SEMrush Holdings, Inc.

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the SEMrush Holdings third quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the call over to Bob Gujjvardi, Vice President, Investor Relations.

Please go ahead.

Good morning. I'm Bob Gujjvardi, VP of Investor Relations, and welcome to SEMrush Holdings' third quarter 2021 results conference call. We'll be discussing the results announced on our press release issued after market closed on Tuesday. With me on this call is our CEO, Oleg Shagalov, our CFO, Evgeny Satisov, and our CSO, Eugene Levin. A summary of our prepared comments are also available on the official SEMrush Twitter account, at SEMrush. Before we begin, I would like to highlight our participation in several virtual investor conferences to be held during the fourth quarter. We'll attend the Stiefel Virtual Midwest One-on-One Growth Conference on November 11th and the RBC Technology Global TIMT Conference on November 16th. 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 statements concerning our expected future business and financial performance and financial condition, expected growth, adoption and demand for our products and features, expected investments and their anticipated benefits, industry and market trends, our competitive position, market opportunities, and our guidance for the fourth quarter of 2021 and the full year 2021, 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, and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. For a discussion of the risks and important factors that could affect our actual results, please refer to our final IPO perspectives, followed with the Securities and Exchange Commission, our quarterly reports on Form 10-Q, as well as our other filings with the FCC. Also, during the course of today's call, we refer to certain non-GAAP financial measures. There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available on our press release issued after market close, which can be found at investors.samrush.com. And with that, let me turn the call over to Oleg.

Thank you, and good morning to everyone on the call. I am pleased with our performance in the third quarter. Revenue of $49.3 million was up 53% year over year and up 9% sequentially. Our paid customers grew approximately 23% year over year, while the average revenue per customer grew by more than 20% year over year. I wanted to once again highlight the breadth of our product offering as I believe this is key to our growth strategy. As part of our repackaging efforts in January, we raised prices for entry-level plants, but we reduced pricing for incremental user licenses as we look to deepen our relationship with our customers. This strategy appears to have been successful. As of September 30, 2021, year-to-date, year-over-year user licenses growth was more than 80%. The user license growth contributed to strong growth in customers who pay in excess of $10,000 annually. These 10K customers were up more than 75% year-over-year in the third quarter. I would also highlight the continued strength of Shimrata Trends, our industry-leading competitive intelligence PADO. SEMrush DOT Trends revenue was up more than 70% in the third quarter, compared to the same period a year ago. We introduced a look-ahead feature in DOT Trends this quarter, which updates forward traffic estimates weekly. I believe this capability is unique to SEMrush DOT Trends and that it could further position us as a leader in the competitive intelligence space. SEMrush is fortunate to not have any customer or industry concentration. However, digital marketing agencies represent an important channel for us. We estimate 20-25% of our customers are digital marketing agencies, and we introduced our Agency Growth Kit add-on to help these customers grow their business. I am pleased to report that Agency GrowthKit's attach rates are approaching 5% for Agency customers only 12 months after launch. I am optimistic that attach rates for Agency GrowthKit will only continue to grow as nearly 25% of our Agency customers have expressed interest in the product by registering at our Agency GrowthKit client portal. We continued to fill out our executive team as Andrew Worden joined SEMrush as our chief marketing officer. Andrew is very familiar with our platform and the marketing technology industry, having served in a variety of marketing roles previously to joining SEMrush, including prior experience as a CMO. Our growth strategy incorporates increased investment in brand marketing, And I am pleased to have a seasoned professional like Andrew on board to help guide those efforts and ensure they have a positive impact to our growth. SEMrush gradually implementing a return to the office where public health conditions allow. And we look forward to meeting more of our investors face-to-face in 2022. If you would like to arrange a meeting in Boston with our team, please reach out to Bob and he can coordinate. In conclusion, I am pleased with our performance in the first quarter. We extended our product leadership and the strong growth in every check and robust user growth suggests that our products are becoming more essential to our customers. Looking ahead, we must stay focused on execution to end the year on a strong note. With that, I will hand the call to Evgeny for a recap of our financial performance.

