SEMrush Holdings, Inc.

23 conference call. We'll be discussing the results announced in our press release issued after market close on Monday, March 4th. With me on the call is our CEO, Oleg Shagalov, our president, Eugene Levin, and our CFO, Brian Mulroy. Today's call will contain four looking statements which are made pursuant to the state public provision of the Private Securities Litigation Reform Act of 1995. Four 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 new products and features, our app center expansion, industry and market trends, our competitive position, market opportunities, sales and marketing activities, the sufficiency of our staffing levels, our guidance for the first quarter of 2024 and the full year 2024, and statements about future pricing and operating results, including margin improvements, revenue growth, and profitability. 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 stage, and we do not undertake any duties to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause action results to differ materially from these forward-looking statements. For discussion of the risks and important factors that could cause their 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 market closed, which can be found at investors.semrush.com. I also wanted to highlight that starting with our guidance for the first quarter and full year 2024, we are updating our guidance measures and non-GAAP definitions. We will no longer provide guidance for the non-GAAP net income and instead will guide to both non-GAAP operating margin and free cash flow margin. Definitions for these are presented in our earnings release. We are also updating our definition of non-GAAP income from operations on which 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. To be clear, all currently and previously reported historical actuals reflect our prior definition, which only excludes stock-based compensation. The updated definitions will be reflected when we report our first quarter 2024 financials. With our year-end and earnings release, we are also providing a reconciliation from the old definition to the new definition for the periods prevented. In anticipation of this change, we are now providing guidance using this updated definition. We believe this update will allow investors to better understand our financial performance, better align with the 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. And with that, let me turn it over to Oleg.

Thank you and good morning to everyone on the call. I am pleased with our team's ability to execute in 2023. We succeeded in accelerating IRR growth, increasing our pipeline of new customers, and expanding our platform as we continue to drive towards sustained profitability. In the fourth quarter, we delivered revenue of $83.4 million, up 21% year-over-year, and for the full year, revenue grew 21% to $307.7 million. Importantly, We also generated strong profitability, exceeding our guidance, reporting non-GAAP net income of $11.4 million in the fourth quarter, while closing out the full year with $16.3 million in non-GAAP net income. As demonstrated by our 2024 guidance, our business is focused on driving strong sustainable growth, expanding profitability, and generating pre-cash flow. Before handing it over to Eugene and Brian to talk about the quarter in more detail, I would like to touch on a few highlights about our strategy to continue to scale the business and capture our significant market opportunities. On our last call, I talked about our strong competitive positioning and the platform of choice for businesses to improve their online visibility. I also discussed our differentiation in the market due to our unique data assets and positive industry dynamics. We firmly believe our success and ability to grow is more about the factors that are within our control and less about competitors. We have a significant greenfield market opportunity ahead of us, and we continue to focus on educating our customers about the value of our unique data assets and diverse portfolio of products. To put it simply, businesses need to be seen online and in places where consumers are. We help customers in a number of ways. We help them organize their websites in order to rank highly for search engines to find them and to be woven in the conversations in social media. We assist them with their keyword strategies to achieve high rankings. Also, we help businesses optimize their location-specific elements about their site so that they show up in the local listings. Clients also need to gather intelligence about consumers and competitors, and our platform provides them with those capabilities. To illustrate our solutions, consider how a potential customer's journey might look. The customer would come to SEMrush initially seeking to elevate the digital presence with higher rankings on search engines, higher levels of customer engagement, and more visibility across several marketing channels. We would start by researching the competitors' ads and selected keywords to figure out which ones have the best ROI potential. those keywords. As we begin to understand the limitations of relying only on paid media, we would then use our platform to make the physical store more easily discoverable on Google Maps. The subscription to SEMrush Local would automate the online listing updates in over 70 different ways. And then the platform would check the rankings in Maps for keywords. Of course, we would also want to use our social tool and leverage our AI features to respond to reviews quickly, while at the same time generating content with those high-value keywords included. As a result of the engagement with our tools, we could choose to share variable data with us, which we could then use to further increase the accuracy and predictability of our algorithms. To complete this hypothetical example and to demonstrate the breadth of our platform, we would also likely want to use our tools to find niche influencers, which they can collaborate with to better enhance their brand visibility and credibility. With the help of AI social content generator, they could then create reels and videos in seconds for Instagram and TikTok. to capitalize on organic promotion opportunities. This hypothetical customer journey highlights the growing trend of businesses of all sizes investing more time, effort, and resources into enhancing their online visibility, which is a trend SEMrush will continue to benefit beautifully from. We believe businesses that are best able to analyze, plan, and execute their digital marketing activities We'll have the potential for exceptional results. And as you can see, our platform provides all the tools in one place where we can do this. We have also created a network effect as we share highly actionable insights with our customers. And they, in return, share the proprietary data with us. This dynamic makes our algorithms stronger and even more predictive, enabling a flywheel effect. The stronger and more predictive our algorithms are, the happier our customers are, which fuels new error growth. Looking ahead to 2024, we are focused on continuing to grow our core business, upselling and cross-selling our offerings, expanding our platform, and exploring new acquisition opportunities. In conclusion, I am very optimistic about 2024. I am excited about our strong competitive market position and ability to capitalize on future growth opportunities. I will now turn the call over to Eugene and Brian to discuss the results of the quarter and our outlook in more detail.

