Q3 2022 SEMrush Holdings Inc Earnings Call
Good morning, My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the <unk> Holdings third quarter 2022 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.
If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Bob could you have already VP Investor Relations. Please go ahead.
Good morning, Bob Good variety VP of Investor Relations and welcome to Sandra Holdings third quarter 2022 is off the conference call.
We will be discussing the results announced in our purpose released issued after market closed on Monday.
With me on the call is our chairman and CEO Oh, it looks like a hawk, our CFO and Danny for Tees up our president Eugene Laden and our CMO and reward.
Before we begin I'd like to highlight our participation in the 12th annual Needham virtual software as a service one on one conference in the southwest ideas conference in Dallas This week.
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 new and existing products and features industry and market trends, our competitive position our market strategies.
Market opportunities our guidance for the fourth quarter of 2022, and the full year 2022.
And our ability that sits absolutely, we'd like hey, blades outside Russia, including executing our relocation plans on the timeline, we expect that the anticipated cost.
These forward looking statements can be identified by words, such as expect anticipate intend plan believe seek or will these.
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.
For the 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 annual report on Form 10-K filed with the Securities and Exchange Commission, our quarterly reports on Form 10-Q as long as our other filings with the SEC.
Also during the course of todays call well refer to certain non-GAAP financial measures. There is 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 downtime rush dotcom.
And with that let me turn the call over to Alex.
Thank you and good morning.
I wanted to call out.
Very pleased with our results in the first quarter, despite the more uncertain environment.
So it started to grow.
Oh 65 million.
$1 up 34% year over year.
5% from the first quarter.
Also for the end of September approximately 94000.
Customers and I would note that.
Slightly more customers in the first quarter all three continue to win.
Well Peter.
With new.
New customer adds was partially offset by lower expansion from existing customers.
Particularly on the.
Those customers who have larger image.
Sure.
And as Jim has done a wonderful job.
Leveraging our high marketing expense.
New customer growth.
We continue to fine tune, our go to market spending and I'm hopeful we will continue to see a solid new customer go in brickell corporate.
On the product front.
We rolled out a major updates to our social media management toolkit and I believe we have.
<unk> brings us closer to future furniture.
The leaders in this space.
In the quarter.
Over 50000 monthly active users of call with this amount of years.
We estimate more than half of these users indicate that social media marketing professionals, you must be thinking.
Get the expense, our total addressable market beyond digital marketing professionals.
Hi, Mogens the team remains focused on user growth. However.
Faithful to a regulatory inquiry.
In January of 'twenty for you to be introduced.
<unk> allows our customers to use third party applications.
Our purpose built to address very true of use cases on our platform.
Despite relatively few of them.
New launches.
Our upstream to continue to sustain growth in the quarter.
We have a great lineup of.
Yes.
In renewable future.
And this should boost up center growth in the fourth quarter you.
<unk> will expand on that.
Thank you Gerald of center in his remarks.
Our goal is not.
Sure.
Joseph.
It will move us.
Hudson mobile platform competitors have done.
We see EBITDA upsetting to us and central to extending the reach of <unk> platform.
Yes.
A more uncertain.
Your mind environment.
Compared to a year ago. However, I believe chimera is uniquely positioned to continue because we are seeing our strong growth.
Customers are looking for products with easy to portray it.
To use and deliver Cripple Creek, Jordan on investment and further checks all of these boxes.
We have here has been full of challenges, but despite these challenges.
Strong premium growth and executed a substantial relocation program under budget.
Schedule similar as always.
EPS with just hi, Paresh and.
Let's get started.
We hardly had any interest in the matter.
So they've been a successful public company with a focus on efficiency remains.
We will pursue growth.
Growth underpinned by.
Solid unit economics, I will now turn the call over to the June or more detailed.
Discussion of our center.
Thanks, Alex.
Looking at the marketing technology space. What is immediately clear is that the market is highly fragmented and therefore consolidation has been very slow.
The fragmentation of the technology stack is a direct result of the varied preferences and use cases of mortgage and professionals.
A handful of product categories that are large enough to give birth the successful public companies.
For example, Sam Rush in SCO, sprout, social and social media management mail genes and email marketing or a few such examples but most mar tech vendors are small and remain focused on niche use cases.
