Q1 2022 SEMrush Holdings Inc Earnings Call
Good morning, My name is Christian I'll be your conference operator today.
At this time I'd like to welcome everyone to the semi holdings Q1, 2022 results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
A transcript of the prepared remarks will be available at investors <unk> com after the call.
Thank you Bob good you've already VP of Investor Relations you may begin.
Good morning, and Bob Mitchell Rite aid V P of Investor Relations and welcome to <unk> Holdings first quarter 2022 results conference call.
We will be discussing the results announced in our press release issued after market closed on Tuesday.
With me on the call is our CEO I'll, let check a lot our CFO , if guinea for pizza and our CFO Eugene Levy.
Before we begin I'd like to highlight our participation in several investor conferences in the second quarter.
On the 17th Daniel Needham Technology, and Media Conference in New York City on May 17.
The New York Stock Exchange Health care and Tech Investor Day on June eight and.
And the Stifel 2022 Cross sector conference in Boston on June nine.
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.
The investments and acquisitions and their anticipated benefits industry and market trends and our competitive position our market strategies.
Market opportunities.
Guidance for the second quarter of 2022, and the full year 2022, and our ability to successfully relocated plays outside Russia, including executing our relocation plan on the timeline, we expect and that they anticipated cost can be identified by words, such as expect anticipate intend plan believe seek or will.
<unk>.
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 these forward looking statements.
For a discussion of the risks and important factors that could affect our actual results. Please refer to our annual reports on Form 10-K 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 today's call, we'll refer to certain non-GAAP financial measures 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 <unk> dot com and with that let me turn the call over to <unk>.
Thank you and good morning to everyone on the call.
I'm very pleased with our execution.
Gotcha.
We delivered solid financial results.
You're up 43% year over year.
Our record new customer additions.
Before diving into the results I would like to speak about.
The wind down our operations in Russia by the end of September .
Thanks Bill.
<unk> announced by the United States and other countries.
Hey, Bill.
Contribution stages and hoped.
Houston would get better and what not last long.
However, it has become clear.
Potential oil long conflict and further decline.
The environment in Russia.
Looking at our performance inventory quarter, it's clear that <unk> is doing well despite all the uncertainty.
However, we need to prepare a possible new assumptions and reduce the potential impact to our operations.
I believe.
Our operations in Russia will not only help us to reduce this.
Risks.
Remove.
Uncertainty for all our stakeholders.
Early indications.
A large majority of eligible employees relocate outside Russia with high level you play.
Sure.
Our broad experience managing remote workforce.
So to help you might've disruption through the relocation process.
Our goal is to wind down our operations in Russia, where we end of September , but I'm hopeful that we can accelerate that timeline.
With this year and Tony if Russia was a difficult one.
The decision with comps of human and financial cost.
But we believe this is Craig this is best for the long term success of sugar Rush.
Recall.
At this point as I listen to the conflict in Ukraine, but our plans to exit should leave us better prepared in case the conflict gets worse.
Now to the results.
We had a solid start.
First quarter revenue of $57 $1 million was up 43% year over year and up more than 6% sequentially.
Our first brand and marketing campaign launched in mid March.
It's too early to make conclusions, but I am inspired by the initial results.
And it's more than 5000 paid customers in the quarter a new record.
And the growth was strong extending beyond our largest markets.
Yeah.
These.
Uncertain times, and we view this environment now but.
Gaining new customers and C trial subscriptions growing at great pace. It gives us confidence in our growth outlook for duena, bringing too.
On the product side I wanted to blow to the performance of our upsell offer.
Last quarter I had mentioned.
Escalator.
<unk> exceeded.
One key overall bookings.
In less than three months.
I've worked a report with upsell to <unk> 1 million of gross.
In the first quarter.
<unk> growth was driven by a single area.
Asia.
I believe the growth of our center is proof that our platform approach will provide us.
Competitive advantage related so point solutions providers.
I kept us to achieve so ancillary is availability of yogurt budget apps and our marketing teams to promote <unk>.
I'm here.
Looking at our pipeline today I believe the number of third party apps will more than triple.
End of 'twenty.
Going into.
We closed the acquisition of <unk> in the first quarter and I am excited about the potential of adding new sales enablement and intelligent functionality to our industry leading product offering.
Empire is growing we plan to advance their product, but also to offer new products, which we can cross sell zimbra platform customers.
In conclusion.