Thank you, Oleg. We delivered another solid quarter and continue to focus on our three main growth pillars that set us up for long-term durable growth. And we're making progress in each front. To review, we are focused on one, increasing new user growth with our existing offerings. Two, driving expansion revenue by delivering higher value to our customers by cross-selling and up-selling within our base. And three, adding new products to our portfolio. Let me provide updates for this quarter. First, we continue increasing new user growth. We have nearly 108,000 paying customers today. But there are tens of millions of marketers and small business owners that we believe will benefit from our platform and product offerings. In Q4, we achieved solid net new customer additions and registrations with a more efficient sales and marketing engine than we've seen in prior quarters. Looking at this further, organic marketing is one of many channels companies leverage to enhance their online presence. It has multiple benefits and our tools provide the data and technology that allows customers to fine tune, analyze, and measure the impact of various organic marketing initiatives. Over the past year, we have seen some considerable improvements in optimizing our sales and marketing span, where we pivoted towards our organic efforts to boost our own online presence. Much of our success can be attributed to leveraging our own SEMrush tools and following recommendations to deliver very successful results. While every marketing channel has its place in the effective marketing strategy, organic marketing can be more cost-effective in the long run, and importantly, it is trustworthy. you are more likely to trust an organic search result for relevance and quality than a paid ad that anyone can place based on your search needs. Organic marketing is like owning a house where you're building equity, whereas paid media can be like renting a house where you get to live there, but when you're done paying, you don't own any real estate. As Oleg highlighted, SEMrush's tools are focused on boosting companies' organic presence in contrast to the focus that companies like Google and Facebook have on paid advertising. This is one of SEMrush's key competitive differentiators and something that we believe provides us with a clear path in the ecosystem. The efficiency with which we generated our results this quarter demonstrates the power of organic strategy. Turning to the second growth pillar, we have a strategy to cross-sell and up-sell our customers in an effort to expand our average ARR per customer, which as reported today is over $3,100. Our cross-sell focus is on search engine optimization, search engine advertising, social media, local marketing, digital PR, content marketing, and competitive intelligence. These are our core competencies where we believe SEMrush clearly differentiates itself in the marketplace, and we saw continued success in Q4. Before we talk about our third growth pillar, which is adding new products to our portfolio, I'd like to take a few moments to discuss a segment of our customer base that we believe represents a significant growth engine for us. Companies that fall into this broad segments are businesses that tend to have multiple marketing team members that are each SEMrush users, and they generally have significantly higher ARPU or average revenue per user than our average customer. While this is a reasonably broad description, the point I'm trying to demonstrate is that they are different from our solopreneur and small business customers. What's exciting about this more sophisticated account is that they add additional products to their subscriptions at a healthier clip than our average customer. So their ARPU grows rapidly as they leverage more SEMrush tools to achieve their business goals. And two, their net revenue retention is meaningfully higher than our average. This cohort of accounts already comprises a meaningful double digit percentage of our ARR. And we expect that this will grow significantly as time goes on. We believe that this high level metrics covering ARPU growth and net revenue retention demonstrate that the adoption of our products within this more sophisticated accounts points to a bright future for this customer segment. and will help support strong, sustainable growth for SEMrush overall. We also believe that the relative strength of this customer set gives us increased confidence that our new enterprise product will be met with a strong adoption, further supporting our goal of driving strong, durable growth on both top line and bottom line. This leads me to our third growth pillar, expanding our product portfolio. During 2023, we launched numerous AI apps and tools and added multiple apps to the App Center. We officially launched an enterprise SEO product into the market. Although we're in early stages, and this will take time to be material contributor to our overall revenue, the early signs we're seeing are very encouraging. Our enterprise offering has the opportunity to create a meaningful inflection of our ARPU as this product carries ARPUs that tend to be 10 to 15 times our client average. We believe our early adopter customers are experiencing significant returns on their investments after migrating to the platform. Features like automated workflows, corporate-level access controls, customizable dashboards, and built-in professional services are helping our customers drive meaningful improvements in efficiency while also delivering significant time and cost savings. To support this anticipated growth in our enterprise product, we spent the last several months analyzing our go-to-market infrastructure and sales motion and making the requisite adjustments. As a result of this very detailed exercise, we reallocated the headcount of several SMB-focused sales teams into more enterprise-facing roles. We believe this will result in optimized LTV to CAAT ratio as we leverage our product-led low-touch sales strategy downmarket while we shift more of our investment focus to the high-value enterprise area. In summary, I'm very pleased with our success driving new customer growth, our success upselling and cross-selling, and our ability to expand our product portfolio and move upmarket. 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.