We leveraged success and our CTO to expand into new categories, such as competitive intelligence digital PR content creation and other areas primarily through internal R&D.
As we look ahead the use cases continue to expand but it is simply not feasible or practical for some rush to build solutions for all the different use cases internally as our R&D resources will need to expand exponentially and thereby limit our ability to invest elsewhere.
This is the crux of our App Center strategy.
The address it fragmented market, including many niche use cases, we seek to offer a wide variety of product capabilities without overwhelming the capacity of our internal developed.
To solve this we intend to offer third party applications that address customer needs in instances, where the third party solution has a wide adoption and we have decided not to build internally.
Over the long term, we believe a substantial portion of <unk> revenue will be driven by products created by partners.
Our only made possible by December <unk>.
Another promising feature of the App Center model has the potential to monetize free active users as many of you know we have a large and growing cohort are free active users on the platform. This users may have very modest requirements.
And the full functionality of the entry level Pro plan may be overkill for their needs.
They may be interested in limited functionality offered by our lower priced App was the possibility to trade up to December subscription in the future as their use cases expat.
As we continue to grow December flat from I believe partners, whether they be third party developers or leading companies like weeks will increasingly see value in collaboration with some rush. The App center is central to our wide platform strategy a strategy that I believe will leave the.
<unk> for our growth well into the future.
Danny will now provide a detailed discussion of our financial performance.
Thank you Eugene third quarter revenue of $65 $8 million was up 34% year over year and up 5% appropriate previous quarter.
Customer growth of more than 17% was consistent with the previous quarter, but average revenue per user growth moderated due to lower expansion from existing customers.
I would note product mix largely unchanged in the quarter with growth of only slightly favoring our entry level of propane.
As expected our dollar based net revenue retention for the third quarter was down to 122% as we lap the easy comparisons of the Covid impacted periods and also impacted by lower expansion from existing customers I mentioned previously.
non-GAAP gross margin of 81, 2% was up over 400 basis points from a year ago, and up 160 basis points from the previous quarter.
We are achieving strong leverage in our cost for hosting services.
I expect gross margin will decline slightly in the fourth quarter.
Total non-GAAP operating expenses, including exit costs were $55.8 million in the quarter up 48% year over year and up 6% from the previous quarter with the majority of growth coming from investment in sales and marketing.
Sales and marketing was $31 million in the third quarter up 48% from the previous year, but essentially flat from the prior quarter.
Growth year over year was primarily due to increased investments in brand marketing and head count.
Research and development expense was $9 8 million in the third quarter up 61% year over year and up 5% from the previous quarter.
The year over year and sequential increase reflects higher head count as well as increased compensation expense related to relocating development resources to higher cost Geos G&A spending of $15 6 million was up approximately 43% year over year and up 23% from the previous quarter.
The growth is primarily related to higher head count and the cost associated with relocating key personnel to high cost locations.
Investment to support more about 30 systems and a wider geographic footprint also contributed to the increase.
Strong revenue growth and higher gross margins were more than offset by higher expenses and contributed.
Contributed to non-GAAP net loss of seven 1 million compared.
Compared to a non-GAAP net income of $12000, a year ago, and non-GAAP net loss of $6 1 million in the second quarter.
I would note that exit cost represented more than 80% of our non-GAAP net loss in the quarter.
Turning to the balance sheet, we ended the quarter with $247 million of cash belladonna slightly from $149 million in the second quarter.
Our cash flow from operations was negative $500000 and we incurred approximately 500000 of net capital expenditures.
I am pleased with our ability to minimize our use of cash in the quarter and expect our cash generation will continue to outperform our non-GAAP operating income in the fourth quarter.
Looking ahead to guidance.
The fourth quarter is typically a strong quarter for <unk>. We believe it is prudent to be slightly more cautious given the more challenging economic environment, which we believe impacted demand for our products. We expect fourth quarter revenue in the range of 6% to $7 25 to $6 to $7 $75 million.
Up approximately 26% year over year at the midpoint for.
For the full year I expect revenue in the range of 252 eight to $253 3 million.
Which would represent growth of 34% to 35% year over year.
We expect that fourth quarter non-GAAP loss of $12 five to $11 5 million.
On a non-GAAP loss of 26% to $25 million for the full year of 2022.
