SEMrush Holdings, Inc.

Good morning and thank you all for attending the SEMrush Holdings Third Quarter 2024 Results Conference Call. My name is Breaker and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Brinley Johnson, Investor Relations at SEMrush Holdings to begin. Thank you. You may proceed, Brinley.

Good morning and welcome to SEMrush Holdings Third Quarter 2024 Conference Call. We'll be discussing the results announced in our press release issued after market closed on Thursday, November 7th. With me on the call is our CEO Oleg Shlegolov, our president, Eugene Levin, and our CFO, Brian Mulwine. Today's call will contain forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements concerning our expected future business and financial performance and financial conditions, expected growth, adoption and existing and future demand for our existing and any new products and features, our expected growth of our customer-based and specific customer segments, the continued development of our products, industry and market trends, our competitive positions, market opportunities, sales and marketing activities, acquisition activity, integration and results of recent acquisitions, future spending and incremental investments, our guidance for the fourth 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. 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 replied upon representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements address matters of the subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. For discussion of the risks and important factors that could affect our actual results, please refer to our most recent quarterly reports on Form 10Q and our annual report on Form 10K filed with the Tracing Exchange Commission, as well as other filings with the FCC. 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 in our press release issued yesterday after market closed, which can be found at .bemrush.com. Now, let me turn the call over to Ole.

