Q1 2024 Semrush Holdings Inc Earnings Call

Operator: Hello everyone, and welcome to the Semrush Holdings first quarter 2024 results conference call. My name is Drew, and I'll be the operator for today's call. After today's presentation, we will begin the Q&A session. To register a question, please press a star followed by one on your telephone keypad. To withdraw your question, please press the star followed by two. With that, I'll hand over to Brinlea Johnson, Investor Relations. Please go ahead.

Hello, everyone and welcome to the Sun Rush Holdings first quarter 'twenty 'twenty fault results Conference call. My name is true and I'll be your operator for today's call.

After today's presentation, we will begin the Q&A session to register a question. Please press star followed by one on your telephone keypad to withdraw your question. Please press star followed by chip.

With that I'll hand over to Brendan <unk> Johnson Investor Relations. Please go ahead, good morning, and welcome to Sandra Holdings first quarter 2024 conference call, we'll be discussing the results announced in our press release issued after market close on Monday may six.

Brinlea Johnson: and welcome to Semrush Holdings' first quarter 2024 conference call. We'll be discussing the results announced in our press release issued after market close on Monday, May 6. On the call with me is our CEO, Oleg Shchegolev, our president, Eugene Levin, and our CFO, Brian Mulroy.

Brinlea Johnson: On the call is our CEO well they snuggle.

Brinlea Johnson: Doug <unk>, our president Eugene button, and our CFO, Brian Boy.

Brinlea Johnson: 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, but are not limited to, statements concerning our expected future business and financial performance and financial conditions, expected growth, adoption, and demand for our existing and any products and features, our expected growth of the customer base and specific customer segments, expansion of our content-shaped tool, industry and market trends, our competitive position, market opportunities, sales and marketing activities, future spending and incremental investment, our guidance for the second quarter of 2024 and the full year 2024, and statements about future pricing and operating results, including margin improvements, revenue growth, and profitability.

Brinlea Johnson: 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 but are not limited to statements concerning our expected future business and financial performance and financial condition expected growth adoption and demand for existing and any products and features I expect.

Brinlea Johnson: The growth of our customer base and specific customer segments expansion of our content shake tool and it's really market trends and our competitive position market opportunities sales and marketing activities, you're just spending an incremental investment our guidance for the second quarter of 'twenty 'twenty, four and the full year 2024 and statements about future pricing.

Brinlea Johnson: The operating results, including margin improvement revenue growth and profitability.

Brinlea Johnson: Forward-looking statements are statements other than statements of fact and can be identified by words such as expect, can, anticipate, intend, plan, believe, seek, or will. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date. We do not undertake any duty to update these statements.

Brinlea Johnson: Forward looking statements are statements other than statements of fact and can be identified by words, such as expect anticipate intend plan believe seek or will these statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, we do not undertake any duty to update these statements.

Brinlea Johnson: Board Looking Statements address matters that are subject to risk and uncertainty that could cause actual results to differ materially from these Board 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, filed with the Securities and Exchange Commission, as well as our other filings with the SEC. During the course of today's call, we referred to certain non-GAAP financial measures.

Brinlea Johnson: 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 filed with the Securities and Exchange Commission as well as are other fan.

Brinlea Johnson: Please with the SEC.

Brinlea Johnson: During the course of today's call refer to certain non-GAAP financial measures. There's 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 thought that rush dotcom.

Brinlea Johnson: There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued yesterday after the market closed, which can be found at investors.semrush.com. As noted last quarter, our results for the first quarter and our forward-looking guidance use our new non-GAAP definition. We are no longer providing guidance for non-GAAP net income and instead guiding to both non-GAAP operating margin and free cash flow margin. The definitions for these are presented in our earnings release.

Brinlea Johnson: As noted last quarter, our results for the first quarter and our forward looking guidance uses our new non-GAAP definition, we're no longer providing guidance for non-GAAP net income and it's dead dying to both non-GAAP operating margin and free cash flow margin.

Brinlea Johnson: Definitions for these are presented in our earnings release is also updated our definition of non-GAAP income from operations in which non-GAAP operating margin is calculated to exclude amortization of acquired intangible assets acquisition related costs restructuring costs and other one time expenses outside the ordinary course of business for example, our exit costs incurred primarily.

Brinlea Johnson: We've also updated our definition of non-GAAP income from operations, on which non-GAAP operating margin is calculated to exclude amortization of acquired intangible assets, acquisition-related costs, restructuring costs, and other one-time expenses outside the ordinary course of business. For example, our exit costs incurred primarily in 2022, in addition to the current exclusion of stock-based compensation.

Brinlea Johnson: In 2022 in addition to the current exclusion of stock based compensation.

Brinlea Johnson: The updated definitions are reflected in our first quarter 2024 financial results. All future financial statements will reflect the new definition for the current and prior periods. We are also providing a reconciliation of the old definition to the new definition for the periods presented. We believe this update allows investors to better understand our financial performance, better align with measures used internally by management in operating our business, and permit a better evaluation of the efficacy of the methodology and information used by management to evaluate and measure our performance. Now, let me turn the call over to Oleg.

Brinlea Johnson: Updated definitions are reflected in our first quarter of 2024 financial results. All keeps your financial statements will reflect the new definition for the current and prior periods. We're also providing a reconciliation in the old definition to the new definition for the periods presented we believe this update allows investors to better understand our financial performance better align with measures used internally by manager.

Brinlea Johnson: In operating our business and permit a better evaluation of the efficacy of the methodology and information used by management to evaluate and measure our performance.

Brinlea Johnson: Now, let me turn the call over to OLED.

Oleg Shchegolev: Thank you and good morning to everyone on the call. In the first quarter, we delivered revenue of $85.8 million, up 21% year-over-year, and IRR growth of 31% year-over-year. We reported income from operations of $1.5 million and non-GAAP income from operations of $9.7 million in the first quarter. Additionally, we generated free cash flow of $12 million and a free cash flow margin of 14%. We exceeded our prior guidance, and I am pleased to say we are raising our full year 2024 guidance.

OLED: Thank you and good morning to everyone can recall.

OLED: In the first quarter.

OLED: Oh, it's a powerpoint.

OLED: I'll leave it at 1% year over year, and a little girl for 31% year over year.

OLED: We reported income from operations of one point.

OLED: Mongo.

OLED: <unk> Oh my goodness.

OLED: In the first quarter.

OLED: Importantly, we generated free cash flow growth Museum.

OLED: Critical module or 14%.

OLED: W. R.

OLED: Our prior guidance.

OLED: Just to say.

OLED: Our call here for you for guidance.

Oleg Shchegolev: Our business is focused on driving strong, sustainable growth while also expanding profitability and generating free cash flow. Before handing it over to Eugene and Brian, I would like to touch on a few highlights about our strategy to continue to scale the business and capture the significant market opportunity we see ahead. We have strong competitive positioning as the platform of choice for businesses to improve their online visibility. There is a growing trend of businesses of all sizes investing more time, effort, and resources into enhancing their online visibility.

OLED: Our business is focused on driving strong sustainable growth, while also expanding profitability and generating free cash flow.

OLED: Before.

OLED: It all goes through.

OLED: I would love to approach on a few of our large Ebola are suited to continue to scale the business and capture the Michigan.

OLED: Market opportunity.

OLED: The pits.

OLED: The retail strong competitive positioning is very portable cures for businesses.

Speaker Change: Could you repeat it.

Speaker Change: Luiz growing.

Speaker Change: Businesses of all sizes.

Speaker Change: Two more time effort and resources.

Speaker Change: The online visibility too.

Oleg Shchegolev: We are leveraging our unique data sets to differentiate ourselves in the market. We continue to make progress on each of our growth pillars. In the first quarter, we reported nearly 112,000 paying customers and now have over 1,125,000 free active users.

