Q2 2024 Semrush Holdings Inc Earnings Call
Chat: Thank you for your patience, everyone. The Semrush Holdings second quarter 2024 results conference call will begin shortly. During the presentation, you'll have the opportunity to ask a question by pressing star four by one on your telephone keypad.?? Hello, everyone, and welcome to the Semrush Holdings' second quarter 2024 results conference call. My name is Chat, and I'll be the coordinator for your call today. During the presentation, you can register to ask a question by pressing a star followed by one on your telephone keypad. If you change your mind, please press the star followed by two. I'd now like to hand over to Brinlea Johnson, Investor Relations, to begin. Brinlea, please go ahead.
Speaker Change: Thank you for your patience, everyone. The Semrush Holdings second quarter 2024 results conference call will begin shortly. During the presentation, you'll have the opportunity to ask a question by pressing star four by one on your telephone keypad.
Speaker Change: ?? ?? ?? ?? ??
Chat: Hello everyone and welcome to the Semrush Holdings second quarter 2024 results conference call. My name is Chat and I'll be the coordinator for your call today. During the presentation you can register to ask a question by pressing star or by 1 on your telephone keypad.
Chat: If you change your mind, please press start or buy two. I would now like to hand over to Brinlea Johnson, Investor Relations to begin. Brinlea, please go ahead.
Brinlea Johnson: Good morning and welcome to Semrush Holding's second quarter 2024 conference call. We'll be discussing the results announced in our press release issued after market close on Monday, August 5th. On the call with me is our CEO, Oleg Shchedulov, our President, Eugene Levin, and our CFO, Brian Mulroy.
Brinlea Johnson: Good morning and welcome to Semrush Holdings second quarter's 2024 conference call. We'll be discussing the results announced in our press release issued after market close on Monday, August 5th.
Speaker Change: With me on the call is our CEO Oleg Shchegolev, our president Eugene Levin, and our CFO Brian Mulroy.
Brinlea Johnson: Today's call will contain forward-looking statements which read, 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 existing and future demand for our existing and any new products and features, our expected growth of our customer base and specific customer segments, the continued development of our product, the expansion of our content shake tool, industry and market trends, our competitive position, market opportunities, sales and marketing activities, acquisition activity, integration and results of recent acquisitions, future spending and incremental investments, our guidance for the third quarter of 2024 and the full year 2024, and statements about future pricing and operating results, including margin improvement, revenue growth and profitability, and assumptions regarding foreign exchange rates.
Speaker Change: Today's call will contain forward-looking statements which were made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Speaker Change: 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 existing and future demand for our existing and any new products and features,
Speaker Change: Our expected growth of our customer base and specific customer segments.
Speaker Change: The continued development of our product.
Speaker Change: The expansion of our content-shake tool, Industry and Market Trends, our competitive position,
Speaker Change: MarketOpportunities.
Speaker Change: Sales and Marketing Activities.
Speaker Change: Acquisition Activity
Speaker Change: Integration and Results of Recent Acquisitions, Future Spending, and Incremental Investments.
Speaker Change: Our guidance for the third quarter of 2024 and the full year 2024, and statements about future pricing and operating results, including margin improvements, revenue growth, and profitability, and assumptions regarding foreign exchange rates.
Brinlea Johnson: Forward-looking statements are statements other than statements of fact and can be identified by words such as expect, can, anticipate, could, 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, and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risk and uncertainty that could cause actual results to differ materially from those expressed in these forward-looking statements.
Speaker Change: Forward-looking statements are statements other than statements of fact and can be identified by words such as expect,
Speaker Change: Can, Anticipate, Could, Plan, Believe, Seek, or Will.
Speaker Change: These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.
Speaker Change: Forward-looking statements address matters that are subject to risk and uncertainty.
Brinlea Johnson: 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 other filings with the SEC. During the course of today's call, we referred to certain non-GAAP financial measures. There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued yesterday after the market closed, which can be found at investors.semrush.com. Now, let me turn the call over to Oleg.
Speaker Change: that could cause actual results to differ materially from these forward-looking statements.
Speaker Change: For discussion of the risks and important factors that could affect our actual results, please refer to our most recent quarterly report on Form 10-Q and our annual report on Form 10-K filed with the Securities and Exchange Commission, as well as other filings with the SEC.