The incremental spending in the fourth quarter, primarily due to the full quarter impact of the employees, we like either from Russia and to a lesser extent additional hiring of these new locations.
We expect to incur higher payroll and benefits expenses as well as increases related to supporting multiple new office locations.
We continue to execute well in order, we are not immune to macroeconomic headwinds I believe we are well positioned to deliver another year of solid growth.
With that we're happy to take any of your questions. Operator. Please open the line for questions.
At this time I would like to remind everyone in order to ask the question simply press Star then the number one on your telephone keypad will pause for a moment to compile the Q&A roster.
And your first question comes from the line of Elizabeth Porter with Morgan Stanley . Please go ahead.
Great. Thank you so much I just wanted to touch again on the background, we heard from a lot of companies about customers scrutinizing spend more but it seemed like <unk> was a little bit more insulated from that dynamic just given the small deal cycle sizes and short tail cycle.
What exactly are the changes youre seeing and when did they start to occur I believe August was an improvement from July so did they start to happen at the end of the quarter. Thank you.
Yeah.
So hi, this is Eugene so in terms of macro we see impact in larger accounts.
But in terms of performance of our core base, we don't see that much difference.
So.
I would say actually and somewhat surprisingly small business segment is holding pretty well, which is I think it was counterintuitive for many extras that we.
Ill talk to but yes, right now this.
Is largely limited to larger transactions, mostly existing customers going through a renewal process and sometimes it takes them a little bit longer sometimes where previously they would buy more of these stay with their current subscription.
Sometimes they experienced layoffs. So so they have to downsize their subscriptions. So that's what we are referring to when we talk about macro situations, but small business segment. When we look at total number of expansion is really doing very well.
Does that answer the question.
Yes, again, and then I believe last quarter, you mentioned some changes in just in the sales leadership.
Segmenting around customer acquisition versus upsell versus retention. So wanted to ask if there were any disruption from those sales leadership changes or alternatively, what are some of the improvements that you've seen since you've re or re oriented sale. Thank you.
Good morning.
Yes, sure it's all the time.
I'm just going to bring some some.
Insurance for.
For example, and so on but I would say since reinsurance.
I don't see big impacts.
Bergstrom from such changes.
So what we have right now.
I would correct.
Okay.
Current current results volatile macro.
Great. Thank you.
Yeah.
Our next question is from the line of James Heaney with Jefferies. Please go ahead.
Great. Thanks, just another one on the macro curious what you are assuming just for Q4 in terms of the guidance do you assume it gets worse or things are relatively stable and then my second question is just around head count how youre thinking about that for next year you talked about obviously the relocations, but are you are you planning on adding any incremental head count for next year. Thank you.
Related to.
For the quarter.
Luke.
So on one side.
We feel.
Some positive signals from demand.
And we are optimistic on.
Our long term future.
Same time last couple of years, which was some sort of new seasonality.
Before <unk>, Inc, and its hard to say.
But we will face.
Included issues this year.
As a result of it.
Have you are going to be.
Yes.
We are always cautious.
Our expectations for fourth quarter.
And for the second.
On a related to second question related to our head count next year.
There are many companies around us.
Sure.
Research.
<unk>.
We don't expect any kind of searching on our site.
This year it was <unk>.
<unk> process.
Because of aging from Russia, and Thats worth moment, our hiring was.
Almost <unk>.
And because of that okay, great now if it's not needed to.
Two.
Hiring installed pre slowed needed tool.
So right now I think.
Correct.
Very good.
Sure.
Thank you.
Okay.
Your next question is from the line of Mark Murphy with JP Morgan. Please go ahead.
Thank you very much.
Following up from an earlier question.
Serious Jimmy can you compare the demand environment.
What you saw back in July and August starting Q3, and if you compare that to what you see what you saw in September and October is it safe to assume it's getting a bit tougher out there demand wise as you head into the winter or does it feel like the environment had maybe.
Stepped down a bit kind of back into the summer.
Remaining at that level.
So this is Andrew Gordon our CMO here at summer ish I would say just commenting on the demand environment. So pointing to the summertime actually August was one of our record years in terms of the August is typically one of our lowest months in terms of demand, but we saw we were surprised by and saw that that pivot. The second pieces as we go into <unk>.
September and October .
Demand continues to be very strong.