Speaker Change: We are leveraging our unique data sets to differentiate ourselves in the market.

Speaker Change: We continue to make progress on each of our growth pillars.

Speaker Change: In the first quarter, we reported nearly 100 broke falls in customers.

Speaker Change: Mark has over 1 million one promise when it probably falls in.

Speaker Change: If users.

Oleg Shchegolev: We believe there are millions of marketers and business owners who will benefit from our platform, and we plan to grow both our paying customers and our free executive. We have an extensive loyal install base that spans over 160 countries across all industries and market segments, from Sorbiner's to Fortune 500 companies. We continue to deliver higher value to our customers by cross-selling and upselling within our base. And as we increase our focus on moving up market, we expect to drive an increase in average output, which, as reported today, is nearing 3,200.

Speaker Change: We believe.

Speaker Change: There are millions of marketers and business owners, who will benefit from all the ports.

Speaker Change: And we plan to grow well.

Speaker Change: <unk> customers.

Speaker Change: Thank you for your base.

Speaker Change: [laughter] inexpensive loyal installed base with over 160 countries across all industries and market segments.

Speaker Change: From solar printers to fortune 500 companies.

Speaker Change: We continued to give me, but however, if you are to our customers by cross selling and Upselling skus in our base.

Speaker Change: <unk>.

Speaker Change: As we increase our focus on moving up.

Speaker Change: Market.

Speaker Change: The increase in average Oh cool reaches airports. This debate is nearing purchase pundits.

Oleg Shchegolev: Our strong profitability, deep competitive mode, and authentic loyal base allows us to continue to invest in the business. We continue to build on our technology and customer foundation with investments designed to further our business objectives. Our reinvestment priorities include launching new AI-based tools like ContentShake and expanding inter- As we highlighted last quarter, we officially soft-launched an Enterprise SEO product into the market in late October 2020, and we are pleased to announce that it is now generally available.

Speaker Change: Our strong portfolio to keep them busy with work and according to the world.

Speaker Change: All of us to continue to invest in the business.

Speaker Change: We continue to build on our.

Speaker Change: Customer Foundation. These investments designed to cover all of these objectives.

Speaker Change: There's no religious includes launching new AI based tools like compensate.

Speaker Change: And expanding existing took heritage.

Speaker Change: Is it kind of lines as last quarter.

Speaker Change: Especially the soft closed and.

Speaker Change: Enterprise It show a product into the market in late October we continuously.

Speaker Change: And we are pleased to start off with you.

Speaker Change: It is now generally available.

Oleg Shchegolev: It is already being used by a select number of large-scale business customers, including one of the largest apparel companies and one of the largest market research companies. While we are still in the early stages, the initial signs we are seeing are very encouraging. Importantly, our enterprise offering has the opportunity to create a meaningful inflection in our pool, and this product carries our pools, which tends to be 10 to 15 times our company average.

Speaker Change: It is already being used.

Speaker Change: <unk> number of large scale business customers, including one of the largest apparel companies and one of the largest market research company as well.

Speaker Change: While we're still in the early.

Speaker Change: Pages the initial signs are risky.

Speaker Change: Encouraging.

Speaker Change: Importantly, all in proposed authority.

Speaker Change: Opportunity to create a meaningful inflection in our pool.

Speaker Change: This quarter's airports, which tends to be 10 to 15 times on a company average.

Oleg Shchegolev: We believe our early adopter customers are experiencing significant returns on their investments after migrating to the platform. Features like automated workflows, corporate-level security controls, customized dashboards, and a built-in professional service network are helping our customers drive meaningful improvements in efficiency while also delivering significant time and cost savings. In 2024, we remain focused on continuing to grow our core business, upselling and cross-selling our offerings, and expanding our platform. In conclusion, I'm very pleased with our start to 2021.

Speaker Change: We believe our customers are experiencing significant returns.

Speaker Change: After integrating to our platform.

Speaker Change: Just like all the way to.

Speaker Change: For clothes corporate level.

Speaker Change: Charles because somebody's got sports and.

Speaker Change: Building a professional service network.

Speaker Change: Helping our customers drive meaningful improvements in efficiency, while also delivering significant time and cost savings.

Speaker Change: We thank you for your call we remain focused on continuing to grow our core business.

Speaker Change: Absolutely and cross selling our offerings and expanding our platform.

Speaker Change: In conclusion, I am very pleased with our start to three D printed books and I am optimistic about our ability to crystallize.

Speaker Change: Future growth opportunity just for all of the year.

Speaker Change: I will now turn the call over to Eugene and Brian to discuss the results of corporate and <unk> in more detail.

Oleg Shchegolev: And I am optimistic about our ability to capitalize on future growth opportunities throughout the year. I will now turn the call over to Eugene and Brian to discuss the results of the quarter and our outlook in more detail.

Eugene Levin: Thank you, Oleg. We delivered another solid quarter, and I am increasingly optimistic about our ability to deliver durable growth over the long term. I want to start with the migration Semrush is making. Last quarter, I discussed a segment of our customer base, sophisticated accounts that we believe represent a significant growth engine for us. Companies that fall into this broad segment are businesses that tend to have multiple marketing team members that are each a Semrush user, and they generally have significantly higher output or average revenue per user than our average and meaningfully stronger net revenue retention than ours. The relative strength of this customer set gives us increased confidence that our new enterprise product will be met with strong adoption, further supporting our goal of driving strong, durable growth on both our top and bottom lines. To service these upmarket customers We're leveraging our product-led, low-touch sales strategy and have shifted more of our investment focus to the high value enterprise area.

Speaker Change: Thank you all and we delivered another solid quarter and I am increasingly optimistic about our ability to deliver durable growth over the long term.

Speaker Change: I wanted to start with the migration of <unk> is making pulp market.

Speaker Change: Last quarter I discussed the segment of our customer base sophisticated accounts that we believe represents a significant growth engine for us.

Speaker Change: Companies that fall into this broad segment, our businesses that tend to have multiple marketing team members that are each camera user and they generally have significantly higher ARPA or average revenue per user than our average and meaningfully stronger net revenue retention than our average.

Speaker Change: The relative strength of this customer set use us increased confidence that our new enterprise product will be met with strong adoption further supporting our goal of driving strong durable growth on both our top and bottom line.

Speaker Change: To service this upmarket customers most effectively we have been making several important adjustments to our go to market model to optimize LTV to CAC ratio over the past several quarters.

Speaker Change: We are leveraging our product led low touch sales strategy and shifted more of our investment focus to the high value enterprise area.

Eugene Levin: First, we have been realigning some of our sales investment from the SMB sector into this upmarket category to focus on converting our existing enterprise customers to use our new enterprise SEO products. Second, we have been making investments in our quote-to-cash process to properly handle the complexities that often surround enterprise clients. These are things like establishing a deal desk and building out proper discipline around large deal sales.

Speaker Change: First we have been realigning some of our sales investments from the SMB sector into this upmarket category to focus on converting our existing enterprise customers to use our new enterprise ACO product.

Speaker Change: Second we have been making investments in our quote to cash process to properly handle the complexities that often surround enterprise clients. These are things like establishing a deal desk and building out proper discipline around large deals sales points.

Eugene Levin: We have been making this investment for some time, and the significant presence we already have in this segment gives us confidence in our ability to successfully handle the ramp that we foresee from our enterprise product. In addition to enterprise product initiatives, we continue to leverage AI in our platform. We continue to see excellent adoption of some of our AI products and features, including our recently released AI-powered content creation tool called ContentShare.