Oleg Shchedulov: Thank you and good morning to everyone on the call. I'm excited about our results. We had a very strong second quarter, delivering revenue of $91 million, up 22% year-over-year, and error growth of 25% year-over-year. We reported income from operations of $3.4 million and non-GAAP income from operations of $12.2 million in the second quarter. Non-GAAP operating margin increased to 13.4% compared to a non-GAAP operating margin of 3.1% in the prior year period.
Speaker Change: Now, let me turn the call over to Oleg.
Oleg Shchegolev: We reported income from operations of $3.4 million and non-GAAP income from operations of $12.2 million in the second quarter.
Oleg Shchedulov: We accept our prior guidance, and I am pleased to say we are raising our full-year 2024 revenue guidance. We are expanding our leadership position in online visibility, and are succeeding in combining strong durable growth with improving profitability and free cash flow generation. Our strong financials are the result of the solid foundation we have been building since 2008. Semrush started as a small group of SEO and IT specialists united by one mission to make online competition fair and transparent with equal opportunities for everyone.
Oleg Shchedulov: Now we are well positioned for the next leg of growth, with the leading software platform that enables marketing professionals to build, manage, and measure campaigns across all major channels. Our edge over the competition comes from our strong culture and history of leveraging our differentiated data to elevate the digital marketing activities of our customers. Semrush's unique data sets are born from our own intellectual property and historical customer knowledge, and the data our customers share with us.
Oleg Shchegolev: Semrush's unique data sets are born from our own intellectual property and historical customer knowledge.
Oleg Shchegolev: and the data our customers share with us. This data generates invariable predictive insights and opportunities for customers to drive significant ROI.
Oleg Shchegolev: As we enable new ways to customers to use our data, VizUse itself generates additional data.
Oleg Shchegolev: leveraging AI, and advanced analytics.
Oleg Shchegolev: And while we started our journey focused on specialists and small business owners,
Oleg Shchegolev: This shift from a single SEO product tailored to specialists and small business owners to a multi-product platform.
Oleg Shchegolev: has been the driving force behind our growth and ability to significantly expand our average error per paying customer by over 50% since the beginning of 2021.
Oleg Shchegolev: We believe our brand competes with world's data sets, product offerings, efficiency and profitability, and customer welfare.
Oleg Shchedulov: This year, we continued on our journey and focused on initiatives we expect to drive the next phase of growth for Semrush. Prior to the launch, we had already been successful in acquiring 8,000 enterprise accounts. We believe the demand for our innovative enterprise SEO product is strong, and we are encouraged by our early traction in the market. In addition to expanding our portfolio, we have a disciplined capital allocation approach around M&A.
Oleg Shchegolev: This year, we continued on our journey and focused on initiatives we expect to drive the next phase of growth for Semrush.
Oleg Shchegolev: In May, we launched our Enterprise SEO product, and we are pleased with the initial traction and demand.
Oleg Shchegolev: Prior to the launch, we already had been successful in acquiring 8,000 enterprise accounts with over 500 employees.
Oleg Shchegolev: In a few short months, we have closed new deals with DigitalOcean, HSBC, Royal Bank of Canada, and many more. We believe the demand for our innovative enterprise SEO product is strong, and we are encouraged by our early traction in the market.
Oleg Shchegolev: In addition to expanding our portfolio, we have a disciplined capital allocation approach around M&A, and we believe we are well positioned to take advantage of new opportunities, given our cash position.
Oleg Shchegolev: In the second quarter we made a small acquisition by taking a majority stake of brand 24, which we expect to extend our capabilities in social media and brand marketing.
Oleg Shchegolev: And most recently, in the beginning of Q3, we acquired RISE, which extends our capabilities with technical SEO and we believe will significantly increase our average error per paying customer potential.
Oleg Shchegolev: With our strong start to 2024, I feel even more confident that we have built the foundation for the future. We plan to leverage our profitability to invest in new products to extend our reach, impact, and cross-sell-upsell capabilities.
Oleg Shchegolev: These moves in concert are designed to solidify Semrush as the marketing platform of choice across all industries, segments, geographies, and now evolving across all marketing disciplines and leadership levels.
Speaker Change: I will now turn the call over to Eugene and Brian to discuss the results of the quarter and our outlook in more detail.
Speaker Change: Our platform is very powerful and helps marketers all over the world grow their online visibility.
Speaker Change: In the second quarter, we acquired a majority stake in Brand24, an impressive company with a strong team and a leading SaaS platform, with a global reach, providing metrics, measuring brand awareness, sentiment analysis, and collecting customer insights.
