Semrush Holdings Inc. Q1 2023 Earnings Call
Good morning, My name is Andre and I will be your conference operator today at this time.
I would like to welcome everyone to the some rush Q1 2023 earnings call. Today's conference is being recorded 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 you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad.
He would like to withdraw your question Press Star one again.
At this time I would like to turn the conference over Chip Renly Johnson with the Blue shirt group. Please go ahead.
Good morning, and welcome to send Rush Holdings first quarter 2023 conference call, we will be discussing the results announced in our press release issued after market close on Monday may eight with.
With me on the call is our CEO Lake like all of our CFO , Brian Moberly, our president Jim oven inner CMO Andrew Gordon.
Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provision 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 existing and any new products and features investments.
And acquisitions and their anticipated benefits industry and market trends and our competitive position our market strategy market opportunity our guidance for the second quarter of 'twenty 23, and the full year 2023, and statements about future operating results, including margin improvement profitability and free cash flow cool. It can be identified by words such as expect.
Anticipate intend plan believe seek or will these statements reflect our views as of today only should not be relied upon as representing our views at any subsequent date, 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.
These forward looking statements for 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 filed with the Securities and Exchange Commission as well as other filings with the SEC.
Also during the course of today's call 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 yesterday after market close which can be found at investors got sand wash dot com.
That let me turn the call over to alike.
Thank you and good morning, everyone in the call I want to provide a few highlights on the quarter before Jim talks about our thinking.
Strategically you should just and then Brian will discuss.
Financial results.
I am pleased to report first quarter revenue of 72.
So.
24% year over year.
I'm also pleased with our strong customer growth issue with a significant milestone this quarter.
100000 paying customers.
I believe six bcf available runway for growth fueled by product expansion.
Net new customer additions as well as sustained demand environment, particularly on the.
<unk> LNG introduced new packaging.
This quarter, we had.
Yeah cause to net new customer additions.
Sure.
In trials continue to hit new peak levels.
They're seeing the success.
Personalized promotions.
Optimistic about our future growth based primarily on the record net new customer.
Our long history of customers returning.
Sure.
The red ones, the global shipping customers <unk> hundred 50 countries.
You, just Houston market segments, ranging from small businesses and startups to fortune 500 companies and global finishes.
Our digital marketing platform features keeps you probably plus tools enable us to cater to a wide range of customer needs.
Yes.
<unk> solution.
Thanks, Steve.
We continue to be in because we are uniquely positioned.
Our products and solutions.
For our customers.
Yes.
Unique software platform, which enables marketing professionals to.
Manage and measure comparisons across all channels to improve online music.
We have a comprehensive tool kit.
White of tools and features would cover search engine optimization.
The interesting thing with research ranked taking Becky analysis.
Audience and paycheck transition.
Our sticky products can generate tremendous ROI for our customer.
It's very loyal user base.
Humans are a plus for them.
As usual for us to ship customers return to us for logging and initial close or constellation.
You also see examples of <unk> users, leaving the employment on the two latest fair enough yes.
New customer.
Where.
Do we believe.
As usual education and dependency.
The value of our products.
Necessity to thousands of marketing professionals.
<unk> of all sizes.
In closing.
Execution on our strategy when we see revenue growth given the focus on profitability and remain dedicated to delivering shareholder value.
We have decent might have made a number of improvements our ability to model, including adjusting our spending.
I am confident in our market position.
Before I turn it over to June <unk>.
I wanted to welcome our new Chief Financial Officer, Brian Mulroney.
Chimera earnings call.
Brian started April bringing skus exceptional the girl institution brush.
If all the regulatory yes of experience behind us.
And due diligence.
She says.
The presence.
His strong financial acumen, and I believe you have to get up to speed. So quickly on our business right. Yes really excited to have you on board.
Net.
I'll turn the call over to you Jim.
Thank you Ali we delivered a strong quarter, starting 2023 with solid momentum as I mentioned in our last earnings call. We are focused on enhancing our product portfolio and driving operating efficiency in 2023, and we are making progress each front.
Let me explain in more detail.
This quarter, we announced a small tuck in acquisition of traffic think 10, leading marketing and education company and comedians featuring premium content by and for World class marketing and growth leaders.