Speaker Change: We have been making those investments for some time and the significant presence we already have in this segment gives us confidence in our ability to successfully handle the ramp that we perceive from our enterprise product.

Speaker Change: In addition to enterprise product initiatives, we continued to leverage AI in our platform.

Speaker Change: We continue to see excellent adoption of some of our AI products and features including our recently released AI powered content creation tool called concentrate.

Eugene Levin: ContentShake is a smart writing tool that combines AI with real-life competitors. It guides you from ideation to publishing directly to the blog, generates SEO-friendly articles, creates personalized content ideas, composes copy with AI, and helps you optimize for organic traffic, engagement, and ranking.

Speaker Change: Content shape is a smart pricing tool that combines AI with realized competitor insights.

Speaker Change: Guy view from ideation to publish and directly to the blog generates SCO friendly articles creates personalized content ideas composes copy with AI and helps you optimize for organic traffic engagement and rankings.

Eugene Levin: We're monetizing content shake on its own, but it's important to understand that we are also monetizing AI in several different ways. First, we have AI features built into all of our tools. And the inclusion of those features helps drive new client acquisition and also aids in retention as they improve the customer experience. Second, we have structured some of our product tiers to only include the AI features at a higher price. This attracts clients to the higher priced tiers and contributes to the overall R program.

Speaker Change: We're monetizing content shake on its own but it is important to understand that we are also monetize it in several different ways.

Speaker Change: First we have AI features built into all of our tools and the inclusion of those features helps drive new client acquisition and also AIDS in retention as they improve the customer experience.

Speaker Change: We have structured some will forward product tiers to only include the AI features in the higher priced tiers. This attracts clients through the higher priced tiers and contributes to overall ARPA growth.

Eugene Levin: And the third way we monetize AI is through separately sold subscriptions, like the content shake product I just mentioned. We're also using AI to help drive efficiency in our own R&D departments. And we have recently seen success using our AI tools for our own marketing efforts, where we are not only producing more content, but we are also making higher quality content that ranks well and drives improved engagement. In summary, I'm confident in Semrush's positioning in the search market and our extensive product portfolio.

Speaker Change: And the third week, we monetize AI is through separately sold subscriptions like the content shake products I just mentioned.

Speaker Change: We're also using AI to help drive efficiency in our own R&D departments, and we have recently seen success using our AI tools for our own marketing efforts, where we are not only producing more content, but we are also making higher quality content.

Speaker Change: Thanks, well and drives improved engagement.

Speaker Change: In summary, I am confident in San brushes positioning in search market.

Speaker Change: Our extensive product portfolio.

Eugene Levin: We're seeing increased adoption of our AI products and continue to innovate and bring new offerings to the market. Our sophisticated accounts are growing and helping to fuel our crew and strong net retention. And I'm very excited about our ability to service our market customers and continue to expand our portfolio of offers. I will now turn the call over to Brian, who will provide a more detailed discussion of our financial performance and guidance. Go ahead, Brian.

Speaker Change: We're seeing increased adoption of our AI products and continue to innovate and bring new offerings to the market.

Speaker Change: Our sophisticated accounts are growing and helping to fuel our crew and strong net retention.

Speaker Change: And I am very excited about our ability to service up market customers and continue to expand our portfolio of offerings.

Speaker Change: I will now turn the call over to Brian who will provide a more detailed discussion of our financial performance and guidance.

Brian Mulroy: Thank you, Eugene. As Oleg and Eugene mentioned, we had a strong first quarter across the board. Our revenue was $85.8 million, growing 21% year-over-year. Growth was driven by new customer additions and an expansion of our average revenue per customer as we continue to execute on our cross-sell and up-sell strategy. Annual recurring revenue for the quarter grew 21% year over year to $354.2 million. However, there are several factors that can cause our net new ARR to fluctuate from quarter to quarter. And as a result, we believe ARR trends are best observed on an annual rather than quarterly basis.

Speaker Change: Brian.

Brian: Thank you Jim as a leg and Eugene mentioned, we had a strong first quarter across the board. Our revenue was $85 8 million growing 21% year over year growth was driven by new customer additions and expansion of our average revenue per customer as we continue to execute on our cross sell and up sell strategy.

Brian: Annual recurring revenue for the quarter grew 21% year over year to $354 2 million. There are several factors that could cause our net new <unk> to fluctuate from quarter to quarter and as a result, we believe <unk> trends are best observed on an annual rather than quarterly basis.

Brian Mulroy: Our calculated ARR per paying user grew 9.8% year-over-year, and our dollar-based net revenue retention for the first quarter was 107%. We believe our dollar-based net revenue retention has troughed and should, over time, begin to trend back up, particularly as our more sophisticated accounts increase as a percentage of our mix, since these customers have higher net retention than our company average. We recognize the importance of having strong retention metrics and accordingly have recently made some changes to our sales team's incentives that we expect could exert some gentle upward pressure on these figures.

Brian: Our calculated IRR per paying user grew nine 8% year over year and our dollar based net revenue retention for the first quarter was 107%.

Brian: We believe our dollar based net revenue retention has trough and over time should begin to trend back up, particularly as our more sophisticated accounts increase as a percentage of our mix. Since these customers have higher net retention than our company average.

Brian: We recognize the importance of having strong retention metrics and accordingly have recently made some changes to our sales teams' incentives that we expect could exert some gentle upward pressure on these figures.

Brian Mulroy: Moving down the income statement, during the first quarter, we had positive non-gap operating income of $9.7 million. We reported another significant improvement to our non-gap operating margin of 11.3%, which is up 2,000 basis points year over year and surpassed our guidance for the first quarter. This improvement is the result of a number of factors.

Brian: Moving down the income statement during the first quarter, we had positive non-GAAP operating income of $9 7 million.

Brian: We reported another significant improvement to our non-GAAP operating margin of 11, 3%, which is up 2000 basis points year over year and surpassed our guidance for the first quarter.

Brian Mulroy: First, our gross margin improved nearly 80 basis points a year over year to 82.9%. Gross margin benefited from higher revenue and our continued ability to gain scale and leverage from our efficiently engineered platform. We continue to expect strong gross margins above 80% in the near term and view the way in which our stack is engineered as a key competitive differentiator. Our healthy gross margins also give us the flexibility to invest below the gross profit line, which gives us a structural advantage in the market.

Brian: This improvement is a result of a number of factors first our gross margin improved nearly 80 basis points year over year to 82, 9%.

Brian: Gross margin benefited from higher revenue and our continued ability to gain scale and leverage from our efficiently engineered platform.

Brian: We continue to expect strong gross margins above 80% in the near term and view the way in which our stack is engineered as a key competitive differentiator.

Brian: Our healthy gross margins also provides us the flexibility to invest below the gross profit line, which gives us a structural advantage in the market.

Brian Mulroy: Second, we continue to execute on our commitment to drive efficiencies while also pursuing growth. It is important to note that we have been able to increase our operating margins while making go-to-market investments for our enterprise products. We expect that we will continue to be able to make incremental investments to strengthen our position here, while also driving further operating leverage in the business. And we don't expect to see any headwinds to our more traditional SMB business as we realign these resources.

Brian: Second we continue to execute on our commitment to drive efficiencies. While also pursuing growth. It is important to note that we have been able to increase our operating margins, while making go to market investments for our enterprise products we.

Brian: We expect that we will continue to be able to make incremental investments the strength of our position here. While also driving further operating leverage in the business and we don't expect to see any headwinds to a more traditional SMB business as we realign these resources.

Brian Mulroy: This is because we pursue a product-led growth strategy that leverages a self-service sign-up process and drives meaningful leverage that we're able to reinvest. Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $243.1 million, up $4.6 million from the previous quarter. Our cash flow from operations in the first quarter was $14.8 million.