Oleg Shchegolev: The acquisition strengthens our portfolio of upmarket media monitoring products and enhances our data analytics capabilities and insights into the market trends.
Oleg Shchegolev: In July , we acquired Grice, which is a SaaS platform that helps businesses optimize their website to improve user experience and organic search performance.
Oleg Shchegolev: RIDE can scan websites of any size and highlight important technical and performance issues, and these insights are used by both marketing and engineering teams.
Oleg Shchegolev: They have strong traction with large companies, and we believe that virtually any large company that generates customers through their website can benefit.
Oleg Shchedulov: We believe RIDE enables us to expand our enterprise portfolio footprint beyond SEO and content marketing by engaging website developers within our current and prospective customer base. We're increasing our number of dedicated enterprise reps. In addition to enterprise product initiatives, we continue to leverage AI in our platform.
Oleg Shchegolev: We talked previously about our enterprise SEO products increasing our average ARR for enterprise accounts by 10 to 15 times. And we estimate RISE could further extend that increase by 15 to 20 times.
Oleg Shchegolev: We're gaining traction with both our SEO enterprise products and our enterprise go-to-market strategy.
Oleg Shchegolev: This quarter, we'll leverage AI to give our customers truly personalized recommendations.
Oleg Shchegolev: In keyword research, we use AI to calculate personalized metrics, such as keyword difficulty.
Oleg Shchegolev: Our AI engine takes into account characteristics such as relevance, topical authority, ease of navigation, and other relevant factors to create a truly personalized experience.
Oleg Shchegolev: These new features enable our customers to identify topics that create the best potential for success to enhance their online visibility.
Oleg Shchegolev: In Content-Shaped AI, we can now generate different content based on the location of the business. For example, if your business is near Boston, you might want to highlight your special offers for Celtics fans.
Oleg Shchegolev: These new features demonstrate how the value of AI can be dramatically increased when it is combined with proprietary Semrush data.
Speaker Change: We were one of the first companies to support these features. Now our clients can monitor their presence in AI overview snippets using Semrush tools such as Position Tracking and Semrush Sensor.
Oleg Shchedulov: We're seeing increased adoption of our AI products and continue to innovate and launch new offerings in the market.
Speaker Change: We're seeing increased adoption of our AI products and continue to innovate and launch new offerings in the market. We're expanding both our revenue and portfolio in the enterprise segment, which helps fuel higher average ARR per customer and strong net retention.
Speaker Change: 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 .
Brian Mulroy: Thank you, Eugene. We had a solid quarter across the board. Our revenue was $91 million, growing 22% year-over-year. Growth was driven primarily by an expansion of our average revenue per customer as we continue to execute on our cross-sell and up-sell strategy.
Speaker Change: Annual recurring revenue for the quarter grew 25% year-over-year to $377.7 million. The acquisition of Brand24 contributed approximately 2% of our reported ARR.
Oleg Shchegolev: Our calculated ARR per paying customer grew 12% year-over-year.
Oleg Shchegolev: and is now up over 50% since the beginning of 2021.
Oleg Shchegolev: with the cross-sell and up-sell benefits that come with our comprehensive marketing platform.
Oleg Shchegolev: focused on search engine optimization, search engine marketing, content marketing, social media, competitive intelligence, local marketing, and digital PR.
Oleg Shchegolev: During the second quarter, we added approximately 4,100 net new paying customers. Roughly three-quarters of those came through our acquisition of Brand24.
Oleg Shchegolev: Our dollar-based net revenue retention for the second quarter remains at 107 percent.
Oleg Shchegolev: We continue to believe our dollar-based net revenue retention will remain strong and increase as our sophisticated accounts increase as a percentage of our mix, since these customers have higher net retention than our company average.
Oleg Shchedulov: Moving down the income statement, during the second quarter, we had a positive non-GAAP operating income of $12.2 million.
Oleg Shchegolev: Moving down the income statement, during the second quarter we had positive non-GAAP operating income of $12.2 million.
Oleg Shchegolev: We reported another significant improvement in our non-GAP operating margin of 13.4%, which was up over 1,000 basis points year-over-year and surpassed our second quarter guidance.
Oleg Shchegolev: Cash flow from operations in the second quarter was $12.1 million.
Oleg Shchegolev: Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $231.5 million.
Oleg Shchegolev: down $11.6 million from the previous quarter.
Oleg Shchegolev: As we used approximately $10.7 million of our cash balance to attain a majority share in Brand24 and reserved another $11.7 million as restricted cash to purchase the remaining shares of Brand24 throughout the second half of 2024.
