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.