Brian: This is because we pursue a product led growth strategy that leverages, a self service sign up process and drives meaningful leverage that we're able to reinvest.

Brian: Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short term investments of $243 1 million up $4 6 million from the previous quarter.

Brian: Our cash flow from operations in the first quarter was $14 8 million.

Brian Mulroy: Turning to guidance, I'm confident in the underlying trends in the business and the capabilities of our team that continue to deliver strong growth and profitability. Our business is off to a strong start this year, and we are encouraged not only by what we have accomplished so far, but we are optimistic about what we see as the opportunities in front of us. For the second quarter of 2024, we expect revenue in the range of 89.1 to 90.1 million, which at the midpoint would represent growth of approximately 20% year over year.

Brian: Turning to guidance I am confident in the underlying trends in the business and capabilities of our team has continued to deliver strong growth and profitability.

Brian: Our business is off to a strong start this year and we are encouraged not only by what we have accomplished so far but we are optimistic about what we see as the opportunities in front of us.

Brian: For the second quarter of 2024, we expect revenue in the range of $89, one to $90 1 million, which at the midpoint would represent growth of approximately 20% year over year.

Brian: We expect second quarter non-GAAP operating margin to be approximately 11%.

Brian Mulroy: We expect the second quarter non-gap operating margin to be approximately 11%. For the full year 2024, we are raising our guidance and expecting revenue in a range of $366 to $369 million, up from our prior range of $364 to $368 million, which translates to growth of 19 to 20% and represents a $1.5 million increase at the midpoint. We expect full year 2024 non-gap operating margins to be between 10.5 and 11.5%, about 50 basis points from our prior guidance range, and full year free cash flow margins to be approximately 8%.

Brian: For the full year 2024, we are raising our guidance and expect revenue in a range of $3 66 to $3 $69 million up from our prior range of $3 $64 million to $368 million, which translates to growth of 19% to 20% and represents a $1 5 million increase at the midpoint.

Brian: We expect full year 2024, non-GAAP operating margins to be between 10, five and 11, 5% up 50 basis points from our prior guidance range and full year free cash flow margins to be approximately 8%.

Brian Mulroy: To help you with your modeling, the difference between our non-GAAP operating margin and our free cash flow margin is the result of interest income offset by capital expenditures and cash tax. Finally, our guidance assumes a euro exchange rate of 1.08. 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 remain committed to a disciplined and balanced approach to spending.

Brian: Help you with your modeling the difference between our non-GAAP operating margin and our free cash flow margin is the result of interest income offset by capital expenditures and cash taxes.

Brian: Finally, our guidance assumes a euro exchange rate of one point OA as a reminder, approximately 30% of our expenses are denominated in euros.

Brian: In closing we are confident in our ability to grow and scale, our business and remain committed to a disciplined and balanced approach to spending we are focused on driving improved efficiency and profitability, even while we invest in future growth opportunities that we expect will deliver long term value to our shareholders.

Brian Mulroy: We are focused on driving improved efficiency and profitability, even while we invest in future growth opportunities that we expect will deliver long-term value to our shareholders. With that, we are happy to take your questions. Operator, please open the line for questions.

Speaker Change: With that we're happy to take your questions. Operator, Please open the line for questions.

Operator: Thank you. We will now start today's Q&A session. If you would like to submit a question, please press start, followed by one on your telephone keypad. To withdraw your question, please press start, followed by two. Our first question today comes from Scott Berg from Needham. Your line is now open; please proceed with your question.

Speaker Change: Thank you we will now start today's Q&A session. If you would like to register a question. Please press star followed by one when you kind of think keypad to withdraw your question. Please press star followed by team.

Speaker Change: Our first question today comes from Scott Berg from Needham. Your line is now open. Please proceed with your question.

Scott Randolph Berg: Hi, everyone. A nice quarter here. And thanks for taking my questions. I have two.

Scott Randolph Berg: Hi, everyone nice quarter here and thanks for taking my questions I have two wanted to start with the macro question a little bit more high level.

Oleg Shchegolev: Wanted to start with a macro question a little bit more high level. Your ARR additions for the last three quarters have been very good, especially on a year over year basis. Yet we're seeing demand for, you know, software that's predominantly sold to SMBs, you know, tech companies be a little bit inconsistent or slow over the last several quarters. You know, can you help us understand maybe something in the product or maybe something in your go-to-market strategy? That's helping you kind of buck this trend to, you know, throw off some really good results last time. Thank you.

Scott Randolph Berg: Sure Yeah, our additions last three quarters have been.

Scott Randolph Berg: Very good, especially in the year over year basis, Yes, we're seeing demand for <unk>.

Scott Randolph Berg: Software predominantly sold to SMB type companies be a little bit inconsistent or software over the last several quarters.

Speaker Change: Can you help us understand maybe something in the product or maybe something in your go to market strategy is helping you kind of bucked this trend to throw off some really good results last couple of quarters. Thank you.

Eugene Levin: Thank you. Let's start with Mark's question. I would say we don't see any kind of significant changes in macro for all businesses in all segments. We believe it's still challenging. But, at the same time, we deliver, I believe, strong results in the current environment.

Speaker Change: Thank you.

Speaker Change: It starts with market condition.

Speaker Change: Uh huh.

Speaker Change: Well I would say, we don't see any kind of significant changes.

Speaker Change: With MACRA.

Speaker Change: All businesses in all segments, we believe it's still challenging.

Speaker Change: At the same time, we delivered.

Speaker Change: Strong results in current and constant.

Speaker Change: Environment and.

Speaker Change: All right.

Eugene Levin: Yeah, I mean, Scott, the key for us is, you know, macro is impacting us just like every other company, but we're faring really well. We have a really strong market position, really good market, secular market shifts that are happening where the spending in companies is shifting from one area to an area where we actually provide good technology and service. And we have a really strong competitive mode. And then, more recently, we've been able to launch a lot of new AI products that we're monetizing in the three ways that Eugene mentioned earlier. And, of course, we have our upmarket play into enterprise. So we think there are a lot of factors that are allowing us to navigate through this macro environment and still deliver really strong, durable growth.

Speaker Change: Yes, I mean, Scott the key for US is macro is impacting us just like every other company, but we're feeling really well we have a really strong market position.

Speaker Change: Really good market.

Speaker Change: Secondary market shifts that are happening, we're suspending <unk> companies is shifting from one area to an area, where we actually provide good technology and service and we have a really strong competitive moat and then more recently, we've been able to launch a lot of new AI products that we're monetizing in the three ways that Eugene mentioned earlier.

Speaker Change: And of course, we have our upmarket play into enterprise. So we think there's a lot of factors that are allowing us to navigate through this macro environment and still deliver a really strong durable growth.

Brian Mulroy: Got it helpful. And then the last question for me is, is Brian, you mentioned you expect NRR to trough in this most recent quarter here. Sounds like you're making some changes on the sales side to maybe incent cross-sell expansions a little bit more. But how do we think about the impact of your new enterprise sales motion on NRR over time? Is that a sale that's still very much a land and expand opportunity, maybe by modules or seats, or are your enterprise customers having the opportunity to maybe land much larger that might not offer some expansion opportunities there?

Speaker Change: Got it helpful. And then the last question for me is Brian You mentioned, you expect <unk> trough in this most recent quarter here it sounds like you're making some changes on the sales side to maybe incident.

Brian: Ross cell expansion, a little bit more but how do we think about the impact of your new enterprise sales motion.

Brian Mulroy: Overtime is that a sale thats still very much a land and expand opportunity maybe by modules or seats or are your enterprise customers, having the opportunity to maybe land much larger of that might not offer some expansion opportunities there.