Oleg Shchegolev: We will report approximately $9 million in cash outflows in the third quarter for the right transaction.
Oleg Shchegolev: Turning now to guidance. For the third quarter of 2024, we expect revenue in a range of $96 to $97 million, which at the midpoint would represent growth of approximately 23% year-over-year.
Oleg Shchegolev: We expect our third quarter non-GAAP operating margin to be approximately 11%.
Oleg Shchegolev: For the full year of 2024, we are raising our guidance and expect revenue in the range of $3.73 to $3.75 million, up from our prior range of $3.66 to $3.69 million, which translates into growth of 21% to 22%.
Oleg Shchegolev: We expect the combination of Brand24 and Rite will contribute approximately 200 basis points of growth, which would mean our organic growth would be in the vicinity of 20% year-over-year at the midpoint.
Oleg Shchegolev: Moving to our guidance for the full-year operating margins.
Oleg Shchegolev: While we are ahead of our full year guidance in the first half, we are maintaining our non-GAAP operating margin guidance for the full year of 10.5% to 11.5% and our free cash flow margin of approximately 8% due to the following reasons. First,
Oleg Shchegolev: Because we are off to a very strong start to the year, we expect to make several focused go-to-market investments to help drive future growth in our enterprise business.
Oleg Shchegolev: Second, although Brand24 and Wright both have margins that are in line with our corporate average, we plan to accelerate our integration efforts to more rapidly incorporate their products into our portfolio.
Oleg Shchegolev: To do this, we expect to incur some temporary one-time integration expenses that we have built into our updated operating margin guidance.
Oleg Shchegolev: We expect these expenses to abate as we get into the next year, and we also plan to extract some synergies which should help their operating margin improvement as we progress through 2025.
Oleg Shchegolev: We also had some expenses originally planned in the second quarter that pushed into the second half of the year. This is part of what allowed us to overachieve our second quarter guidance.
Oleg Shchegolev: And finally, the increase in our stock price, combined with changes in our affiliate ownership structure, means we will transition to large accelerated filer status under the SEC rules. As a result, we anticipate higher general and administrative expenses as a result of increased compliance costs.
Oleg Shchegolev: I note that holding our Operating Margin Guidance still implies that our Operating Profit Guidance in dollars will increase, despite these components.
Oleg Shchegolev: To help you with your modeling, I'd make a few additional comments. We expect that the combined total of Brand24 and Wright will have a revenue growth rate similar to our corporate average over the near term, before our cross-selling efforts kick in.
Oleg Shchegolev: The difference between our non-GAAP operating margin and our free cash flow margin is the result of interest income offset by capital expenditures, cash taxes, and acquisition-related expenses for the brand 24 and right transaction.
Oleg Shchegolev: As a reminder, we enacted a core price increase during Q3 of last year, which we don't expect to repeat this year. This could put some pressure on the year-over-year growth rates we've been experiencing in our ARR per paying customer.
Oleg Shchegolev: And finally, our guidance assumes a Euro exchange rate of 1.08. Approximately 30% of our expenses are denominated in Euros.
Oleg Shchegolev: In closing, we are very pleased with the performance of our business in the first half.
Oleg Shchegolev: We have executed well to overachieve on top line growth and profitability, advance forward our strategic priorities, and place Semrush in a strong position for our next phase of growth. We continue to remain confident in our ability to grow and scale our business.
Oleg Shchegolev: We are pleased with the traction of our most recent investments and remain committed to efficient and profitable growth that drives long-term value to our shareholders. With that, we are happy to take any of your questions. Operator, please open the line for questions.
Speaker Change: Thank you, Brian . If you'd like to ask a question, please press star, followed by 1 on your telephone keypad now. If you change your mind, please press star, followed by 2. When preparing to ask a question, please ensure your device is unmuted locally.
Scott Berg: The first question comes from Scott Berg from Needham; please go ahead.
Speaker Change: The first question comes from Scott Berg from Needham. Please go ahead.
Scott Berg: Hi, everyone, really nice results here this quarter. I just wanted to touch on the, I guess, touch on the demand environment and maybe what you're seeing with the enterprise solution, you know, early in its stage. I think you talked about still being able to get pricing in the 10 to 15x, kind of multiple of the core Semrush product, and that's excluding what you've recently acquired here. But we're able to see pricing kind of in that expected range here, you know, early on with this in the market.