Good morning to everyone on the call. I am pleased with our results this quarter, delivering a revenue of 97.4 million, up 24% year over year, and our growth of 24% year over year. We reported income from operations of 1.7 million and non-GAAP income from operations of 12.1 million in the third quarter. Non-GAAP operating margin increased to .4% compared to non-GAAP operating margin of .5% in the prior year period. We exceeded our guidance, and I am pleased to say we are rising our full year 2024 guidance and are very excited about our growth opportunities in 2025. We continue to expand our leadership position in online visibility and are succeeding in combining strong durable growth with profitability and free cash flow generation. We recently hosted our first Analyst Day in QBH ago in New York, which was very exciting for us. So we will keep my remarks to the brief. In case you could not attend in person, a webcast along with the slides is available on the investor relations section of our website. One of the highlights from our Analyst Day was the discussion around our total addressable markets. We have more than tripled our term from 13 billion at the time of our IPO to roughly 40 billion today. What is really exciting about this term is that it provides an opportunity to gain share within an existing fragmented market and more importantly to capture new white space created by the ever-evolving digital marketing landscape. Our platform solves marketers increasingly complex and critical problems. The volume of diversity of available content is immense. The amount of time we spend online is maxed out. The algorithm is changing and it is getting more expensive to navigate through all this. This is where we come in. Our Simrash digital marketing platform utilizes data and intelligence at its core and it is surrounded by API-powered interconnected hubs focused on search engine optimization, data advertising, social media management, local marketing, brand marketing and content marketing. We continue to innovate on our platform to help marketers to find opportunities to deliver efficient results across numerous marketing channels. I'm especially excited about the early momentum we are experiencing from our new enterprise product. Prior to the Enterprise SEO product launch, we successfully acquired 8,000 enterprise-sized accounts, our term for companies with over 500 employees. And we believe these 8,000 enterprise-sized accounts are ideally suited to migrate to our Enterprise SEO product. Today we close new deals with Salesforce, HSBC, LG, Samsung, Alibaba, Sony, Nordash, TikTok, Square and many more. We believe the demand for our innovative Enterprise SEO product is strong and we have a long runway for growth ahead. Simrar's age of the competition comes from our strong culture and history of leveraging our differentiated data to elevate the digital marketing activities of our customers. And as we add more customers and data to our platform, our competitive mode increases. This data generates a pliable effect that strengthens the quality of our algorithms and enhances the effectiveness of our recommendations we give to our customers. In summary, Q3 was in our solid quarter clause, which is a testament to our integrated and complete platform approach to serve companies of all sizes. With our continued training and growth acceleration, I'm confident that we have built a strong foundation for the future. We plan to leverage our profitability to invest in new products that extend our reach and drive cross-sell and upsell capabilities. We have a strong balance sheet and disciplined capital allocation approach around M&A opportunities. I look forward to keeping you updated on our progress. 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 scale and innovate, all while driving strong growth. Our platform is very powerful and helps marketers all over the world improve their online visibility. We continue to expand our product portfolio by leveraging our innovative internal development teams, partnerships, and mergers and acquisitions. Most recently, we acquired the digital marketing publisher, Third Door Media, whose brands include Search Engine Land, Martech, Search Marketing Expo, or SMX, and Digital Marketing Depot, which are all known for their contribution to search and digital marketing education. We believe this will help us expand our reach of industry-related content and insights to marketers. This acquisition, coupled with the presence we have at over 200 accredited universities, is part of our commitment to inspire and equip both current and future generations of digital marketers with the know-how to succeed in an increasingly competitive landscape. To help illustrate our successful top of the funnel marketing strategy, I'd like to highlight two recent customer wins. The first is New Enterprise Customer, a market-leading provider of efficient resource-conserving cleaning systems. Prior to working with us, the company was using search metrics with a unique user and access management approach, limiting their ability to oversee other market activities. They are now scaling our enterprise SEO solution across all of their markets. SEMrush's customer success team is onboarding and training the entire organization, demonstrating our commitment to equip their teams with actionable SEO insights that drive consistency and coordination. In addition, the company is leveraging our Adobe Analytics integration and unique data insights to better align digital strategy using custom dashboards for precise data-driven decision-making across regions. The second example highlights SEMrush's ability to successfully expand our platform within existing enterprise customers. One of the world's largest online retailers, like all e-commerce platforms, success hinges on search visibility, attracting new customers, driving repeat purchases, and increasing average basket size. Selection, price, and exposure are core If they cannot understand all three in real time, they risk losing sales. In priority categories, such as electronics, toys, and apparel, our customer was struggling due to significant competition in the market. This led to stagnation in new customer editions, repeat purchases, and flat average basket size. Leveraging our enterprise solution, they're now able to track hundreds of thousands of key items in real time. This is a process that used to take days or even weeks. Using AI and advanced analytics, our enterprise solution identifies what is impacting rankings and suggests immediate actions to boost visibility, driving revenue from both new and existing customers. And this isn't just saving the customer time, it's delivering immediate business insights that directly drive revenue. Looking at our enterprise product and customer wins in more detail, in only five months since our general availability launch, we secured major deals with brands like Salesforce, HSBC, LG, Samsung, Alibaba, Sony, DoorDash, TikTok, Gartner, Square, and many more. Salesforce, Samsung, Sony, Alibaba, DoorDash, and Gartner were existing clients who made substantial upgrades, while HSBC, LG, TikTok, and Square represent significant new wins, choosing SEMrush as their enterprise platform and displacing competitors. The strong demand from both existing and new clients, achieved with minimal marketing, gives us immense confidence as we continue to accelerate growth. In summary, I'm excited about our ability to service enterprise customers and continue to expand our portfolio of offerings, reiterated by our customer examples and wins. 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.