Brian Mulroy: Sure, yeah. So, two things. NRR, we're really pleased with the performance. Over many quarters, we've been able to maintain very strong, durable retention on a gross and a net basis. And in the most recent quarter, we saw a drop at 107%. We have talked about that over the past couple of quarters, that it is somewhat of a lagging metric that measures performance over a 24-month period. So it's doing exactly what we expected and troughing, and we expect it will tick up over time, especially as we move up market and start to take advantage of the enterprise SEO product.

Brian Mulroy: Sure Yeah, so two things.

Brian Mulroy: <unk>.

Brian Mulroy: Really pleased with the performance.

Brian: I'm pleased with the performance over many quarters, we've been able to maintain very strong durable retention on a gross and a net basis.

Brian Mulroy: In the most recent quarter, we've seen a trough at 107% we have talked about that over the past couple of quarters that it is somewhat of a lagging metric that measures performance over 21 24 month period.

Brian Mulroy: So it's doing exactly what we expected.

Brian Mulroy: The key for us is, for sure, there are land and expansion components to our enterprise play, but our early potential there is more of an expansion. We've been talking about the fact that we already have more than 5000 enterprise accounts. They've been very loyal and have adopted the majority of our platform and are asking for more features to do their best work. We've delivered on that with the launch of our new enterprise SEO product.

Brian Mulroy: Trapping and we expect it will tick up over time, especially as we move up market.

Brian Mulroy: To take advantage of the enterprise ACO product.

Brian Mulroy: Key for Us is.

Brian Mulroy: For sure there are land and expand components to our enterprise play.

Brian Mulroy: But our early Patel.

Brian Mulroy: Potential there is more of an expanse we've been talking about the fact that we do already have more than 5000 enterprise accounts.

Brian Mulroy: They've been very loyal and have adopted a majority of our platform and are asking for more features to do their best work, we've delivered that with the launch of our new enterprise SCO products and as you know that commands our pool of about 10 to 15 times, what our average <unk> per paying customer. So we do expect that to be in the early days and.

Brian Mulroy: And as you know, that commands our pool of about 10 to 15 times what our average ARR per paying customer is. So we do expect that to be in the early days, an expansion of our existing enterprise accounts and, therefore, having good upward pressure on the NRR metric.

Brian Mulroy: Expand of our existing enterprise accounts, and therefore, having a good upward pressure on the <unk> metric.

Brian Mulroy: Okay.

Scott Randolph Berg: understood. Thank you for taking my question.

Speaker Change: Understood. Thank you for taking my questions.

Surinder Thind: Our next question comes from Surinder Bind from Jeffreys. Your line is now open; please proceed.

Scott Randolph Berg: Our next question it comes from Surinder <unk> from Jefferies. Your line is now open. Please proceed.

Eugene Levin: Thank you. It's a follow-on to kind of the enterprise customers as you look up markets. Can you maybe talk about behavior or potential between U.S. enterprise-based customers and maybe international opportunities?

Surinder Thind: Thank you as a follow on to the enterprise customers and so you look up markets can you maybe talk about.

Surinder Thind: Behavior or potential between the U S enterprise based customers, who maybe international opportunity.

Eugene Levin: Yeah, thank you. Thank you for the question.

Surinder Thind: Yeah. Thank you. Thank you for the question so of course, United States as the number one market.

Eugene Levin: So, of course, the United States is the number one market for us. It's almost half of the opportunity from our point of view. At the same time, if you actually look at the list of early customers that we acquired since our soft launch at the end of October, you know, at least half of them are international companies; we have very strong traction in Germany and France and other markets. And as you probably know, in general, we always had a philosophy in mind to build products for global use because even our US customers don't know that a lot of them are also multinational companies who sell overseas and across the globe.

Speaker Change: For us it's.

Eugene Levin: Almost half of the opportunity from our point of view and at the same time, if you actually look at list of.

Eugene Levin: Early customers that we acquired since soft launch.

Eugene Levin: In the end of the tober.

Eugene Levin: At least half of them are international companies, we have very strong traction in Germany and France.

Eugene Levin: In other markets and as you probably know.

Eugene Levin: So from that point of view, the product is definitely built for global use. And in terms of going to market, again, Semrush also has a presence in over 103 different countries. For enterprise, the list is probably going to be a little bit smaller. But still, we're, you know, we're going to ramp up our teams based on the geographic presence of our customer base proportionally. And another thing, if you know, the world is actually not as big as it might seem, because from a go-to-market point of view, what matters the most is what languages people speak, and you know, you probably know there are only several really popular languages, and we all need to scale Salesforce with native But that's really pretty much all the work that needs to be done in terms of international expansion.

Eugene Levin: In general we always had a philosophy in mind to build products for global use because even our U S customers. David a lot of them are also multinational companies, who sell overseas and across the globe. So from.

Eugene Levin: From that point of view product is definitely build for global use.

Eugene Levin: And in terms of go to market. The young <unk> also has a presence in over 130 different countries for enterprise. The list is probably going to be little bit smaller.

Eugene Levin: But still were.

Eugene Levin: We're going to ramp.

Eugene Levin: Our teams based on geographic presence of our customer base proportionately and another thing.

Eugene Levin: World is actually not as big as it might seem because.

Eugene Levin: From go to market point of view what matters. The most is what languages people speaking.

Eugene Levin: We know there are only several really popular languages, and we will need to scale sales force.

Eugene Levin: With me give speakers, who can help us with go to market in those markets, but thats really pretty much all of the work that needs to be done in terms of international international expansion.

Eugene Levin: And then there's a follow-up on just the sales structure for the enterprise opportunity here. How would you describe the changes that you've made? I mean, you kind of talked about it on the call, but how disruptive are the changes, or how significant are the changes? Because obviously, SMB sales are very different from enterprise sales. And then how much more change should we expect before we kind of get to what I would call full productivity levels? Yeah, so

Speaker Change: Thank you.

Eugene Levin: And then as a follow up on just the sales structure.

Eugene Levin: For the enterprise opportunity.

Eugene Levin: Opportunity here.

Eugene Levin: How would you describe the changes that you've made I mean, you've kind of talked about it on the call but.

Eugene Levin: How disruptive are the changes or how significant are the changes because obviously SMB sales are very different in enterprise sales.

Eugene Levin: And how much more change should we expect before we kind of get to what I would call full productivity levels.

Eugene Levin: Yeah.

Brian Mulroy: Yeah, so great question. Just two questions there. One is, what changes are we making to SMB? And how does that impact it?

Speaker Change: Yes, so good question.

Eugene Levin: So two questions. There one is what changes that we're making to SMB and how does that impact it and then what investments in enterprise. So on the SMB side, we've been very fortunate that we have a very low cost frictionless selling process, we've been able to enhance that over the last couple of years with AI and automation.

Brian Mulroy: And then what investments in enterprise? So on the SMB side, we've been very fortunate that we have a very low-cost frictionless selling process. We've been able to enhance that over the last couple years with AI and automation.

Brian Mulroy: That has allowed us to really maintain good success and efficiency with a product led selling motion.

Brian Mulroy: That has allowed us to really maintain good success and efficiency with a product-led selling motion. And because of that, we've been able to efficiently grow and manage the transactions for our SMB and even mid-market customers. That's given us a structural advantage that's allowed us to reinvest that efficiency into an enterprise upmarket play, and we have been doing that over the past couple of years. And there are three fundamental things that we're focused on.

Brian Mulroy: And because of that we've been able to efficiently grow.

Brian Mulroy: And manage the transactions for our SMB and even mid market customers.

Brian Mulroy: That's given us a structural advantage that has allowed us to reinvest that efficiency into an enterprise upmarket play and we have been doing that over the past couple of years.