Thanks, Eugene. Before I discuss our results in more detail, I'd like to remind you what I highlighted last quarter on my plan for the finance organization. As I sit here one quarter later, my confidence has only grown stronger in our ability to drive durable growth over the next several years as we further penetrate our served markets. Evidenced by our recent results and guidance, I see an opportunity for us to do this while also making significant improvements to our profitability. To bring this to fruition, our finance team focuses on data and metrics for decision-making throughout the organization. Because SEMrush has such a valuable customer data set, We have the ability to segment our user base to understand their buying patterns, retention dynamics, and interest in new products, among many other things. You heard Eugene talk about this a moment ago. In taking that example of how our corporate accounts have extremely robust characteristics for growth, retention, and ARPU, we rigorously analyze this data and allocate our investments in sales, marketing, and product accordingly. We expect the outcome of doing this on a regular basis to result in a disciplined approach that enables us to capitalize on our biggest opportunities while simultaneously driving operating efficiencies. We expect this ROI framework will apply to our capital allocation decisions, whether that is for internal projects, external M&A, or the optimization of our capital structure. With that, I'd like to turn to our fourth quarter results in more detail. We had a very strong quarter across the board. Our revenue in the fourth quarter was 83.4 million, growing 21% year-over-year. For the full year, revenue increased 21% to 307.7 million. 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. Our dollar-based net revenue retention for the fourth quarter was 107%. We expect our dollar-based net revenue retention to drop within the next quarter or two, as we increase adoption of our full portfolio products, tools, and add-ons within our install base. Annual recurring revenue for the quarter grew 23% to $337.1 million compared to a year ago. We reported significant improvements in our operating margin, which is up approximately 2,500 basis points a year over year. This improvement is a result of a number of factors. First, our gross margin improved 100 basis points a year over year to 83.6%. 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 provides us the flexibility to invest below the gross profit line, which gives us a structural advantage in the market. Second, we continue to execute on our commitment to drive efficiencies carefully manage expenses, and further expand our profitability. In the short time I've been here, I have implemented policies and programs to objectively examine spending initiatives, and I believe there are additional opportunities to drive durable growth while also expanding our profit margins through focus and discipline. During 2023, across the company, we carefully managed expenses and maintained our headcount. Moving down the income statement, during the fourth quarter, we had positive non-GAAP net income of 11.4 million and 16.3 million for the full year, both surpassing the high end of our guidance range. The strong non-GAAP net income relative to our guidance was a result of the flow through of our operating performance and the accounting treatment for gains on investments we made in 2021 and 2022. Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of 238.6 million up from 230.1 million in the previous quarter. Our cash flow from operations in the fourth quarter was 11.6 million. Turning to guidance, we're very confident in the underlying trends in the business and capabilities of our team that continue on the path that delivers strong growth and profitability. Our business is very strong, and we are encouraged not only by what we've accomplished so far, but we're optimistic about what we see as the opportunities in front of us. Looking at the first quarter, we're off to a strong start with respect to net customer additions, as we're seeing a similar seasonal pattern to previous years where customers that paused their subscriptions in the fourth quarter returned to the platform in Q1, a trend we attribute to the holidays. As mentioned in the forward-looking statements, we are now guiding to revenue, non-GAAP operating margin, and free cash flow margin. For the first quarter of 2024, We expect revenue in the range of $84.7 to $85.3 million, which translates into a growth of approximately 20%. Because we are already two months into the first quarter, this range is a bit narrower than what we expect to normally provide during the remainder of the year. We expect a first quarter non-GAAP operating margin to be approximately 8%. For the full year 2024, We expect revenue in the range of $364 to $368 million, which translates into growth of 18 to 20%. We expect full-year 2024 non-GAAP operating margins to be between 10 and 11%, and full-year free cash flow margins to be in the range of 7 to 8%. To help you with your modeling, the difference between our non-GAAP operating margin and our free cash flow margin is a result of interest income offset by capital expenditures and cash taxes. 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 a balanced approach to spending in 2024. 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 any of your questions. Operator, please open the line for questions.

