Q3 2021 SEMrush Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the same rock holdings third quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise.
The speaker's remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
I would now like to turn the call over to Bob Good Gerardi, Vice President Investor Relations. Please go ahead.
Good morning, Bob because you've already VP of Investor Relations and welcome to <unk> Holdings third quarter 2021 results conference call.
We'll be discussing the results announced on our press release issued after market closed on Tuesday.
With me on this call is our CEO I'll, let me take a lot of people are CFO of Guinea fatigue and.
And our CFO Eugene Levy, a summary of our prepared comments are also available on the official <unk> Twitter account at sandbox.
Before we begin I would like to highlight our participation in several virtual investor conferences to be held during the fourth quarter.
Attend the Stifel virtual Midwest one on one growth conference on November 11, and the RBC technology Global P. I N T conference on November 16th.
Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of $19 95.
Forward looking statements include statements concerning our expected future business and financial performance and financial condition.
<unk> growth.
Dobson and demand for our products and features expected investments and their anticipated benefits.
Industry and market trends and our competitive position.
Market opportunities and our guidance for the fourth quarter of 2021, and the full year 2021.
And can be identified by words, such as expect anticipate intend plan believe seek or will.
These statements reflect our views as of today, only and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements.
Forward looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from those forward looking statements.
For a discussion of the risks and important factors that could affect our actual results. Please refer to our final IPO prospectus filed with the Securities and Exchange Commission.
Our quarterly reports on Form 10-Q, as well as our other filings with the SEC.
Also during the course of today's call, we refer to certain non-GAAP financial measures a reconciliation.
<unk> schedule, showing the GAAP versus non-GAAP results currently available on our press release issued after market close which can be found at investors Dot <unk> dot com.
And with that let me turn the call over to Ali.
Thank you and good morning to everyone on the call.
I'm pleased to give our performance in the first quarter.
$49 $3 million was up 53% year over year and up 9% sequentially here.
Customers, approximately 23% year over year, while average revenue per customer.
Hi, Morgan.
Percent year over year.
I wanted to once again highlights the breadth.
Our product offering.
This is key to our growth strategy I'll.
As part of our new packaging.
Engineered.
Raise prices for entry level.
But these use pricing incremental user licenses.
As we look to deepen our relationship with our customers.
<unk> appears to have been successful.
September thank you. Thank you.
Year to date.
Year over year licenses growth was more than 80%.
Ladies and license growth contributed to strong growth in customers.
So $10000.
Got it.
This 10-K customers.
More than 75% year over year in a very strong quarter.
I would also highlight the continued strength of.
Similarly loss trends.
Our industry, leading competitive intelligence.
Similarly, the parents came in Europe was up more than 70% in the third quarter compared to the same period a year ago.
So as you look ahead feature in those trends this.
This quarter reached updates for traffic estimates will be cleared.
I believe these capabilities here is unique.
And could further position us.
And we can basically protection space.
<unk> is fortunate to not have any customer or industry concentration.
Digital marketing agencies.
An important channel for us.
Estimates. Thank you. Thank you 5% of our customers are digital marketing agencies, and we introduced our agency growth.
To help these customers grow their business.
I am pleased to report was agency growth.
Approaching 5% agency customers.
With 12 months after launch.
Im optimistic.
Tax rates for EBIT growth.
We will only continue to grow.
Nearly 75% of our agency customers have expressed interest in the product by registering our <unk> client portal.
We continue to feel out.
Their team and rewarding journey.
Our chief marketing officer.
Andrew is very familiar with our platform and remarketing technology industry here.
Sure.
Sure.
Marketing roles previously to joining shamrock, including.
Brian experience.
<unk>.
Our growth strategy incorporates increased investments in brand marketing.
I am pleased to have a.
<unk> professional.
Mark.
To help guide those efforts.
And ensure.
We have a positive impact.
Our growth.
<unk> great.
Return to the office, where public health conditions, Hello, and we look forward to meeting more of oil and gas space.
Face to face weighted Wichita.
If you would like to <unk> meeting in Boston.
Please reach out to both.
Chicken coordinate.
In conclusion.
I am pleased with our performance in the first quarter.