Brian Mulroy: One is there are systems and infrastructure that we need, so a demand generation engine, a CRM engine that manages the lead to opportunity process, and an ERP system to manage quote to cash. So we've been investing in that and preparing for these types of transactions. From a human resources perspective, we're investing in a deal desk to help facilitate the transactions and the negotiations with procurements. And, of course, scaling up the enterprise sellers that have that skill set and experience to be able to develop relationships and strong partnerships with companies to be able to evolve from just a transaction to a value-based sale that will allow us to be successful.

Brian Mulroy: And there is three fundamental things that we're focused on one is their systems and infrastructure that we need so there's a demand generation engine. Our CRM engine that manages the lead to opportunity process and.

Brian Mulroy: And in an ERP system to manage quote to cash so we've been investing that and preparing for these types of transactions.

Brian Mulroy: From a human resources perspective, we're investing in a deal desk to help facilitate the transactions and the negotiations with procurements.

Brian Mulroy: And of course scaling up the enterprise sellers that have that skill set and experience to be able to develop relationships and strong partnerships with companies to be able to evolve from just a transaction to a value based sale that will allow us to be successful and so we're making those investments.

Brian Mulroy: So we're making those investments. We're not expecting that this will be disruptive because the SMB dynamics have been things, efficiencies that have been building in a business over time, and we're able to see the impact and then adjust the investments accordingly. And for enterprise, it's new for us. So while we do have more than 5,000 enterprise accounts, this upmarket selling motion and the enterprise SEO product are new, and we're taking into account the risks and the opportunity and setting expectations accordingly.

Brian Mulroy: Not expecting that this will be disruptive because the SMB dynamics have been things efficiencies that have been building in the business over time, and we're able to see the impact and then adjust the investments accordingly and for enterprise, it's new for us. So while we do have more than 5000 enterprise accounts desktop market selling motion.

Brian Mulroy: And the enterprise ACO product is new.

Brian Mulroy: And we're taking into account the risks and the opportunity in setting expectations Accordingly.

Speaker Change: Thank you.

Brian Mulroy: Okay.

Operator: Our next question today comes from Scott Ada from KeyBank. Your line is now open; please proceed.

Brian Mulroy: Our next question today comes from Scott <unk> from Keybanc. Your line is my wife then please proceed.

Operator: Okay.

Jackson Ader: Hey, guys. It's Jackson Ader from KeyBank Capital Markets. Hope you're doing well.

Jackson Ader: Hey, guys, it's Jackson ader from from Keybanc capital markets Hope.

Jackson Ader: Hope you're doing well.

Jackson Ader: First question is.

Jackson Ader: Brian I know you guys had talked about the balance of growth and profit.

Jackson Ader: But just given the results of late have shown.

Jackson Ader: More more upside kind of being heavily skewed towards margin is there, but could you in fact deliver a little bit faster <unk> growth. If you were to make some additional investments.

Jackson Ader: So the first question is, you know, Brian, I know you guys have talked about the balance of growth and profit. But you know, just given the results of late have shown more upside kind of being heavily skewed toward margin. Is there, like, could you, in fact, deliver a little bit faster ARR growth if you were to make some additional investments? And I'm curious if, if the answer is yes, like, where would you make those?

Jackson Ader: And I'm curious if the answer is yes, like where would you make those investments.

Brian Mulroy: Yeah, this is a really, really good question. It's something that we think about every single day. We're always challenging ourselves and the leaders throughout the organization to make sure they're focusing on investments that will drive long-term growth and value for us and our shareholders. And our goal here, we've talked about this, our goal at Semrush is to achieve an efficient frontier. So we want to be investing in the business so long as that investment drives incremental results. But we don't want to be overspending and getting past that efficient frontier where the incremental return doesn't justify the investment.

Speaker Change: Yes. This is <unk>.

Brian Mulroy: A really really good question, it's something that we think about every single day.

Brian Mulroy: We're always challenging ourselves and our leaders throughout the organization to make sure theyre focusing on investments that will drive long term growth and value for us and our shareholders and.

Brian Mulroy: And our goal here, we've talked about this our goal at <unk> is to achieve.

Brian Mulroy: Efficient frontier, so we want to be investing in the business. So long as that investment drives incremental results.

Brian Mulroy: But we don't want to be overspending, and getting past that efficient frontier where.

Brian Mulroy: Incremental return doesn't justify the investment for.

Brian Mulroy: <unk> in 2024, we are investing quite a bit so we're investing on this enterprise market play.

Brian Mulroy: For Semrush in 2024, we are investing quite a bit. So we're investing in this enterprise upmarket play, as evidenced by the most recent general availability of enterprise SEO. We've been doing a lot of product investments in AI. Eugene talked about one new product, Content Shake AI, and a number of others earlier this morning that we've monetized in a few different ways. And we're constantly focused on what that next close adjacency is for our customers that will allow us to expand our platform beyond our core competency.

Brian Mulroy: As evidenced by the most recent general availability of enterprise SCO, we've been doing a lot of product investments in AI Eugene talked about one new product content shake AI and a number of others. Early this morning that we monetize in a few different ways and we're constantly focused on what that next close adjacency is for a customer.

Brian Mulroy: <unk> that will allow us to expand our platform beyond our core competency. So were continuing to invest we do believe in 2024 and a foreseeable future that there is a lot of opportunity. We have a strong foundation with 112000 paying customers over $1 million for users and we have quite a bit of cash on the balance sheet to put to work.

Brian Mulroy: So we're continuing to invest. We do believe in 2024 and the foreseeable future that there is a lot of opportunity. We have a strong foundation with 112,000 paying customers, over a million free users, and we have quite a bit of cash on the balance sheet to put to work. And we'll be doing that over time.

Brian Mulroy: And we'll be doing that over time.

Jackson Ader: Okay, all right, great. And then just a quick follow-up kind of a practical question. Those 5,000 enterprise customers that you talk about, what is, can we get a sense for, for what their current ARPU looks like? Do they have the propensity or the, you know, the willingness, I guess, to spend 10 to 15x more than your typical customer?

Speaker Change: Okay, Alright, great and then just a quick follow up kind of a <unk>.

Jackson Ader: Practical question those those 5000 enterprise customers that you're talking about.

Jackson Ader: What is.

Jackson Ader: Can we get a sense for like for what their current RP looks lately it looks like do they have.

Jackson Ader: The propensity or the.

Jackson Ader: The.

Jackson Ader: Willingness I guess to spend 10 to 15 X more than your typical customer.

Eugene Levin: Yeah, definitely. They already pay more. And their, you know, expansion, their LTV is much higher than average as well. So they're not just buying more expensive subscriptions; they're more active, they're more likely to have multiple people using the product. So they have all the signs that correlate with a high willingness to pay.

Speaker Change: Yeah definitely they already pay more.

Eugene Levin: And there.

Eugene Levin: Expansion their LTV is much higher than average as well so they're not just of.

Eugene Levin: Buying more expensive subscriptions they are more active they're more likely to have multiple people using the product.

Eugene Levin: So they have all the signs that that correlate with pi willingness to pay.

Jackson Ader: Got it. All right, great. Thank you.

Speaker Change: Got it alright, great. Thank you.

Operator: Our next question comes from Adam Hotchkiss from Goldman Sachs. Your line is now open, please proceed.

Jackson Ader: Our next question comes from Adam Hotchkiss from Goldman Sachs. Your line is now open. Please proceed.

Adam Hotchkiss: Great. Thanks for taking the questions. I guess to start, I just wanted to touch a little bit more on the enterprise product. When we look at the early access page, we see stats like 10x faster SEO productivity and a 360-degree view of customer data, which seems like a pretty ambitious message to send to prospective enterprises. So could you just take a step back and give us a sense of what enterprise customers are asking for that the tiered offerings aren't giving them today?

