Q2 2022 SEMrush Holdings Inc Earnings Call
And 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 <unk>.
Thank you and good morning to everyone on the recall.
I'm very pleased.
In the second quarter.
There is a strong growth with revenue up 39% year over year and solid new customer additions.
As most of you know our sales cycles.
We are very short.
Oh. It is deal size is relatively small so despite complicated market conditions in Europe and doing it you shouldn't making.
Does it affect our second quarter results much.
Two things.
<unk> performance in the second quarter.
Is there anything you grew more than 70.
<unk> from the previous year.
Local leaching is always second most popular done but attach rates remain in the mid single digits.
Believe listings management alone.
$500 million markets.
And to recap the long runway for growth.
I am pleased to see our customer mix continued to improve in the quarter.
The number of customers, who pay us more than $10000 annually was up more than 80% from a year ago.
We remain focused on the SMB market.
But we continue to see rapid growth from mid market enterprise customers as well.
I believe our brand marketing campaigns contributed to the new customer growth year to date.
And I would like to provide insight on our lands for second half of the year.
We saw good success with our campaign in the streaming service Hulu.
And we expect to expand to August trading platforms in the third quarter.
According to Nielsen assuming is poised to become the most popular form of video consumption.
It appears to be a very efficient channel for reaching new customers.
Smbs are facing a more challenging macroeconomic environment.
And we plan to adjust our campaigns to reflect the new reality.
In the back half of Duena opinion, too and we expect to have a more balanced expense between brand and product marketing with emphasis on value selling campaigns.
Yeah.
Our focus for year to date.
He's been in paid traffic.
However, we have not ignored investment in organic opportunities as well.
As many of you in political.
The acquired between in the first quarter. The claim is one of the most recent sites for a short training and operational.
Acquiring the site was what we could get better monetization of the tragic by improving our conversion rates.
This played out.
In the second quarter as we doubled the number of conversions from the kimco as compared to the year ago.
Finally, I want to highlight three key changes until their organization.
Just.
We promoted Eugene veteran to roll off.
President.
Many of you know Eugene and to Bill agree. He is intimately involved in operations and <unk> had some rush his promotion reflects reality.
He is contribution goldfarb.
Of Chief strategy Officer.
In conjunction with better announcement.
Also promoted to meet that ambition to the role of Chief operating officer.
Via a product led growth company and believe there is nothing more important to our future success.
Introducing compelling new products.
We thought it was previously head of product development and has a track record of bringing great software products to market.
In his new role.
She will have more operators to make sure you could on our product roadmap.
Second we have made key changes to our sales organization.
We now have multiple teams dedicated to executing on our lend and expense stages here.
Rewarding our CMO will focus on new customer acquisition Brian .
Brian <unk>, our SVP of sales and we will focus on upsell of existing customers through new products and additional use of licenses and finalist Margaret <unk>.
Sergio retention youll be focused on retention of existing customers.
Each of these sales motions requires different skill set and therefore it was logical to create a dedicated teams led by experienced exhibitors.
Sure.
We have made remarkable progress with relocations.
Opened multiple offices across Europe , and the allocated nearly all of our full time employees as of today have no operations in Russia.
I'm extremely proud of the <unk> team.
The complexity and scale for locating so many people over a short period of time was immense.
But we rose to the challenge and debated.
I will now turn the call over to <unk> for a more detailed recap of our financial performance and our forward guidance.
Thank you Alec.
Revenue of $65 $6 million was up 39% year over year and up more than 9% sequentially.
Growth was driven by an increase in the number of paying customers and higher average revenue per customer mix.
Mix was again, a tailwind as a percentage of revenue from customers on the Guru and business plan to hit another record high.
As expected our dollar based net revenue retention for the second quarter was down slightly at 125% as we lap the easy comparisons of the Covid impacted periods.
Gross margin of 79, 5% was up 230 basis points from a year ago and largely flat from the previous quarter.
We expect gross margin of 17, 9% plus or minus for the back half of 2022.
non-GAAP operating expenses, excluding exit costs were $52 4 million in the quarter up 53% year over year and up 11% from the previous quarter.
Sales and marketing represented the largest increase year over year and sequentially.
Sales and marketing was $30 million in the second quarter up 67% year over year and up 18% from the previous quarter.
This is driven by higher head count as well as a full quarter of expense related to our brand marketing campaigns.
We expect those brand campaigns to continue for the remainder of the year.
Research and development expense was $9 million in the second quarter up 58% year over year and 17% from the previous quarter.
The year over year and sequential increase reflects higher head count as well as an increased compensation expense related to our trading in high across geographies.
A full quarter of combined also contributed modestly to the increase.