We delivered solid financial results and record customer growth.
Despite all the uncertainty in the markets.
I will now turn the call over to <unk> for a more detailed recap of our financial performance.
Thank you Mike.
Q1 revenue of $57 1 million was up 43% year over year and up more than 6% sequentially growth was largely driven by an increase in the number of paying customers. While we continue to see an increase in the average revenue per customer as well.
And by the acquisition closed in late March and therefore was immaterial in our first quarter results.
Our dollar based net revenue retention was 127% as of March 31 up.
Up slightly from 126% as of December 31.
I expect revenue retention to moderate in 2022 as the base effect of easy comparison wanes I.
I expect to see a gradual decline in the metric beginning next quarter and extending through the remainder of 2022.
Gross margin of 79, 8% was up 170 basis points from a year ago and up 140 basis points from the previous quarter. We saw some benefits in Cogs, primarily due to the lower third party costs. However, I would expect gross margin closer to 78% for the remainder of the year.
Our non-GAAP operating expenses of $47 1 million in the quarter were up.
62% year over year end up more and more modest 5% from the previous quarter.
Not surprisingly the largest increase year over year was in G&A, driven primarily by public company costs.
Sales and marketing was $25 million in the first quarter up 56% year over year and down slightly from the previous quarter.
As Alex mentioned, we launched our brand marketing campaign in March.
We delayed the launch by several weeks due to the conflict in Ukraine and as a result, some of the marketing spend in the first quarter will be incurred in the second quarter.
Research and development was $8 million in the first quarter up 51% year over year and 20% from the previous quarter. The sequential increase was driven by a reduction in capitalized product development costs, while the year over year increase was driven by head count growth as we've continued to expand our R&D teams with a focus on western Europe .
G&A spending of $13 7 million was up approximately 80% year over year and up 8% from the previous quarter. The sharp year over year increase is related to public company expenses as the year go get it and become the company has just completed an initial public offering.
Strong revenue growth and higher gross margins were more than offset by higher operating expenses and contributed to non-GAAP net loss of $1 6 million.
Compared to non-GAAP net income of $2 1 million a year ago.
This is an improvement from the non-GAAP net loss of $2 9 million in the fourth quarter.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $260 million down from $270 million in the fourth quarter.
The decrease was largely driven by 40 million paid for <unk> and combined acquisitions, which was partially offset by $8 million of cash from operations.
I am very pleased with our cash generation this quarter, despite an increase in spending and larger operating loss cash flow from operations was down only slightly from a year ago.
Over the last four quarters. The company has generated approximately $23 million of cash from operations, even as we have investments in support of the business.
Looking ahead to guidance.
I expect second quarter revenue in the range of $59 $5 million to $65 million.
Up 33% year over year for the full year I expect revenue in the range of $249 million to $251 million.
Which would represent growth of more than 33% year over year.
Winding down our Russia operations resulted in incremental cost in 2022 and as a result, we expect second quarter non-GAAP loss of $9 8 million and a non-GAAP loss of <unk> $46 million to $44 million for the full year of 2022.
The incremental loss is almost entirely due to the relocation of our employees are the pressure while stepped up investments in compliance is a contributing factor as well.
We delivered solid financial results in the first quarter with record revenue and gross margin more significantly we added more than 5000 customers, which gives us confidence in our outlook for the revenue growth well above 30% in 2022.
The winding down of our Russia operations comes with cost in the short term, but we believe it is the best path forward for all of our stakeholders, including employees customers and shareholders.
With that I'll ask Eugene and I are happy to take any of your questions.
Later, please open the line for questions.
I'll just remind everyone if you'd like to ask a question. Please press Star then one on your telephone keypad. Our first question is from Michael <unk> with Keybanc. Your line is open.
Hey, guys, congrats on putting up some good numbers and especially.
So on yes can you tell us where that makes sense for them.
What really drove those.
I'll just throw my follow up questions, which are really on the relocation can you just run through the details on that in terms of <unk>.
You have with US the total number of your head count number.
Place in Russia.
What's the specific cost for moving tomorrow.
No.
What do you expect that the schedule to be like what the risks are there.
Thank you.
Sure.
Luke.
We are happy to address that.
Bye.
New customers during the first quarter and I think.
It's connected to.
Too many experiments, which we finished.
In the past quarter, but at the same time in third quarter.
It was.
Great supporting.