Thank you. As a reminder, if you would like to ask a question, you can press star followed by one on your telephone keypad. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Surrender Find of Jefferies. Your line is now open. Please go ahead. Thank you.

So, Brian, just starting with the margin part of the story here, can you maybe walk us through the thought process of how you're balancing the growth of the profitability? It looks like the margin trajectory appears to be, you know, well ahead of expectations of, I think, where everybody was. Just any color commentary there.

Yeah, good morning. Thanks for the question. Look, the tradeoff between growth and profitability, is something that we think about every day and it's a really extremely important question. It's something we need to get right. So our goal at SEMrush is to achieve what we call an efficient frontier. So essentially we're going to continue to invest in the business so long as that investment drives results and growth, but we don't want to spend past that where the incremental return doesn't justify that incremental investment. And for 23, 24 and for the foreseeable future, We do see opportunities to invest in the business and drive durable growth. Oleg and Eugene mentioned this in the prepared remarks, where we have an extensive market opportunity, and we've been able to deliver really good durable growth over the last few quarters. We're uniquely positioned to capitalize on that opportunity. We have 108,000 paying customers, over a million free users. We're expanding our portfolio, and it's creating a really good, compelling cross-sell and up-sell growth sector for us. So as we said, our business is very strong. We're encouraged by what we've seen and we're really optimistic about what the business has in store for us going forward. So I say this to say, look, growth is our priority. We're going to be investing in a business and efficiency and profitability is really important to us. This framework we outlined in 23 and we're continuing to operate with that framework in 24. We're after efficient growth. So we committed to sustain profitability the last year. We originally guided zero to 3 million on non-gap net income and ended up landing the year at 16.3, which was a 40-plus million increase in net income. So we're really pleased to see the results. We're going to continue with that framework in mind, being disciplined and balanced and making sure that we have the appropriate tradeoff between investing in the business, driving growth, but also doing that in an efficient way.

