Q4 2021 SEMrush Holdings Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the <unk> Holdings fourth quarter 2021 results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
He would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you'd like to withdraw your question. Please press star one again.
Please note a transcript of the prepared remarks will be available at investors got some rush dot com after the call. Thank.
Thank you Bob could you party VP of Investor Relations you may begin.
Good morning, Bob could you already VP of Investor Relations and welcome to <unk> Holdings fourth quarter and full year 2021 results conference call.
Will it be discussing the results announced in our press release issued after market close on Monday.
With me on the call is our CEO , Alex <unk>, our CFO , if guinea for Pizza and our CFO Eugene Leben.
Before we begin I'd like to highlight our participation in several investor conferences to be held in March.
We will attend the Morgan Stanley TMT Conference on March eight and the Keybanc emerging technology conference on March nine.
Did I 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 1995.
Forward looking statements include statements concerning our expected future business and financial performance and financial condition expected growth adoption and demand for our products and features expected investments and their anticipated benefits.
Industry and market trends and our competitive position our market strategies market opportunities and our guidance for the first quarter of 2022, and the full year 2022 and.
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 that 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 these 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 a quality reports on Form 10-Q , and Form 10-K as long as the other filings with the SEC.
Also during the course of today's call will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market close which can be found at investors doubts that rush dotcom.
And with that let me turn the call over to outlet.
Thank you and good morning to everyone on the call.
Before I discuss our results I would like to provide commentary on the Russia's invasion in Ukraine.
This represents a terrible moment in few safe all of us.
We strongly oppose any act of war anywhere and we're playing it.
Oh, Oh, Oh Communion chip.
And our top priority is to make sure that.
Handful of our conductus from Ukraine and families are safe.
So for US the short of it is business via unions.
We have risk mitigation, Susan just in place and all of core data centers are based in the states of Virginia, and Georgia and virtually our entire well that's where it is held in the cloud.
I want to reassure the investment community to which we remain positioned for strong growth.
Now the results.
We had a solid finish.
Outstanding here.
Fourth quarter of.
You're pretty.
Three $7 million was up 47% year over year and up more than 9% sequentially.
For the full year 2021 .
$188 million was up over 50% year over year.
The growth in the quarter was again.
Strong growth among our larger customers.
The number of customers, who pay <unk> more than $10000.
Was up more than 75% year over year in the fourth quarter.
I also wanted to highlight the strong performance proud here Rick.
We're quite proud of the whole business of <unk> and in the first year as part of some rush.
Our team delivered outstanding results.
IRA.
More than.
100% year over year.
December 31st.
Probably remains.
It's small.
Slightly more than 1% operator to anticipate javan.
However, I believe early success of problems there bodes.
Bodes well for a.
Our recent acquisitions, <unk> and compared it to.
<unk> announced.
Announced in the first quarter.
I am very optimistic about 'twenty to 'twenty two as I continue to see strong demand for our products and expect our increased investment in brand marketing and sales.
In another year of strong revenue growth.
It's too early too early but I would point to some positive results from our marketing programs in the fourth quarter.
November our paid search channel set a new monthly record for new customer addition, eclipsing the previous high.
From March 2021.
Our first marketing campaign will kick off in much and I look forward to sharing some results from the campaign.
When we report our first quarter results in May.
On the product side.
And a bunch of introduction Eric go for some rational tense.
<unk> center in <unk>.
Our epicenter is still okay.
It's small, but I see plenty of opportunity for strong growth.
<unk> pointed to the success of the clarity.
It was one of the first apps available through the epicenter and at least 1000.
Of grocery renewal within three months of launch.
Okay Center growth, we must increase the number of third party apps available.
Available.
I believe that making that approval process.
It will help us scale, the number of certified to apps and increase sales.
I believe Oh platform growth if you will.
A more attractive destination for <unk>, who want to reach the widest possible audience.
Similar to the trends.
Our campaigns to continue the solution continues to see strong user adoption and I believe composites has the potential to further accelerate growth of the tests.
Complaint offers leading products for competitive intelligence.
And sales enablement.
But customers.
Much.
Hey, rich Approx.
Approximately $10000.