G&A spending of $30 million was up approximately 26% year over year, but down 6% from the previous quarter and.
The year over year increase reflects higher public company costs, while the sequential decrease was related to a onetime benefit that occurred in the second quarter.
I expect G&A spending to increase in the back half of the year in absolute terms and as a percentage of revenue.
Strong revenue growth in high growth margins were more than offset by higher expenses and contributed to a non-GAAP net loss of $6 1 million.
Compared to a non-GAAP net income of $291000 a year ago, and then non-GAAP net loss of $1 6 million in the first quarter.
I would note that exit cost represented more than half of the non-GAAP net loss in the quarter and this suggests that once we complete our locations in 2022 hour trading losses should decline reasonably quickly.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $249 million down from $260 million in the first quarter.
Our cash flow from operations was negative $4 7 million and we incurred approximately $2 3 million of capital expenditures.
Looking ahead to guidance, we expect the current economic conditions to persist and therefore, we are guiding for slower growth in the third quarter before rebounding in the fourth quarter.
We expect third quarter revenue in the range of $63 eight to $64 2 million.
30% year over year for the full year I expect revenue in the range of $251 million to $253 million, which would represent a growth of 34% 35% year over year.
We expect the third quarter non-GAAP loss of $13 million to $12 million.
And then non-GAAP loss of $32 million to $28 million for the full year of 2022.
We continue to execute well despite a more uncertain economic environment and I believe we have good visibility to deliver another year of revenue growth well above 30%.
Is that <unk> and I are happy to take any of your questions.
Operator, please open the line for questions.
Okay.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Brent Thrill from Jefferies. Your line is open.
Great Hey, guys. This is James on for Brian . Thanks for taking the question. My first is just around the macro.
Are you seeing any impact in Europe , and specifically in just in general how that may have impacted new customer adds in the quarter. That's my first question and then my second is just.
Around <unk>, you mentioned that as being more of a driver of growth is there any way to quantify its impact to revenue or is it still pretty much immaterial today. Thank you.
Okay.
Okay.
Hi, This is Eugene so in terms of macro.
<unk> seen some signs of softness in Europe , I would say specially around June .
I wouldn't say, it's really that much about new.
Additions demand is still pretty strong it's more of a <unk>.
Overall softness of the market.
In the United States, we don't see any.
Anything like this so you asked seems to be very strong even some European non euro markets are quite strong.
As for <unk>, Yes, we definitely can quantify the growth internally, but it's not something we were probably other companies would report.
This level of granular granularity I would say, it's definitely material compared to the size of the acquisitions that we believe we are getting really good ROI in this transaction, but as you recall transaction itself was not huge so that's that's probably gives you some some sense of scale.
Great. Thank you.
Your next question comes from the line of Parker Lane with Stifel. Your line is open.
Hi.
Yeah, Hi, guys. Thanks for taking my question just curious if you could give us an update on the performance of the <unk> business and the demand environment, you're seeing around competitive intelligence. It seems like it would be particularly relevant with the uncertainty out there in the markets right now thank you.
Yes, great Great question.
And.
I think I think you are getting this absolutely right. So competitive intelligence is definitely one of the verticals.
That is going to be impacted by uncertainty in macroeconomic environment. We are seeing strong demand, especially with the cross sell and I think we're seeing good results because business that we acquired you know relatively small compared to <unk>. So we already have a huge user base of people who are good leads for this new product.
And <unk>.
Compared to this difference in scale any kind of softness in demand wouldn't be very significant.
At the same time, yes.
When we talk to customers, we hear some anecdotes.
About their plans to budget cuts.
Sometimes we.
Start conversation with an account and then in the middle of this conversation our kind of champion inside that organization disappears and guests.
<unk> becomes a victim of the layoffs, so so that happens.
But I wouldn't say that it's.
It's a reoccurring thing I would say, it's more of an anecdote that you can use.
You know to make judgments about the overall market environment, but in terms of numbers. It doesn't really impact us just because <unk> was so much smaller than the whole scale of Sam Russian.
Kind of potential cross sell opportunity.
Yeah. Thanks, Dan I appreciate you taking the question congrats on the quarter.
Thanks Robert.
Your next question comes from the line of Elizabeth quarter with Morgan Stanley . Your line is open.
Great. Thank you so much and so it's really impressive to see the higher priced plans had customer is up about 25% year over year, just coupled with the overall strong net ads and we've been hearing a lot about inflation and higher interest rates pressure and consumerism and small business markets.
My question is if youre seeing any sort of shift to some rash from higher cost platforms, providing any sort of tailwind for the business and if there is a comment kind of overall market share in that year that'd be great. Thank you.
Okay.
I would say for individuals.
