Q4 2022 SEMrush Holdings Inc Earnings Call

Speaker 1: Good morning, my name is Audra and I will be your conference operator today. At this time I would like to welcome everyone to the Sem Rush Holdings 4th quarter 2022 results conference call. Today's conference is being recorded.

Speaker 1: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.

Speaker 1: A transcript of the prepared remarks will be available at investors.semrush.com after the call.

Speaker 1: At this time, I would like to turn the conference over to Bob Giavardi, Vice President of Investor Relations.

Speaker 1: Please go ahead.

Speaker 2: Good morning. I'm Bob Gujrardi, VP of Invest Relations, and welcome to SEMrush Holdings' fourth quarter 2022 results conference call. We'll be discussing the results announced on our press release issued after market close on Monday.

Speaker 2: With me on the call is our CEO , Oleg Shagalov, our CFO , Evgeny Fotisov, our President, Eugene Levin, and our CMO, Andrew Wharton.

Speaker 2: 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, and future business.

Speaker 2: adoption and demand for existing and any new products and features, investments and acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for the first quarter of 2023 and the full year 2023.

Speaker 2: and statements about future operating results, including margin improvements, profitability, and free cash flow goals, can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will.

Speaker 2: 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.

Speaker 2: 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 most recent quarterly report on Form 10-Q and our annual report on Form 10-K , followed with the Securities and Exchange Commission and the Federal Reserve Information District's overallem stunningly-

Speaker 2: as well as our other filings with the FCC.

Speaker 2: Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There is a reconciliation schedule showing the GAAP vs. non-GAAP results currently available on our press release issued yesterday after market close, which can be found at investors.semrush.com.

Speaker 2: course of today's call, we'll refer to certain non-GAAP financial measures. There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available on our press release issued yesterday after market close, which can be found at investors.semrush.com. And with that, let me turn the call over to O-Life.

Speaker 3: Thank you and good morning to everyone. Pop quarter revenue of $69 million goes up 28% year over year and up 5% from the previous quarter.

Speaker 3: Despite a more challenging macroeconomic environment, I really knew it came in above our expectations.

Speaker 3: We reported a strong year, the full year of $254 million up 35% year over year as we beat and raised estimates about 2022.

Speaker 3: We have a well-partitioned business with a growing market and we are excited who we are as a business.

Speaker 3: I wanted to provide a few highlights.

Speaker 3: on doing anything at all. And then Eugene will talk about our future strategic initiatives in doing anything.

Speaker 3: 2022 and then Eugene will talk about our future strategic initiatives in 2020. In three different tools, I watched.

Speaker 3: our first brand marketing campaign conducted a wide variety of experiments across different channels to determine which would drive the best results.

Speaker 3: We had a number of successful brand marketing campaigns that affected net new audiences and users to see what should be done.

Speaker 3: our core customer group, which is particularly promising.

Speaker 3: These results were largely positive as we delivered record new customer additions in 2022 despite a more challenging environment.

Speaker 3: We closed the year with over 95,000 paid customers. However, net customer additions were slightly lower than the year-ago period. We continue to see record new customer additions which were lower than the year-ago period.

Speaker 3: partially offset by churn of existing customers.

Speaker 3: I wanted to share some things about Charles and...

Speaker 3: propensity of customers to return to CMRS. For example, on average more than 30% of customers who turn CMRS return to the platform.

Speaker 3: For the customers who turned at the onset of COVID-19 lockdowns in April 2020, the return rate was more than 40%.

Speaker 3: We believe this level of customers in fact demonstrates the value of our product and its necessity to thousands of marketing professionals for organizations of all sizes.

Speaker 3: We are implementing targeted personalized promotions to help address churn and are already seeing improvements.

Speaker 3: adoption inAS those core

Speaker 3: We are optimistic about the future growth based on the record new customer ads and history of customer returns for the pandemic.

Speaker 3: In fact, we experienced a strong start to 2023 with record new custom editions in January and February .

Speaker 3: Other important leading indicators, registrations and trials have hit new peak levels as much as 79% year over year for trials in February 2023, which is significant.

Speaker 3: Looking ahead to 2020 guidance, we expect it will be a year of balanced growth and significant margin improvement starting in the first quarter, and we expect to return to a non-GAAP-rekeeping run rate in queue-free time through our growth and efficiency initiatives.