Thank you, Oleg. Q3 revenue of $49.3 million was up 53% year-over-year and came in above our expectations. Growth was once again driven by a steady increase in paying customers and an increase in the average revenue per customer. We experienced average revenue per customer growth of more than 20% in the third quarter as compared to the year-ago period. The growth was driven by additional user licenses, a richer mix of core and business accounts, and strong growth of add-ons. Our trailing 12-month revenue retention was 124% as of September 30th, up from 121% as of June 30th. The increase continues to reflect easy comparisons due to COVID in 2020. I believe we will see some moderation in revenue retention as those easy comparisons abate. However, even achieving a modest decline, I believe SEMrush will continue to produce industry-leading revenue retention for software firms servicing small and medium enterprise markets. Gross margin of 76.9% was down slightly from the previous quarter and up from 76% a year ago. Non-GAAP operating expenses of $37.6 million in the quarter were up 47% from a year ago and up approximately 10% from the previous quarter. The growth was driven by additional headcount as well as increased marketing spend. Non-GAAP operating expenses of $37.6 million in the quarter were up 47% from a year ago and up approximately 10% from the previous quarter. The growth was driven by additional headcount as well as increased marketing spend. We plan to make additional investments in brand marketing in the back half of 2021, and these investments drove the majority of the sequential increase. Those investments are expected to extend into the fourth quarter and into 2022. Strong revenue growth was offset by slightly lower growth margin and higher trading expenses and contributed to a non-gap net income of $12,000 in the third quarter, up from a net loss of $778,000 a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $188.5 million, up from $180.8 million at the end of the second quarter. The increase in cash was primarily due to approximately $8.6 million of cash flow preparations. The third quarter was another strong quarter of cash integration, and I expect cash flow to moderate in the fourth quarter due to increased investment into marketing and sales. Looking ahead to guidance. I expect fourth quarter revenue in a range of $51.8 to $52.3 million, representing 42% to 43% year-over-year growth. For the full year, I expect revenue in a range of $186 to $186.5 million, which would represent 49% year-over-year growth. Increased investments primarily driven by higher spending and marketing are likely to weigh in profitability, and therefore I expect a fourth quarter non-GAAP loss of $5.5 to $5 and a non-GAAP loss of $3.5 to $2.6 million for the 2021. We achieved another quarter of strong revenue growth and now a third consecutive quarter of non-GAAP net income. Cash flow rebounded strongly, and our financial performance puts us in a position to make the appropriate investments to support our growth in 2022 and beyond. With that, Oleg, Eugene, and I are happy to take any of your questions. Operator, please open the line for questions.

At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile our Q&A roster. Your first question comes from the line of Brent Thill with Jefferies. Your line is open.

Great. Hey, guys. This is James on for Brent. Thanks for the questions. Could you talk about bringing on Andrew Worden to run marketing and just what his strategic objectives are on The go-to-market side, should we expect any changes to your sales structure, or should we assume everything just stays relatively intact? That's my first question. My second one is, I know you're not providing specific 22 guidance yet, but can you talk about the puts and takes for revenue growth next year? Are there any big drivers that we should be considering? How should we be thinking about the mix of subscriber versus average check? Thank you so much.

Thank you. I will take the first question related to our new CMO, Andrew Gordon. My name is Eric, and look, we don't expect any kind of significant changes in our go-to-market strategy. We should continue the same way, and this quarter shows us that we are very good with our marketing and sales strategy. But at the same time, we should prepare ourselves for three, five years future. We want to start more branding campaigns. We want to give more attention to brand marketing. We started many experiments with video advertising, and we want to continue with video advertising even more. I think Andrew Worden would be a great addition to our team.

And next.