With more than 300 hours of content from over 90 industry experts.
Traffic Shane <unk> Academy is one of the most well respected resources of digital marketing and education in the world.
We expect the wealth of knowledge of their experts and they're expensive content library will further enhance San Brushy Caddy me to provide new training for marketers and continue improving existing modules.
Sam Raj has ambitious goals to establish a customized and best in class self paced training platform.
In a new benchmark for digital marketing and education, and aiming to deliver a premium experience for marketers globally.
We believe that by adding traffic think tank and ongoing enhancements to our Academy program, we will inspire and educate the next generation of digital marketers.
I'll leave that by adding additional educational content and an overall premium experience.
We will make our product stickier and will be a necessary tool and resource for marketers worldwide.
We continue to develop our platform by adding new apps automating the onboarding process and cross selling our products in fact more than 20% of Sam rush customers now buy multiple products.
This success reinforces our commitment Telework App center and overall platform vision.
We often get the question of what generates your payout means to our business and I would love to spend a couple of minutes, explaining how generally do you play I presents new opportunities for us.
First we're aggressively adapting our product to incorporate new sources of data and improve functionality with a particular focus and generate your AI capabilities.
This year, where we launched several important AI powered apps in our App sector. For example, we released content shake and that combines <unk> data with GPT to create content that.
Is optimized for virtually any audience. Our topic. We also launch instant video creator that makes videos from block post in seconds, allowing our customers to repurpose existing test content and social media.
We also have several apps that use AI the January everything from social media posed to hashtags to add coffees and banners.
We have analytics narrative that scans, Google analytics extract the most important information and uses AI to presented as an executive salary that even fees greater can understand.
Throughout the year, we plan to keep expanding our portfolio of products. They use this technology, both within our core products and in App Center find.
Finally, we are focused on operating more efficiently.
In markets, where we have completed several experiments from last year and we are now seeing the benefits with sustained higher level of trials year over year.
As a result of all of our experiments we are launching a stronger more efficient campaigns. We've continued to adjust our go to market strategy to invest in territories and channels to improve ROI.
We're bringing more balance between organic and paid marketing channels and already see strong signs of growth across both the organic ahead of plan in Q1 and better than expected optimization of span for pay channels.
We will heighten our focus on automation and we've seen record net new customer adds.
And our sales team specifically in expansion and retention, we are committed to driving better efficiency with dedicated automated ways to grow our customer counts. We plan to focus sales efforts on expansion and increased sales team productivity for accounts that have higher average checks.
Drive overall growth.
We're investing now in actions to drive stronger sales results and further efficiencies in 2023 and beyond.
This year as a percentage of revenue we plan to spend less on sales and marketing compared to prior year across the company, we intend to carefully manage expenses and were staffed according to current demand environment.
As a result, we expect headcount growth to be modest compared to 2022.
I will now turn the call over to Brian who will provide a more detailed discussion of our financial performance and guidance. Brian is great to have you on board for your first <unk> earnings call.
Thank you again and thank you for the warm welcome and introduction.
It has only been a few weeks and I can already see that <unk> has all the attributes CFO values, a high margin growing recurring revenue business and our loyal committed customer base.
Have a huge market opportunity and a truly diverse global business serving customers in 150 countries across all industries and across all market segments.
<unk> from small businesses and startups to fortune 500 companies and global agencies I'm incredibly excited to join Sunrise and it would be working with an experienced and passionate management team.
Look forward to helping drive the next phase of growth.
Now turning to our Q1 2023 results.
Our Q1 revenue of $70 9 million was up 24% year over year and above the high end of our Q1 'twenty three guidance range growth was driven by record net new additions and continued growth in our average revenue per customer.
Our dollar based net revenue retention for the first quarter was 116% we continue to affect our net revenue retention remains strong as we execute on upsell and cross sell strategies within our install base.
<unk> was $293 million as of March 31, 2023 first quarter gross margin of 82, 2% was up approximately 250 basis points from a year ago.
Gross margin benefited from higher revenue and continued leverage from our hosting and third party service costs. We continue to expect gross margin above 80% in the near term.