Speaker 3: Looking ahead to 2020 guidance, we expect it will be a year of balanced growth and significant margin improvement starting in the first quarter, and we expect to return to a non-GAAP breakeven run rate in Q3 time through our growth and efficiency initiatives. For the first quarter.

Speaker 3: be expected in the range of $70.7 million.

Speaker 3: approximately 23% year over year.

Speaker 3: We expect a first quarter non-gauge that was of 8 to 7 million dollars.

Speaker 3: For the full year, I expect you in range 4.

Speaker 3: $309 million, which would represent growth at the midpoint of approximately 21% year-over-year.

Speaker 3: We expect non-government income of the given to $3 million for the full year.

Speaker 3: including approximately 1.3 million of exit costs.

Speaker 3: I would remind investors to post our location program.

Speaker 3: Roughly 30% of our costs are now incurred in Euro and Euro linked currencies.

Speaker 3: My guidance for 2023 non-government income assumes a year exchange rate of approximately 1.08 to the dollar for the remainder of the year. I remain very encouraged by underlying trends in the business and have been efficient in deploying capital to the public.

Speaker 3: And we are focused on achieving longer productivity in Q3 2023.

Speaker 3: very uniquely positioned and are diversified across geographies, industries and customer size with no considerations.

Speaker 3: Our price points and go-to-market strategies target the widest possible customer base, and we offer our customers a high degree of flexibility.

Speaker 3: I believe these qualities will provide to be even more competing in 2023.

Speaker 3: In closing, I want to thank all our employees, customers and partners for helping us deliver strong growth while navigating through a challenging year.

Speaker 3: We remain focused on shareholder value and execution on our strategy to drive growth and future profitability.

Speaker 3: Before I turn it over to Eugene, I wanted to highlight a recent announcement we made appointing Brian Mulroy as Chief Financial Officer.

Speaker 3: 2023.

Speaker 3: Brian brings an exceptional background to Chevron with over 23 years of experience in finance and technology.

Speaker 3: He has very strong leadership skills, most recently holding SAP Finance roles at Microsoft and NUANCE Communications.

Speaker 3: I also want to thank Yevgeny for his key contributions to SEMrush over the last four years.

Speaker 3: His expertise was instrumental in building our financial foundation and we wish he would be a success in his future endeavors.

Speaker 3: expertise was instrumental in building our financial foundation and we wish you gaining success in its future endeavors. And now I pass it to Vigyn.

Speaker 4: Thank you, Oleg. I'm pleased with our results in 2022 and even more excited about the future.

Speaker 4: During 2023, we will be focused on expanding our product portfolio while leveraging new technologies and search landscape changes.

Speaker 4: driving operational efficiency and managing expenses across the organization, and delivering positive free cash flow.

Speaker 4: Let me cover each area in more detail.

Speaker 4: First, we plan to continue updating and adapting the product as we have every year to incorporate new sources of data and improve functionality.

Speaker 4: We will further develop our platform by 1. adding new apps to App Center, 2. increasing our capacity to onboard new apps, making the onboarding process more automated, and 3. allowing bundles to be bought outside of main subscription plans.

Speaker 4: As the leading online disability management software of Anver, Sembrush is uniquely positioned to benefit from two strong tailwinds to our business. Generate a AI and changes in the search engine industry landscape.

Speaker 4: Generative AI is not a product by itself, but rather technology that can be used across an entire portfolio of our products.

Speaker 4: We already have implemented Generative AI in several of our products, including our writing assistant and position tracking.

Speaker 4: This year, we are planning to keep expanding our portfolio of products that use this technology, both within our core products and in the App Center.

Speaker 4: The search and web landscape changes digital marketers rely more heavily on digital landscape data.

Speaker 4: And as the reliance on this data builds, we will see spike in demand for data and insights. For example, Bing becoming bigger, more meaningful player, and its gaining market share will benefit us as we can sell products for Bing optimization on top of those.

Speaker 4: we offer for Google today.

Speaker 4: Additionally, optimization for combined chat and search interfaces or answer engines is more complex than the regular search engine optimization and requires sophisticated products that we can provide.

Speaker 4: We can address online visibility questions and as search engines introduce new interfaces, so we can help our customers to navigate in an ever changing environment.

Speaker 4: Second, we will be focused on operating more efficiently.