In the short term, we will focus on cross selling compared to our existing customers.
Given that comparison is much higher than the trends given a small uptick.
Great.
Yields significant growth in IRR.
Longer term, we see an opportunity to leverage compared success product managers and sales organizations to extend the trends to a wider audience.
Last but not least we continue to innovate on the core.
We show a plus for them.
Looking at Google's results last month.
Search app purchased 6% year over year.
It is clear, but search is still a very relevant to our customers and in many cases still provides.
Best channel to drive traffic.
Oh, it's a search intent feature as part of our religion Cumulus Magic tool.
Okay with magic to ease a bit largest keyword database in the market.
We aim to millions of keywords.
And it helps us show content propitious specialists, and Brent managers to improve <unk> and <unk>.
It's the content what drives converts traffic.
We have such intense customers can view research related to a sheet keyword.
Transactional commercial informational and navigational.
Listing the effectiveness of it.
They are comprehensive.
Thinking about future product areas our customers.
Recently.
Looking at video us an attractive channel to reach potential customers.
Video platforms have grown dramatically over the last few years Youtube alone has well over 2 billion monthly users and is a very popular across all demographics.
To put this in perspective, Facebook has slightly more than 3 million monthly users.
Over 95% of over the top universe, Youtube, which exceeds.
Kevin popular streaming services, such as Netflix and drop off.
We expect to roll out new functionality to help our customers better leverage video to improve online visibility.
And drive traffic.
We are thrilled include leveraging <unk>.
<unk> centre and enhancing our existing tools like social media management.
In conclusion, we delivered outstanding financial results in 'twenty to 'twenty, one with record revenue and margins.
I fully expect to deliver another year of strong revenue growth in 2022.
But we will be accelerating investments across marketing sales and product development in 2008 vintage tool, but as always we will expect investments to be focused and to maximize return on investment.
I'll turn the call over to <unk> for a recap of our financial performance.
Thank you Ali.
Q4 revenue of $53 7 million was up 47% year over year and up 9% sequentially.
Growth was once again, driven by an increase in paid customers and increasing the average revenue per customer.
<unk> was once again, a tailwind and we exited the quarter with almost 66% of revenue coming from customers when our two higher price lift in business.
Despite concerns about the omicron variant I was pleased to see balanced growth with strength across virtually all of our markets I would note that for the full year of 2021, the United States represented slightly more than 45% of total revenue similar to the contribution in 2020.
Our dollar based net retention was 126% as of December 31st upfront had a 24% as of September 30th I continue to expect revenue retention to moderate in 2022 as the impact of easy comparisons begin to begin debate, but it should remain comfortably above 110%.
Gross margin of 78, 5% was up 160 basis points sequentially and approximately 190 basis points from the year ago as hosting costs are largely fixed while revenue grew substantially.
I expect gross margins to stay relatively flat and sustained these higher levels for 2022.
non-GAAP operating expenses of $44 9 million in the quarter were up 53% from a year ago and 20% from the previous quarter.
As I mentioned in November we expect it to make greater investments in marketing as well as sales have gone and you saw that come to fruition in the fourth quarter, our sales and marketing was up 25% from the previous quarter.
Research and development spending was up 24% year over year, but up only 10% from the previous quarter.
But that would not spending would have been more up more than 20% sequentially if not for approximately 1% of capitalized product development costs in the quarter, we continued to add to our R&D teams, including new teams in Western Europe .
G&A spending was up approximately 44% year over year and 15% from the previous quarter. The increase is largely related to continued investments in head count and systems to support the growth or the business and public company expenses.
Strong revenue growth and higher gross margins was more than offset by higher operating expenses and contributed to a non-GAAP net loss of $2 9 million.
Compared to a non-GAAP net income of $12000 in the third quarter and a net loss of $1 5 million in the year ago period.
Turning to the balance sheet, we ended the year with cash and cash equivalents of $270 million up from $188 5 million at the end of the third quarter.
The increase was driven by approximately $79 million in proceeds from our follow on offering in November and approximately $4 million in cash from operations offset by $1 million of capitalized development.
For the year, our free cash flow margin was above 10% up sharply from three 6% in 2020.
