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Operator
Greetings. Welcome to SimilarWeb's third quarter fiscal 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Raymond Jones, Vice President, Investor Relations. Thank you. You may begin.
Raymond Jones
Thank you, Operator. Welcome everyone to our third quarter 2022 earnings conference call. During this call, we will make forward looking statements related to our business. These statements may include the expected performance of our business and our future financial results, our strategy, the potential impacts of the COVID-19 pandemic and its associated global economic uncertainty, our anticipated long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected or implied during the call. Again, actual results and the timing of certain events may differ materially from the projected results or the timing predicted or implied by such forward-looking statements. Further, reported results should not be considered as an indication of future performance. Please review our Form 20-F filed with the SEC on March 25, 2022, In particular, the section entitled Risk Factors therein, for a discussion of the factors that could cause our actual results to differ from the forward-looking statements. Also, note that the forward-looking statements made on this call are based on the information available as of today's date, November 16, 2022. We undertake no obligation to update any forward-looking statements we make today, except as required by law. As a reminder, certain financial measures we use in presentations of results and on our call today are expressed on a non-GAAP basis. In particular, we reference non-GAAP operating loss, which represents GAAP operating loss, less share-based compensation, adjustments, and payments related to business accommodations, amortization of intangible assets, and certain other non-recurring items. We use this and other non-GAAP financial measures internally to facilitate analysis of our financial and business trends, and for internal planning and forecasting purposes. We believe these non-GAAP financial measures, when taken collectively, may be helpful to investors because they provide consistency and comparability of the past financial performance by excluding certain items that may not be indicative of our business, results of operations, or outlook. However, non-GAAP financial measures have limitations as an analytical tool and are presented for supplemental informational purposes only. They should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Our reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our investor relations website at ir.similarweb.com. Today, we will begin with brief prepared remarks from our CEO or offer and CFO, Jason Schwartz. Then we will open up the call to questions from sell-side analysts in attendance. Please note that we publish a detailed discussion of our third quarter 2022 results in a letter to shareholders for investors to reference, as well as an updated investor presentation with a strategic overview of the business, both of which are available on our investor relations website. With that, I will turn the call over to Orr Opper, CEO of SimulaWeb.
Jason Schwartz
Thank you, RJ, and also thank you to everyone joining the call today. We reported a solid result in our third quarter as we navigated the challenging macroeconomic environment. Revenue grew 41% over Q3 last year to $50 million in the third quarter. The expansion of our global customer base consisting of SMB, enterprise, and strategic account stayed steady. Our customer base grew 21% year-over-year to 3,900% and our average account spends about $52,000 with us annually, up 15% over last year. Furthermore, over 53% of our annual recurring revenue come from customers who spend more than $100,000 per year with us. Today, 37% of our relationships consist of multi-year contracts, a metric that has expanded year over year since 2020. When we look back, to 2020, digital transformation become mission critical for every businesses and we benefit greatly. At the time, we became a public company, nearly doubled our revenue and we focus on continuing our rapid growth. Despite incredible trajectory we have been experiencing since the outset of the pandemic in 2022 and other plans, we are facing the impacts of continued war in Ukraine raising interest rate, global inflation, and customer with linear budgets. We now believe that the microeconomic condition will take longer to recover than we assumed and are looking at an entirely different economic climate in 2023. To succeed in this environment, we must adjust our priorities and sharpen our focus and take the right action for our company. This leads me to a truly difficult change I'm sharing with you today. We have decided to reduce the size of our team by about 10%, saying goodbye to similar webinars who mean a lot to us. To the incredibly talented webinars that we have to say goodbye to, I'm deeply sorry. Over the last couple of months, we made a lot of adjustments trying to adapt to the quickly changing market conditions. However, now I know that we were overly optimistic in our estimate of the duration of the recession, and it seems the market will take much longer to recover. With that in mind, we certainly need to make this change. In addition to the changes in our headcount, we will be reducing expenses across the company. Those changes will align to one key decision – accelerating our timeline to become free cash flow positive during 2023. To achieve this, we will match the pace of our investment with the realities around us, and we will sharpen our focus and deploy resources carefully on the core activities that create revenues. What is great about SimilarWeb is that our solution is very valuable in times like this. The visibility we give into the digital world are critical to companies to make decisions in those times. We will double down on our customer needs to survive and win in this unpredictable economy. As we adapt to the microeconomic environment with our customers, we greatly appreciate the support of our shareholders, all those who are navigating with us. Jason, I will turn the call over to you.
