Q3 2023 Similarweb Ltd Earnings Call
Greetings and welcome to similar words third quarter fiscal 2023 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference.
Please press star zero on your telephone keypad.
They're a reminder, this conference is being recorded.
Now my pleasure to introduce your host RJ Jones, Vice President Investor Relations. Thank you R. J you may begin.
Thank you operator, welcome everyone to our third quarter 2023 earnings conference call.
During this call we will make forward looking statements related to our business. These statements may include the expected performance of our business and our future financial results our strategy the potential impacts of rising interest rates rising global inflation and current macroeconomic and geopolitical conditions, including the current war in Israel challenges in our business.
The markets in which we operate our anticipated long term growth and overall future prospects.
These statements are subject to known and unknown risks uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call.
Further reported results should not be considered as an indication of future performance. Please review the forward looking statements discussion in our shareholder letter along with our form 20-F filed with the SEC on March 23, 2023, and in particular the sections entitled cautionary statements regarding forward looking statements and risk factors therein.
For a discussion of the factors that could cause our actual results to differ from the forward looking statements.
Also note that any forward looking statements made on this call are based on information available as of today's date November eight 2023, we undertake no obligation to update any forward looking statements, we make today, except as required by law.
As a reminder, certain financial measures we use in presentations of results on our call today are expressed on a non-GAAP basis in particular, we reference non-GAAP operating loss, which represents a GAAP operating loss less share based compensation.
Estimates and payments related to business combinations amortization of intangible assets and certain other nonrecurring items we.
We use this and other non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes.
We believe these non-GAAP financial measures when taken collectively may be helpful to investors, because they provide consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business results of operations or outlook.
However, non-GAAP financial measures have limitations as analytical tools and are presented for supplemental informational purposes, only and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at IR Dot similar web dot com.
Today, we will begin with brief prepared remarks from our CEO or offer and CFO. Jason Schwartz then we will open up the call to questions from sell side analysts in attendance. Please note that we published a detailed discussion of our third quarter 2023 results in a letter to shareholders for investors to reference as well as an updated investor presentation with a strategic one.
The business both of which are available on our Investor Relations website.
With that I will turn the call over to or offer CEO of similar web.
Thank you Jay and welcome everyone joining the call today.
In Q3, we reported another quarter of growth and operation operating improvements and grow our revenues, 10% over Q3 last year to 54.8 to medium.
Our global customer base grew 12% year over year to 94400 customers now.
No average customer spends nearly $51000 with us annually.
I'm very proud of the team as we crossed a serious of possibility and milestones.
I'm excited to report that our Q3 non-GAAP operating margin showed a strong improvement of 29 percentage point compared to last year, which led us to achieving our first ever non-GAAP operating profit in the quarter.
This is a significant achievement for us and it is truly a team at home fitness and I'm very proud of the team.
Q3 metrics at the top of our funnel continues to stay strong.
We had around 13 million visitors to our free tools similar web com in Q3, and we are on a phased off exceeded more than 120 million visits to our tools this year.
As a result, our pipeline remains robust and we are adding new customers and expanding our penetration into our market.
During the quarter, we launched similar web three O.
Oh, which is the latest generation of our platform.
Hello Web thought Oh, he's the new way, which we think that you are offering that includes new data insights and navigation.
Now I have a better pricing alignment with our customer that enhance our go to market motion and improve our offering.
Enterprise customer and I'll ever although value since launch has increased noticeably.
We continue to make progress with similar ask Oh, they get that intelligent system that uses similar web digital data to answer any questions that they use a typing street taxed without having to know how to navigate our platform. The latest version of the feature is not widely available to our plants.
And integrate the AI based trends analysis into the research results for websites benchmarking.
Well, just getting stopped out but with what is possible would generate.
And we believe that managing similar dig it out that that would be I capabilities creates an amazing growth potential for us.
I would like to take a minute to discuss the circumstances, we are facing in Israel.