Buzz around our creations.
Really shift very great support from our.
Oh, just from our experience.
And.
Look.
Even.
We started our mark.
New brand marketing campaigns.
Much.
At the same time I believe.
Before it was.
Enough experiments and related to that.
I believe we have we can recover back from it.
And second question.
<unk> been at this.
Hi, Michael so in relocation costs or start them with the overall number of employees. We had about 800 800 people in Russia and about 85% of these people will relocate.
The relocation costs will consist of a travel recommendation and relocation bonuses. So thats thats basically will be the core component components affecting dose of one off expenses.
Okay, and just to review them.
We were also.
Head count.
Our total head count as the 12% to 1300 before.
Okay.
And then just one.
Just one more.
And again, you raised by about $23 million or an operating loss for the year $15 million in costs from the relocation.
And you also as I think by about $4 million on revenue so.
Slightly higher in terms of the net expense increase so what are the let's.
What's the increase in expenses.
And beyond that.
Relocation costs, which.
Frankly come at Etame.
Last quarter I spoke with a trend.
With brand campaign.
Yes, yes, Michael the difference is explained by our expectation that people, who would move to the higher I would say more expensive locations will be getting higher salaries. So thats, our preliminary expectations over that higher run rate for different costs, which will incur of people staying in western Europe .
Okay, so that separate from the actual relocation costs.
And now you are.
More expenses.
Cost of living environment.
They're.
That is correct.
Alright, Thanks, Sean I'll yield thanks.
The next question is from Tucker lean with Stifel. Your line is open.
It's actually Parker Lane at Stifel. Thanks for taking the questions guys wanted to get a little more visibility on what's going into the brand marketing campaign that started in March.
You've obviously had very strong net adds and youre expecting that strength to continue this year, but but what does that brand marketing campaign look like what are some of the key components that we should be aware of.
Neuromarketing company is more focused on.
Yes.
I think.
And robust.
In our marketing campaigns.
We were more focused on our product offerings and product features and so on it right now.
Uh huh.
We want to address much larger markets and because of that.
We want to talk more about value.
Our customers can get from it.
You are talking about <unk>.
Most focused on value or not.
On futures not northern product.
Got it understood and then just so we're clear as far as those employees that are relocating can you give us a sense of what roles that we're serving in.
Inside of the organization and are those going to remain the same upon relocation.
Initial barcode so the majority of those will be developers there'll be marketing people finance and admin. So some salespeople so it's a different mix of.
The functions, which we had in the original location.
Got it I appreciate it congrats again on the quarter.
Yes.
The next question is from Scott Berg with Needham Your line is open.
Hi, everyone. Congrats on a nice sales quarter and thanks for taking my questions here.
I guess a couple of them we've been doing some recent work in this space and one of the things.
Items that came up.
Was your ability to sell up market and scale, where other competitors have not scaled well in terms of functionality. If you look at your 5000 customers that you signed in the quarter, how should we think about the distribution of those customers kind of across different different customer sizes, just trying to understand if you are having.
A lot of traction upmarket as you our job market.
Thank you.
I appreciate it.
Hi, Scott So what we saw in this quarter with the largest adds war with say hi to your customers.
Which would be above 200, 2500, and maybe just to give you a sense of the numbers.
Customers with more than $10000 per annum grew about 17% quarter over quarter.
And then I would say a similar growth rate would add like medium medium price tiers.
So it's a good it's a good traction with <unk>.
Lending and lower price customers and upgrading them as the.
Is there a relationship matures.
Okay Fair.
Fair enough and then on the <unk> acquisition I know some of the costs are embedded there is there any revenue contribution from the acquisition for the year that we should be aware of.
It's so far it's minimal right. So there will be some revenue of course, but it's irrelevant.
The overall numbers at this point of time.
Alright, great Thats, all I had thanks for taking my questions.
Yeah.
The next question is from Mark Murphy with Jpmorgan. Your line is open.
Yes. Thank you.
At a high level to what do you attribute being able to show this improvement in the net customer adds also in the net new <unk> and also the retention happening simultaneously against this backdrop that.
That you mentioned as being more volatile.
With the with the macro and then and then also the war in Europe I think that's the element of this that is surprising just given the circumstances.
Thank you.
Look.
Alright.
King.
Microfiche Im not extra.
Experts.
And restore VIX, but.
The business is very strong.
You have very very strong business model and give you said subscription business research.