SimilarWeb
Thank you, War. And thank you to everyone joining us on the call today to discuss our third quarter results. I will briefly address our financial performance, and then we will open up the call to questions. Our results in the third quarter continue to demonstrate our disciplined execution. Revenue reached $50 million for the quarter and exceeded our outlook of $49.2 million on the high end of our range. Our overall dollar-based net retention rate, or NRR, increased to 112% as compared to 110% in the third quarter of 2021. And for our $100,000 ARR customer segment, NRR increased to 123% as compared to 122% in Q3 last year. Our remaining performance obligations, or RPOs, increased 39% year over year to $158 million, 86% of which will be realized over the next 12 months. As we exceeded our plans on the top line, we also exceeded expectations on our bottom line. Our third quarter gap operating loss was $20.6 million, while our non-gap operating loss was $13.3 million, which was much less than the $20.9 million loss we had anticipated on the lower end of our guidance range. Importantly, our non-GAAP operating margin improved over 1,200 basis points versus the prior year. In addition to increased sales, we deployed broad-based operating efficiency measures across the business. As a reminder, this result includes non-comparable expense impacts from our acquisitions as compared to the prior year. Turning now to Q4 2022, we expect total revenue in the range of $50.5 million to $50.9 million. For the full year, we expect total revenue in the range of $192.4 million to $192.8 million, representing 40% growth year over year at the midpoint of the range. Non-GAAP operating loss for the fourth quarter is expected to be in the range of $14.5 million to $15 million, and for the full year, between $67.4 million and $67.9 million. Compared to last year, our outlook includes impacts to cost of goods sold relating to our data.ai partnership, and to the acquisition of MB Mobile. We anticipate non-GAAP gross margin will be approximately 75 to 76% in Q4 2022 and approximately 75% for the full year 2022 as a result of these impacts. As we finish 2022 and plan for 2023, we are anticipating a different growth trajectory next year than we have experienced to date, influenced by recessionary conditions that will persist for an indeterminable amount of time. As Orr mentioned, we are adjusting our strategic priorities as we, along with our customers, prepare to face these increasing challenges globally. Today especially is a trying day in our history as we restructure our organization to balance our expectations for moderating growth with accelerating our path to profitability. Our team, our business model, and our balance sheet remain resilient as we navigate these challenges. The decisions we are making and actions that we are taking reflect our focus on becoming free cash flow positive during 2023. With that, Ora and I are ready to answer your questions.
Operator
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Ryan McWilliams with Barclays. Please proceed.
Ryan McWilliams
Thanks for taking the question. Or given your insight into current market trends and through speaking with your customers, what are some of the things that you're seeing that could indicate these prolonged changes in demand for SimilarWeb? And are you seeing any more pressure on existing customer growth or new customer acquisition?
Jason Schwartz
Hey, Ryan. Good to hear from you. Thank you for the question. And so what we think, I think it's similar emotion that are in the market for most software companies is that there is a slowdown in making business. What's mean that the process of approving a deal now getting much longer, you need to go and hire the organization to get approval from C-level, if it's a CFO, CEO. A lot of clients pushing to the end of the year or pushing into next year budgets. And what means that the pressure is mostly coming from new business. We're seeing stability on the credit book of business, but new business is tougher. The KPI there are totally different than what they used to be.
Ryan McWilliams
Appreciate the color. And then Jason, pleased to see the guidance for similar web becoming free cash or positive move up the year to 2023, along with the renewed focus on profitability. So how should we think about the benefit free cash flow from the reduction in workforce? And is there any particular segment or area where the employee headcount changes are primarily impacting?
Operator
Hi, we're unable to hear the speakers. Please check and see if you have your line muted.
