Klaviyo (NYSE: KVYO) is a ‘Growth’ Stock But FY 2024 Incremental Revenue Growth is Increasingly…

Klaviyo’s Q1 2024 results showed a revenue beat and a raise in annual revenue guidance. However, this revenue beat coincides with…

Klaviyo (NYSE: KVYO) is a ‘Growth’ Stock But FY 2024 Incremental Revenue Growth is Increasingly…
Photo attribution.
Complaints of recent increases in spam bots blowing up list sizes on Klaviyo, via Klaviyo’s Community forum: https://community.klaviyo.com/
Complaints of recent increases in spam bots blowing up list sizes on Klaviyo, via X.
Complaints of recent increases in spam bots blowing up list sizes on Klaviyo, via X and reddit.com/r/klaviyo
Above: an email marketing consultant explains, in this video published Feb. 27, 2024, how Klaviyo customers may take additional steps to scrub and suppress bot email addresses. These bots have spiked in Q1 2024 and they hurt Klaviyo customer email deliverability while Klaviyo simultaneously makes incremental revenue off these “blown up” list sizes given Klaviyo’s pricing model. Note: these are retroactive measures to reduce list sizes after Klaviyo has already created billings and revenue from the increased list sizes.

Klaviyo (NYSE: KVYO) is a ‘Growth’ Stock But FY 2024 Incremental Revenue Growth is Increasingly Tied to Short-Term Tricks Around Spam Bots, Shared IP Pools, and Upsell Games

Klaviyo’s Q1 2024 results showed a revenue beat and a raise in annual revenue guidance. However, this revenue beat coincides with increasing amounts of spam bots blowing up email list sizes for Klaviyo’s SMB customers. I believe Klaviyo is willfully allowing rampant fraud on its platform and I believe Klaviyo will face significant lawsuits and regulatory actions, just as Constant Contact and Criteo SA have faced in the past for similar behaviors. I am short the equity of Klaviyo (NYSE: KVYO).

Background

  1. On December 19, 2023 I published a piece titled “Did Klaviyo Hustle Revenue Growth Leading Up to IPO?” This piece outlines the role of third-party “list pumper” softwares such as Retention.com and GoBot and their role in increasing Klaviyo customer list sizes. These third-party softwares take IP addresses and other information from website visitors, match IP addresses to emails, and resell these lists over and over to Klaviyo customers, even if the website visitor has not consented to receive email marketing from that Klaviyo customer. As Klaviyo’s revenue model is highly pegged to the # of email addresses in Klaviyo, these “list pumper” softwares contribute incremental revenue to Klaviyo, including an increase in activity immediately prior to Klaviyo’s IPO. Additionally, because these are low hit rate lists, these “list pumper” softwares affect email deliverability on Klaviyo shared IP pools among customers.
  2. Since December, 2023 the problem of list pumping has only gotten worse on Klaviyo. In late Q4 2023 and ongoing in Q1 2024 there has been a large upswing in Klaviyo customer complaints of various spam bots blowing up list sizes and impacting deliverability of emails. Simply put, many Klaviyo customers are paying more to Klaviyo and padding incremental Klaviyo revenue while getting worse results out of the platform.
  3. Klaviyo utilizes shared IP pools among customers, which has exacerbated deliverability problems. Most Klaviyo customers, which are SMBs, do not have a dedicated IP address or addresses for sending emails, instead relying on Klaviyo to pool together dozens to hundreds of Klaviyo customers on the same IP addresses. These shared IP pools are easily ruined by one bad actor company buying lists from Retention.com or GoBot or failing to update their email settings in accordance with new Google and Yahoo spam requirements, which went into effect in Q1 of 2024. One single Klaviyo customer behaving poorly and spamming consumers can bring down the deliverability of every other of the hundreds of Klaviyo customers in the shared IP pool.
  4. Klaviyo posted a revenue beat of $210M for its first quarter ended March 31, 2024 and increased revenue guidance for FY24 to a range of $899M–$907M. However, these numbers need to be taken in context of the increase in spam bots driving up Klaviyo list sizes, and therefore revenue, through Q1 2024 and Q2 2024.
  5. Further, Klaviyo’s auto-upgrade settings and retroactive approach to solving this problem for customers put incremental spam revenue on the books for Klaviyo in the short-term, as more and more Klaviyo customers become frustrated and churn or downgrade their Klaviyo plans. Klaviyo is simply squeezing as much juice out of their less sophisticated SMB customers as possible as larger Klaviyo customers leave the platform.

Klaviyo’s Shared IP Address Pools are Only as Good as Klaviyo’s Worst Customers…and Email Inbox Spam Thresholds are Getting Stricter

One of Klaviyo’s main selling points to customers — the ease of use of getting started — is made possible by the use of shared IP pools. While many large enterprises in the market often have their own dedicated IP addresses for emails and actively manage these, Klaviyo’s customer base is largely SMBs who lack the technical sophistication and ability to hire dedicated teams to manage dedicated IP addresses.