Speaker 4: We expect to launch more efficient marketing campaigns, drive increased productivity of sales with focus on expansion and reduction of G&A spent as a percentage of revenue. With respect to marketing, we will fine-tune our go-to market strategy to focus on territories and channels which result in the best return on investment.

Speaker 4: We expect to focus more of our budget on those channels and campaigns with the highest return on investment.

Speaker 4: We expect changes in our go-to-market with a heightened focus on automation and more balanced marketing span between organic and paid channels.

Speaker 4: We made an investment in our organic search team in 2022 that are starting to deliver.

Speaker 4: Currently, our organic surge non-brand channel is performing a buff plan. Our emphasis on optimizing our pay channel is paying off, with better than expected ROI in the first quarter year to date.

Speaker 4: As a result, we expect marketing spend as a percentage of revenue to decline throughout 2023. In our sales teams, especially in expansion and retention, we are testing automated ways to grow and retain customer accounts at scale. World efforts will focus on expansion and increase sales team productivity.

Speaker 4: Continue to manage expenses as this is the most prudent way for us to run the business in the current environment. We believe we are staffed appropriately for the current demand environment and expect headcount growth or the remainder of 2023 to be modest and lower than in 2022.

Speaker 4: expenses as this is the most prudent way for us to run the business in the current environment. We believe we are staffed appropriately for the current demand environment and expect headcount growth for the remainder of 2023 to be modest and lower than in 2022. And finally –

Speaker 4: We are focused on delivering positive free cash flow. Efficiency and agility are the core of how SEMrush operates.

Speaker 4: We have historically been very good stewards of capital and will continue to pursue a growth strategy with a set path to profitability.

Speaker 4: I will now turn the call over to Evgeny for more detailed discussion of our financial performance.

Speaker 5: Thank you Eugene, and many thanks to OLEC and the Sembres team.

Speaker 5: I have certainly enjoyed my time working together. It has been an incredible journey in preparing our company to go public, and we achieved tremendous results together both IPO and on our path to growth.

Speaker 5: Now turning to Q4 and full year 2022 results. Q4 revenue of $68.8 million was up 28% year-over-year and up 5% sequentially. And then to full year revenue $254.3 million.

Speaker 5: was up 35% year over year. Growth was driven by higher average for customer and growth in paying customers.

Speaker 5: Compared to a year ago, we have seen an increase in revenue from the higher price for school customers in place of lower paying pro customers.

Speaker 5: Our dollar-based net revenue retention for the fourth quarter was 118%, down from 126% in the year-ago period, consistent with our prior expectations.

Speaker 5: We continue to believe net revenue retention will settle at mid-teens over the long term. ARR was 275 million as of December 31, 2022, up 28% from the previous year. As a reminder, December is seasonally soft, given the timing in holidays, and a fully express sequential acceleration in ARR in the first quarter. In 2022, margins reflected brand marketing campaigns.

Speaker 5: and higher personal costs in new locations, as our operating expenses grew faster than revenue, largely due to our allocation program, which cost approximately $11.3 million. Fourth quarter gross margin of 82.6% was up over 400 basis points from a year ago.

Speaker 5: Gross margin benefited from higher revenue and lower cost for hosting and third-party services.

Speaker 5: These lower costs should persist and as a result I expect the gross margin will remain above 80% for all of 2023.

Speaker 5: Operating expenses excluding aggregate costs were $70.2 million in the quarter, up 53% over year and up 22% from the previous quarter.

Speaker 5: The year-over-year increase was driven by growth in headcount as we ended the year with 1,530 employees, including 214 contractors, which is up 25% from a year ago, as well as with the costs associated with operating in high cost locations.

Speaker 5: Sales and marketing expense was 39.6 million in the fourth quarter, up 54% year over year, and up 30% from the previous quarter.

Speaker 5: The increase largely reflects high headcount as well as increased spending on brand and performance marketing programs.

Speaker 5: I would also note that the sequential and yearly increase was partly a function of a pre-classification of costs from G&A into sales remarketing, as previous to the fourth quarter, sales and marketing leadership expenses were recognized in G&A.

Speaker 5: We expect sales and marketing expenses as a percentage of revenue to be lower in 2023 as we drive greater efficiency in our spend.

Speaker 5: Research and development expense was $13.3 million in the fourth quarter, up 94% year over year and 31% from the previous quarter. The year over year and sequential increase reflects higher headcount as well as an increased compensation expense related to operating in higher cost geographies. I expect R&D spending to be relatively in line with the fourth quarter.