No one months ago, Israel suffers a refit terrorist attack.
We stand in solidarity with Israel, and why you think organizing the human suffering across the region.
We are proud to be an Israeli company with all season employees around the world.
Since October seven our people have demonstrated their grateful to Dan keeping business as usual on adapting to the current situation.
We continue to deliver our solutions and insights to all of our global customer without interruption.
So all similar webber's, we thank you for your continuing commitment to keep business operating running smoothly.
So our customers following those and you in the investment community. We are grateful for your support. So many of you wrote to me personally to shelf for modality. It's meant so much to me and thank you so much.
With that Jason I will turn the call over to you.
Thank you ward and thank you to everyone joining us on the call today to discuss our third quarter results I will briefly address our financial performance and then we'll open up the call to questions.
Our results in the third quarter reflect the cumulative effect of our focus on disciplined execution revenue was $54 $8 million for the quarter and exceeded the high end of our guidance range for our 100000 dollar AOR customer segment and <unk> was 108% as.
<unk>, 123% in Q3 last year and now represent 55% of our total E. R. R.
Despite longer sales cycles than we havent seen historically customer acquisition and logo retention were steady in the third quarter.
Consistent with trends earlier this year, we saw challenges to expansion within our existing customer base as enterprises are continuing to optimize their budgets and spending some customers have reduced their spending with us in order to meet budget constraints, while remaining a similar web customer we are encouraged.
That 43% of our AOR is generated from customers with multi year contracts, demonstrating the strength and longevity of those customer relationships terrific by the enduring value that we deliver.
While our results on the top line were better than planned we also exceeded expectations in our operating efficiency and on our bottom line.
Our non-GAAP gross margin reached a new record of 83%.
Our third quarter GAAP operating loss was $4 $9 million, while our non-GAAP operating profit was $1 $1 million. This result was our first ever profitable quarter on a non-GAAP operating basis and this is a momentous achievement.
Notably as or mentioned, our non-GAAP operating margin improved 29 percentage points versus the prior year.
Turning now to Q4 2023, we expect total revenue in the range of 55, and a half to $56 million for the full year. We now expect total revenue in the range of $216 8 million to $217 $3 million representing.
Taking approximately 12% growth year over year midpoint of the range.
non-GAAP operating profit for the fourth quarter is expected to be in the range of half a million to $1 million, which would amount to our second profitable quarter on a non-GAAP basis.
For the full year, we expect our operating loss to be between $8 6 million and $9 $1 million.
Last quarter, we expect to reach our goal of sustained positive free cash flow quarterly.
We continue to focus on balancing growth with profitability as we become sustained free cash flow positive. We believe that our team our business model and our balance sheet remained resilient as we navigate the current environment.
As a global company headquartered in Israel, we remain United resilience and term and to achieve our goals. We are committed to keeping business as usual and our focus on disciplined execution will continue the opportunities in front of US we will continue to inspire us and our hope for peace.
We'll not relent.
That or and I are ready to answer your questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and there'd be nothing.
Sorry to pick up your handset before pressing the FERC one.
One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Ryan Macwilliams with Barclays. Please proceed with your question.
Hey, guys. Thanks for taking the questions and congrats on the results given the circumstances, it's great to see the improvements in profitability.
New for Jason how did you see macro change during the quarter, you know maybe certain different customer segments and have you seen any changes from a macro standpoint since the end of the quarter or to your customer base.
Yeah.
Hey, Thanks Ryan.
So we saw we're starting to see some improvements in the overall demand environment.
And deal starting to accelerate.
We're seeing that mostly in Europe.
And in APAC and still you asked is is similar kinds of trends like we've been saying, but we're starting to see that demand started.
Or.
I'm, a little optimistic going into our into the future.
Excellent and then in your shareholder letter you said the average order value has increased since the launch of similar web 2.0, that's great to hear.
You mean like a higher price point for the platform or are customers adopting additional capabilities or just a larger scope within organizations love more detail there. Thanks guys.