That's helpful. And then in terms of just the new enterprise platform, getting it to general availability, any insights at this point from the initial set of users? And then how are you thinking about, given it's an enterprise sale, customer acquisition costs and maybe payback period for something like that?

All right. Thank you for the question. So early traction is very good. We're really working hard every day to scale our ability to onboard customers and delight them. But first batch of customers that we brought into the product, they're all very happy. A lot of them see great ROI, especially some of the early customers who use our link recommender workflows. So they're already seeing good results in terms of traffic improvements. So, yeah, we expect general availability in the first half of this year. Working really hard, a lot of very positive traction. In terms of sales motion, really, we just trained several sales reps. We made a couple new hires, people who have experience selling up market. But also, when you go to, let's say, $50,000 per year range, you don't need entirely new sales team. So we already had a lot of A players and we just reallocated resources, if actually from our SMB selling team to our enterprise selling team. We've built several new workflows in our CRM systems, like adding a lot of CPQ components and other standard components for enterprise selling. But it's really, Just normal course of business. Everything's relatively straightforward, and we're seeing very good ROI. If anything, we're actually seeing much better ROI when we use enterprise sales reps versus what we've seen historically with SMB sales reps. And, you know, even in the SMB segment, we're making tons of money through our sales teams. And in enterprise, we're seeing efficiencies even much better.

Thank you.

A few things just to add on the financial side. Just a few things to add on the financial side. We're really excited about the opportunities that enterprise provides for us. Eugene and Oleg have mentioned that it presents an ARPU inflection for us where the price one is about 10 to 15 times what our average ARR is per paying customer. And of course, the customer acquisition costs are going to be higher. But we're preparing for that. And I'd say two things. One is we're not going to see a significant change to our expense to revenue ratio on sales. As Eugene mentioned, we're driving efficiencies in our S&B selling motion and able to reinvest that back into enterprise. And we've already started making the investments and building a foundation for enterprise focused on three main things. First is bringing people and talent into the organization. that are able to build relationships with senior level executives and move on from a transaction to more of a partnership with the customers we serve. We're building out a deal desk and have a deal desk already started to be able to navigate through the negotiation and procurement dynamics that come with an enterprise deal. And of course, we're building out an enterprise selling motion and process within our CRM system that facilitates the process from demand generation through the negotiation and close to the deal. So yes, enterprise is different, the cost structure is different, but we have the foundation in place and we're now starting to scale it up to be able to prepare for future growth.

Oh, thank you. I appreciate the additional call here.

Thank you. Our next question comes from Scott Berg of Needham & Company. The line is now open. Please go ahead.

Hi, everyone. Passing the quarter. This is Rob Morelli. I'm for Scott. So customer additions were lighter than expected, but net new ARR added in the quarter versus that customer count was quite high. Is this a result of signing larger customers this quarter, or are you seeing better cross-selectivity to existing customers to drive that new ARR added? Thank you.

You got it. Hey, Rob. Thanks for the question. Really good question. So I think we should step back and just talk about our growth vectors. Uh, and then I'll, I'll specifically get to the fourth quarter. So we we've been very focused on, uh, three main growth factors. One is to continue to expand our net new ads. Uh, we're at nearly 108,000 paying customers. And we believe we're in the early innings of adoption. There's millions of marketers and business owners out there who will gain value from our platform. And we're going to continue on that path in executing that strategy and extending out the number of net new ads. In 2023, we did add 12,000 net new paying customers. So we're really pleased with that progress. The second growth factor is around cross-selling and upselling. We do have a very extensive platform and portfolio of products, and we continue to invest in that. And to your point, yes, that is creating an inflection point in ARPU. We're able to increase our cross-sell and expansion, and then drive ARR up. And then finally, we have very strong gross profitability. Our gross margins hit 83.6 in the fourth quarter, and it's up 100 basis points. And it creates a structural advantage for us to be able to reinvest back into the business to enable strong partnerships and develop products that continue on that trajectory. For the fourth quarter specifically, I'll note one thing. It is a seasonally low quarter for us. So because we have so many customers, nearly 108,000 paying, and we extend from solopreneurs all the way up to Fortune 500, there is a cohort of smaller customers that tend to pause their subscriptions during the holidays, and then they return in the first quarter. We're actually seeing very good traction in January and February and seeing that trend play out. So it's one quarter and something we just attribute to a seasonality dynamic.