But I will say again in this environment.
One week, we see a little bit of pressure then another week when we launch another experiment, we see an upswing and demands.
So right now that's why we point to be cautious, but we're optimistic.
Okay, no cautious, but optimistic demand was better, but sometimes it's worse and sometimes it's better I guess I'm, just trying to kind of listen through that I don't understand I don't really understand.
Which way the environment is changing I mean do you feel that the environment is degrading as time passes.
I don't see at this point any any sign that anything is degrading.
Okay for us for us.
Okay understood.
And then can I ask you as you look into early next year, and we think about the seasonality of bookings.
Ben it's been pretty first half weighted in 2021, and 2022 and I think <unk> had various reasons there.
We had the COVID-19 environment, there with some pricing and packaging changes and some of those years.
Do you expect that type of trend to continue into 2023, where you're booking a little more business in the first half or do you think it's going to revert back to.
Something more normal perhaps with higher bookings in the second half.
Yes.
Yes, so we think there will be somewhat similar seasonality.
No.
But I think next year, we would expect it to be little bit more kind of flattened.
Because like you said.
Previous couple of years, we had some unique events and plus.
A lot of our campaigns have been not executed equally during the year and there have been some spikes in our spend especially when it comes to brand campaigns.
I am sure Andrew can provide more details around that if you if you would like.
I would be happy to provide additional comments I think that especially when we look at 2022.
We we were delayed in launching some of our larger campaigns until the first week of March which were planned earlier in the quarter.
We are now in a different position and already set up for Q1 four four campaigns to launch very very early in the season or early in the quarter.
So again, we are optimistic that we will be as we're pushing more noise into the markets. We expect to see a demand continue.
Thank you.
Your next question is from the line of Scott Berg with Needham. Please go ahead.
Hi, everyone. Congrats on a good quarter, thanks for taking my questions.
I guess I have a couple here I wanted to.
Start with the App Center commentary.
So I think some of the comments there were new.
Wanted to help better understand how you ultimately monetize some free users on the platform.
And if we think about the functionality of that those partners will bring.
What's the kind of long term revenue opportunity that that's possible to generate with your strategy here because I think the comment was.
To make a significant significant amount coming through coming off that product.
So first of all thank you for the question.
Because that's one of the topics that I like to talk about.
In terms of monetization of <unk> users. The way we think about this is that now our entry level product starts at $120 per month for many people. This is.
Reasonable price to pay for a starting package for some people. It is it is not maybe they're very early in their marketing journey. They don't expect to invest that much money maybe their business is struggling maybe they're a solid print yours and <unk>.
They just don't want to spend that much.
And also a lot of them don't need all the functionality that we provide even on our entry level plan, which is quite robust so without central start with something smaller no, let's say for $20 or $50 and we are seeing that would increase percentage of free active users who start paying.
<unk> and then over time as they learn more as their businesses grow they will probably buy more.
So that's the idea around how App center helps to increase conversions from free active users to paying customers.
And then in terms of long term potential of course. This is very early for us that's very hard to say, but the way we are thinking about this.
It's a fragmented market.
A lot of different use cases covered by a lot of different products.
Don.
We find a lot of illustration in business models executed by companies like Amazon or if youre familiar with gaming market there is still.
Steam marketplace for gaming so those are.
Companies that inspire us in terms of marketplace models and of course, new SaaS World. There are other examples.
No.
Shopify for example has really good ecosystem.
Apps within within SaaS space. So I think looking at those examples you can see what percentage of revenue is feasible for app centers like ours.
Bob.
My point is we are very optimistic.
But it's too early to say.
Fair enough and then from a follow up.
Question, if we look at the cost structure in Q3, most of your relocated Russian employees are likely in.
And there are new in their new locations here in Q3, and I'm sure, there's a little bit of trickle that spill into Q4, but if we look at the cost structure in Q3.
What's effectively $65 million worth of operating expenses, excluding the exit costs is that the right way, we should start thinking about the model into next year or are there. Some other puts and takes to consider thank you.
So Scott this is <unk> getting so Q4 will be the quarter to be using as a baseline for next year. It goes in Q3 people were still moving some of them were in transit or in buffer location. So Q4 will be the appropriate base two to start model next year, that's where it will then that's when we'll start the <unk>.
