Q3 2023 Semrush Holdings Inc Earnings Call

Thank you for standing by and welcome to the <unk> third quarter earnings 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 you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question press. The star one again I would like to hand over to mainly Johnson to begin the call. Please go ahead.

Good morning, and welcome to semi floating third quarter 2023 conference call.

Well be discussing the results announced in our press release issued after market close on Wednesday November 1st with me on the call is our CEO Omega Schlegel out our president Eugene <unk>, and our CFO Brian <unk>.

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.

Statements include but are not limited to statements concerning our expected future business and financial performance and financial condition expected growth adoption and demand for our existing and our new products and features our App center expansion industry and market trends and our competitive position market opportunities sales and marketing activities, the sufficiency of our staffing level.

Our guidance for the fourth quarter of 2023, and our full year 2023, and statements about future pricing and operating results, including margin improvement revenue growth and profitability forward looking statements are statements other than statements of fact and can be identified with words, such as expect can anticipate intend plan believe seek.

While 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 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 <unk>.

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 our other filings with the SEC.

During the course of today's call, we refer to certain non-GAAP financial measures a reconciliation.

<unk> schedule, showing the GAAP versus non-GAAP results currently available in our press release issued yesterday after market close which can be found at investor <unk> Dot com and with that let me turn call over to OLED.

Thank you and good morning to everyone on the call.

Our team executed well this quarter delivering.

Engraving, you or $78 7 million Canadian.

20% year over year.

Importantly, we also generated strong profitability, we reported non-GAAP net income.

8.4.

Our solid performance this quarter.

Raising our full year non-GAAP net income guidance.

We continue to drive towards sustained perfect I'll leave you to read.

<unk> built a business focused on driving strong sustainable growth.

Improving profitability and this quarter was no exception.

Before handing it over to you John and Brian will talk about the quarter in more detail.

I'd like to touch on the fuel highlights we discussed on our earnings call.

And sure why.

Cited about my future Akshay brush.

On the auto up coal.

Hey, Bob how are we have heavily invested and continued to invest in the unique combination of data assets and products.

Software platform helps customers improve their online visibility across.

All major channels.

Well the current product.

We believe <unk> has become the platform of choice for businesses of all sizes.

Across all industries.

Although revolt.

And language of Uhm.

We remain differentiated in our markets.

Importantly, we are uniquely positioned to help our clients because of our strong data assets and because of sustained industry dynamics.

Our strong competitive positioning that comes from our unique data assets is based on a combination of our own intellectual property and historical data.

<unk> collected from our customers.

Just to give you new data.

Being fed into our algorithms collector.

Collectively these allows us to generate strong predictive capabilities.

I have significant ROI for our customers.

When looking at the industry dynamics <unk> search engine companies, primarily make money from advertising as it is.

Those are designed to get clients to optimize great advertising on their own platform.

We believe it does not.

Just to give those clients unbiased advice on optimal use.

Marketing efforts.

Particularly if they're bad.

Alright would come from organic efforts or advertisements on our platform other than their own.

Jim Ross on the other hand provides.

Unbiased advice to its customers and the highest expected market guarantee across us alright.

Alright.

Yeah.

This is important.

Because we continue to benefit from great tonic shift of dollars being allocated away from physical visibility towards online video religion.

Politically.

He has spent the efforts.

Physical <unk> rents.

Are you able to be competitive without a significant online presence.

<unk>.

Judge organic social media and you spoke to earlier.

<unk> has changed.

In order to be successful businesses now mark.

Embrace new ways to create.

Fair enough for their brands.

But we must excel at is that now more than ever brands recognize the competitive ultra reliable.

Well, let me distinguish themselves online.

To be successful businesses need to be.

Just kind of it online.

We need to.

Top of the rankings and we need to be part of the discussions are happening on social media channels.

A critical component to connecting with consumers and replaces.

Now spend their time.

Yes.

Early innings of this exponential shifts.

And we believe the compelling ROI provided by Shamrock only continues to strengthen online markets become more situations.

Our unique data set and 15 years of expertise and investment in R&D.

<unk> built a platform for companies to enhance and maintain a competitive online presence across all channels.

The essence of Watson, thus, where GBS of the Internet.