Scott Berg: Hi everyone, really nice results here this quarter. I just wanted to touch on the demand environment and maybe what you're seeing with the enterprise solution early in its stage. I think you talked about still being able to get pricing in the 10 to 15x.
Speaker Change: kind of multiple of the core Semrush product and that's excluding you know what you've recently acquired here but we're able to see pricing kind of in that expected range here you know early on with this in the market.
Speaker Change: Hi, thank you for the question. Yeah, absolutely. We actually increased prices a little bit after initial launch in May. We had some feedback from customers who were saying that sometimes we're a little bit underpriced and we could charge more.
Scott Berg: So, we use this opportunity now, you know, it's still in the same range, 10 to 15, but, you know, it's kind of a little bit closer to the higher end of that.
Scott Berg: Got it. Very helpful. And then, you know, Brian , one of your last comments there, talking about modeling here going into the next year, can you remind us what the benefits to growth rates, the pricing increase has been over the last year, and, you know, just the way titrate our models effectively to what that headwind could be over the next 12 months? Thank you.
Oleg Shchedulov: Thanks, Scott. So in the third quarter last year, 2023, we did a price increase across all of our core offerings.
Brian Mulroy: Thanks, Scott. So in the third quarter last year, 2023, we did a price increase across all of our core offerings.
Speaker Change: for all new customers and then we had a small cohort of existing customers that we rolled out that pricing increase to as well. Remember from our earnings calls we mentioned that it was about four million of ARR.
Scott Berg: that we ended up getting the benefit of in the second half of last year and then continued for our new customers to get, it was roughly five to eight percent increase on our price for new customers. So all in, I'd say it was about
Scott Berg: 2.5 to 3 million of impact last year and an incremental 2.5 to 3 million impact in the first half of this year.
Speaker Change: Excellent. Next quarter again. Thanks for taking my questions.
Jackson Ader: Thank you. The next question is from Jackson Ader from KeyBank Capital Markets. Please go ahead.
Speaker Change: Thank you. The next question is from Jackson Ader from KeyBank Capital Markets. Please go ahead.
Jackson Adder: Great. Thanks for taking our questions, guys. The first one is on the Enterprise launch in May. Can you just give us maybe a little bit of an early update on what some of the features that you rolled out in that new SKU people are most attracted to in the early going?
Speaker Change: Yeah, absolutely. So, the three key pillars of enterprise product are
Speaker Change: Number one, deep customization, so our S&B product is kind of like one-size-fits-all interface and, of course, enterprises, they know really well what they need and they want
Speaker Change: You know, dashboards to be exactly what they're looking for, and they also sometimes want to combine metrics in certain ways that, you know, requires customization. So this is number one thing that they're really excited about. The second big one is our automated and AI workflows.
Speaker Change: So, for example, there are a lot of tasks you can do manually if you have a very small website, but if you have a big website, you need all this automation and AI. And a couple of good examples would be...
Speaker Change: our forecasting workflow that a lot of teams use to justify
Speaker Change: investments in organic search and show ROI calculations to their finance teams.
Speaker Change: We also have really strong traction with our content marketing workflows that can scan a huge website and make very specific suggestions about what people need to improve in content or in internal linking to drive better visibility. And then the third one is...
Oleg Shchedulov: Our enterprise product includes services. Of course, Semrush is a software company. We don't provide services ourselves, but we connect our enterprise clients with leading experts in certain areas, and they can collaborate, you know, through our platform, and that's the third feature that has been very well received.
Speaker Change: Our enterprise product includes services. Of course, Semrush is a software company. We don't provide services ourselves, but we connect.
Speaker Change: Our enterprise clients with leading experts in certain areas, and they can collaborate, you know, through our platform. And that's the third feature that have been very well received.
Speaker Change: Okay, all right, great. And then a follow-up on the financials for you, Brian . I think when you mentioned a little bit of extra color on the acquisitions,
Brian Mulroy: that on 24 and right would grow roughly in line with the company.
Speaker Change: You know, the core Semrush growth rate until the cross-sell motion gets underway, so the expectation that you would hope that they would be able to accelerate their revenue growth as you kind of build out the go-to-market motion once they're in the product family.
Jackson Ader: You would hope that they would be able to accelerate their revenue growth as you kind of build out the go-to-market motion once they're in the product family.
Speaker Change: Hey Jackson, that's absolutely right. Semrush has been really successful in building out
Speaker Change: a strong brand and a loyal group of paying customers. We have 116,000 paying customers today. What's been driving and fueling our success recently is our ability to cross sell and upsell and expand the average ARR per paying customer.