Let me switch focus with retention, you're such a focus on delivering value for customers and focus on education customers I think.
Helps.
My understanding whats.
Yes.
It's about this model.
We have so strong business model and so great markets.
Okay.
Okay.
And if Jenny.
All else equal when we think about your operating losses would you expect them to improve by the $15 million in 2023, which is at one time relocation costs or are there additional margin improvements that we could.
<unk> factoring in as well for next year.
Yeah.
Mark.
Of course this is too early to go into much detail about 2020, because there are many many moving parts, we will need to see how this relocation.
Settles down and worthy of the land.
What the run rate expenses would be for those different locations.
Clearly.
There.
R&D expenses will probably be at the higher run rate as we go forward into 2023 more close to the industry standard given that our developers will now be more I would say expensive locations.
$15 million, one off will not be there and we will also be looking at inefficiencies on the G&A side as we as we like finish with relocation. So again, unfortunately won't be able to give you a precise number at this point of time, but probably will we will have better visibility during the next quarter call.
Okay.
And one last one the two acquisitions, we understand they're very small, but I am I'm wondering just how much net new <unk> those might have contributed to that to the number here in Q1.
Yes. Thank you for the question. So in Q1, we have really not attributing any meaningful revenue to those transactions I also want to highlight that our combined deal was technically closed.
Sure.
Yes, very fair.
Late into Q1, so even if we.
One is there is nothing really to recognize just based on the timeline.
And then the first acquisition that we've done in Q1 that clean coal was not really are for revenue right. We made an acquisition for audience. So while we're definitely seeing a lot of demand coming from this website and we are changing content on the website to generate even more demand is not really.
Sure.
Directly attributable to revenue it's more of a.
Number of leads that we see number of registration audience reach so those are the metrics that we are focusing on when we think about value of this transaction.
Yes, and I appreciate the color Eugene.
I'm not.
Only thing is I'm not I'm not asking about the in period revenue in Q1, I understand that that one of those closed late in the quarter I mean, the actual like book of <unk> right the run rate of IRR.
<unk> carried.
Carried over that would have contributed to your Q1.
I understand it's small.
I don't think I understand is it.
Yes.
Is it a few million dollars is it a couple of hundred thousand I, just don't have much sense of that.
Yes, so I would like to.
At the beginning of Q2, we were still in the process of transferring contracts because we did an asset sale. So it's little bit more complicated question, but if you think about the overall scale of the operation right. It's a business that had roughly 20 people and UGG our supply like industry standard.
<unk>.
<unk> per employee bedroom.
Thank you Mark for those business. If you will get close so we're not disclosing actual IRR for this particular line of business, but is that if you look at number of employees and just apply some standard multipliers youll get very close.
Okay. So something like 200, K per head run that through and it will be it will be in the ballpark.
It's going to be.
I'd be happy to disclose it later.
If you are gaining allows me maybe closer to Q4, but right now we're not really providing a lot of color on that one but I think in the ballpark youre right now.
Understood. Thank you.
The next question is from Brent Thill with Jefferies. Your line is open.
Hey, guys, it's James on for Brian . Thanks for the questions can you talk about just the disruption that you would expect to see from the employee relocation and it looks like youre still expecting pretty robust topline growth for 2002.
Curious, if you're maybe expecting any potential.
Disruptions to overall top line as a result of the relocation and then just a quick one on customer growth that just are there any particular markets that did particularly well or others that were a bit weaker any color there would be great. Thanks.
Okay.
Alright understood.
I don't expect.
And yes, a significant impact on our operations because of such specialty locations.
Luke.
Corbett.
It helped us a lot.
We have a great culture.
So as such.
Remote approach what would change.
June quarter Thats periods all of us.
This strategic approach all companies are owned.
Our culture and with our focus on.
So if organizations.
Autonomy teams.
I don't think we should expect any kind of disruption here.
Yes.
Okay.
And then just around the customer growth any any particular markets that did well or others that were a bit softer.
All lines with our expectations.
Oh no.
No there are no surprises here.
It's very very stable.
Even with some macro.
Conversations around us.
Don't see here.
Sure.
Anything related to it related to our current cohorts two numbers.
It's stable.
Great. Thank you guys.
Okay.
The next question is from Clarke Jeffries with Piper Sandler Your line is open.
Hello, Thank you for taking the question.