Hey, Ryan its all and thank you for the question so they kind of repackage than defense see chairs.
And different emotional.
And that drove very nice.
And gross.
Anyway.
So, but you got to give some sense of it.
Because they really are.
Build it from scratch, so it's very different than the old pricing and structure we had.
Thanks, guys.
Thank you. Our next question is from Jason <unk> with Oppenheimer. Please proceed with your question.
Thanks, and just wanted to send.
Support.
And best wishes to everybody in Israel.
So first.
Yeah.
Do you think we're at an inflection point here I mean, obviously, we saw the improvement in billings on a year over year basis you.
How much of this is.
Youre basically getting customers to move to sign contracts faster versus you know you you're now starting to see customers add some more capabilities, where they were not willing to do that.
No.
And there are some pricing. So if you kind of like look at it three ways you can kind of drive billings, maybe break that down and you get I guess do you think we're at an inflection point from here. Thanks.
And I was just out its own and maybe our JV also Oh I've got more information.
I I do start seeing a but a dialogue around dawn sudden.
No, it's something that they feel that way.
And the end of the area.
Companies that I'm trying to optimize their budgets.
I think this is a good indication that maybe there is a shift.
Well, that's a bad thing to have something that maybe you have anything to add from your side.
Yeah, I think that we're starting to see some of that starting to trough, but I think the the thing that continues to impress us is the.
Continuous.
Desire of customers to sign on for multi year commitments.
That's very encouraging in an environment, where people were trying to reduce commitments or reduce their spend.
And the fact that we see again year over year and sequentially quarter over quarter.
That number of the percentage of our AOR, that's committed under a multiyear agreement.
It's something that we watch closely I'd say, a good sign for the durability.
Thank you.
Thank you.
Next question.
Rachel a O T with William Blair. Please proceed with your question.
Yeah. Thank you Yeah I was wondering if you could talk a little bit more about any impact you guys have seen to either like the sales cycles or pipeline conversions in kids and then your pricing and packaging plants earlier this quarter.
Okay.
And yeah sure.
So I think that the new pricing and packaging we introduced improved.
A little bit the sales cycle and the conversion rate, but but overall in the past few quarters those metrics, that's harrods because the microenvironment.
So we did see.
Longer sales cycle around the Smbs.
This increase.
Particularly I think around stopped and the strategic identify the county, there was a small increase.
And in the conversion rate I think again, so in the past few quarters you saw that that was all due to confer it's mostly S&P.
And the other thing it's it's it's improve the threatened but you know you still need to do more improvement in all of the Quebec too.
The metrics that they were before and.
Microenvironment still changing.
This year.
Awesome. Thank you and then maybe just following up on that were there any adjustments you needed Tonight glass.
Our go to market motion or the sales force when you and I guess, that's then I want to point out.
No.
No.
Okay. Thank you.
Thank you.
Thank you. Our next question is from Brent Thill with Jefferies. Please proceed with your question.
Hi, Jason.
Jason This is John Andy on for Ben So I have two question on cement, what we pointed out I mean, it's been I guess two months since that was announced that I don't know if you could dig in a little bit in terms of the E mail them to you know where you've seen the most impact it comes out on the major solution category or add ons.
And then secondly, you know from.
From the previous commentary it does look like things are starting to maybe stabilize debated net well, let me retention numbers seem to be slowing data center as well.
And then if you agree with that.
And where or when do you think that might bottom. Thank you.
Yeah, So I'll try to answer it.
Two questions I heard I think the nice thing, we're seeing with the solution pretty old that seems like a new approach when we kind of all in on that customer now buying that's a package you get exposed to most of the features that we have even the premium one but with the lower.
Capacity, so it's giving US also much better land and expand so you see like one of the features play once twice if you want to repeat usage and then they go to that can meet the approach.
And Oh do see what does the future of this week, we introduced US and also one of them was them tracking capabilities. So it's a capability. We got from acquisition. We did last year from a company called <unk> and Ranger.
