Braze Inc. (NASDAQ:BRZE) had a rough Wednesday, and it's not hard to see why. The customer engagement software company reported fiscal second-quarter results that actually beat Wall Street's earnings and revenue expectations. But the market is a forward-looking beast, and Braze's third-quarter adjusted EPS guidance came in below what analysts were hoping for. That's a classic recipe for a sell-off, and the stock paid the price.

Let's dig into the numbers. Braze reported adjusted EPS of 19 cents, beating the 16-cent estimate. Sales rose 26% year over year to $227.23 million, topping the $219.92 million estimate. Adjusted operating margin improved by more than 600 basis points year over year as operating efficiency improved. Adjusted gross profit rose to $156 million from $125 million a year earlier. Gross margin narrowed to 68.6% from 69.3%, reflecting higher premium messaging volumes and additional Decisioning Studio headcount.

Cash flow is looking healthier too. Operating cash flow climbed to $24 million from $7 million. Braze generated record free cash flow of $22 million and ended the quarter with about $414 million in cash, cash equivalents, restricted cash and marketable securities. The company also completed a $50 million accelerated share repurchase program in August, buying back about 2.1 million shares. About $50 million remains under its board authorization.

Customer Growth And AI Adoption

Braze ended the quarter with 2,789 customers, up 15% year over year. Customers spending at least $500,000 annually increased 28% to 361 and represented 65% of total annual recurring revenue. Trailing 12-month dollar-based net retention was 110% across all customers and 112% among large customers. Remaining performance obligations rose 27% to $1.1 billion, while current RPO increased 24% to $691 million.

AI is becoming a real revenue driver. Braze AI Decisioning Studio generated $6.6 million in quarterly revenue. Paid adoption of Braze AI tools reached roughly one-third of large customers, up about 900 basis points from the first quarter. Braze also signed a three-year strategic collaboration agreement with Amazon Web Services covering co-selling, joint go-to-market initiatives and incentives for AWS sellers to bring Braze into customer accounts.

Outlook

Now for the part that spooked investors. For the third quarter, Braze expects adjusted EPS of 13 cents to 14 cents, below the 16-cent estimate. However, it forecast revenue of $229 million to $230 million, above the $227.86 million estimate. So it's a mixed bag, but the market tends to focus on the bottom line.

Looking further out, Braze raised its fiscal 2027 adjusted EPS guidance to 64 cents to 65 cents from 61 cents to 65 cents. The consensus estimate is 63 cents. The company also raised its fiscal 2027 revenue outlook to $910 million to $913 million from $895 million to $899 million, above the $898.09 million estimate.

So the full-year picture looks better, but the near-term EPS miss is what's driving the sell-off. Braze shares were down 18.54% at $24.69 at the time of publication on Wednesday, according to market data.