Yes, this is Evgeny. I'll take the second question, James. So on revenue guidance, I believe it's slightly too early to talk about the next year, full year's numbers. We will provide you more clarity on our next call in February. However, I can say that we plan to continue to be high grower. We'll continue to focus on adding more customers plus expanding our checks, basically in line with how we were working this year. I guess that's the level of detail we'll be able to provide. And then, Eugene, right?

Yeah, so for the next year, we think that in terms of comps, first half of the year is going to be a little bit easier when it comes to growth of users, and then second half, oh, sorry, growth of error check, and then second half is going to be a little bit easier when it comes to growth of users. So that's directionally how you can use this information in your models. But we'll provide more details later. Great. Thank you.

Your next question comes from the line of Michael Turretts with T-Bank. Your line is open.

Hey, guys. Congrats on the course. Just a couple questions on how things progressed through the third quarter. On the one hand, you did point out that on NRR that you're starting to see tougher comps there and you will into the future as we come past some of the COVID bounce, if you will. But then I was wondering how that played out in the third quarter combined with what may have been, if there was any seasonality from activity levels as we hit the summer and back to the office, and just general levels of project. I would say that we looked at, say, some of the bigger MarTech companies. What we saw is that fall off from that accelerated growth to slight deceleration.

Michael, this is Evgeny. I'll try to pick up this question. So what we saw in the first half of the year were clearly, I would say, accelerated growth, which will not be typical, and we didn't see the typical seasonality. What we saw in the second half of the year, or continue to see in the third quarter in particular, is actually returned to the more normal patterns, which the numbers which we're seeing are fairly much in line with what we expected them to be at the beginning of the year. So that's probably corresponds to what you were seeing across the board. So elevated first half of the year, more normal second half of the year.

Thanks. And Evgeny, I was wondering if you could, you talked a little bit You guys talked a little bit about pricing and those two different factors of the price increase, but also the price reduction and incremental seats. So can you talk a little bit, if you can, quantify the impact of each of those?

So we quantified earlier, Nikola, so we see an accelerated adoption of additional user licenses or seats by our customers. So net-net with lower prices, we're seeing a higher touch rate and higher revenue. from this particular, I would say, feature. And then overall, we see a supportive, I mean, part of the growth in the average chip, just part is driven by higher, like new customers coming at the new price, plus there is a fraction of the increase which is driven by our existing customers migrating to new price plans when they upgrade. So there is a positive, I'm sorry, go ahead.

Yeah, so just to be clear, it seems like you're getting demand elasticity, if you will, out of the reduction in incremental seed price where it is driving more revenue even at a lower incremental price.

Absolutely, that's correct.

Thank you.

Your next question comes from the line of Mark Murphy with J.P.

Morgan. Your line is open.

So great. Hey, this is pendulum sitting in for mark. Congrats on the quarter. I want to ask at a high level, what are you hearing from your customers in terms of how they're evolving their marketing budgets, given all the uncertainties around IDF and cookies? Are you seeing them lean more towards organic marketing, which could maybe act as a tailwind for your content marketing solutions?

Yeah, thank you for the question. This is Eugene. It's a big part of the conversation that we are seeing in the marketing community and people are trying to figure out what is the right path forward. In general, what we have done so far, we did a small-scale survey and asked our customers about how they're planning to address changes in the marketplace and how they're planning to reallocate the budget. Now, within our customer base, we've seen that most of people saying that they will sort of doubled down on their investments in organic search, paid search, and content marketing. Those have been sort of top three gainers in their budget. Surprisingly, number four was Facebook ads. So people still have more faith in Facebook ads than in things like programmatic advertising or retargeting. Those are our conclusions so far. Now, I have to comment that it's really a small-scale study, and it's only our customer base, which is a fraction of, you know, total market. But that's what we are seeing within our user base. That's how they address changes in the market.

Understood. And just to follow up on you, Jenny, maybe, on the net new ARR side, it seems like it was a little bit muted. Is that mainly a function of pull forward of business towards the first half from the second half, or are you seeing any potential impact on marketing budgets from the supply chain uncertainties or any other macro uncertainties when you're talking to customers?