Adam Hotchkiss: Great. Thanks for taking the questions I guess to start I, just wanted to touch a little bit more on the enterprise product. When we look at the early access page, we see stats like Tenex faster ACO productivity and generating 360 degree view of customer data.

Adam Hotchkiss: Which seems like a pretty ambitious message to send a prospective enterprises. So could you just take a step back and give us a sense for what enterprise customers are asking for that the tiered offerings arent, giving them today and then when you think about how much of that is just a function of customers wanting to run more volume through your system versus actively looking to you too.

Adam Hotchkiss: And when you think about how much of that is just a function of customers wanting to run more volume through your system versus actively looking to you to co-innovate on incremental products, how would you describe the balance of that customer relationship?

Adam Hotchkiss: Co innovate on incremental products, how would you describe the balance of that customer relationship.

Eugene Levin: Great question. So, yeah, I mean, of course, you know, to sell, you have to sell.

Speaker Change: Great question so yes.

Speaker Change: Yes of course.

Eugene Levin: So, of course, 10x is definitely achievable, but people need to put in the work and, you know, fine-tune the product to their needs, which we help them with. But to give you just a couple examples of why I think 10x is maybe even conservative, we have, for example, customers who use our internal linking module. And when you do internal linking for a small website, it's not hard. You can do it using a white

Speaker Change: To sell you have to sell so.

Eugene Levin: Of course, <unk> is definitely achievable, but people need to put work and fine tune the product to their needs, which we help them win but.

Eugene Levin: To give you just a couple of examples of why I think 10 access maybe even conservative we have for example customers who use our internal Lincoln module.

Eugene Levin: You just put 20 pages in and figure out how to connect them. Now, our enterprise customers have millions of pages. So there is no whiteboard in the world that is big enough to put all those pages and figure out how to connect them.

Eugene Levin: And when you do internal Lincoln for a small website, it's not hard you can do it using whiteboard you just put 20 pages and figure out how to connect them now our enterprise customers. They have millions of pages. So there is no wide boards in the world that is big enough to put all of those pages and figure out how to connect them. So.

Eugene Levin: So that's why we crawl their websites. We understand what other websites link to them. So we can figure out the external link profile, the internal link profile, the map of the website, and figure out what pages should be connected to other pages and sort of share the authority of the page with other pages using AI and machine learning.

Eugene Levin: So that's why we called our websites.

Eugene Levin: We understand what other websites linked to them. So we can figure out externally profile internal linked profile. The map of the website and figure out what pages should be connected to other pages and sort of share the authority over the page.

Eugene Levin: And if you think about the incremental value, it's not just being 10x more productive; it's actually finally being able to do the work that you would not be able to do without this technology. And the difference between tiered offerings like that we sell to SMBs and enterprises is that SMBs don't have websites with millions of pages, so they don't need those features, while large enterprises have millions of pages, so they need additional products.

Eugene Levin: With other pages, using AI and machine learning and if you. If you think about the incremental value is not just being tenex more productive it's actually finally being able to do the work that you would not be able to do without this technology and the difference between tiered offerings like that we sell to Smbs and.

Eugene Levin: That smbs don't have websites with millions of pages. So they don't need those features while large enterprises have millions of pages. So they need additional products.

Eugene Levin: That technically a philosophy that we have with enterprise products.

Eugene Levin: And that's technically a philosophy that we have with enterprise products. Things that we build on enterprise platforms are purely incremental. They're not things that are just, you know, fancy versions of things you can buy with our SMB offering. They're incremental. They use the same technology and data, but they solve totally different sets of problems that only big companies have.

Eugene Levin: Things that we build in enterprise platform, there are purely incremental they're not things that are just.

Eugene Levin: Fancy or versions of things you can buy with our SMB offerings. There are incremental they use the same technology and data.

Adam Hotchkiss: Okay, thank you, Gene. That's incredibly helpful.

Eugene Levin: But they sold totally different scope of problems that only big.

Gene: Big companies have.

Eugene Levin: And then could you just talk a little bit more about your professional services strategy here as you move upmarket? It seems from what we've seen that you're opting to vet and collaborate with enterprise freelancers to help enterprises. Is it fair to say that this will exist in place of building out more meaningful services in-house? And then maybe, Brian, if you could just touch on what the monetization arrangements look like with those freelancers, that would be useful.

Speaker Change: Okay. Thanks for gene that's incredibly helpful. And then could you just talk a little bit more about your professional services strategy here as you move up market.

Eugene Levin: Seem through what we have seen that youre opting to vet and collaborate with enterprise free rent freelancers excuse me to help enterprises is it fair to say that this will exist in the place of building out more meaningful services in house and then maybe Brian If you could just touch on what the monetization arrangements look like with those freelancers that would be useful.

Eugene Levin: <unk>.

Eugene Levin: Yeah, great question. And I probably should have answered this in the first part as well, because, of course, services is another area where enterprise products are differentiated from SMB products. And as you mentioned, big companies need extra services, they need someone to hold their hand, they need someone to provide a second opinion and guide them. And there are two options that companies, software companies, have when they tackle this problem. Sometimes they decide to build a service arm inside the company, which has some benefits, but from our point of view, it's actually margin dilutive.

Eugene Levin: Yes.

Speaker Change: Great question and I, probably should have answered this in the first quarter as well because of course services is another area, where enterprise product is differentiated from SMB products and as you.

Eugene Levin: You mentioned big companies, they need extra services, they need someone to hold their hand, they need someone to provide second opinions and guide them.

Eugene Levin: End of <unk>.

Eugene Levin: There are two options that companies software companies have.

Eugene Levin: They tackle this problem.

Eugene Levin: Sometimes they decide to build service arm inside the company.

Eugene Levin: Some benefits, but from our point of view its actually margin dilutive and.

Eugene Levin: And, you know, we're a software company; we want to run a very high-margin business. And the other approach is actually what we're doing to partner with industry leading experts in different areas and connect them with a pool of customers that we have. And we are starting with freelancers and experts. Over time, we think we could expand this to our agency clients as well and generate additional leads and demand for them by allowing them to work with our brand customers.

Eugene Levin: We're a software company, we want to run very high margin business.

Eugene Levin: The other approach is actually what we are doing to partner with industry, leading experts in different areas and connect them with the pool of customers that we have and we are starting with freelancers and experts over time, we think we could expand this to our agency clients as well and generate additional leads and demand for them.

Eugene Levin: By allowing them to work with our brand customers and in terms of financial arrangement.

Eugene Levin: And in terms of financial arrangements, what we do is we productize their services, and we provide for billing and handle transactions and then take our small commission for facilitation and then pass the remaining revenue to freelancers. So we recognize only our commission as revenue, so it's a clean, high-margin revenue for us. Okay, really useful.

Eugene Levin: What we do is we move product ties their services and we.

Eugene Levin: Provide sort of billing and handle transactions and then take our.

Eugene Levin: Small commission for facilitation, and then pass their main revenue to freelancers. So we recognize revenue only our commissions. So it's a clean high margin revenue for us.

Adam Hotchkiss: Okay, really useful. Thanks so much, Eugene.

Speaker Change: Okay really useful thanks, so much Eugene.

Operator: Our next question today comes from Elizabeth Porter from Morgan Stanley. Your line is now open. Please go ahead.

Adam Hotchkiss: Our next question today comes from Alicia desk Forza from Morgan Stanley. Your line is now open. Please go ahead.