I would say it's seasonal.
Got to talk about.
Results here.
C B.
Some conversations related to it.
It's too early to talk about.
Okay.
They are interrelated.
Thanks.
Okay.
This is Eugene I would just add small thing in terms of market share are definitely something we will be looking for at the same time in the enterprise space with bigger accounts.
All those subscriptions that usually annual so most of the customers haven't been through the renewal cycle. During this economic environment. Yet. So we don't know to what extent, we would be able to pull demand for more expensive platforms, but definitely monitoring this and being optimistic.
Got you and then just a quick one on cost.
The net cost guidance kind of narrowed and it sounds like there is some lower costs in the relocation, but just curious to see if there's any other areas that youre seeing greater efficiencies in the business. Thank you.
Yes, Elizabeth <unk>.
<unk> game. So there are a few components to the improvement of the net income one is the better performance in Q2 as you may have seen we have we've updated our expense outlook for the locations, which is better by roughly $5 million and then the rest is the combination of the improvement in the overall head count outlook for the year and then.
Favorable euro FX. So thats, what this is worth effectively as our net income outlook and one more thing.
In my prepared remarks, and you spoke on the cash flow from operations number it's negative seven four of $4 seven I'm sorry about that.
Got it and thanks, so much for the clarification.
Okay.
Your next question comes from the line of Mark Murphy with Jpmorgan. Your line is open.
Thank you and I'll add my congrats.
Could you say that you have no operations in Russia as of today I just wasn't sure if I heard that correctly.
And if so could you clarify does that mean no offices or does that mean no people or how exactly are you defining that word operations.
Yes. So this is Steve <unk>. So we don't have any any observations in Russia. So we have sold our local subsidiaries.
We've done that right. There. So basically no presence we have some people who have left it's less than 5% of the total population, which have moved overseas theyre in the process of migration and that will take them a couple of or maybe a few months and they still like therefore different rhythms, but otherwise we've exited the country.
Okay understood and.
Second question was on the macro situation in Europe . If you could just clarify I think you said demand is pretty strong and then the next thing he said, but there is an overall softness and I'm struggling a little bit to put those two comments together.
You just clarify what is it that you might have experienced in Europe , because the results of a pretty thought and just also did that continue into July and August .
Or was it has there been any change recently.
Yes, so great question, so what I meant.
By the word softness.
It is.
A number of things.
For example.
Yeah.
Thank you.
<unk>.
And.
It takes longer than previously to renew account or are they start negotiating more favorable for down payment terms like maybe they want to have net 60 or at Ensign, where previously they would not have been negotiated.
Sometimes you have a deal that is sort of already verbally agreed and then last minute. They say no. We probably go into bio less sometimes he negotiated the deal, but Dan person, who was leading the process departed for <unk>.
<unk> been laid off and you have to deal with some are new so that's kind of what I mean by softness sometimes customers just say they are under pressure from the management.
To be more prudent to spend less.
<unk> there a budget cuts so like I said, it's not something huge and those things are more of an anecdote and statistically none of those reasons would be huge in our metrics, but in aggregate, that's what I call softness Covid explains.
Yes.
That's extremely helpful. Thank you for that much appreciated and just did that is the situation kind of status quo into July and August or is it stabilizing degrading further.
Yes.
So.
I would say.
I would say August started pretty strong for example year over year.
July .
I would say.
I would say I would say better than for example, <unk>.
The second quarter Bud.
In general.
You see you see the guidance that we provided so that guidance was based on what we've seen so far in this quarter.
But like I said, so far in August I'm optimistic soon.
Okay excellent. Thank you and I'll add my congrats.
Thanks Mark.
The next question comes from the line of Clarke Jeffries with Piper Sandler Your line is open.
Hello. Thank you for taking the question I wanted to touch on a record $5 5 million of sequential growth in revenue.
But the <unk> in the quarter was actually lower than year ago period. I was wondering if that was reflective of the sort of discussion about maybe some softness towards June was it really better early quarter performance that drove that and if there's anything maybe to call out that was an impact that might not have been just that.
Linearity through the quarter.
Yes. This is the beginning thank you for the question Clark.
Youre absolutely right. So it is a reflection of a stronger beginning of the quarter and then that sulfur inning as Eugene has just mentioned so June was.
I would say like a slower versus the over quarter. So.
The.
Dynamics is reflected in the Q3 guide.
Alright, perfect and then any chance you could comment on what 10-K per annum customers grew in the quarter.
For the quarter I mean, I think we disclosed the number for the year, which is above 80%.
About 80% growth year over year for the <unk> customers.
Okay.
Ill squeeze in one more as a follow up.
You lay out the 19 Mar tech categories that Youre involved with.