Cash flow generation to be strong in 2022, but even with our investments in growth brand marketing and product development I expect we will be near free cash flow positive for the year.
Looking ahead to guidance.
I expect first quarter revenue in the range of $55 8 million to $56 2 million up 40% year over year.
For the full year extra revenue in a range of $245 million to $247 million, which would represent growth of more than 30% year over year.
We expect to maintain the higher levels of spending experienced in the fourth quarter and as a result of expected first quarter non-GAAP loss of four 7% to $4 5 million.
And our non-GAAP loss of 22 to $21 5 million for the full year of 2022 with a bulk of the losses in the second and the third quarter as we scale our marketing investment.
In conclusion, our growth rebounded strongly in 2021 as revenue grew more than 50% year over year and resulted in higher margins and record free cash flow.
We're making focused investments to support our growth in 2022, India in lessons that we can fund from cash flow, even though a very efficient go to market strategy highly productive product development and data driven approach to marketing.
With that I'd like to gene and I are happy to.
Take your any of your questions a greater please open the line for questions.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Michael Curtis with Keybanc. Your line is open.
Hey, it's Michael <unk> from Keybanc. Thanks, very much congrats guys on the stabilized stabilization of strong high single digit revenue growth sequentially in the net adds.
Good continued good performance can I ask a bit about.
Opex and as you said you did guide to.
A bit of a net loss.
The net loss into into next year. After a strong year free cash flow. This year. So can we be specific about where you intend to make those investments.
Sure Michael Thank you for the question. This is <unk> Guinea. So as we have alluded before we plan to spend more in marketing in the first place and the explanation is that we're always bidding about five percentage points of revenue more in marketing throughout the year with more most of the investments taking place in Q2, and Q3 and then less of in Q1 and Q4 it though.
The expected profile well.
We plan also to spend more on a sales center, we started hiring more sales at the end of last year, which will probably start to play out throughout the first half of the year as the ramp up their productivity.
We are budgeting for more spend on India. So thats.
The expectation again will probably be.
By getting some leverage out of G&A as we go throughout the year.
Okay, and just out of curiosity, given given the devaluation.
<unk> in the ruble and you do have some expenses there.
What are your assumptions in terms of the guidance is that based on the newer lower level of the ruble or is that based on the level before the devaluation.
Could we see some benefit from that DBS devaluation.
Yes. So the guidance is based on the average ruble right from the beginning of this year. So it's pre devaluation.
So and to give you a sense, we about 60% to 70% our expenses of ruble. So you can make your assumptions data base of that.
Great. Thanks, very much congrats on the quarter.
Yes.
Our next question is from Parker Lane with Stifel. Your line is open.
Yeah, Hi, guys. Thanks for taking the question and congrats on the quarter.
There were some puts and takes in the pricing levers that you ended last year and I'm. Just wondering if we look in the context of this guidance can you give us a sense of how you expect revenue growth to trend from a seasonal standpoint.
Notably that back half of the year when we start to lap some of these comps. Thanks.
So when we think about revenue growth typically.
You have to think about the number of days in the quarter right. So the first quarter will be we will have a less less lesser number of days. So its 90 days only close it starts with the <unk>.
Slow periods, where we can go by going out of Christmas. So typically Q1 will probably be the slowest one Q2 will be better as it is 91 days and then.
But Q3 will be equally and then will accelerate towards Q4 I think that's how we would typically have.
But the year and for this year, our expectation is that we'll probably see a year on year acceleration of customer growth towards the back half of the year versus.
I'd say more normal first half <unk>.
Has to do with the comps of 2021.
Got it got it. Thank you and then just to follow up on Michael's question, a little bit differently.
Given the sizable employee footprint in Russia are you anticipating any operational disruption there are good sanctions have any issue on <unk>.
Hiring or just overall operations of that side of the business. Thanks.
I mean, there's a lot of.
We don't expect.
Any significant impacts on our business.
Great.
We have offices in Europe .
This is on for Arkansas presence now we are opening offices in Amsterdam, Paragon and Barcelona.
We don't expect any significant unusual goes just.
Hiring.
It could be some some sort of frustration of some.