Operating expenses were $69 million in the quarter down four 3% sequentially as we continued to drive efficiencies carefully manage expenses and drive towards sustained profitability.
non-GAAP net loss was $7 1 million and at the high end of our guidance range of $8 million to $7 million loss.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short term investments of $232 3 million down from $237 5 million in the previous quarter.
Our cash flow from operations in the current fiscal year was negative $3 6 million.
We also incurred approximately 300 K of capital expenditures and $1 1 million of software development costs.
Looking ahead to 2023 guidance and confident in the underlying trends in the business and capabilities of our leaders to deliver profitability. We are committed to maintaining a disciplined and balanced approach to optimizing costs and improving efficiency and profitability, while continuing to invest in future growth opportunities that we expect will drive long.
Term value.
For the second quarter, we expect revenue in the range of $73 $6 million to $75 million up approximately 19% year over year at the midpoint.
We expect our second quarter non-GAAP net loss of $3 million to $1 5 million.
For the full year, we are reiterating our prior revenue guidance of $306 million to $309 million, which would represent growth at the mid point of approximately 21% year over year.
We continue to expect non-GAAP net income of breakeven to $3 million for the full year our.
Our non-GAAP net income guidance range assumes a euro exchange rate of approximately $1 six to the dollar for the remainder of the year.
With that we're happy to take any of your questions. Operator. Please open the line for questions.
Yeah.
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.
We will go first to Mark Murphy at Jpmorgan.
Hey, guys. This is already on for Mark Murphy. Thanks for taking the questions first one you guys paying customers really in parts of adds in the quarter.
Anything to speak to that and what's driving that kind of more specifically under the hood.
The demand environment kind of improved quarter over quarter have been stable or gotten a little bit worse, that's part of what helped.
Thanks very much for the question. This is Andrew So I would say that the b the.
Record net new adds is really a product of the experiments and the growth that we invested in last year, primarily an organic marketing channels as well as our paid experiments last year those continue to drive those numbers that you see.
Q1, I would say, it's a similar demand environment from.
From the last reporting cycle, we are.
Continuing to see strong tailwind from those investments.
But we also believe that there is a stickiness that we have for our product going forward.
Overall I'm confident in our demand generation motions, and we believe that where were positioned for a balanced approach.
Great. Thanks, and then to follow up you guys announced a pretty exciting chairman of AI tools.
Interesting would be to just know how are these translated from kind of types of actual usage are you seeing cuts.
Customers really take these and adopt or is there kind of a learning curve. There still there is still going through.
Thanks.
Thank you this is Eugene so.
We definitely see a lot of usage and I just want to give you kind of bigger background here, we started implementing some GPT based features.
Even from early versions of <unk> and so on.
And that happened roughly two years ago implementation was primarily in our rising assistant tool that was available only for Google users. So usage was somewhat limited to higher end of the same rush user base, but we had a lot of usage for a while and right now with new changes, we realize that there is much broader audience for those kind of products. So we.
And opening up a lot of those features through App center, including launch of content shape.
And also we encourage a lot of.
Our partners, who work and generate you've AI space to build apps and we are seeing quite a good traction in terms of usage and all of those directions.
Sin.
Maybe a little bit early to say how much usage, we're going to see moving forward because it is such a hot topic a lot of demand is really coming from people being excited about new generation of AI capabilities and wanting to try them, but I think the traction we're seeing right now is very encouraging, especially in terms of usage.
That's great to hear thank you.
Well move next to Scott Berg at Needham.
Yeah.
Hey, this is a rob <unk> on for Scott Berg, continuing on the topic of regenerative AI functionality or are you guys looking to monetize this as a separate module or is it more about driving incremental functionality just stay at competitively.
Well, we definitely going to see how market develops to John understand to what extent, we can apply monetization features that we have right now they are monetized the route.
Some things you can do in the free version, but once you need to generate a lot of content. We will ask you to start pain. So.
Bill Mudd monetization is already implemented and those features as of now.
Okay.
Got it thanks, and then with the guidance it implies a modest level of revenue growth acceleration here. What gives you confidence in that guidance versus macro that is still a bit soft. Thank you.
Hey, Rob it's Brian So yeah, we're guiding 360 to 390 <unk> for the year It does assume.