Speaker 5: as a percent of revenue as we continue to build our platform and deliver new products and functionality.

Speaker 5: G&E at 10 of 17.4 million was approximately 31% year-over-year, but essentially fled from the previous quarter. The year-over-year increase reflects higher public company costs, costs related to new locations and investments in systems and people. The sequential comparisons benefited from our given executive costs.

Speaker 5: to separate functions as I referenced earlier. In 2023, I expect GNA scanning will grow on an absolute basis, but below the pace of remit growth.

Speaker 5: During the quarter, solid trading growth and higher growth margins were more than upset by higher expenses, including nearly $2 million of exit costs, and contributed to a non-GAAP net loss of $11.6 million compared to a non-GAAP net loss of $2.9 million a year ago.

Speaker 5: Also to note, we have relatively low share-health resolution as a result of stock-based compensation, due in part to a large portion of our workforce being located outside of the US, where stock-based compensation is less prevalent.

Speaker 5: Turning to the balance sheet, we ended the quarter with cash and cash equivalents in short-term investments of $237.5 million, down from $246.6 million in the previous quarter.

Speaker 5: Our cash flow from operations in the current fiscal year was negative 9.6 million, and we incurred approximately 4.2 million of capital expenditures and capitalized 1.7 million of software development costs. In summary, we continue to execute well despite a more uncertain economic environment.

Speaker 5: Looking ahead to 2023, I believe we have solid visibility to deliver another year of growth while also improving margins. With that, we are happy to take any of your questions. At the radar, please open the line for questions.

Speaker 1: Thank you. 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.

Speaker 1: We'll go first to Elizabeth Porter at Morgan Stanley .

Speaker 6: Great, thank you for the question. I wanted to ask on the demand environment. You know, net ads soften in Q4 after being fairly robust for the last couple quarters and I recognize you called out some higher churn. So were the softer ads in Q4 fully attributable to churn or were there any changes in the new demand environment that...

Speaker 7: question. This is Andrew. So I would say that the net customer ads have been well within our guidance. Like everyone else, we're seeing an impact from the macroeconomic environment on our overall customer base. But I want to make sure to mention that we've added a record number of customer additions in Q4, and this growth continues through Q1 of this year so far.

Speaker 6: We are seeing the outcome of the brand marketing campaigns we ran in 2022 carrying us into 2023. Great. And then on the, you guys highlighted there was an increased sales focus and just growing average check size going forward. And just given the NRR.

Speaker 6: softness, which you've seen across many other companies. How should we think about the growth in ARR per customer into 2023, and can that sustain double-digit growth?

Speaker 5: Hi Elizabeth, this is Yevgeniy. I think we should be expecting the average check to go in line with what we saw in Q3 and Q4. There will be an impact from the macro, but as we get back to the more normal environment, we will expect this.

Speaker 5: the average check growth to slightly accelerate. Great. Thank you so much. Thank you.

Speaker 7: We'll move next to Parker Lane at Stiefel. Yeah, hi guys. Thanks for taking the questions. You alluded to supporting Bing on top of the Google use case that many of your customers are embracing today. Have you already started to see the benefits of that, either through new customer acquisition or expansion, or are you viewing that as more of a long-term benefit?

Speaker 4: and how that would be beneficial for our business. Not necessarily something that customers are asking today. Also on top of this, we have competitive intelligence products that show us how much actual usage these new features have been gained. And while we saw initial spike, we're actually not seeing a lot of growth right now. It's sort of stabilized. So we're monitoring the situation.

Speaker 4: I just wanted to highlight that if Bing becomes a real player in search engine space, we absolutely would be delighted to provide new features to our customers.

Speaker 7: Understood. Thanks for clarifying on that. And then on the generative AI front, I was just curious, did you develop those solutions in-house for writing assistance and tracking, or were those some tools that you contracted a third party for? So, of course, we're using GPT a lot.

Speaker 4: but on top of that we also use our own models. First of all, the trick is that you need to give GPT algorithm right input. So our algorithms define what is this right input, what will make content perform well, and then of course we use...

Speaker 6: pure generative capabilities of GPT. Great, thanks for the feedback. Appreciate it.

Speaker 7: We'll go next to Scott Berg at Needham. Hi everyone. Thanks for taking my questions. I guess I have a couple here. Wanted to start on the churn comments. Appreciate that 30% of your customers that churn return to the platform, but how should we think about the elevated churn in the quarter?