We extended our productivity issue at the stronger growth in average check and robust user growth suggests what our products are becoming more essential to our customers looking at that we must stay focused on execution.
And a year on a strong months.
With that I will hand recall too youre, gaining four cap.
Our financial performance.
Thank you Alex.
Fee revenue of $49 3 million.
Was up 53% year over year and came in above our expectations.
Growth was once again, driven by a steady increase in paying customers and an increase in the average revenue per customer.
We experienced average revenue per customer growth of more than 20% in the third quarter as compared to the year ago period.
The growth was driven by additional user licenses, a richer mix of core and business accounts and strong growth of add ons.
Our trailing 12 month revenue retention was 124% as of September 30th.
Up from what from up from 121% as of June 30, the increase continues to reflect easier comparisons due to COVID-19 and 2020.
I believe we will see some moderation in revenue retention as those easy comparisons debate.
However, you can accumulate a modest decline I believe <unk> will continue to produce industry, leading revenue retention for software firms servicing small and medium enterprise market.
Gross margin of 76, 9% was down slightly from the previous quarter and up from 76% a year ago.
Non-GAAP operating expenses of 37 6 million in the quarter were up 47% from a year ago and up approximately 10% from the previous quarter.
The growth was driven by additional head count as well as the increased marketing spend.
Non-GAAP operating expenses of $37 6 million in the quarter were up 47% from a year ago and up approximately 10% from the previous quarter.
The growth was driven by additional head count as well as increased marketing spend.
We plan to make additional investments in brand marketing in the back half of 2021 and these investments drove the majority of the sequential increase.
Those investments are expected to extend into the fourth quarter and into 2022.
Strong revenue growth.
By slightly lower gross margin and higher operating expenses and contributed to non-GAAP net income of $12000 in the third quarter up from a net loss of $778000 a year ago.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of 188 5 million up from $180 8 million at.
At the end of the second quarter.
The increase in cash was primarily due to approximately $8 6 million of cash flow appropriations.
In the third quarter was another strong quarter of cash generation and I expect cash flow to moderate in the fourth quarter due to increased investments into marketing and sales.
Looking ahead to guidance I expect fourth quarter revenue in the range of $51 eight to $52 3 million.
It represented 42% to 43% year over year growth for the full year expert revenue in the range of 186 to $186 5 million.
Which would represent 49 year over year growth.
Increased investments, primarily driven by higher spending in marketing are likely to weigh on profitability and therefore, I expect the fourth quarter non-GAAP loss of $5 $5 million to $5 million.
And a non-GAAP loss of $3 five to $2 6 million for the 2021.
We achieved another quarter of strong revenue growth and our third consecutive quarter of non-GAAP net income.
Cash flow rebounded strongly in our financial performance puts us in a position to make the appropriate investments to support our growth in 2022 and beyond.
With that Alex Eugene and I are happy to take any of your questions.
<unk>. Please open the line for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile our Q&A roster.
Okay.
Your first question comes from the line of Brent Thill with Jefferies. Your line is open.
Great Hey, guys. This is James on for Brian. Thanks for the questions could you talk about bringing on and rewarding to run marketing and just what its strategic objectives are on the go to market side should we expect any changes to your sales structure or should we assume any everything stays relatively intact. That's my first question.
My second one is I know, you're not providing specific 'twenty two guidance, yet, but can you talk about the puts and takes for revenue growth next year or are there any big drivers that we should be considering how should we be thinking about the mix of subscriber versus app versus average check. Thank you so much.
Okay.
Thank you.
I will take the first question.
Okay.
Our new CMO Andrew Gordon.
My name is correct.
And.
Look we don't expect any significant changes in our.
Our go to market procedure.
We shall continue the same.
You can weigh in.
This quarter shows us.
Very good.
Marketing and sales strategy.
But at the same time, we should prepare ourself for three five years future.
To start <unk>.
Ranging campaigns, we wanted to give more attention to brand marketing.
Got that.
Many experiments with video advertising and we want to continue.
Even more.
I think.
Andrew Gordon.
Great addition, Belgium.
Okay.
Our next.
Yes. This is <unk> I'll take the second question James So.