Which of these segments are you most excited about in terms of taking share from pure play players.
With the release of the local listing product you might move that category higher on the list just curious on your thoughts here.
So.
It's like you know.
Hard hard to ask parents about who's their favourite child right. So so that's kind of how I'm seeing this of course.
Yes.
Children Havent been behaving as well as other children Budd.
We like them all I would say in terms of where we are spending more time, where we're spending more resources.
Is probably not necessarily areas, where we already feel very strong, but areas, where we want to be much stronger even though we have great reviews right are there is.
There are other things to care about like market share and revenue so I would say IMAX.
Im extremely proud of what we're doing in competitive intelligence space, especially after acquisition of combined so now we have really good self service product for kind of SMB and mid market and we have this more enterprise focused.
For product for.
And the larger companies and largest marketing teams, but also sales teams and leadership teams.
Local listings I think have been one of the products that have been around for a long time I was actually.
One of the people involved in it.
In launching this so it was sort of member of the first team.
The thing we've been.
Development at.
Somewhat slower than we could primarily.
Primarily because we didn't launch a lot of global markets. We think this now so now and way more optimistic but also we have a lot of great features and a roadmap.
For example, we were always thinking how to go beyond list and management.
One of the next things would probably go into <unk> review management you already have some features in this direction and we probably are going to keep developing them and double down.
And then of course of course digital PR I think it's a huge category that.
I would see.
It is.
It is not that competitive from product point of view as many other categories, where we operate so we think we can be really innovative player there and disrupt the market.
This year, we have launched our media monitoring product still very early but so far we have great feedback from some customers as well as early signs of positive revenue trends. So I would highlight those.
Kind of categories.
Areas, where we focus the most right now.
But we're always trying to surprise people and they are probably a couple of things we're working on that I cannot mention right.
I appreciate it thank you very much.
Your next question comes from the line of Michael <unk> with Keybanc capital markets. Your line is open.
Hi, This is Michael <unk> on for Michael Thanks for taking my question.
On your second half guidance are you factoring in lower customer addition.
Or is it more just lower expansion in the near term.
I think.
Michael I think it's a balanced combination so as you can see we've guided for a slower Q3, and then acceleration in Q4 and we are looking at both I would say in the <unk> in the same direction.
Okay, and then on the 5 million reduction in relocation costs are you seeing heightened churn and includes relocating or it feeds into that change.
Okay.
Given this was a I would say unprecedented move that we had to take it was very difficult for us to be very accurate in predicting how much we'll spend in where people will go which countries. They will go to et cetera. So all of this we have been able to I would say like clarify and narrow down in terms of our future expected.
Expenses.
Where are the savings coming from.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from Scott burden William Your line is open.
Hi, everyone. Congrats on the good results and thanks for taking my questions I wanted to start with the guidance.
Obviously, we can all back into the fourth quarter guidance with what your third quarter and full year.
The numbers are relatively good in <unk>.
The commentary was that you're expecting in the macro to rebound a little bit in the fourth quarter can you help us understand maybe where that optimism comes in after expecting some slowness here in Q3. Thank you.
Okay.
This is Alan.
Look we have.
Some we have some very good results.
Patricia you mentioned mentions.
Thank you.
<unk>.
So shift with samples received right now.
Linda.
Rich.
Could you give us.
Some some positive results.
Got it helpful. And then I wanted to ask about kind of partner impact can partner traction in the quarter, we had a chance to speak with some partners.
Some very good feedback on your product and platform, but as you look at the macro slowing is how much of thats coming from maybe your own digital sales versus.
What you end up.
Getting reference to you booked through your partnership thanks.
Yes.
Eugene I just wanted to clarify maybe was not technically we're not really seeing.
Sure on the demand side from like New acquisition point of view, that's where we employ all kind of more as most of our partner tactics. So we haven't seen.
Me any kind of meaningful slow down their demand is.
Strong so.
And I would say if we speak about affiliate marketing channel, which was also one of the partner instruments in our Arsenal.
Definitely haven't seen slowdown there.
And pretty much all of our key channels grew this.
This year quite well.
And maybe to add this is <unk>. The question on the Q3 versus Q4 dynamics I mean Q3 now feels like a typical summer for us like it's very very similar in terms of what we're seeing in the.
What we are building our expectations on at the same time as Eugene has alluded to we have seen August is showing positive signs and traction. So again, if we exited the quarter with like bright AOR that that as a base for the good Q4 and this is how we think about this year and the structure of the rest of the year.
Great. That's all I have thanks for taking my questions.
Thank you.
There are no further questions at this time.
This concludes today's conference call you may now disconnect.
[music].
Yes.
Okay.