend. They're making sure that their plan sizes aligns to their usage. They're making sure that their messages are highly targeted and that those messages are driving high ROI. We've built that into our guidance. And over the long term, we appreciate that because we want our customers to be sending really targeted, personalized high ROI messages.

Your next question comes from the line of Rob Oliver with Baird. Your line is open.

Great. Thanks, guys. Good afternoon, and thanks for taking my questions. I'll squeeze in two as well. AB one for you and then Amanda, one for you. So AB, you called out the fitness win that came via the Mindbody partnership. And obviously, mid-market very strong for you guys. And just wanted to get a sense of how we should expect that progression away from Internet retail when you look within sort of the pipeline and talk to your sales and marketing folks, how we might expect that to play out that diversification throughout '24? And then Amanda, just for you. Just my follow-up is just around the NRR trends. Clearly, it seems like a big -- obviously, a big difference between what we would see at SMB versus what we'd see mid-market and up. Just curious not expecting to break that out, but just wanted to get a sense from you of, have those trends held steady, have they been stronger than expected up at the high end of the market? Any color there would be really helpful. Thanks, guys.

Great. Thanks for the question. So I'll speak a little bit of our growth outside of e-commerce. So it's still early here, but Ill give you a little bit of color. We're seeing -- we're early, but we're seeing some really encouraging signs of more businesses outside of e-commerce and retail moving over to Klaviyo. So that cohort still represents less than 5% of our revenue due to the strong growth we're seeing in e-commerce, but it's growing really rapidly. So we talked about European Wax Centers, F45 Training. I'll give you one more. There's a pizza chain, a national pizza chain with over 300 locations. They also consolidated down market spend on Klaviyo. They bought both our email and our SMS products, and they're taking advantage of our integration with Olo as well as another point-of-sale system to essentially manage all of their first-party consumer data. So that is going to do the same thing we're in e-commerce. That's going to allow them to create many more targeted campaigns, more automation and ultimately drive more sales. So if you back up a little bit, like for all of our customers, they're as focused as ever on the importance of having direct relationships with their consumers in building their consumer database. We're seeing that in e-commerce, in retail and beyond. And I think we're all seeing everybody focus on collecting that data as well as how to leverage that data and put it to work. I think we've got a really good product market fit, both within e-commerce and retail, and then we're seeing, with new vertical expansion that in part of [indiscernible] extends beyond that.

Yeah. And as regards NRR and how it varies depending on customer side, I would not really call out any strong variation depending on the size of the customer. We do see in our mid-market customers that they tend to have more SMS. So some of the trends that I talked about as being more pronounced among SMS users, maybe impact the mid-market more, but it's really, I think, more of a question of the product that they're using and the way that they're being more thoughtful about how they use that higher price per message channel than it is necessarily related to what we've seen in the size of the business. Related to what we're doing about that and overall, the way we think about the course of the year, we are really doubling down on how do we help our customers with best practices. So what are the things that we can do to help them generate the highest ROI that they can and to continue to drive the usage so that they're getting great KAV growth coming out of these channels. Because we think that, that ability to generate high KAV per message is a real differentiator for us, not only helps our expansion as we drive that, but it also helps strong retention as well.

Really helpful detail all-around. Thank you guys very much.

Your next question comes from the line of DJ Hynes with Canaccord. Your line is open.

Hey, guys. Thanks for taking the question. So maybe just building on Rob's last question there. AB, I totally understand the comments on spend thoughtfulness on SMS given the higher cost you use. I want to ask about KAV conversion versus -- for email-only customers versus those that are using e-mail and SMS. Is there a discernible difference there, which I guess gets out the question of, is SMS working the way that you hoped?

Sure. So, one, I'm very excited about the amount of KAV we drove last year, over $50 billion. And that continues to be a north star for us. And like I said, our customers are -- they're trying to consolidate their first-party customer data and then how do you put that to work to deliver experiences that actually drive conversion? So to the question about like difference between email and SMS, no, we're not seeing any material changes there. And as we said before, SMS is a slightly different cost structure, so the ROI there is always going to be a little bit different. However, we see from both channels customers really getting great results. And one of our goals is focused on getting more personalization, more segmentation, both through our product, through the artificial intelligence we're layering into the product. We're helping them discover more and more use cases that they can apply to their customers to deliver better experiences, but also help them optimize better.

Got it, thank you.

Your next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Yeah, thank you, Andrew, Amanda and Jack, for taking my question. I'm going to pivot from SMS and just ask about international. Should we -- well, it is actually a multiparter, but it's a single question. Should we expect that, that just drift higher as a percentage of revenue? And is it still more in '24 where you're getting pulled in to that market as opposed to more of your directly kind of attacking it with a lot of boots on the ground? And then are you seeing some potential benefits from Shopify in that market because they're talking about some pretty substantial growth in EMEA? Thank you.