Related to extreme sports going on but.
At the same time.
We don't expect.
Long term impact for the business.
We don't see any risk for.
For business continues.
Got it thanks Ali.
The next question is from Scott Berg with Needham Your line is open.
Hi, everyone. Congrats on the good quarter and thanks for taking my questions I do apologize for any background noise I'm in my hotel.
Liberia at the moment.
One I guess, let's talk about demand your revenue has accelerated nicely this year.
Demand trends changed at all by region are you seeing any outsized growth opportunities geographical area or it's kind of been more broad based.
Right.
Thank you.
Thank you.
I would say.
In fourth quarter was.
Hum.
Let's say must be expected.
We didn't face any kind of surprises sure.
We see some good signs.
This quarter, we see some good science here.
But.
It's a very broad based.
And then from a follow up perspective, your net revenue retention continues to trend very much higher than your historical and kind of targeted levels. How should we think about the growth in those in that segment or those customers are they landing.
Excuse me I'm thinking I might say 10000, K customers Thats up 75% are you landing more in that segment or is it customers that are expanding.
Their existing implementations and usage of semi prospect 10000 K threshold.
So this is Eugene.
Thank you for the question so.
Right now we definitely see more of this coming from expansion of existing accounts, usually even if it's a big company. We would have relatively small initial installation and then we will grow accounts within organization, adding more seats, adding more limits. So I would say it's largely expansion.
Simply some customers would start with the bigger product, but in the end even in that case, they would usually have trial or free subscription first to test the product to learn and to understand the value and then they will buy more so a majority of this is expansion effort.
Excellent congrats on the good quarter and thanks again for taking my questions.
Again that is star one if you'd like to ask a question.
The next question is from Clarke Jeffries with Piper Sandler Your line is open.
Hi, Thank you for taking the question.
Nice to see the rebound in net new <unk> this quarter and crossing the $200 million threshold. When you look at the business trends exiting 2021 and engineering you may have touched on this in terms of the customer growth expectations in the second half of the year.
Are there any specific factors or headwinds that are that are being translated in the model today that might improve or change in 2022 or any broader macro considerations that you're embedding in guidance today for the.
For the next year.
So we thank you for the question Clark.
Our expectation for the new customer growth or the total customer growth I would say for the beginning of the year is similar to what we've seen at the exit of 2021, So I'd say on par with our normal growth rate. However, I might I might say that there are early indications that the beginning of the year is slightly better.
Otherwise I think I mean, we've made some changes in effects. Our initial FX expectations were I would say more.
Moderate in terms of the ruble rate, but then we've adjusted it to the average rate for the quarter like year to date, which will probably change as we go into the Q1.
Favorably in terms of the expenses.
Apart from that there is no major.
The changes that we've anticipated.
Great and then maybe a follow up very interesting to see comp had a average contract value of over 20000 as.
As well as the departmental pregnancy sales.
As we think about it.
Departmental expansion in sales is the sales expansion one of your primary focus is near term and how could you how much could you imagine.
The investment into other departments beyond the marketing department come from an organic or inorganic basis.
Thank you and I are happy.
You read the press release, because that was one of the key focuses around M&A thesis for the deal.
Not just bigger average Jack not just something that we can cross sell to our existing customer base, but going after new buyer personas and actually it's kind of result of years of research that we have done we wanted to have product that would be used across <unk>.
Mainly different groups across organization. So combined for example can.
Can be used by a leadership team I use it myself can be used by marketing marketing department demand Gen part product margin part and obviously sales team sales team can use battle cards and competitive transactions to have higher win rates.
And I think in general there is definitely a desire to work with more people within organizations.
Currently we are expanding into sales organizations with this acquisition.
Down the road when when we feel comfortable we would be open to pursue.
Other areas in general we want to work with more people and we wanted to bring value of our market data and market intelligence to all stakeholders, who can benefit from it.
Yes.
Sounds excited looking forward to it.
Okay.
There are no further questions at this time and this will conclude the <unk> holdings fourth quarter. Two 2021 results conference call. Thank you for participating and you may now disconnect.
Okay.
[music].
Sure.
Okay.
Sure.
Yes.