Speaker 7: Are you able to maybe isolate small customers versus large customers, any particular region or vertical that maybe saw some higher turn in particular?

Speaker 4: Yes, so in Q4 actually I think there is no particular regional segment that did stand out. I would highlight that a lot of customers who were on the larger end and churned in Q4 are actually getting back right now in January and February .

Speaker 4: That was really more of a long renewal rather than real churn, even though in December they were telling us that they're not sure. But a lot of them actually got back, so we're already seeing them. And I think that's in line with commentary that Oleg have provided. On the lower end, unfortunately, we don't see that yet. But we're optimistic based on what we've seen historically.

Speaker 7: Got it helpful. And then from the possibility comments, trying to help understand where the leverage in the model comes from this year, the gap net loss in Q1 has been selected fairly significantly in the back half of the year to drive your

Speaker 7: guided profitability for the year. Does most of that come from, that leverage come from GNA or is there something in cost of goods? You made some comments on the sales and marketing expense, maybe just trying to understand where that leverage will come from in the second half. Thank you.

Speaker 5: Scott, hi, this is Yevgeniy. So the proximity will be driven by, I would say, three main factors. One, the gross margin will be, I would say, solidly above 80%. Second, marketing spend will go down substantially as a percentage of revenue. And then the rest of the costs will, I would say, also go down as a percentage of revenue as well. So G&A will be lower.

Speaker 5: And then, our G&E will be lower and sales costs will be lower as a percentage of revenue. The only I would say I would like will probably be R&D, which will go up slightly and then stayed there, I would say slightly above 20%.

Speaker 5: And then, our G&E will be lower and sales costs will be lower as a percentage of revenue. The only I would say I would like will probably be R&D, which will go up slightly and then stay there, I would say slightly above 20%. Got it. Very helpful. Thanks for taking my questions.

Speaker 6: And as a reminder, if you would like to ask a question, please press star 1. We'll go next to Michael Turret at Key Bank. Hey, guys. Good morning. A couple questions. First of all, just in terms of relocation costs, where are we in terms of having an apples to apples comparison?

Speaker 8: in the sense that you had the relocation cost this year, but you weren't fully operating this year in the higher expense regions. So how much of a headwind is this year?

Speaker 8: do we have this year and then obviously and as we go into 24 that's seems to be completely apples to apples but and therefore no longer a headwind so how much of an incremental headwind this year how much that goes away in the following year

Speaker 5: Michael, thank you for the question. I guess I would split it in two parts. There are one-time costs which we clearly like separate and talk about. So $11.3 million, $11 plus million in 2022. And we expect about $1.3 million in 2023.

Speaker 5: majority of that in Q1. And then we expect that will be over. And then there will be the higher cost of running the business since we are relegated to more expensive locations. We believe that Q4 is a very solid base of which we can model our business going forward.

Speaker 5: And as I mentioned, we plan on improving portability every quarter as we go through 2023, improving margins. And again, I probably won't be repeating myself, but I guess we expect efficiency to be falling through every quarter.

Speaker 8: Thanks very much for that. And then congratulations on having made this transition.

Speaker 8: of the operations of the business. On generative AI, I guess the simple question is, as a company in search engine optimization to the extent that search broadly shifts over to.

Speaker 8: a chat functionality as opposed to a listed search functionality. How does your ability to add value and optimize people's moves to certain websites change when that is a chat function versus a listed search function? Thank you. And this is definitely something we're spending a lot of time discussing in terms of the

Speaker 4: we don't know what Google is going to do. But I think from what we've seen so far, the outputs of this model are actually very similar to what happens if you try to produce a feature snippet based on a couple of top articles. So it's really more of an answer that takes more real estate and provides combination from several sources.

and in most examples we've seen so far provide citation to those sources. So from a technical point of view, optimizing for this is very similar to optimizing for a feature snippet, which we helped people to do for a very long time, and actually we've seen a lot of demand for those features and support of our tracking of feature snippets as well as proactive recommendations about how people can rank and be mentioned in those feature snippets.

So from a technical point of view, if things go the way that we are seeing them now, this is very similar to what we already have. With minor fine-tuning, we should be able to help our customers get mentioned in those answers. But like I said, it's a little bit hard to tell until we see the actual implementation. But we are very positive about our ability to serve our customers.