We have some leveling off line growth.
In the second half and I think some of the comments that Andrew made earlier were really driving the confidence and that we are seeing strong demands and that's continuing into the second quarter.
And yes, our expectation is that will drive some leveling off in the growth rate in the second half and allow us to achieve that full year guidance.
Got it thanks for the color.
Next we'll move to Parker Lane at Stifel.
Hi, This is Matthew kicker for Parker and thanks for taking my questions to start to what degree are you seeing the macro driving vendor consolidation and how much are you planning to benefit from that trend.
So.
I would say vendor consolidation have had been a big trend across mark. So as you follow other companies in the space such as hub spot they've been mentioned this for a while as well.
Definitely something we're seeing now in an environment like this people don't want to overspend and they want to buy.
Blatt firms that provide best value for money.
We can provide anecdotal evidence of core is that this is happening based on conversations we're having with customers and based on how they choose vendors now.
Don't think we could quantify this but definitely something we're hearing from other players in the industry and from our customers as well.
Yeah.
Okay understood and then secondly, you've shown great progress on that center now are 50 apps. What does the company is doing in terms of R&D or working with other developers to keep increasing that number and how should we think about the App center as a revenue contributor going forward.
So.
Just.
Again to give storage background.
It is something that we started doing not long time ago. App Center was launched in 2021 and it was really more of an experimental product, where we are trying to see if it's a viable go to market strategy and we were really excited about success, we've seen early on and starting to doubling down on this but I would say in terms of allocation.
<unk> resources, where it's probably still a little bit behind compared to where we want to be and even though we are committing more and more of our R&D resources towards data center.
In terms of what we're doing now we are investing a lot in infrastructure for apps, especially in billing systems. So there is a greater flexibility in terms of how those apps can be monetized.
We are adding engineering resources in this direction.
And then in terms of partner sourced and we actually now established.
A team that is dedicated towards partners sourcing we have five people there and.
Our goal is to bring not just more parker's but of course partners.
Okay.
That are let's say more established as businesses.
We are very excited about partners, we have now theyre doing great job building great products.
I think.
For our next batch of partners. We also want to have a couple of big names. So so that's what we're aiming for in terms of Op Center development.
Okay got it thank you.
We'll move next to Michael <unk> at Keybanc.
Hi, This is Michael the Adobe go on for Michael Thanks for taking my question.
Just to start could you talk about broadly the change that you saw an overall macro environment and the demand environment between Q4 and now.
Sorry, this is Andrew I'd be happy to happy to take the question. Thank you for it. So again, we see just as we reported in our previous cycle, we do see elevated and sustained demand, particularly registration trials net new customer adds as I mentioned before a couple of things are driving this not only the investments from last.
Year and multiple channels for growth.
But also I would say, particularly in Q1, we have activated new audiences with our first ever campaign focused on our real customer. This has struck a chord with our existing and new audiences, which is driving some of our best ever results at the top of the funnel further on down so I think going back to your question.
The demand that we continue to see.
Supportive it's strong.
We will continue to drive high visibility high impact programs for the rest of the year to sustain that.
Great. Thanks, and then just a quick follow up on the five K customer I.
I guess, how sustainable is that level I know you've talked to three K previously so I guess it was abnormally high and above your expectations and are not re achievable or what are you expecting at this point.
I think it's in line with our expectations I think that we just need to remember that everything is according to our guidance our business just like others is seasonality.
And I would just I would just look forward look towards the guidance that we've given.
Great. Thanks, a lot.
Yeah.
And our next question comes from Elizabeth quarter at Morgan Stanley .
Yeah.
Alright. Thank you so much I'll ask a follow up on that.
There are 116.
Do you expect it to remain strong benefiting from some of that upsell and cross sell so could we see it stabilize at this level for the remainder of the year.
The risk to the downside of the upside as an entity.
And were there any intra quarter kind of NR trend that you can speak to from Q4 and Q1. Thank you.
Alright. Thank you for the question this is Eugene.
And maybe maybe we're not really communicated in this well.
But the thing is just based on how our formula is culture.
Is calculated.
There is.
As certain mass mass.
<unk>.