So those kinds of operational capabilities.
Christian.
<unk> somebody attention in the platforms. So they are coming more often and they use it.
Two more and so it was a good success and now with the utmost listen free all of the customer.
And expose them to those features.
And this is around that.
Second question I remember was the.
The trend around then and now.
We do we do see stability around the logo and then the two stable.
Am I in the past few quarterly calls tougher to upsell them.
And but the but I do feel and see this is going to change hopefully, especially as Michael environment gets more stable.
Thank you.
Okay.
Thank you. Our next question is from Glenn Knoblock with Cantor Fitzgerald. Please proceed with your question.
Hi, Jason or Oh, Thanks for taking my question this sort of thing my support as well.
Maybe on the product front could you maybe walk us through what the top two or three things or you're doing that you think will kind of increase that the missing criticality of your platform.
Maybe it's something to do with Gen AI, but just curious what you're doing on that front and what that means kind of like a physical demand backdrop.
Yeah.
Yeah Yeah.
Yeah for sure and so.
I will answer in two parts first a lot of our teams are we shifted them to improve stickiness and successful onboarding in the past few quarters there'll be putting another fantasy about improving set up on boarding.
Thank you and our platform is very deep and have lots of those capabilities and we still feel that most of the customers are not aware of all of the Philippines, we have.
We can.
And amazing insight then we know that they can push.
We use them to discover all of those other capabilities.
It is increasing our retention and up sell and all the other metrics. So we're putting another empathy around that.
And then regarding <unk>, we have a dedicated team that these days old job is to implement the eye all across the platform. So we just released that.
Recall that the first version of a similar to ask them to help users to navigate inside our platform and pre taxed if they can find.
Ever adopted they want to get in.
He will walk them in the platform to the right place to find that.
And I think the second part is will integrate the I and many other parts will help you do that analysis, but it's going to be our co pilots you know whether you use the platform.
So there's a lot of exciting stuff that's.
It's not working in progress and.
And we want to lose them slowly every quarter in different parts of the of the platform.
Okay.
Awesome and then maybe one for Jason on just sales cycles. I think you guys first mentioned the possibility of of them elongated in the second quarter of last year.
And I think every quarter since we've kind of had talked about sale cycles, you won't getting I'm. Just curious if they still have been lengthening call it quarter over quarter or if they've kind of remain steady and at what point. If they are remaining steady would become maybe less of a headwind.
Sure.
Okay.
Okay.
Alright, do you hear me now.
I think that yeah.
Youre right, we started seeing the impact of that.
About Q2 of last year, we saw that the cycle starting long gating I think the last couple of quarters, we've seen them stabilizing kind of where they're at the right. If we don't see maintaining a longer but we do see them.
We didn't see them getting shorter we're starting to see some of that.
Free up and it's starting to turn but it's too early to say that that's a trend just yet I think the number that we report in the investor deck, we shared the.
The CAC payback period, which is now between 19% to 20 months on a gross profit basis. Historically, that's been in the 15 to 16 month payback period, and we think that our stock starts shifting back to to normal cycles that we'll start seeing those those payback periods starting to.
<unk> returned back to those historical levels.
Awesome. Thank you guys.
Thank you. Our next question is from Patrick Walgreens with JMP. Please proceed with your question.
Oh, great. Thank you and we're keeping you and your families and our prayers.
You know first of all congratulations on the profitability, it's kind of a big deal right. So Jason where can that go what's the plan.
Hey, Pat Thanks, so much for the good wishes and.
We believe that on a on a long term basis.
Youre going to be seeing you know, 85% gross margins and and 25% non-GAAP operating margins and we that's our long term.
Margin in our long term model that we think is somewhere in the neighborhood of $4 million to $500 million has been consistent that way and.
And we're really excited to see that the numbers start.
Pulling into.