And then Oleg, you mentioned acquisitions in 2024. How should we think about that opportunity here? Small tuck-ins or are you looking to execute on something more strategic? Thanks.

All the time. We give a lot of attention to strategic decisions and I would say we will be focused more on channels related to digital PR and content marketing. Of course, we will give more attention to all these opportunities that we have in front of us.

And financially, we're well positioned to engage in M&A. So we have nearly 250 on the balance sheet. We're projecting 7% to 8% free cash flow margin in 24. and starting to see private valuations get much more in line. So our appetite for M&A is something that we'll keep everybody updated, but for sure something we'll look at in 2024. Got it.

Appreciate it, Colin. That's good.

Thank you. Our next question comes from Adam Hotchkiss of Golden Stacks. Your line is now open. Please go ahead.

Great. Thanks for taking the questions. How would you characterize what the competitive environment looks like for you in the enterprise? For those businesses that aren't using SEMrush today in the multi-user category, what are they typically doing in online visibility? And then how does your view on that inform the enterprise sales motion that you're going after?

Thank you.

If you talk about competitive Thank you. If you talk about competitive environment, look, in our core business, we don't see any kind of significant activities from our competitors. And at the same time, with enterprise, we are very, very optimistic about product launch. We see very good traction and we see very positive feedback from our customers. And it is a little bit hard to talk about our competitors here we can talk about it just from point of view of our customers and once again we receive very positive feedback and we don't see any kind of significant activity from our customers we see it like a greenfield opportunity and we built a very different enterprise solution if you compare it to other players what we have around

just to add a couple points you know we already have 5 000 clients who are large corporations and they are perfect targets for us to sell our upmarket products and those customers don't really use anything else usually even some of them do but most of those deals like olex said there are greenfield deals where you're not really competing with anyone um And in general, even when deals are competitive, we see very good win rates. So I think that's market dynamics that is very favorable for leading brands like SEMrush, where our product is so much better than, you know, there is a lot of greenfield opportunity for us in existing user base, but also Even when we have go head to head with other, let's say, enterprise SEO players, our product portfolio is very, very strong. In terms of adoption rates for other products, there's definitely going to be a big factor in product portfolio that we bring up market. So the first candidates for enterprise level products would be those categories where we already have a strong traction. which is, for example, competitive intelligence or our local marketing products or our digital PR products. Again, there's quite a lot of traction already across the board, and those will be good products for us to add to the portfolio of enterprise products.

Okay, great. That's really helpful. And then what are your updated thoughts on free to paid conversion any changes in the way you're approaching free customers, either through The product additions that you're making are in platform marketing that's given you a little bit more visibility into what the opportunity there looks like.

Adam, I can take that.

The way we think about free users, and we're really pleased to see it grew 30%, so we're now over a million. We think about free users in three ways. First is we're training the next generation of marketers. So we're in over 60 universities as a core part of the curriculum and investing in that next generation and ensure that we can sustain durable growth when that next generation comes into the workforce. and looks to SEMrush to be able to facilitate and add value to the work they're doing every day. We also use it to test products. So we often put free products into the marketplace and we get a lot of free user adoption. And then over time, as we get traction and we get feedback and we fine tune that technology, we monetize it. And we did that with the social media platform that we launched a while ago and then monetized it in the third quarter. So you'll often see products being pushed in, an expansion of our free user base, and then them coming back out when we convert them to paid. And then finally, there are a cohort of users who are small customers who are very early in their journey and can leverage the free version to start training their marketing capabilities and ultimately converting into a paying customer in the future. So we don't look at free users as a near-term metric to convert. directly and they'll pay paying customers. It's more of a longer term source of developing a foundation and building our business in the long run.