Elizabeth Porter: Great, thank you so much. I'm just going to focus on cross-sell and up-sell, plus addressing larger enterprise customers. It sounds like it can be a material upside to ARPU. So how should we think about the growth algo between new customers and ARPU, shifting between these two factors? I think historically, it's been a little bit more balanced, maybe skewed a bit more towards customers. So just wanted to give an update on the growth algo and the forward outlook as we go through these new initiatives. Thank you.

Elizabeth Porter: Great. Thank you so much just given the focus on the cross sell and up sell plus addressing larger enterprise customers. It sounds it can be a material upside to our panel.

Elizabeth Porter: How should we think about no growth found go between new customers and our appeal shifting between these two factors I think.

Elizabeth Porter: Historically, it's been a little bit more balanced may be skewed a bit more towards customers. So just wanted to level set on the growth algo and our forward outlook as we go down these new initiatives. Thank you.

Brian Mulroy: Hey, Elizabeth, it's Brian. Yeah, so we expect, as we've experienced in the past, that both will be significant growth drivers for us. So we're still very pleased to see the amount of net ads that we experience every single quarter. The S&P and mid market, which tends to be the bulk of the incremental net ads for us, have been very strong and healthy. And we expect that it will continue to be a growth driver for us.

Brian Mulroy: Hey, this is Brian.

Elizabeth Porter: So we would expect as we've experienced in the past that both will be significant growth drivers for us.

Brian Mulroy: So we're still very pleased to see the amount of net adds that we experience every single quarter, the SMB and mid market, which tends to be the bulk of the incremental net adds for us has been very strong and healthy and we expect that will continue to be a growth driver for us at.

Brian Mulroy: At the same time as we've been talking about we do see much healthier metrics as we're moving up market, we've talked about things like the retention.

Brian Mulroy: At the same time, as we've been talking about, we do see much healthier metrics as we move up market. We've talked about things like retention, the average ARR per paying customer, and even growth for that particular segment. So I think going forward, you might see a slight shift where the number of accounts and, sorry, the growth would actually shift a little bit more towards upsell and higher-valued accounts. But we still expect that we'll see healthy growth in net ads as well.

Brian Mulroy: The average IRR per paying customer and even growth.

Brian Mulroy: For that particular segment, so I think going forward you might see.

Brian Mulroy: A slight shift where the number of accounts.

Brian Mulroy: And sorry, the growth would actually shift a little bit more towards upsell.

Brian Mulroy: And higher valued accounts, but we still expect that we'll see healthy growth from that as well.

Brian Mulroy: Yes.

Elizabeth Porter: Great, and then a follow-up on the net ad side. Net ads of 4,000 were just a bit below the 5,000 you've consistently added in prior Q1s. So just curious if there were any factors to call out. And then also touch on the seasonal trend of customers leaving in Q4 but coming back in Q1. You know, how did that play out relative to prior years? Sure, so you're just building on what we were just talking about.

Speaker Change: Great and then a follow up actually on the net add side.

Elizabeth Porter: 4000, just.

Elizabeth Porter: Just a bit below the 5000 used consistently added in prior Q1. So just curious if there were any factors to call out and then also touch on the seasonal trend of customers, leaving in Q1 Q4, but coming back in Q1, how did that play out relative to prior years.

Brian Mulroy: Sure, so you're just building on what we were just talking about the, you know, like any metric, they can fluctuate from quarter to quarter; there are always seasonal dynamics within one quarter or even year over year that could affect that number. But I think what you're seeing is just because we're putting more focus on higher-valued, upmarket enterprise accounts, you could see that as we're putting more focus on that, you could see that net ad metric be impacted going forward. Great, thank you. Our final question.

Speaker Change: Sure. So just building on what we're just talking about the.

Speaker Change: Like any metric they can fluctuate from quarter to quarter, there's always season.

Brian Mulroy: Seasonal dynamics within one quarter or even year over year that could affect that number.

Brian Mulroy: But I think what Youre seeing is just because we're putting more focus on higher valued upmarket enterprise accounts.

Speaker Change: That you could see that.

Brian Mulroy: As we are putting more focus on that.

Brian Mulroy: That you can see that net add metric be impacted going forward.

Speaker Change: Great. Thank you.

Operator: Our final question comes from Mark Murphy from JP Morgan. Your line is now open, please go ahead. Hey, this is Arti Vula on behalf of Mark Murphy. Thanks for taking the question.

Brian Mulroy: Our final question comes from Mark Murphy from Jpmorgan. Your line is now open. Please go ahead.

Arti Vula: Hey, this is already who on for Mark Murphy. Thanks for taking my question and congrats on the quarter.

Arti Vula: I spoke to some of these investments you guys are expecting to make particularly on the on the upper end of the market.

Arti Vula: Any sense of how you expect hiring this.

Arti Vula: Because this year. Thank you.

Operator: Hi.

Arti Vula: It was It's up to here. It was a little bit, um, a little bit choppy. Can you ask it again? Sorry, it was tough to hear you. Yeah, is this better? It's breaking up a little bit, but I'll try again.

Arti Vula: It was tough to hear it was a little bit.

Arti Vula: Little bit choppy could you just ask it again.

Arti Vula: <unk>.

Arti Vula: Sorry, sorry, sorry, it was tough to hear you.

Arti Vula: Yeah.

Arti Vula: Yeah, it's been better.

Arti Vula: It's breaking up a little bit but try again.

Operator: And my question was just around hiring and how we should expect Petcom growth, particularly in sales and marketing, to trend this year, maybe compared to last year and the year before. Thanks. I see. Yeah, good question.

Arti Vula: And my question was just around hiring and how we should expect at some growth, particularly in sales and marketing expenses. This year.

Operator: If you compare to last year and year before.

Brian Mulroy: We're not expecting a significant change. So we've been talking about how our investments in enterprise are being funded by the efficiencies we're seeing in S&B and mid-market. Of course, the quantity of S&B and mid-market sellers was higher. So now that we've been able to take advantage of leveraging AI and automation and really push a lot of the S&B sales through our e-commerce platform and take advantage of the product-led growth strategy, we're able to reinvest back into the enterprise. So while we're investing significantly and making a strong push into the enterprise, you shouldn't expect to see sales expense from an E2R perspective or even sales headcount change materially.

Speaker Change: Yes, good question.

Brian Mulroy: Not expecting a significant change so we've been talking about our investments in enterprise are being funded by the efficiencies, we're seeing in SMB and mid market.

Brian Mulroy: Of course, the quantity of SMB and mid market sellers.

Brian Mulroy: Was higher so now that we've been able to take advantage of leveraging AI and automation and really push a lot of the SMB sales through our E Commerce platform.

Brian Mulroy: And take advantage of the product led growth strategy.

Brian Mulroy: To reinvest back into enterprise, so while we're investing significantly.

Brian Mulroy: And making a strong push into the enterprise you Shouldnt expect to see sales expense from an EUR perspective, or even sales head count change materially.

Speaker Change: Great. Thank you.

Brian Mulroy: Okay.

Operator: There are no further questions in the queue at this time. That concludes today's Q&A session. I'll now hand over to the management team for closing remarks.

Speaker Change: There are no further questions in the queue. At this time that concludes today's Q&A session I will now hand back over to the management team for closing remarks.

Operator: Okay.

Oleg Shchegolev: Thank you all for joining us today. I want to say again that we are very pleased with our execution in the first quarter and our strong start to 2024. And we look forward to keeping you updated on our progress.

Speaker Change: Thank you all hotel yesterday.

Speaker Change: I want to see again, we are very pleased with our execution.

Operator: That concludes today's call; you may now disconnect your line.

Speaker Change: In the first quarter and strong start to clean if any for Andrew.

Operator: And we look forward to giving you updates on our progress. Thank you.

Operator: That concludes today's call you may now disconnect your lines.

Operator: [music].

Operator: Yeah.

Operator: Okay.