On revenue guidance I believe it's slightly too early to talk about the next year full year numbers. We will provide you more clarity on our next call in February. However, I can say that we plan to continue to be high grower, who will be will continue to focus on adding more customers plus expanding our ever check basically in line with how we work in this year.
Year, So I.
I guess that's it.
The level of detail I will be able to provide and then fusion.
Yes so.
For the next year or are we seeing that.
In terms of comps.
First half of the year is going to be a little bit easier when it comes to <unk>.
Rows of users and then second half sorry and growth of our check and then second half is going to be a little bit easier when it comes to growth of users. So that directionally how you can.
Use of music this information in your models.
But we will provide more details later.
Great. Thank you.
Your next question comes from the line of Michael <unk> with Keybanc. Your line is open hey.
Hey, guys.
Congrats on the quarter.
Couple of questions on how things progressed through the third quarter on the one hand, you did point out that on <unk>, starting to see tougher comps there.
<unk>.
Future does it come past some of them.
With the balance if you will.
And I was wondering how that played out in the third quarter.
Bind with what May have been if there was any seasonality from activity levels as we hit the summer and back to you.
Back to the office and just general what levels of project I would say that as we looked at some of the bigger martech companies, we saw a falloff from that accelerated growth to slight deceleration.
Yes, Michael this is Steve ill try to pick up. This question. So what we saw in the first half of the year. We're clearly a I would say accelerated growth and which will not be difficult and we didn't see the typical seasonality. What we saw in the second half of the year or will continue to see in the third quarter. In particular is actually return to the more normal patterns, which which.
The numbers, which we're seeing fairly much in line with what we expected them to be at the beginning of the year. So that's probably corresponds to what you were seeing across the board. So.
Elevated first half of the year and more normal second half of the year.
Okay. Thank you.
I was wondering if you could you talked a little bit how you guys talked a little bit about pricing in those two different factors of the price increase but also the price reduction in incremental seats. So can you can you talk a little bit if you can quantify the impact of each of those.
So we can quantify the early Nicole so we see an accelerated adoption of additional user licenses or seats by our customers. So net net with lower prices, we're seeing a higher attach rate and higher revenue from from this particular I would say feature and then overall we see.
A supportive I mean part of the growth in the average check just part is driven by higher.
But like new customers coming in at the new price.
There is a fraction of the increase which is driven by our existing customers migrating to new price points when they upgrade.
So there is a positive im sorry go ahead, yes, just to be clear it seems like youre getting demand elasticity. If you will out of the reduction in incremental seed price works and is driving more revenue even in a lower incremental price absolutely that's correct. Thank.
Thank you.
Your next question comes from the line of Mark Murphy with Jpmorgan. Your line is open.
Oh, Great Hey, this pendulum sitting in for Mark Congrats on the quarter.
I wanted to ask at a high level. What are you hearing from your customers in terms of how they're evolving their marketing budgets, given all the uncertainties around ibs and cookies.
Are you seeing them lean more towards organic marketing, which could maybe act as a tailwind for your content marketing solutions.
Yes. Thank you for the question this is Eugene.
It's a big part of the conversation that we are seeing in the market and community and people are trying to figure out what is the right path forward.
In general what we have done so far we did a small scale survey and ask our customers about how theyre planning to address changes in the marketplace and how they are planning to reallocate the budget now within our customer base. We have seen that most of people, saying that they will sort of double down on their investments in organic.
<unk> search paid search and content marketing those have been sort of top three gainers in their budget surprisingly number four was.
Facebook ads, so people still have more faith, and Facebook ads than in things like programmatic advertising or re targeting so.
Those are our conclusions so far now I have two.
Comment that it's really a small scale study and its only our customer base, which is a fraction of total market.
But thats, what we are seeing within our user base that is how they address changes in the in the market.
Understood.
And just a follow up.
Jenny maybe on.
On the net new IRR side seems it seems like it was a little bit muted is that mainly a function of pull forward of business towards the first half from the second half or are you seeing any potential impact on marketing budgets from the supply chain uncertainties or any other macro uncertainties when youre talking to customers.
Thank you Brian This is Gary I think you're right. It's more of a I would say pull forward or I would say higher like higher base of the first half of the year. So.