Thank you, Eugene. We had a solid third quarter across the board. Our revenue was $97.4 million, growing 24% 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 upsell strategy. Before reviewing Q3 results in greater detail, I want to call your attention to the new disclosures we made during our analyst day in October, as I think it's worth driving home some key takeaways from them. Specifically, I would like to highlight the customer segmentation metrics we provided. We have 8,000 enterprise accounts, over 17,000 mid-market, and over 21,000 marketing agencies, in addition to our strong SMB business. Our mid-market agency and enterprise accounts represent our most sophisticated users and contribute a healthy 55% of our overall annual recurring revenue. We also significantly expanded the number of customers paying more than $10,000 and $50,000 per year. And you can see that there was a noticeable uptick in 2024 as we've really chosen to focus more on this group. To demonstrate the increase, during 2018, we had approximately 200 customers paying more than $10,000 and close to zero paying more than $50,000. Fast forward to today, we now have more than 4,000 customers paying us over $10,000 and nearly 300 paying over $50,000. We expect both of these to increase significantly as our new Enterprise SEO solution gains traction. In fact, since we launched the Enterprise solution for general availability just a few months ago, we have already added 50 new customers to the 50,000 plus cohort. Our confidence in our ability to deliver strong growth and profitability going forward comes in part from the demonstrated success in these higher average ARR segments, where our retention rates are also the strongest. As we said during our analyst day, our net revenue retention rate in this group is above 120. Now turning to our third quarter results, we came in slightly ahead of what we released a few weeks ago. Annual recurring revenue for the quarter grew 24% -over-year to $401 million. We've enjoyed success in building out a very strong and loyal customer base, increasing it nearly three times since the end of 2018. During the third quarter, we added approximately 1,300 net new paying customers. Our calculated average ARR per paying customer now exceeds $3,400, up 13% -over-year. This was due to both the relative mix of business and agency customers and also the strong upsell activity, including our Enterprise product that we saw this quarter. We have consistently increased the average ARR per paying customer, which is up two times since the end of 2018. The strong average ARR per paying customer increase is a result of our success in our cross-sell strategy, as well as our sophisticated customers growing as a percentage of our overall ARR. A trend we expect to continue going forward, especially with our new Enterprise SEO product and upmarket investments in sales and marketing. Our dollar-based net revenue retention for the third quarter was strong at 107%. We believe our dollar-based net revenue retention will increase over time as we benefit from our enterprise -to-market and product investments. Moving down the income statement, during the third quarter, we achieved a positive non-GAAP operating income of $12.1 million. We reported another significant improvement in our non-GAAP operating margin to 12.4%, which was up nearly 300 basis points -over-year and surpassed our third quarter guidance. Cash flow from operations in the third quarter was $8.1 million. Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $233 million, up $1.3 million from the previous quarter, as cash flow from operations was offset by the approximately $9 million in cash we disclosed last quarter that we used to acquire rights. Turning now to guidance, for the fourth quarter of 2024, we expect revenue in the range of $100.8 to $101.8 million, which at the midpoint would represent growth of approximately 21% -over-year. We expect our fourth quarter non-GAAP operating margin to be approximately 11%. For 2024, we are raising revenue guidance to be in the range of $375 million to $376 million, up from our prior range of $373 million to $375 million, which translates into growth of 22% at the midpoint. As it relates to full year 2024 non-GAAP operating margins, we now expect to be approximately 12%, and we continue to expect a free cash flow margin of approximately 8%. Our guidance assumes a year exchange rate of 1.08. Approximately 30% of our expenses are denominated in euros. And finally, looking beyond the current fiscal year, we expect to maintain a 20% compound annual revenue growth rate over the near term. In closing, we are very pleased with our performance. We executed well to overachieve on our top-line growth and profitability, advanced forward our strategic priorities, and placed SEMRUS in a strong position for our next phase of growth. With that, we are happy to take any of your questions. Operator, please open the line for questions.

Thank you, Brian. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. And again, it is star one to ask a question. And just as a reminder, if you are using the speakerphone, please remember to pick up your handset before asking a question. We have the first question from the line of Scott Berg with Needham and Company. Please go ahead.

Hey, everyone. This is Rob Morelli for Scott. Thanks for taking the question. Congrats on the quarter. So we conducted a customer check recently, which received positive commentary relating to your AI capabilities with that customer interested in spending more and upgrading. Can you maybe touch on how your pricing strategy is being received and which avenue of the pricing, I guess, strategy overall is being received, I guess, most positively in any sort of capabilities that are of most interest? Thanks.

Hi,

so just this is Eugene. Just want to clarify when you say higher prices, you mean our core plans, of course, enhanced now with AI features or enterprise plan.

Well, just they really interest in potentially spending more for these AI capabilities. Just looking to understand which avenue of your pricing strategy, whether it's upgrades, whether it's enterprise SEO or just drive adoption. Yeah.

Right.