Most Klaviyo accounts use shared IP pools, and it’s the default option when signing up and joining Klaviyo.

In a shared IP, dozens to thousands of SMB customers are grouped together and send emails through several shared IP addresses. These Klaviyo customers have no relationship with one another, nor do these Klaviyo customers know who is in the shared pools with them, unless they actively search who else is in them.

Google and Yahoo are now enforcing stricter spam policies on their inboxes, and these shared IPs are now a much greater liability for every Klaviyo customer utilizing them.

In fact, Google and Yahoo’s stricter spam thresholds are noted in Klaviyo’s Risk Disclosures in their most recent 10-Q.

Klaviyo’s most recent 10-Q, for period ending March 31, 2024. via SEC EDGAR

On May 9, 2024, this below Klaviyo customer experiencing poor deliverability notes his shared IP pool issues on the Klaviyo community forums, with specific examples.

Customer question about poor shared IP pools + Klaviyo Community Manager response. via https://community.klaviyo.com/analytics-and-deliverability-72/sending-ip-11782

Let’s look at who is in these Klaviyo shared IP pools reported by this Klaviyo customer.

First shared IP pool: https://senderscore.org/assess/get-your-score/report/?lookup=167.89.55.148&authenticated=true

As of April 15, 2024 this IP address shared among multiple Klaviyo customers had an 80 score. By May 15, 2024, this IP address had a 64 score as more low-quality volumes moving through the IP address more than doubled in this 30 day window.

As volume moving through the shared IP pool increased from April 15, 2024 to May 15, 2024, the score of this shared IP pool decreased significantly, from an 80 to a 64. As these scores decline, the likelihood of the sender actually reaching the end recipient and driving a behavior like clicking on a coupon or returning to the website decreases.

Among the domains in this Klaviyo shared IP pool are:

  • Cigadesign.com, a watch brand
  • Daddybutter.com, a supplements brand with questionable claims about removing parasites and a questionably-named domain
  • Bashafrica.com, a distributor of Birkenstock products in South Africa, with a questionably-named domain
  • Ochrelane.com, a swimsuit brand
  • Craftedseries.com, a wine, beer, and cider kit brand
  • Equalution.com, a diet and weight loss brand
  • Flexpromeals.com, a meal kit service
  • HustlerHollywood.com, an adult toys store which is currently offering bondage gear on its homepage
  • and thousands more

None of these companies have anything to do with one another. If one company starts sending spammy emails, or neglects to follow best email practices, everyone else is punished for it and everyone else will see worse email delivery.

  • If Hustler Hollywood is marked as “spam” at high rates by customers for delivering content with adult themes, everyone else in the shared IP pool is punished.
  • If “Bash Africa” is flagged for sounding like racial hate speech and has its emails flagged, everyone else in the shared IP pool is punished.
  • If any of these companies decide to hand over the email reigns to an untrained intern to manage their email messaging and then the intern spams a list of 100,000 people, everyone else in the shared IP pool is punished.
  • If any of these companies start buying lists or using services like Retention.com or GoBot or similar and spamming thousands of people who never signed up to be contacted via email in the first place, everyone else in the shared IP pool is punished.

Klaviyo’s business model of using shared IPs for its heavy SMB customer base and pooling customers together is at this point at a race-to-the-bottom. Many of Klaviyo customers do not have exacting email standards around messaging and delivery configuration and these Klaviyo customers are bringing down other Klaviyo customers with them.

However, the Recent Klaviyo Spam Bot Problem is Exacerbated Further Beyond Just Shared IP Pools, with Some Customers Reporting More Spam Signups to Klaviyo Lists than Actual Customers

Above screenshots from Klaviyo community forum post, “HELP! Spam attack? More sign-ups than users…” posted on Dec. 23, 2023.

Instead of Offering Customers Support, Tools for Fighting Bots, or Money Back, Klaviyo Has Instead Announced New Pricing and Billing Changes to Capture Incremental Revenue as Klaviyo’s Long-Tail Customers Become Overrun with Spam Bots

On February 23, 2024 Klaviyo Partners (various agencies, marketing firms, and consultancies) received an email from Klaviyo with the subject line “Important updates to Klaviyo billing” outlining changes to Klaviyo’s billing policies, which would be announced roughly 5 weeks later to the general Klaviyo customer base.

This email is seen below.

Klaviyo email sent to Klaviyo Partners on Feb. 23, 2024.

Aside from the bad optics of announcing billing changes to marketing agencies before the customer base (of course it’s going to get out) what’s important here is Point 1.