Fred, I think you're right. I think you're right. It's more of a would say pull forward or i would say higher like higher base of the first half of the year so it's a little bit tougher comparison again as i mentioned that was the abnormal seasonality where we wouldn't we would not be expecting it to be as high a year ago but now we can coming back to normal so that i think it's a bit like the former got it thank you so yeah

Your next question comes from the line of Mauro Molina with Piper Sandler. Your line is open.

Hi, good morning. Just popping on for Brent Braceland here. Thanks for taking our questions. Certainly one thing that stands out here is that 20% plus growth in revenue per customer. And we were just hoping to get some color on what strategies you're using that are proving to be most effective in driving both license upsells and just add-on upsells in terms of driving that revenue per customer number. And then I'll have one follow-up.

Thank you. This is Oleg. First of all, such focus on revenue per customer, it was on our side all the time. All the time we talked about initiatives, about additional products, about what we should do on marketing and sales side to improve it. And in the third quarter, we gave additional focus to experiments on the sales side. We had product-oriented goals for our sales, and it was very successful. And also, even in our marketing, we started some experiments related to such expansion. I feel very optimistic about such experiments in future.

Got it. Thank you. And then, oh sorry.

No, yeah, I just wanted to add that one more thing that we are doing is we are investing a lot of effort into personalization technology so we can understand what particular products will be good fit for a particular customer and highlight the sub-front for our sales team. So that sort of increases efficiency. When they reach out to customer to pitch particular product, they already know that this customer could be interested and they know why this customer could be interested. So those are just Couple extra highlights of what we are doing to boost our revenue per user.

Got it. That's really helpful. And then would it be possible to get an update on the social media marketing tools? Anything you can call out there in terms of user adoption and maybe some color on how you've seen active users trend to that solution? Thank you.

So this is Eugene. In this quarter, we had very high growth in number of free active users. That was driven primarily by two products. One of them is backlinks analytics that we made for free with some limitations for a large portion of customers. So that attracted a lot of customers at the top of the funnel. And then we continued offering free social media tools with also some limitations, but largely free. And that also have been driving this number of free active users up. In general, we had more than 500,000 free active users, which was an increase of 28% quarter over quarter. So we definitely invest in a lot of effort into generating top of the funnel for the future growth.

Got it. Thank you.

Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from the line of Parker Lane with Stiefel. Your line is open.

Hi, it's Max Osmond for Parker Lane. Staying on that topic right there, just thinking about the new customer acquisition, maybe free and paid users, is there any specific feature that's driving that outside of search engine optimization? I know you kind of alluded to it there, but maybe paid instead of free?

Yeah, so as I pointed, social media tools are having great traction with sort of new free customers. And we continue expanding functionality and adding new features there. So those products become even more attractive. As you can see, this traction happens across many different products, not just search engine optimization, search engine marketing. And we will continue adding new and new verticals to our portfolio of free products. I think it's very important to focus on this kind of newer generation of future marketers that are very early in their journey, and maybe they're not ready to buy premium paid products, but they need something to guide them in today's environment. And we are happy to be the company that provides them those free products. And then when they become more experienced and ready to make a next step, we want to be the company that sells them their first paid product.

Got it. And then just thinking different ways of expanding. I know you guys now have local listing tools in Canada. and its availability is in six countries, how should we think about the coverage of that tool from a population and addressable market standpoint? And are there any additional countries that we should expect it to roll out to over the next year?

Yeah, thank you for the question. So adding Canada was a big milestone just because a lot of our customers in the United States, they also have branches in Canada, so that was pretty essential. In general, today we cover our most critical English-speaking markets with this product. We will definitely keep expanding into new geographies as those geographies get more mature. Right now, I would say in the developing world, there is maybe not that much need in those products, so that's why they're not the highest priority. But as those markets mature, we will be adding them to local listings products as well.

And this is Bob. I just add the incremental color. We've seen a very strong response from Canada. It's early days, but good response from that expansion.

Got it. Thanks, guys.

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.