IPO Update: Klaviyo Readies $500 Million IPO Plan (Pending:KVYO)

A Quick Take On Klaviyo

Klaviyo, Inc. (KVYO) has filed to raise $499 million in an IPO of its Series A common stock, according to an amended SEC S-1/A registration statement.

The firm operates a SaaS system to assist marketers in better communicating with their online customers and prospects.

I previously wrote about Klaviyo’s initial IPO filing here.

KVYO is quickly growing revenue and is generating profits and substantial free cash flow.

The Klaviyo, Inc. IPO appears to be reasonably valued, so my outlook is a Buy at up to $26.00 per share.

Klaviyo Overview

Boston, Massachusetts-based Klaviyo, Inc. has created a platform that combines data into a ‘vertically-integrated solution with advanced machine learning and artificial intelligence capabilities.’

Management is headed by co-founder, Chairman and CEO Andrew Bialecki, who has been with the firm since its inception in 2012 and was previously Chief Technology Officer at RockTech and Senior Engineer at Performable, a marketing software company.

The company’s system provides marketing automation capabilities for primarily small and medium-sized businesses in the retail and eCommerce industry segments.

Below is a chart showing the company’s platform composed of the data layer and the application layer.

As of June 30, 2023, Klaviyo has raised $455 million in equity from investors, including Summit Partners, Shopify Strategic Holdings and Accomplice.

Klaviyo Customer Acquisition

The firm is a part of the Shopify platform and produces prospect demand through Shopify and agency partners.

As of June 30, 2023, the company had over 130,000 customers worldwide.

Selling and Marketing expenses as a percentage of total revenue have trended materially lower as revenues have increased, as the figures below indicate:

Click to enlarge

(Source – SEC.)

The Selling and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling and Marketing expense, increased to 0.9x in the most recent reporting period, as shown in the table below:

Click to enlarge

(Source – SEC.)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

KVYO’s most recent calculation was 56% as of June 30, 2023, so the firm has performed extremely well in this regard, per the table below:

Click to enlarge

(Source – SEC.)

The firm’s dollar-based net revenue retention rate as of June 30, 2023, was 119%, a good result.

KVYO’s most recent average annual contract value was $5,100.

Klaviyo’s Market & Competition

According to a 2020 market research report by Grand View Research, the worldwide market for marketing automation was an estimated $4 billion in 2019 and is expected to reach $8.6 billion by the end of 2027.

This represents a forecast CAGR (Compound Annual Growth Rate) of 9.8% from 2020 to 2027.

The main drivers for this expected growth are ongoing digitalization and automation of industries, increasing internet usage and growing demand for marketing automation to improve marketing ROI.

The chart below shows the historical and projected future growth trajectory of the U.S. marketing automation market by end-use through 2027:

Major competitive or other industry participants include the following:

• Braze

• ActiveCampaign

• Iterable

• Adobe

• Salesforce

• Oracle

• Maropost

• Others.

Klaviyo, Inc. Financial Performance

The company’s recent financial results can be summarized as follows:

• Strong top line revenue growth

• Increasing gross profit and gross margin percentage

• A swing to positive operating profit

• Substantial positive cash flow from operations.

Below are relevant financial results derived from the firm’s registration statement:

Click to enlarge

(Source – SEC.)

As of June 30, 2023, Klaviyo had $439 million in cash and $147 million in total liabilities.

Free cash flow during the twelve months ending June 30, 2023, was an impressive $49.7 million.

Klaviyo IPO Details

KVYO intends to sell 19.2 million shares of Class A common stock at a proposed midpoint price of $26.00 per share for gross proceeds of approximately $499.2 million, not including the sale of customary underwriter options.

BlackRock and AllianceBernstein affiliated entities have indicated a non-binding interest in purchasing shares in the aggregate of $100 million at the IPO price.

Class A stockholders will receive one vote per share; Class B shareholders will be entitled to ten votes per share.

Holders of the Class B shares will have approximately 99.2% of voting control of the company immediately after the IPO.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

The company’s enterprise value at IPO (excluding underwriter options) will approximate $5.9 billion.

The float to outstanding shares ratio (excluding underwriter options) will be approximately 7.62%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds as follows:

Management’s presentation of the company roadshow is available here until the IPO is completed.

The firm said it is not currently a party to any material legal proceedings.

Listed underwriters of the IPO are Goldman Sachs, Morgan Stanley, Citigroup, and other investment banks.

Valuation Metrics For Klaviyo

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO:

Click to enlarge

(Source – SEC.)

Commentary About Klaviyo

Klaviyo, Inc. is seeking to go public to provide a public market for its shares and for its future growth plans.

The company’s financials have produced strong top line revenue growth, increasing gross profit and gross margin percentage, a swing to positive operating profit and substantially positive cash flow from operations.

Free cash flow for the twelve months ending June 30, 2023, was a robust $49.7 million.

Selling and Marketing expenses as a percentage of total revenue have trended lower as revenue has increased; its Selling and Marketing efficiency multiple rose to 0.9x in the most recent reporting period.

KVYO’s recent capital spending history indicates it has spent lightly on capital expenditures out of its operating cash flow.

The company’s Rule of 40 results have been quite strong, with excellent revenue growth and a small amount of operating profit.

The market opportunity for marketing automation software and services is substantial and expected to grow at a moderately strong growth rate in the coming years.

Goldman Sachs is the lead underwriter, and the eight IPOs led by the firm over the last 12-month period have generated an average return of 13.7% since their IPO. This is a mid-tier performance for all major underwriters during the period.

Management is seeking an Enterprise Value / Revenue multiple of approximately 10x on very high TTM revenue growth of nearly 54%.

Regarding valuation, management’s proposed valuation would be approximately 10x on TTM revenue growth rate of 54% against a median Meritech SaaS Index implied ARR growth rate of 219% (Source).

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 8.6x on September 1, 2023, as the chart shows here:

So, by comparison, KVYO is currently valued by the market at a premium to the broader Meritech Capital SaaS Index, at least as of September 1, 2023.

However, what tends to differentiate firm valuations within the SaaS Index is their growth rates, and Klaviyo’s TTM growth rate of nearly 54% is extremely high, indicating the 10x multiple may be an attractive valuation for its growth rate.

Considering its high revenue growth rate, positive operating profit and strong free cash flow generation, my outlook on the Klaviyo IPO is a Buy at up to $26.00 per share.

Expected IPO Pricing Date: September 19, 2023.