Speaker Change: We do that by taking our core customers and continuing to diversify the channels and marketing disciplines that are important to them and provide technology and data.
Speaker Change: that helps them to enhance their online visibility. With both brand 24 and right, that extends our capabilities into close adjacencies that we believe will continue Semrush on that trajectory.
Speaker Change: Okay, great. All right, thank you.
Speaker Change: Thank you. The next question is from Elizabeth Porter from Morgan Stanley . Please go ahead.
Elizabeth Porter: Great, thank you so much. I have another question on brand 24 and right.
Elizabeth Porter: What is the opportunity to sell into the customer base? Is this applicable to all customers or should we be focusing more on just the larger customers to upsell?
Speaker Change: And then it sounds like there's a big opportunity, again, to increase ARPU per customer. So what are the signs that give you confidence that customers are willing to increase their spend kind of to this degree that we're talking about, kind of, again, another 10 to 15 percent type levels on ARPU? Thank you.
Speaker Change: Thank you, great question. So, I'll start with Brent24. So, Brent24, they have two different products in their portfolio. One is focused on SMB. It's called Brent24. It's already available for Semrush customers in App Center. We're just expanding capabilities.
Speaker Change: And now, because this company is sort of in the Semrush family, we will, of course, double down on bundling opportunities. We're having very strong traction with our own social media tools.
Speaker Change: And Brand24 as a social media monitoring tool is a really great addition to that portfolio and social media bundle. They also have Insights24 product that is less known but actually very, very good media monitoring product for large companies and they have customers.
Speaker Change: Like, you know, one of the biggest automotive companies, you know, who is managed by a very charismatic leader and so on. And then...
Speaker Change: Right is a little bit different story. So this is a product that is designed specifically for companies with very big websites.
Speaker Change: So, you know, there's definitely big bumbling opportunity between the right.
Speaker Change: and our own enterprise SEO product.
Speaker Change: There will be...
Speaker Change: You know, we'll need...
Speaker Change: A little bit more time here to fully integrate it into our enterprise SEO product.
Speaker Change: But overall, in terms of buyer persona, this is exactly the same buyer persona, and we're very positive about bundling here. And then in terms of average revenue per user, our estimates right now are based on
Speaker Change: There are current average revenue in this segment. That said, their revenue is a little bit focused on Europe , which is usually a little bit lower checked than what you can get in the United States.
Speaker Change: Does that answer the question?
Speaker Change: Yes, it does. Thank you very much. And then just as a follow up, I wanted to ask on monetizing AI. And you guys have a few different ways that you're monetizing, including one for AI being added to more of just the higher price tiers.
Speaker Change: First question is, are you seeing customers start to upgrade to higher tiers for those AI capabilities today? And then second, how do we think about kind of a broader opportunity around an upgrade cycle in order for customers to get access to AI? You know, is there any way to kind of segment the base of who might...
Oleg Shchedulov: Yeah, so we're really working on three different strategies to monetize AI. The number one strategy is to start including it in base product offerings to improve conversion and retention. That's what we're doing with our copilot features in core SEO products. You know, over time, we will think of ways to maybe add even more functionality only on premium tiers. But right now, this part is really more about increasing conversion. Now, the second big driver of monetization when it comes to AI is
Speaker Change: and those more likely candidates be.
Speaker Change: Yeah, so we're really working on three different strategies to monetize AI. Number one strategy is.
Speaker Change: to start including it into base product offerings to improve conversion and retention. That's what we're doing with our co-pilot features in core SEO products. Seeing really good adoption,
Speaker Change: you know over time we will think how to maybe add even more functionality only on premium tiers but right now this this part is really more about increasing conversion. Now the second big driver of monetization when it comes to AI is
Speaker Change: You know, pushing some features on higher tier plans. For us, a good example is how we monetize our reply to review feature in local products.
Speaker Change: where you can buy entry-level product for $20 per user, per location, per month. And then there is a premium product that is $40 per location, per month. And premium product includes...
Speaker Change: AI features such as reply to review, and of course, it drives quite a lot of upgrades because it's such a helpful feature.
Speaker Change: And then the third...
Speaker Change: The way to monetize AI features for us is just to launch standalone products.
Speaker Change: that are, you know, solving particular large problem. And the good example would be our Content Shake AI product that people use to create content and blog posts. And this is where we not just use...