Okay, really helpful color. Thanks a lot, Brian.

Thank you. Our next question comes from Clark Jeffries of Piper Sandler. Your line is now open. Please go ahead.

Hi, this is Wayne Trent on for Clark. Thanks for the question. I want to go back to the pricing you announced back in Q3. I believe it was 8% to new customers. Have you tested this on existing and how much of it is factored into guidance?

I can start with the guidance and then Eugene can add some color on pricing in general. But yes, we did do about an 8% price increase in the third quarter. So we've got about a half a year of the revenue. We did mention at the time that it was about three to four million of incremental ARR. So half of that in 23 and the other half coming through in 24. We're really pleased with the results we saw there. And Eugene, you should talk through more on our pricing. We have a very strong pricing asset and something that we're looking at all the time, but for now, In our guidance, we've, of course, based in the impact from the pricing changes that we made in 2023.

Yeah, so there was part of the question about increasing prices for existing customers. So, we did that as well, but for a very, very small cohort of existing customers. And, you know, when you do those kind of pricing changes, we do like different scenarios, and reality was much better than we expected. I think it's a really good proof that our product provides so much value that people are willing to buy it at higher prices. And of course, we use this information as we think about the future. I think the real question is when exactly we do more changes. But even right now, we are already optimizing monetization in several of our add-on products. For example, social media product prices have changed recently. And we will keep doing those changes when it makes sense. We're also doing big pricing research for core plans to kind of finalize our thoughts about price elasticity and willingness to pay. And again, when time is right, we'll do more, but There's, you know, unfortunately nothing to report right now, but we're very, very optimistic about our ability to improve monetization.

Great. Thank you. And I guess I saw net retention dip down a bit more this quarter. Is the pricing the main factor in that? And I guess two months into Q1, what are you seeing so far and what are you looking for in terms of a sign of a trough and recovery? Thank you.

That's a great question. Our NRR, net retention rate, is very strong, and we're really pleased to see the traction we're making on retaining customers, renewing them, and, of course, expanding them as they adopt more and more of our expanding portfolio. The net retention rate metric is actually a bit of a lagging indicator. So we have seen ARR and revenue reaccelerate. We did deliver 23% growth on ARR and then 20% and 21% growth respectively in Q3 and Q4 for revenue growth. NRR lags behind about two to three quarters just because it's measuring over a 24-month period. So we'll see that trough in the next quarter or so. And then as we continue to execute on our strategy to cross-sell and up-sell, which is a very important and successful growth sector for us, and then move upmarket and start to see the advantage of our 10 to 15x average ARPU, on enterprise, we'll start to see that flow through that metric.

Okay, great. Appreciate it.

Thank you. Our next question comes from Elizabeth Porter of Morgan Stanley. Your line is now open. Please go ahead.

Great. Thank you very much. I wanted to hit on a macro quickly. Did you see any changes in Q4 as it relates to Q3? and any initial observations as we head into 2024. And also, if there's any differences you're seeing between smaller or larger customers, I know you're kind of moving up market with that opportunity, but just if there was any sort of differences to call out between those two customer cohorts, that'd be very helpful. Thank you.

Thank you for the question. Well, you mentioned seasonality, things that we see every year and probably this year it was a little bit stronger. At the same time, first quarter looks very strong and if you think about environments, it's very stable, it's good demand for all our products, for our core products and for new things that we launched last year and even for things like local listings and AI features and content marketing and so on. It's good demand. I would say environment is very stable.

And welcome back, Elizabeth. Just on the question on the segmentation, Eugene mentioned earlier that we do have a cohort of more sophisticated enterprise accounts that are growing faster. They do adopt our expanding portfolio. At a faster clip, their retention rate and expansion rates are higher. We are going to share a bit more about that and the stability it provides to the business and the ability to upsell with our enterprise platform. We'll talk more about that in the next couple of quarters.