Awesome. Thanks, Terry, for the question. So on international, yeah, I mean, another area that we're very bullish on. Continue to drive strong growth there. Our aggregate EMEA and APAC revenue was up over 40%. So without commenting on the distribution, I think that we're seeing strong growth domestically as well, I'll tell you that we're very excited about where international is going. It's one of our four key drivers. So on that front, there's a couple of things that we're doing. On the product side, we still haven't internationalized and localized Klaviyo's core interface. That's something we're working on and will ship later this year. And then on the go-to-market side, we're -- Amanda talked about, we're very thoughtful about how we go to market because our history is as a product-led company, our strategy to grow internationally is also product-led. We're putting our product in market, watching to see where there's adoption and then following those trends. And with Shopify and others, a big part of our intentional strategy is working with partners, both globally and locally. So I expect that we're going to see really nice growth there. And yeah, we're excited about what we're seeing.

Thank you.

Your next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

Thanks for taking my question. I wanted to ask you about CDP that you guys announced few a few months back. Wondering what kind of feedback you have got so far, what kind of interest or use cases, you're seeing there?

Yeah. Great. So our CDP product launched last summer, and you can think about CDP in especially the reporting and analysis use cases, we're seeing a lot of customers adopt those. So to just give you an example of how our customers are using CDP, we have -- there's a large pet retailer that's taking advantage of some of the advanced analytics you can do around frequency and frequency of spend. So finding customers who used to be really loyal but have since lapsed. And they're using that, doing that analysis inside Klaviyo on the Klaviyo core database, and then immediately able to turn that into email and SMS automations and campaigns and monetizing those. So that's the kind of -- what we're seeing is a lot of that kind of behavior. We're tightening the loop between traditionally what was analytics in one part of the company, one set of tools for that and then actually activation, putting it to work in a different part. Those two worlds are merging. So it's still early there for us, but we're excited about what we're seeing with CDP, and I think there's a lot more adoption that's coming this year.

Thanks, AB.

Your next question comes from the line of Scott Berg with Needham. Your line is open.

Hi everyone. Nice quarter for me. Amanda, you had a pretty impressive year last year in terms of free cash flow margins from the year-over-year improvement there. There's about a 5-point spread in between operating margins and free cash flow margins for the year. Is that the right way to think about fiscal '24 as well? Or will there be some divergence there even after taking into account some of the spending in the first half? Thank you.

Yeah. Great question. And thank you. I appreciate calling out. 17 points of operating margin expansion year-over-year, it was indeed a very strong year. In general, over the long term, I would expect that because the majority of our customers are month-to-month and those payments are coming in monthly, that our operating income margins and our free cash flow margin are going to track relatively closely over time. You may see some variation year-to-year just literally depending on the timing of when some payments happen to particular vendors, but in general, you should see those tend to track pretty closely to each other.

Excellent. Thank you.

We have time for one more question and that question comes from the line of Derrick Wood with TD Cowen. Your line is open.

Great. Thanks. Great. Amanda, there was a big sequential increase in sales and marketing expenses in the quarter. Are you able to dimensionalize how much of this was seasonal marketing spend versus how much of it was adding headcount? And I guess as a follow-up to AB, just would love to hear kind of how sales hiring activity has been trending over the last few months? And how are you feeling about ramping reps to productivity and trying to creating some new growth levers up market with new capacity as you progressed in 2024?

Hey, Derrick, I'll start and then I'll let Amanda add on. So we're very excited about the sales and marketing investments we're making. We mentioned that some of the key growth levers of not just growing a number of new logos, but getting customers to expand with us the number of products they buy, expanding into the mid-market, expanding internationally. So there's really 2 drivers of our sales and marketing investments to date. The first is, as you mentioned, is increasing sales capacity. And we're focused in a couple of areas. International mid-market as well as expanding what we call our customer growth team, which is about driving more and more customers to adopt a greater portion of the Klaviyo product set. So that's part number one. And the second part is we're making additional investments into marketing. We have a lot of customers who are super fans of Klaviyo. We're using their story, these customer testimonials, as a lead-in to find additional customers. So we're ramping up that marketing investment and sharing those stories of success to drive awareness, top of the funnel and ultimately, net new customer acquisition. So in general, like well, those are the two drivers, like Amanda and I, we're still very strong believers in the roots of what Klaviyo was founded on, which is good unit economics. So we're going to continue to experiment, but also be very disciplined and closely monitor the economics and the ROI of those investments.

Yeah, if you think about how to build your model and how the investments might flow over the course of the year. More of the investments, as we mentioned on the call, are weighted towards the first half of the year as we're investing to build that sales capacity to ramp up heading into the back half of the year. And then historically, seasonally, we have ramped up marketing in the third quarter as we prepare for heading into Black Friday Cyber Monday, and so I would expect those trends to continue.

Great, thank you.

Those are all the questions I have for today's call. With that, I will turn the call-back over to Andrew Bialecki for closing remarks.

Great. Well, thank you all for joining us on today's call. I want to thank again the entire Klaviyo team for their great work delivering for our customers in 2023. As we say internally, we're 1% done, and we're excited for the year ahead. We'll be attending the KeyBanc and Morgan Stanley conferences in March and look forward to seeing many of you there. Have a nice evening.

This concludes today's call. You may now disconnect.