OK,

so so we think about AI monetization as something where you want to use all the available tools of monetization depending on the type of product you're selling. So for our core plans, we have three main ways to monetize AI. Number one is we include certain AI capabilities, such as our overview feature in reporting tools or our co-pilot feature. And we make those features available for everyone. And then we see how as engagement grows, it improves retention. And of course, it improves conversion rates from free to pay as well. So that's one of the ways to monetize AI. Now, if you have something more specialized that is good, it may be not for 100 percent of your audience, but maybe, let's say, for a certain segment like local businesses, then you want to put it on the skew where only target audience will have access to those features. So local is a good example where we use AI feature called reply to review to help people upgrade from entry level local plan to higher tier local plan. And that's another example of how we monetize it. And also recently, we have tons of traction with our AI concentration tools, such as content shake AI. And this is a standalone skew, standalone app that people buy separately from their course subscription. And that's another way to monetize AI features when you have an enormous value that really justifies a standalone skew and product is tailored to a large audience. And then, of course, enterprise product that we now sell for on average fifty thousand dollars roughly is another product that benefits greatly from different AI features. Pretty much all of our workflows in enterprise SEO product are powered to a certain extent with AI features. And what we really like is that a lot of use cases would not be even possible without AI. So I hope those four examples help. But I can keep going pretty much for hours.

No, that is helpful. Thank you. And, you know, great to see NRR remaining flat, rather than compressing. Any update on where you anticipate an inflection in this metric? Understanding enterprise SEO solution is a potential driver of that.

Hey, Rob, we didn't pick up the actual metric you referenced. It was a little bit of a question. Oh, sorry, just NRR, Met Dollar Retention. Oh, net revenue retention. Yeah, so net revenue retention is one hundred and seven percent for the quarter. And it's been about that level for a number of quarters in a row here. What we've been saying is it's important to look at our business by segment to really understand that metric. At our analyst day, we showed that we have a solopreneur and freelancer segment that has a retention rate that's below one hundred percent. And then we have our business and agency accounts, which includes SMB, mid-market and enterprise that have a net revenue retention that's above one hundred and twenty percent. So there's some dynamics occurring in the business by segments that are influencing that number. It's still strong at one hundred and seven percent. But there's two drivers for us increasing that number in the future. And we do believe that it will happen. One is the solopreneur and freelancer dynamic to abate. And we do expect that that will eventually happen. And then, of course, continued traction and momentum with our enterprise products and selling motion.

Got it helpful. Thanks for taking my questions and congrats on the quarter.

Now have my. Thank you

very much. I'll have my congrats. I was wondering, Eugene, are you are you noticing any extra interest in SEO recently on the heels of what Google has done in Google search where they've infused AI, you know, into the search page. They're including those AI generated snippets, you know, at the top of the search page. And I'm just wondering if you if you're coming across more marketers that need to look, are they reaching out to you to try to produce content that's going to be optimized for that or even to try to produce content that maybe is, you know, so complicated or so lengthy that it cannot be used in those snippets. I'm just wondering what you're encountering now.

Yeah, that's that's a fantastic question. And we definitely see a lot of interest in a marketing community. A lot of people want to be featured, of course, in those new search elements. It occupies a big part of real estate at the very top of the page. And usually there are three spots that you can occupy. And they're a decent click through rates for a lot of those queries. So it actually drives a lot of traffic to publishers. And as a result, of course, a lot of people are very interested in it. Now, the question is, what are the rules of ranking there? And, you know, of course, without tools like SEMrush, you cannot answer that question. So that's why we've been one of the first people who implemented full support of AI overviews in our rank tracking tool and in our organic research tools. So people can start answering this question and can start writing correlations on what exactly they need to do to get featured there. And the rules, of course, are not the same for different queries. For one query, you need a long form content. For another query, you need maybe shorter content. So it would depend on the industry. It's not one size fits all type of advice. But we definitely see a lot of people using our rank tracking organic research tool to start getting a sense of what they need to do to get featured there. And, of course, as we also run the same analysis on very large volumes of data, we can start implementing those suggestions. And, for example, our content writing tools such as Content Shape to help people create content that ranks well in those search elements in a more automated fashion. So tons of interesting research to do. We're very proud to be in a kind of front runner position and helping marketers to get there. I'm excited about the interest and adoption of those new features.