Speaker Change: You know, AI APIs from companies like OpenAI, but we also combine it with our own proprietary data to improve quality of the insights and recommendations and write content that really performs well in search engines and social media.
Speaker Change: So, that's an example of the third monetization strategy.
Speaker Change: Great, thank you.
Speaker Change: Thank you. The next question is from Mark Murphy from J.P. Morgan. Please go ahead.
Mark Murphy: Thank you very much. So I wanted to touch on the net new ARR performance. It's quite strong in Q2. It's a bigger number than Q2 of the last couple years. How much of that would you ascribe to any upmarket traction?
Speaker Change: versus any sense of stabilization in the macro demand. And then, you know, should we think about that outperformance affecting how we might have modeled Q3 in terms of any deals that might have pulled forward and closed earlier than expected? And I have a quick follow-up.
Brian Mulroy: Mark, it's Brian . It's a good question. So I'd say a few things. First of all, some of the net new ARR performance, of course, was brand 24, so that's about a third.
Mark: A little bit more than a third of the number. Independent of that, we did see a pretty significant increase year over year in our net new AR growth.
Speaker Change: It is, in part, driven by Enterprise, but we're still in the very early stages of that. So we just launched Enterprise in May. We, of course, do have some ARR contribution from that Enterprise product. But I'd say the bulk of it is we have a cohort of larger, sophisticated accounts who continue to adopt.
Speaker Change: a larger and larger portion of our portfolio.
Mark: We expand beyond SEO into competitive intelligence, local, social media, digital PR, content marketing, and of course, the AI products that Eugene just mentioned. So we have a very extensive portfolio.
Speaker Change: and we're starting to see really strong traction in our ability to cross cell.
Mark: and Upsell into our install base. What you saw...
Mark: This quarter, we reported in the release that our customers that have more than 10,000 in AR grew 37%.
Mark: So that cohort of accounts are becoming an increasingly larger portion of our base and helping to bolster AR performance. I would say just in the second half and going into 2025 that we do expect
Mark: Our enterprise product to start to gain some traction and contribute to AR, but it was smaller in the second quarter.
Eugene Levin: Okay, thank you. And then, as a follow-up, maybe for Eugene, with the latest acquisition, it sounded like you're moving further into the area of performance and issue monitoring, like what we think of as the infrastructure of websites. What is triggering that decision? And do you sense that that market is growing faster than your core markets for online visibility, or do you think this is just part and parcel of it? I'm wondering maybe how far you think about extending the product footprint into that area.
Mark: Okay, thank you. And then, as a follow-up, maybe for Eugene, with the latest acquisition, it sounded like you're moving further into the area of performance.
Eugene Levin: and issue monitoring, I think what we think of as the infrastructure of websites. What is triggering that decision?
Speaker Change: Do you sense that that market is growing faster than your core markets for online visibility, or do you think this is just part and parcel of it? I'm wondering maybe how far you think about extending the, you know,
Eugene Levin: Yeah, we think this is really a must-have feature for a large company.
Mark: product footprint into that area.
Speaker Change: Yeah, we think this is really a must-have feature for a large company.
Speaker Change: you know, when you have a small website.
Speaker Change: you effectively can just, you know, audit the code and test the website yourself when you have millions and millions of pages you need.
Mark: a web crawler to go through every page and check if everything is okay.
Mark: There are definitely...
Speaker Change: ways to expand this opportunity even beyond this category of products. You can start doing audits of GDPR compliance and so on. For us, we're really focusing on the buyer persona.
Speaker Change: Technical optimization is a very important part of online visibility, and SEO teams work very, very closely with product teams.
Speaker Change: And often those products become part of their deployment pipelines and, you know, necessary checks that engineering teams need to perform before they push the code in a production environment. So, thank you.
Speaker Change: That's kind of why we're interested in this category, it of course expands the market, it's a must have.
Speaker Change: feature. It's something that every large company needs and it helps us to get a foot in a door and have relationships with engineering organizations inside our existing accounts. So that's kind of why we're excited about this.
Speaker Change: Thank you.
Mark: Thank you. Our last question is from Adam Hotchkiss from Goldman Sachs. Please go ahead.
Adam Hoschkiss: Great, thanks so much for taking the question. I'd be curious for an update on how you think about generative AI and the impact on search engines more broadly as it relates to SEO. I'm thinking things like no-click searches that generative AI responses have to search queries and other ways the search engines are incorporating generative AI. I'd just be curious how you and customers need to adapt, if at all, from an SEO perspective as that continues to evolve.