Net retention ticked up again this quarter wondering if there was any kind of particular products or upgrade paths, whether that was users or otherwise that are emerging that is really helping drive that metric upward.
Yes.
Yes, Thank you and thank you for pointing this out definitely one of the metrics, we're really proud of.
One of the Big factors is of course expansion of seeds that we started seeing early last year and it continues.
Today, more and more people buy subscriptions with multiple seeds, we're expanding usage of existing multi seed subscription. So I would say this is definitely contributing factor obviously other things like strong sales numbers for our add on products and App center that <unk> already mentioned contributor.
As well, but I would say if I had to pick one are definitely expansion of seats.
Yes, Linda that was going to ask a follow up question that pleasant to see $1 million gross IRR and App Center could you remind us of what the revenue model. Our economic model is for that is that a rev share base to marketplace for some of the partner products.
The triple.
That's correct.
<unk> revenue share now specific percentages could be different for different partners, but I would say in a ballpark, we always aim for something around 40%.
Take rate.
Which I think is more or less standard for this kind of relationship.
Understood and if I can squeeze one more in you mentioned improved search volumes and some of the largest markets mortar rollout. During this year with the recent acquisition to add some more volume too.
SCE capability, how do you view that competitively do you feel like you're really outpacing the competition in terms of scale and accuracy of search estimates.
Yes. So this definitely has been a big focus of our R&D team I personally was involved in development of algorithm and tests.
So it was definitely a high priority because marketers to make right decisions they need to understand what people are searching for and they need accurate data. So as part of the rollout we tested.
For example, ours, our search volume estimates against source of truth data.
We were able to collect from Google search console.
<unk> results were I would say better than anything else that we were able to find in the market and we really tried to heart and didn't leave any stall stone unturned on touch so to.
To the best of my knowledge, what we have today is the most accurate.
Metric for search volume.
We're for keywords right now it works in the United States and Australia of course, there are plans to rollout to other locations.
I appreciate the color. Thank you.
Okay.
The next question is from David <unk> with <unk> capital. Your line is open.
Hi, and congrats on a good quarter.
Countries, where the relocated employee been moving to and will they be moving to locations with company offices or they have the ability to work remotely.
I'd like to know how much the cost of these employees will increase and whether your key advantage of having lower cost software engineers is still intact.
Thank you.
Okay.
Last year, we decided to open authorization.
On Spain.
So <unk>.
Berlin, Germany.
<unk>.
Our product teams, mostly relocating to these locations but.
Yes.
Because of.
Because of a conflict because of flu or other things.
And we decided to open ocean.
Yes.
Shelby.
And.
Some marketing groups, some some revenue growth customer success groups.
Sure.
Moving to such special occasions, our opinions.
Uh huh.
It's more relevant to them.
Sure.
<unk>.
<unk>.
<unk>.
And of course.
And also good allocation.
Im pleased to offices.
Cypress.
Brock.
Czech Republic.
We opened.
About seven years ago right now.
<unk>.
It's really attractive location for oil in place.
And this is <unk> on the cost side, we definitely expect that our R&D as I mentioned R&D expense will go up because the because of the cost of the living in those countries and the Netherlands mentioned with where we're more like Western Europe focused for the developers.
For the G&A all for the support staff, who will be with arginine in locations, which are closer in terms of the cost of living so Jeremy near our survey, which will be like maybe slightly higher post relocation for for those functions, but overall like I mentioned the run rate impact will probably be there this year and we'll have to work it through.
In 2023.
Okay. Thank you.
Okay.
Again, Thats star one to ask a question. The next question is from Michael <unk> with Keybanc. Your line is open.
Thanks for letting me follow up just a quick one I think we were expecting you to do that.
Free cash flow breakeven previously any sense for where that falls out now and how we might think about into next year.
So Michael at this point of where we are doing our estimates we're clearly just simply in Blaine and increase in net loss to our free cash flow projections. So we don't have.
Very like accurate assumptions given the gains that we there are many moving parts, but I would probably expect us to be cash flow negative like for the full year given the increased estimate for the loss.
Okay.
So just to think about that improving maybe breakeven next year.
Can I say it again please.
Do you think it's realistic to think about that free cash flow, improving and possibly being breakeven next year in 2010, yes, yes, yes.
Okay, great. Thanks.
Thank you.
We have no further questions at this time and this will conclude today's conference call. Thank you for participating you may now disconnect.
[music].