And this is very well said. At a high level, is it creating a tailwind? You have like a fundamental change in the search page, in the major search page for most companies in the area. Is that a driver right now for people to reach out and maybe do more business with SEMrush?

We would definitely see it this way. We always say every time there is something new, something that complicates analysis, there is a greater need for products like SEMrush that can use big data and AI to run this analysis for people in the events where manual analysis is not going to lead to good results. So, yeah, we think it's a tailwind for us. And, you know, to the same extent, feature simpsons were a tailwind for us in the past.

Yeah, yeah, okay. And one thing as a quick follow up for whoever wants to take it, when you're mentioning these enterprise customers, Salesforce, LG, you know, Samsung, TikTok, Square, you know, they're great logos. How large are the paying user populations that you're seeing? I'm just trying to understand the extent to which it might be clustering on SEO specialists or, you know, as they pick up the enterprise product, it might also be expanding into the, you know, across the marketing to digital marketers or social media folks or market researchers, etc. What are you seeing there?

Yeah, so definitely our core focus right now is to sell them enterprise SEO product, which is our the most sort of expensive skew right now. At the same time as we go into those deals, we also see that there is a demand for our market research features. So a lot of those deals, they also come with a large number of seats for dot trans product or for our content creation products. We even had one with a good attach rate of social media, which is traditionally, we focus more on SMBs, but we had an enterprise client who also purchased a lot of seats for our social media features. So you're absolutely right, there is definitely opportunity to sell them, not just enterprise SEO and, you know, it's definitely in plans. But for now, we want to make sure we keep an eye on the ball and keep driving momentum for enterprise SEO. But when there is an opportunity to sell more, we always sell more.

And Artie, just to give you a little perspective on the number of users for these, there are some that are approaching 100, there's others that are mid 50s. So there's a substantial number of users and subscribers to this enterprise SEO platform.

Thank you. I'll let Artie know about that.

Thank you. We now have Elizabeth Porter with Morgan Stanley on the line. Please go ahead when you're ready.

Great. Thank you so much. I wanted to circle back on the enterprise product penetration into the 8k enterprise account base that you guys currently have. In the prepared remarks, you referenced that these customers are just ideally situated to leverage the product. So I was wondering if you could give us an update on how many have moved and what that could look like over the next year or so. And just how we should think about the migration path for companies that are already in the existing base.

Yeah, thanks for the question, Elizabeth. We're really pleased with the traction and the momentum that we've been getting. We did just launch the product that went generally available in May. We have been talking about the 8,000 enterprise customers that we already have that are using our core solutions that, as we've said, are ideally situated to upgrade and increase the average ARR that they're paying. We mentioned at Analyst Day that as of the end of our third quarter, we had already acquired 70 or migrated 70 of our accounts up to that enterprise SEO solution. As of the end of October, it's already above 90. So we're getting some really good traction and adoption of that platform and do feel that not only the 8,000, but also other companies, larger companies where it's really important for them to enhance their online presence are also ideally situated to adopt this platform. So in Analyst Day, Tommy talked about the three layers of our market opportunity. It's the 8,000 existing accounts. It's displacing competitors. But the biggest population of companies out there is really white space where a lot of companies are using internally developed solutions, aggregating together a lot of disparate solutions, and then leveraging an army of engineers to pull together the environment that we need that we believe we can displace with the enterprise SEO solution.

Got it. And then just as a follow-up, the acceleration and growth of ARR per customer was just a bit more muted than it had been previously. And it does look like you guys are coming up on some tougher comps. And I think there was some pricing action last year. So just how should we think about the durability in that ARR per customer growth metric, given you have some of the tailwinds around the enterprise product? So just some of the puts and takes there.

Sure. Yeah. You're asking about ARR growth or the actual net new additions?

On the per customer side, that's the average ARR per customer. Just given you took some of the pricing action last year?