<unk> of people being in their final locations.
Great very helpful. Thanks for taking my questions everyone.
Thank you.
<unk>.
Your next question is from the line of Michael <unk> with Keybanc. Please go ahead hey.
Hey, guys.
One just.
One on absent or so.
One is can you talk about the decline in the <unk> growth and the decline in the expansion rate can you parse that out I'm not sure. If you commented, but what did happen with the gross retention rate this quarter and can you try to just review quickly.
The issues around <unk>.
Expansion and how do you will you be addressing them.
Michael This is getting so on the gross retention rate. So it didn't change much versus last quarter. So what we saw is the I would say higher demand from the <unk>.
<unk> awards, which starts with the <unk>.
Average check and that diluted the overall growth rates. So that's the effect of that so I would see stronger demand from the initially lower tier customers and that affects the blended rates otherwise they can appoint another which may which may be counterintuitive. When you look at the blended rates we have our 10-K.
Who are your customers growing 12% quarter over quarter number wise or more than I think it's more than.
70% the year over year. So it is substantial growth in the higher priced accounts, but at the same time as new cohorts and their entered the client base that leads to the slow growth of the average check.
Okay. So in other words.
Terms of the AD the AD the lower priced ads are still coming in at a higher rate, but still diluting more because of that point.
I think I think that's the right way to look at this because I mean the company started.
Okay.
Okay, and then what about on the on the on the expansion side in terms of the lower net expansion rate.
So.
I am happy to provide more details around the expansion so.
Yes, like I said.
It's really more about.
The behavior of existing customers, who already buy a lot.
And.
Like I said, sometimes deals take more time, so some of them remain on lower tiered subscriptions for longer.
Denver locked in to expand some of them have different procurement requirements compared to what they had a year ago. So it's more of a software environment, we don't see people dropping their subscriptions, sometimes like I said.
People had layoffs they would buy less so that's what contributes to lower expansion.
When it comes to SMB segment, where most of the transactions are self service, we don't see that much difference.
But you're on a higher end.
Total number like you are gaining said is growing really well, but some of those highest.
Subscription tiers.
They are little bit reluctant to buy more where previously they would be much more eager to do that to do that.
Okay. Thanks, and then on the <unk>.
That center side.
I guess.
<unk> makes ton of sense I guess, one question I would have is well what compels third parties to build on your platform I mean, obviously youre already bundling and your brand name. So there is commercial logic to it.
A real.
Yes.
A real product or technical logic to them running on your platform that would make it sticky and keep them loyal to running a newer platform versus alternative channels for them.
So I would start that.
In general like I said, Mark Tech is very fragmented. So what fragmentation means for software developers is that it's much harder for them to get access to audience is much more expensive for them to advertise its harder for them to explain the value of their product and it's almost impossible to gain wide brand recognition.
<unk> earned trust upfront. So I think that's we're partnering with <unk> provides enormous value to all new App developers, we have over 94000 paying customers over 750000 free.
<unk> active users.
Thats, a huge asset that attracts app developers and I've been saying for a couple of quarters that we have our Q. We have a lot of people who want to integrate with US right now the bottleneck is just our technical ability to launch those partnerships.
We're working on.
But in general demand to partner with US is very high among developers and like I said of course.
Audience is a big asset, but also we have some data assets Sam.
Sam Rush data powers, a lot of third party applications, but sometimes bind data from us is expensive and a lot of people would rather partner with us and build app for our App Center, where we have more favorable terms for data partnerships.
So thats another big reason for them to partner instead of build on their own.
Great. Thanks.
Your next question is from the line of Parker Lane with Stifel. Please go ahead.
Hi, it's Max <unk> on for Parker Lane.
Thinking about kind of the top line for this year. So far can you give us a sense of any contribution from acquisitions thats flowed into the top line.
Oh, it's very minimal I would say less than one percentage point.
So most of our growth is organic.
Okay, Great and then going back to <unk>.
First question did you say.
Lower expansion activity was more in the larger customer base and the smaller customers have.
Been consistently growing or did I hear that wrong.
Yes.
Yes, that's correct.
Okay got it thanks, that's it for me.
And at this time there are no further questions and this will conclude today's conference call. Thank you all for joining today you may now disconnect.
[music].
Sure.
Yes.
Okay.
Yes.