We help companies establish maintain and enhance.

Online presence our customers can choose which market content is the most efficient for their businesses.

And we can drop out new routes and changed routes at anytime.

Let me provide the client example of an SMB affording the chairman the fracturing client boost organic rankings and online sales growth targets for three years, where they began their.

John can you give us and everything changed.

We started with site audits to fix website programs and generate a strong side helps corner.

Then we added pecking order tool to improve their online visibility.

Next we build a clear up tick.

Our kiosk magic and keyword for your tools.

And exploit what where competitors were doing and how they trading group.

Our organic research report and position taking two very.

Began to show impressive step ups in engagement and other within the next two years, we saw 73% increase in organic traffic.

This example, underlies how businesses are increasingly shifting their time effort and money to create awareness and visibility for their businesses online we believe businesses.

Able to analyze and execute on this shift will have the potential for exceptional results.

<unk> provides all of these tools in one place where they can do with this.

Industry intelligence, and our unique software offering positions us well to ensure lasting durable growth.

We are excited about where we sit today and what we are future holds for cameras.

Ill now turn the call over to Eugene and Brian to discuss with results of the quarter in more detail.

Thank you Ali we delivered another solid quarter and continue to be focused on three main pillars of growth to set us up for long term durable growth.

And we're making progress on each front.

To review our three main growth pillars are.

One increasing new user growth.

To maximize the value we generate from our users.

Three adding new products to our portfolio to address clients' needs and market trends.

Let me provide an update from this quarter.

First we continued increase in new user growth, we now have over 100800 paying customers within our core platform and believe we have a long runway of adoption ahead of us.

In Q3, we achieved solid net new customer additions and registrations with a more efficient sales and marketing engine than we've seen in prior quarters.

Using our platform for our own internal use and optimizing our sales and marketing spend on our organic efforts, we boosted our own online presence.

Turning to the second growth pillar, we have a strategy to grow as our customers grow and maximize the value we generate from our users.

During Q3, we saw continued success leveraging our brand to cross sell and up sell into our user base.

This quarter, we also initiated a rollout of some new pricing.

We took the opportunity to optimize our pricing strategy to better align with the tremendous value our product deliveries.

In Q3 and into early part of Q4 with tested price increases with a cohort of customers and we were encouraged by the response.

Net adds and retention were in line with our expectations and recent trends.

And I will review this indicates customers have a strong need for our offering and are willing to pay more given the unique benefits. It provides while we're still in early phases of pricing adjustments. This initial findings suggest that there may be more room to prudently.

Raised prices to better capture the value we provide.

Which we're seeing over time would also contribute further to all of our growth.

Our plan is to be thoughtful and measure we expect to continue testing and analyzing the data so that any broader pricing changes are backed by customer insights, while maintaining our commitment on delivering exceptional value.

The last pillar of our growth strategy is adding new products to our portfolio to set us up for long term durable growth and during Q3, we made good progress on this front.

During this quarter, we saw excellent adoption of some of our AI products and features and launched new monetization initiatives for our social media tools.

We also saw continued adoption of App center, which is one of the ways in which we are efficiently, adding tools and capabilities for our clients to further increase their ROI from our platform.

Pleased about the adoption of additional customer products, especially in our mid market and enterprise segments as we move upmarket clients find more value in our products continue to add more functions and features and as a result, we're able to generate higher average revenue per user.

In summary, I am very pleased with our success driving customer growth maximizing the value of our user base and expanding our product portfolio I will now turn the call over to Brian who will provide a more detailed.

Discussion of our financial performance and guidance go ahead Ryan.

Thank you Jim before I discuss our third quarter results in more detail I'd like to reflect on what I've learned here over my first two quarters as CFO I would also like to lay out my vision for how <unk> will operate as a finance organization, both internally and externally.

Over the past two quarters I traveled to several <unk> offices, and I've met with our team leaders to discuss their businesses.

I've been incredibly impressed with our team and their command of their respective markets and products I see a meaningful opportunity for <unk> to achieve durable growth over the next several years by further penetrating our served markets with our online visibility platform.

Shortly I see an opportunity for us to do this while also driving significant improvements to our profitability.