Placing gross margin getting 80, 283, I'm seeing sales and marketing down to 41% and and G&A you know already at 16 and coming down I think there's there's a lot of efficiency that we talked about throughout this year that we were going to deliver.
Deliver and.
We are really.
Focused on that disciplined execution that we've talked about over the last couple of quarters.
Okay and then so once you hit free cash flow positive.
What do you feel like you can start operating a little differently.
What do you mean.
Well, what we would be able to do that you're not doing now.
No I think the the model that we go you know we've been a the model is designed to be profitable.
Profitable from the gecko.
Beauty.
The unit economics here are that we have a good retention rate and more importantly, we have great.
Ongoing aren't growing margins in the second and third year, we lose money on the customer in year. One that's a 15 to 16 a payback period.
Year, two were wildly profitable on the customer and so that retention that we have and the durability that we see in those multiyear deals. It gives us a lot of confidence that we're gonna be continuing to produce that will continue to invest in the things that drive further growth, but we're very committed to.
Operating as a profitable growth company and I think that's what we said beginning of the year and we're happy to see some of this stuff.
Start to come to fruition with the achievement of operating profitability already this quarter.
Okay last one for me so as a as a customer and a user is an example of something I'd love to see you invest in would.
It would be a and iPhone mobile app, and especially if you're going to use Jed I. If I can just talk to my phone and tell them, what I want to see in terms of the data.
So that you know or what am I going to get one of those.
Maybe it wasn't responsible books in cat, so I would've thought that right now.
Thanks, so much.
Uh huh.
Yeah.
Maryland will be profitable I can go back to those adventure.
I think so.
Yeah, Hey, what are we going to do with the with the free cash flow you've got your answer.
Okay, Alright, great always commands.
Yeah.
Thank you. Our next question is from Tyler Radke with Citi. Please proceed with your question.
Okay.
Yeah, Hey, thanks for taking the question.
I'll Echo my best.
Best wishes and.
The resiliency here.
Wanted to just start off on the the gross retention sites. It was encouraging to hear kind of a pick up in what seems to be you know new bookings and an expansion bookings, but do you feel like you're starting to see the the gross retention rates and that turn turn the corner. If you could just kind of comment on the timely.
The thing that bottom.
Yes, we're starting to see it see that sort of thing or mentioned earlier.
Early retirement of debt.
We're starting to see a.
A slowdown in the in the down sales or you know the constriction of budgets that our customers are having I think people have done the optimizations that they needed.
And we're starting to see those things not only renew but also renewing for them for longer periods of time as you see that.
That metric that we keep on watching.
The multi year commitments.
That gives us some degree of confidence, but again, we're starting to see it turn and we're going to keep our monitoring it over the next couple of quarters and see that that that turned its happening on a sustained basis.
Okay.
Okay, Okay, great and Jason I know, you're not providing official 'twenty 'twenty four guidance obviously.
Obviously Q4 is a big quarter to get through but if we just think about where you're guiding in Q4 I believe in the high single digit.
Revenue growth range is that a good baseline for next year or maybe given what you're seeing on the new business side, we could see growth rates.
Up from from that 9% and then secondly, unprofitability do you feel like.
You know certainly there's been a lot of margin expansion this year, but how should we just think about the puts and takes on the margin expansion side of equation too. Thank you.
Yeah.
Yes so.
So.
We're gonna obviously weighed on giving guidance for 2024 till until the end of the year I think youre right that Q4 is a is an important part as we start thinking about that but yeah. The optimizations in and that we've done during the year I think have proven that we can operate more efficiently.
And and we've done that the beauty of the model is that there is a lot of leverage right. The same fixed cost that we have whether that's in the gross margin line or in G&A R&D and alike.
<unk> are highly leverage is as the revenue grows so.
That's there should be further margin expansion as that continues to grow but.
We'll give more guidance on on the on all the margins for 2024.
At the beginning of the year.
Okay. Thank you.
Thanks.
Thank you.
There are no further questions at this time. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Thank you.
Thank you.