Makes it go down this year and is going to continue till the end of the year and then it will start going up.
Sometimes you have those fluctuations just because no something moves from luminaire denominator and.
Continues to do that for a year so.
Again in terms of where this number is going to be it will keep slightly declining till the end of this year and then we expected to start growing back and I think we're saying that.
For a normal environment when you don't have those fluctuations.
Sure.
It's reasonable to expect it to be somewhere in 114 range.
Of course, if it's better.
That's great but.
Normal environment floor, we usually think about $1 14, but of course like I said right now we have.
Spending numbering denominator and will continue being therefore.
The remainder of the year.
About.
Yes in terms of intra quarter. Unfortunately, we havent done this calculation, so I wouldn't be able to provide details, but we will be happy to follow up later.
Got it thanks for the clarification and then just as a.
A follow up on the consolidation theme, you mentioned Korea of greater than 20% of customers are buying multiple products.
Any color on how that looked a year ago and where it could go over the next few years and what are the specific kind of go to market motions are driving.
Got that and Chris Thank you.
So I would say that I wouldn't say that.
I don't have the number just in front of me about last year versus this year, we will be happy to follow up on that but I would say that over time, particularly when we look at App Center. When we look at the over 55 tools that we have.
As our overall platform, we continue to invest particularly in in those accounts that show even more promise two to expand.
We absolutely are investing in more and more activities to grow those those average checks.
At this point, we can't give specific guidance on where that number could improve from 20%. The non words over the next couple of years, but I can tell you that it's absolutely a priority for us.
Okay. Thank you.
We'll move next to James Hany at Jefferies.
Thank you for taking my questions you mentioned in the letter that you are focused on upgrading your product offerings could you just talk more about what some of those upgrades are and when we should expect those to show up and.
And then my second question, just if you could elaborate more on your comment around the number of customers paying over 10000 growing over 45% just how much of that was adding new clients at the average at a higher average selling price versus upselling customers into new.
The higher price tiers. Thanks.
So let me start with.
Our last question so.
In terms of how people get into this bucket.
I would say.
The normal path is going to be through upgrade so people would buy something and then eventually.
Get into this higher tier and start buying more.
I would say that majority of those cases that said, sometimes this path is really short so it can happen within the first couple of months.
So I don't know where it would qualify on your scale of.
A new customer if it came just a couple of months before or is it an existing customer that got extended but I would say this was also quite quite a big bucket people, who started with something small just to try the product and quickly realized they need more and sorry to normal kind of kind of buying process that larger companies do when.
The need to write bigger checks.
In terms of ongoing product improvements I think the list is going to be huge if we have dimension everything but.
On the SCO front, we've launched several really innovative features for example.
Stuart classroom feature that utilizes AI too.
Semantically analyze.
So the keywords and bundle them together in groups that makes most sense in terms of covering particular topic in creating blog posts.
Yeah.
Believes really.
Unique and new algorithm to estimate organic traffic based on certain features. So this is really in line with overall search trend where.
In the past you can have 10 blue links now every searches unique with a unique combination of search and search features and our traffic algorithms dialed traffic estimation algorithms now taken into account. So we forecast traffic based on composition of certain features in each particular reside I don't know any other company that is doing the same.
So really a lot of innovation happening across our entire portfolio of our products. We've mentioned a couple of things we've launched an app Sandra primarily focused around AI, but there are tons of other products that we didn't mention just because they're not utilizing AI that much at the same time, we're seeing a lot of traction with those products as well.
So tons of stuff happened and now we will have to narrow down. The question for me would you be able to provide more specific details.
I appreciate it thank you.
And that does conclude our question and answer session. At this time I would like to turn it back over to management for any closing remarks.
Thank you for your questions.
Hosing.
Hey.
Luke.
<unk> delivered.
Strong starts to the year end.
Our ratios today.
Gordon it's milestone.
What are the chosen.
Our customer.
Phone paying customers, it's very important milestone for us we are very committed to making online marketing easier for businesses of pesos.
Thank you for.
And for your support.
Okay.
Looking forward to keep you update updated on our progress. Thank you.
And that does conclude today's conference call. Thank you for your participation you may now disconnect.
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