Facilitate type a relentless focus on data and metrics for decision, making throughout the finance organization, because semis has such a valuable customer dataset. The finance team has the ability to segment our user base to understand their buying patterns churn dynamics and interest in new products. Among many other things our plan is.

Rigorously analyze the data to allocate our investment in sales marketing and products.

We expect the outcome of this will be a disciplined approach that enables us to capitalize on our biggest opportunities while simultaneously driving operational efficiencies.

We expect this ROI framework, we will apply to our capital allocation decisions.

That is for internal projects external M&A or the optimization of our capital structure.

This will take some time to be fully realized in our results, but we are already deep into our 2020 for planning and have begun using this framework. We will give you more details on our 2024 outlook. When we report next quarter, but I feel very encouraged by what we're seeing so far and I look forward to sharing them with you in approximately 90 days.

With that I'd like to turn to our third quarter results in more detail.

<unk> had a very strong quarter across the board. Our Q3 revenue was $78 7 million with growth accelerating to 20% year over year growth was driven by solid new customer additions and continued growth in our average revenue per customer as we continue to execute on our cross sell and upsell strategy.

Our dollar based net revenue retention for the third quarter was 109%.

We expect our dollar based net revenue retention to trough within the next quarter or so and then begin to trend up as we increase adoption of our full portfolio of products tools and add ons within our installed base.

Annual recurring revenue surpassed 320 million growing 21% to $322 $8 million year over year.

We reported significant improvement in our operating margin, which was up 9800 basis points year over year and up 700 basis points sequentially.

This significant improvement is the result of a number of factors first we reported significant improvement in gross margin, which was up 230 basis points year over year up to 83, 4% gross margin.

<unk> continued to benefit from higher revenue and our continued ability to gain scale and leverage from our platform.

We continue to expect strong gross margin above 80% in the near term.

We continue to execute on our commitment to drive efficiencies.

They're fully manage expenses and drive towards sustained profitability.

One example of this is in marketing, where we made the strategic decision to slow paid spend and prioritize organic in brand spend which is delivering impressive results.

We saw strong demand for our products across <unk> subscribers growing our total paid subscriber base by 14%, while also lowering our customer acquisition costs.

And across the company, we continue to carefully manage expenses.

And plan to maintain our current head count for the near term. We believe we are sufficiently staffed to execute on our growth strategy.

Liver on our strategic priorities and manage the operations of the business.

Within that context, our Q3 operating income also benefited from the timing of some expenses that were originally expected to occur during the third quarter that we now expect will happen in the fourth quarter.

Moving down the income statement non-GAAP net income was positive $8 4 million, surpassing the high end of our guidance range the.

The outperformance of our non-GAAP net income relative to our guidance was a result of the flow through of our operating income performance.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short term investments of $230 1 million.

From $223 8 million in the previous quarter our.

Our cash flow from operations in the third quarter was positive $6 4 million.

Looking at the fourth quarter I am confident in the underlying trends in the business and capabilities of our team to continue on the path to deliver strong growth and profitability. We are updating our topline guidance to a new range of $3 7 million <unk> 8 million compared to our previous guidance range of $3 7 million.

$309 million.

We are also meaningfully raising our non-GAAP net income guidance to account for our improved efficiency.

We now expect non-GAAP net income in the range of $9 million to $11 million up from our previous range of $2 million to $4 million. This takes into account the strong operating profit we delivered in Q3, but also reflects a few offsetting factors, including the timing of our tax provision.

Timing of some expenses, we had originally planned in the third quarter, but now expect will occur in the fourth quarter.

For the fourth quarter, we expect revenue in the range of $82 7 million to $83 $7 million.

We expect fourth quarter non-GAAP net income of $4, one to $6 $1 million.

Finally, our updated guidance assumes a euro exchange rate of one that OE.

As a reminder, approximately 30% of our expenses are denominated in euros.

In closing, we are confident in our ability to grow and scale our business and.

And remain committed to a disciplined and balanced approach to spending which will drive improved efficiency and profitability, even while we invest in future growth opportunities that we expect will drive long term value and growth to our shareholders.

With that we're happy to take any of your questions. Operator. Please open the line for questions.

Operator, we can open up the lines for the question.

Operator, you can take the first question.

Okay.

Operator first question please.

Yes.

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