Great. Thank you. And then just as a follow-up, your tools are able to drive a lot of efficiency for customers and their sales and marketing spend. You mentioned also using some of your tools internally, so I'm just hoping to double click to hear about how you are integrating kind of your own tools, particularly some of the AI initiatives, into your business and what types of improvement you're seeing kind of within sales and marketing and where that could go. Thank you.

Thank you.

Using a lot of our own products, it's really, for us, almost a benchmark. Our products need to be so good that our own teams would use it, but our teams are very, very picky and they can buy anything. And most of the time, they choose SEMrush for almost everything they do. But to sort of, like I said, double-click on this particular question, Once AI improved in terms of content creation, we very, very quickly decided to scale up our content production operation. We're not just producing more content now, but we are also making content of a higher quality, both in terms of how it ranks and in terms of how people read it and engage with it. really just different volumes of content production, different quality. And the tools that we use, of course we use, for example, our organic and keyword research to understand topics that are, you know, relevant for our audience, but maybe not covered yet through all content. And then of course we use our content pricing tools such as writing assistant content shake to really you know, put our content production on steroids and just ship a lot of, you know, great content very efficiently. We also, of course, use our products and, you know, especially competitive intelligence to find audience overlaps to improve our affiliate marketing partnerships. We use the same tools to identify good digital asset acquisition. So sometimes we buy content instead of just building it ourselves. So, Tons and tons of applications. Of course, our social media teams use our social media posts. Of course, our influencer marketing team uses our influencer marketing tools. Our PR team is using our PR tools. But that's, you know, like I said, that's pretty much given, right? Because, like I said, one of the success criteria for us in products, you know, in terms of how we measure quality of our products is that our own teams use it.

Great. Thank you.

Thank you. Our next question, our final question for today, comes from Mark Murphy of JP Morgan. Your line is now open. Please go ahead.

Hey, thanks for taking the question. This is already on for Mark Murphy. You know, you guys talked about this kind of shift of resources from the SMB up market, and I think that makes a lot of sense. But do you guys expect any headwinds as you guys are kind of shifting those resources away from the SMB and as you kind of get those fires going in the market? Thanks.

Oh, thank you for the question.

So no, we, we actually see both sides of the market being great. Uh, it's more of a, you know, just number of customers that we already have that are large enterprises reached a certain point where we, we just couldn't ignore that. Uh, you know, when you have thousands of customers who come to you on the regular basis and they say, listen, I'm willing to pay more money, but you have to build this and this and this for me. Um, As volume of those conversations increases, we started to realize how big is the opportunity there. It doesn't mean we're unhappy with what we see on SMB front. On SMB front, we're adding a lot of great products, especially with our recent focus on AI capabilities. We're seeing a lot of traction in all those products. We've recently launched monetization of our social media tools that is doing great. We have very good traction with our local marketing products with a lot of SMBs using it on a regular basis, pretty much daily. So, yeah, I don't think there is any kind of headwind. We're very excited about both sides of the market. At the end of the day, small companies need more traffic and big companies need more traffic, and we're there to help.

And one thing I'd add, just building on Elizabeth's question, is Elizabeth was asking about our use of AI. That's a big contributor to the efficiencies we're seeing in the business. So we're now automating over 40% of the customer interactions. And the use and continued expansion of that is giving us a lot more efficiency on the SMB side and giving us the capability to be able to reinvest that into enterprise, which is why we're saying our E to R for sales won't expand overall, despite the investment.

Great. That's very helpful. Thank you.

Thank you. At this time, we currently have no further questions, so I'll hand back to Oleg for any further remarks.

Thank you for your support.

We are very pleased with our results and our education in 2023, and we are very optimistic about our future. Once again, I thank you all for your support and look forward to keep you updated on our progress.

Thank you for joining today's call. You may now disconnect your lines.