Speaker Change: Yeah, great question.
Speaker Change: By now, we already have some time to monitor how new interface, such as AI overview, impacts user behavior. And it's pretty much in line with the...
Speaker Change: You know how we were describing this in the past. The way we think about this is that Google have been involved in their interface for many many years.
Speaker Change: They've been always adding new search elements, and often those new search elements would reduce percentage of...
Speaker Change: Customers who click on, you know, on links and, you know, visit another website at the same time, because of those new search elements.
Speaker Change: Google became more and more valuable tool for many people so the total traffic and total amount of time and total number of use cases would increase and as a result total number of outgoing clicks would also increase over time.
Speaker Change: So that's kind of a little bit of history of this phenomenon of introduction of new search elements. And we think the new AI overview element fits perfectly based on what we are seeing right now. It's really replacing feature snippets in most of the cases.
Speaker Change: And it provides links to original source of content, and a lot of people click on those links.
Speaker Change: And the rules that are applied to get featured in this AI overview are very similar to the
Speaker Change: Just general recommendations that we usually give people that they need to follow to rank high or to be featured in a featured snippet. So from that point, it would really just one more step in a very long journey.
Brian Mulroy: Okay, thanks, Eugene. That was really helpful. And then, Brian, you addressed this a little bit in an earlier question, but just given the recent acquisitions, it'd be great to get a refresher around your broader capital allocation strategy, just how you think about evaluating potential deals, and what you'd say your big gaps in functionality are that you'd look to address.
Brian Mulroy: Okay, thanks, Eugene. That was really helpful. And then, Brian , you addressed this a little bit in an earlier question, but just given the recent acquisitions, it'd be great to get a refresher around your broader capital allocation strategy, just how you think about evaluating potential deals and what you'd say your big gaps in functionality are that you'd look to address.
Speaker Change: Yes, it sounds like two questions. One is just on capital allocation and then one in particular around the products.
Brian Mulroy: and markets that we're targeting. So I just say in general.
Speaker Change: We have a very strong balance sheet, $230 million.
Speaker Change: and Cash and Cash Equivalents. As you've seen from our recent announcements, we have been active.
Speaker Change: We feel that the markets are favorable, there's really good multiples.
Speaker Change: and a lot of good opportunities out there. So we'll continue to put.
Speaker Change: are cashed to work in both investing in the business.
Speaker Change: And whether that means organically through our sophisticated and talented R&D teams, strong partnerships, or M&A, we'll assess each equally and make sure we're focused on the one with the strongest ROI. Eugene can get into just specifics on which technologies and markets we're focused on today.
Eugene Levin: Yeah, I think in general we're always looking for opportunities to accelerate our R&D roadmap and get faster, you know, from A to B.
Eugene Levin: and sometimes M&A is the best way to get there. We have very robust.
Eugene Levin: product roadmap. We effectively talked to our engineering teams and if we see something that is a heavy lift,
Eugene Levin: and the reason opportunity to get it through acquisition and the team is great and there are a lot of synergies and chemistry and the financial terms are reasonable or you know like in recent examples attractive.
Speaker Change: We pull the trigger and we like to do partnerships and acquisitions when they make sense.
Speaker Change: Really helpful. Thanks, Brian . Thanks, Eugene.
Speaker Change: This is the end of the Q&A session, so I'd now like to hand back to the management team for closing remarks.
Oleg Shchedulov: Thank you everyone for joining us today. We delivered a strong second quarter, exceeding our guidance and positioning us to raise our full year 2024 guidance. We continue to expand our portfolio of products, and I'm very excited about our ability to move up market and the direction of our recently released SEO enterprise products. We continue to expand our leadership position in the online visibility space and are succeeding in combining strong, durable growth with improving profitability and revenue flow generation. We hope to see many of you at our upcoming Analyst Day on October 1st in New York City. Thanks, everyone.
Speaker Change: Thanks everyone for joining us today. We delivered a strong second quarter, exceeding our guidance and positioning us to raise our full year 2024 guidance.
Speaker Change: We continue to expand our portfolio of products, and I'm very excited about our ability to move upmarket and grow.
Speaker Change: We continue to expand our leadership position in the online visibility space and are succeeding in combining strong, durable growth with improving profitability and figure flow generation.
Speaker Change: We hope to see many of you at our upcoming Analyst Day on October 1st in New York City. Thanks everyone.
Speaker Change: This concludes today's call. Thank you for joining. You may now disconnect your lines.