Just year over year. Absolutely. Yeah. So year over year, just remember our third quarter is when we rolled out a pretty significant price increase. And what was different about the increase a year ago is we rolled it out to a cohort of existing accounts. So there was an uptick in average ARR and ARR in general in the third quarter. That obviously works its way out in the fourth quarter where we had a one-time increment in average ARR and ARR in the third quarter from that existing cohort. But overall, independent of that, we're continuing to see really strong growth over average ARR. If you look at it by segment, we're seeing really strong growth in enterprise and mid-market, driven by the enterprise SEO product. We are still in early days, though. We just launched it in May. And we do believe that over time, as we start to see more adoption of our enterprise SEO products and we start to get more traction on the investments we're making in our enterprise good of market, you'll continue to see that number tick upwards.

Thank

you. Thank you. Just as a reminder, if you do have any further questions, please press star followed by one on your telephone keypads now. We have the next question from Adam Hotchkiss with Goldman Sachs. Please go ahead.

Great. Thanks so much for taking the questions. I guess to start, so when we speak to your customers, we often hear that the larger agencies and enterprises are using many SEO and disability tools. And I guess I think it often differs, but in general, each of the point of view seems to have their individual and unique value in the market. So is it difficult for you guys with the enterprise platform to ultimately take over what all of these solutions ultimately do for our customer? If so, how do you think about the organic and inorganic avenues to expanding your functionality? Thanks so much. That's

a great question. In enterprise, when we sell to brands directly, we indeed see the sort of patchwork of different solutions poorly connected. Sometimes they will use some kind of custom code that is very hard to maintain. The person who wrote it first time had left five years ago. Nobody knows what to do with it. Then they have a lot of spreadsheets, maybe with 100 different tabs for different slices of data. They need to update all this manually to do a report. So it's a struggle. And what we offer is an alternative to that approach where you get everything fully integrated, customizable, and you don't need any kind of custom code. You don't need spreadsheets. It's all updated automatically. It's ever prone versus the manual approach. And customers are extremely excited. And they don't just save time and money, but they also get results that they couldn't get before they got our platform. And of course, as you implement this platform, you usually don't need a lot of those point solutions anymore. And that also helps them to kind of streamline their tech stack. For agencies, it's going to be a little bit different story because agencies will have to buy everything that all of their customers buy. And if you have 100 customers, some of those customers might have some point solution and you would still have an agency need and access to that point solution to serve that particular customer. So for agencies, it's going to be a bit longer to kind of really switch them entirely to some rough platform. But for brands, we see a lot of success pretty much for each implementation. When we started, we had a couple customers who wanted to have technical SEO, which we didn't have back in May or June when we have launched. But since then, we have acquired Wrike, which adds this capability. So now we feel very confident about our ability to fully consolidate the stack for all SEO teams.

Okay, that's helpful, Eugene. Thank you. And then Brian, just on the sort of the monetization and revenue opportunity, can you just give us a sense for how you think that differs for agency versus non-agency customers and generally what the differences between what those individual types of businesses are using for at the higher end of customer sizes?

Sure, yeah. It always depends on the company and the agency. We scale our offerings based on the amount of technology and marketing disciplines that you're focused on, the amount of data that you need, the number of keywords, phrases, and sites that you're focused on, and of course, the number of users and marketers that need access to this technology. So they scale in multiple ways. For most agencies, or some agencies, they're specialized on one particular marketing disciplines. In others, they're a full stack shop. So it all depends on the type of agency and company. But both agencies and companies are scaling based on those four pricing dynamics.

Okay, super helpful. Thank you.

Thank you. I can confirm that this concludes today's Q&A session. And I'd like to hand it back to the management for some closing remarks.

Thank you all for joining us today. We delivered a strong third quarter, and exceeding our guidance and positioning us to rise our full year 2024 wages. Thank you all.

Thank you all for joining. I can confirm that does conclude the SEMrush Holdings Third Quarter 2024 Results Conference Please enjoy the rest of your day and you may now disconnect from the call.