It will be tougher comparison and again as I mentioned that was the abnormal seasonality, where we would we would not expect them to be as high a year ago, but now again coming back to normal. So I think it is.
Like the former.
Got it thank you.
Your next.
Comes from the line of moral Molina with Piper Sandler Your line is open.
Hi, Good morning, just hoping on for Brent <unk> here, thanks for taking our questions.
Certainly one thing that stands out here is that 20% plus growth in revenue per customer and we were just hoping to get some color on what strategies, you're using that are proving to be most effective in driving those license upsells and this add on up sells.
In terms of driving that revenue per customer number and then I'll have one follow up.
Thank you.
Okay.
<unk>.
First of all such focus on.
And per customer.
It was.
I'll now searched overtime.
Good.
Both initiatives.
<unk> products about.
About what we should do on marketing and sales side James Lewis.
In the third quarter.
We gave additional focus to <unk>.
<unk>.
<unk> site.
Product oriented goals for <unk>.
Sales.
It was very successful.
And.
Also even in our marketing.
It starts with us.
Some experiments related to such expansion.
I feel very optimistic.
With such experiments in future.
Okay.
Got it thanks and then.
Alright.
Yes, I just wanted to add one more thing that we are doing is we are investing a lot of effort into personalization technology. So we can understand what particular products will be good fit for a particular customer and highlighted the sub front for our sales team so that sort of increases efficiency when they reach out to.
Customer to beach particular product they already know that this customer could be interested and they know why this customer could be interested so so those are just.
A couple of extra.
Highlights of what we're doing at.
To boost our revenue per user.
Got it that's really helpful and then would it be possible to get an <unk>.
On the social media marketing tools.
You can call out there in terms of user adoption and maybe some color on how you've seen active users trend to that solution. Thank you.
So this is Eugene.
And this quarter, we had very high growth in number of free use of pre active users that was driven primarily by two products are one of them is back links analytics that we made for free with some limitations for large a portion of customers. So that attracted a lot of customers at the top of the <unk>.
And then we continued offering free social media tools.
With also some limitations Bod largely free and that also have been driving this number of pre active users up in general we've had more than 500000.
Three active users, which was an increase of 28% quarter over quarter. So we definitely invest in a lot of effort into generating top of the funnel for the future growth.
Okay.
Got it thank you.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Next question comes from the line of Parker Lane with Stifel. Your line is open.
Hi, it's Max Osmose on from for Parker Lane.
Staying on that topic right. There just thinking about the new customer acquisition may be free and.
Paid users and is there any specific feature that's driving that outside of search engine optimization I know you've kind of alluded to it there but may be paid an incentive fee.
Yes.
Yes, so as I pointed our social media.
The tools are having great traction with.
So our view free customers.
And we continue expanding functionality and adding new features there. So those fraud has become even more attractive so.
As you can see this traction happens across many different products not just search engine optimization and search engine marketing and.
We will continue adding new verticals.
<unk> to our portfolio of free products I think it's very important to focus on this kind of newer generation of future marketers that are very early in their journey and maybe they are not ready to buy premium paid products, but they need something to guide them in in today's environment and we are here.
To be the company that provides them those free products and then way when they become more experienced and ready to make a next step we wont be to the company that sells them their first pain product.
Got it and then just thinking different ways of expanding I know you guys are now have local listing tools in Canada and its availability is in six countries. How should we think about the covenant that tool from a population an addressable market standpoint and are there any additional countries.
So we should expect it to roll out to over the next year.
Yeah.
Yes. Thank you for the question So Ed in Canada was a big milestone just because.
A lot of our newer customer.
Customers in the United States and they also have branches in Canada, So that was pretty essential.
In general today, we cover our most critical English speaking markets with this product and we will definitely keep expanding into new geographies as those geographies get more mature right now I would say in the developing world. There is maybe not that much need in those products. So that's why they are not the highest priority.
But as those markets mature, we will be adding them to local listings products as well.
And this is Bob I'd, just add the Incrementals higher we've seen we've seen a very strong response from Canada. It's early days, but good response from that expansion.
Got it thanks guys.
There are no further questions at this time, ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Sure.
Yes.