Historically, Klaviyo has ratably charged customer account upgrades based on the software services Klaviyo delivered. For example, if a customer were on a $1000/month plan and upgraded 15 days into a 30 day billing month to a $2000/month plan going forward, the customer would be ratably billed for the upgrade only for the days of the month the customer received the services of the upgraded tier. Now, however, Klaviyo has announced a move to a policy in which customers will be fully billed even for days when the upgraded tier was not in place.

Further, most Klaviyo paying customers are set to auto-upgrade plan settings, as Klaviyo will cut off service for customers who hit the cap on their plan and have a manual upgrade setting in place.

Combined with these spam bot issues that can rack up thousands of new Klaviyo accounts in hours or days, customers may have their Klaviyo email lists bombarded with spam email addresses, then be auto-upgraded to a new, more expensive tier, then be billed for the full month of the upgrade, even if the upgrade occurred part-way through the month.

This announced practice also bring into question how Klaviyo is recognizing this incremental revenue per ASC 606, specifically 606–10–25–23, which states:

An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

Per this billing policy, Klaviyo customers will be billed for the asset of the upgraded plan tier (and all of its benefits, such as the ability to add more customers to a list, the ability to send extra emails per month, etc.) without having control of this asset on the days they are billed.

This entire practice reeks of desperation and it reeks of pushing as much revenue forward as possible while Klaviyo churns more mature customers who will not tolerate this to competitor email platforms.

Klaviyo’s upgrade policy is also available on their website.

Klaviyo auto-upgrade and billings settings, last updated May 1, 2024 at this time of publication, available on Klaviyo’s website here.
https://twitter.com/imrayjohnston/status/1773820263534047425
https://twitter.com/heysimbird/status/1759915202445742304

For the sake of argument, let’s look at some of these pricing comps before and after a customer got hit by spam bots.

As seen above, one customer recently reported going from 800 to 3000 people on their email list, starting in Feb 2024, and that this is increasing Klaviyo bills.

Just on a basic email plan, and without extras for email overages, this customer would go from a rate of $360/year to $840/year, more than doubling their Klaviyo spend due to spam bots. Not only are they paying over double for vapor, but this actually risks the deliverability of the emails they do send to real people.

Klaviyo Pricing Page, as of May 15, 2024. https://www.klaviyo.com/pricing

Conclusion

It’s evident that Klaviyo is greatly benefitting from collecting incremental revenue due to increases in spam bots blowing up Klaviyo customer email lists, and that this buoyed their Q1 2024 revenue beat. Klaviyo is not only happy to sit back and collect this short-sighted revenue which clearly picked up last Q4 2023 and into Q1 2024, but they have instrumented new billing policies to help capture and take advantage of this short-term revenue.

Klaviyo may like to claim how many enterprise customers they are winning, yet many customers are churning altogether and tired of the billing games and decreasing deliverability. Although revenue may look positive now and for another quarter, many of these e-commerce companies that live-and-die by Q4 holiday sales and live-and-die by email marketing are not going to put up with poor results.

Klaviyo’s total customer number growth is indicative of Klaviyo’s reliance on a high number of extremely long-tail businesses, many of which have poor spam practices to begin with, which further poisons Klaviyo’s shared IP lists and ruins the Klaviyo experience for Klaviyo customers who want to play by the rules.

Klaviyo may claim that other ESPs face similar problems with spam and Google/Yahoo changes. However, this is not a clear argument. Customers that primarily serve the enterprise tend to have a customer base that has chosen to use dedicated IPs. These enterprise customers also often have dedicated employees whose entire jobs are focused on email marketing. This shared IP pool problem, which is exacerbated by all the recent spam bots, is a function of Klaviyo’s exposure to extremely long-tail SMB Shopify storefronts.

Klaviyo’s new process of retroactively charging customers for days of calendar billings cycles for software service upgrades that were not actually delivered to the customer shows just how desperate Klaviyo management is to post incremental revenue today. Klaviyo has made many claims about being an “AI” company.

If Klaviyo were actually an “AI” company as they claim they could easily set up filters and tools to help customers quickly identify and take action on spam accounts without blowing up costs, while simultaneously helping keep Klaviyo’s shared IP pools clean.

However, this is not the case. Posting short-term, short-sighted incremental revenue driven by spam bots to beat a quarter and raise is just too tempting.

I do not believe this practice is sustainable over a year or more out, and I believe Klaviyo’s Q1 and Q2 2024 revenue numbers should be viewed with heavy scrutiny.

I remain short Klaviyo (NYSE: KVYO).

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This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. Lauren Balik does not represent the interests of any fund or of any investor other than herself. Past performance is not indicative of future results. This content speaks only as of the date published. Any projections, estimates, forecasts, targets, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.