SimilarWeb
Are you able to hear me now? Yes, please go ahead. Thank you. Okay, sorry. So the reductions are actually all across the business. I think you're seeing efficiencies already in this quarter in Q3 in terms of that 1,200 basis point improvement. in the operating expenses. You see the margin come down on R&D and on sales and marketing and on G&A. And that was before we implemented the restructuring that we announced today. That'll come through towards the end of the year. We're looking to just drive the business to be more efficient. And we think that that's the right way for us to be managing going into 2023. Perfect. Thanks, guys.
Operator
Our next question is from Arjun Bhatta with William Blair. Please proceed.
William Blair
Hey, thanks, guys. Well, I'm curious. Just as you look at the business, obviously you're seeing slowdown and that's not unique to similar web, right? We see that across the space. But when you think about your business, what are the different areas where you think you may be more resilient and where do you think the impact may be more pronounced from a macro perspective, whether you break that out by industry or customer size between enterprise and SMB? Any call you have there would be helpful.
Jason Schwartz
Good to hear from you. Thank you for the question. When we analyze the different segments that are getting tougher than others, I would say that Europe is more challenging than the rest of the world. I think the U.S. is okay. And in APEC, it's also good. So the phase of doing business is maybe a little bit tougher, but you see that it's still rolling. From the motion side, like SMB, so I think SMB is still doing good, so we see good traction now. And enterprise are more tougher, and I think strategic is, Maybe getting more complex. We'll see a lot of budget getting from centralized team to decentralized, but we're still closing deals. We're still progressing. Maybe a little bit more complexity. I think enterprise maybe is getting hit harder than S&P and strategically.
William Blair
Okay, got it. And Jason, maybe one for you. When you think about, you know, obviously you're not going to guide to 2023 at this point, but when you think about the margin expansion that's available looking ahead, where do you see the most leverage, I'll say most incremental leverage in the model versus how you're operating the business today?
SimilarWeb
Sure, Arjun. We actually see it across the lines. You know, When you look at gross margin, gross margin, if you recall, last year was already at the 78%, 79%. We took a hit on that earlier this year because of the acquisition of MB Mobile and the deal that we did with Data AI. As that stuff gets blended in, we're already starting to see the leverage of that coming through. as the gross margin continues to increase already up at 76. And we think that that's one thing that you'll see going into next year. And we think that you'll see efficiencies all across. I mean, look at the improvement that we were able to do on the sales and marketing side, taking that to 55% of revenues. consistently we've been consistently about uh 60 65 66 when you look over the last seven quarters so i think that you're going to see more and more efficiency coming through while we continue to maintain our our you know our unit economics our unit economics are still very very positive inherently drive a profitable business over over a two-year lifespan of a customer we don't have to wait for three four years in order to get recovery and profitability on the customer. We feel very good about that. Okay, got it. Perfect. Thank you very much, guys.
Operator
Our next question is from Jason Hestan with Oppenheimer and Company. Please proceed.
Jason Hestan
Thanks. Hey, guys, two questions. So first, can you talk about the e-commerce product adoption in the quarter versus perhaps like what you saw a year ago? And are you still as bullish on this opportunity as you were in the past? And then the second question, you know, when business, just from the cost reduction perspective, I'm assuming you're, you know, for example, in sales and marketing, just reducing headcount to kind of right size for the current opportunity. How do you think that impacts sales, though, coming out of this? So, you know, obviously, you know, things will rebound presumably late in 23. you know, how do you think about that? Do you then have to rehire on the other side of that? And then consequently, you know, with R&D, you know, are you pushing out product development that then you rehire on the other side? So how much of this do you just think about is driving permanent productivity gains versus you're right-sizing for the current environment and then we'll just need to rehire when the opportunity is right? Thanks.
Jason Schwartz
Thanks, Jason. And So the first question around the shopper intelligent product, we still see strong momentum. We have a really good quarter from low acquisition and I think overall growth. So we still have a good momentum. We're focusing now on the U.S. market. So this is regarding the shopper product, the e-commerce one. And regarding the reducing force, I think that when we look at the reducing force, we were mostly adapting, so we tried, the strategy there was mostly to protect the revenue-generating teams in marketing sales and already the one with driving innovation and product. So basically, you know, GNA got hit hard. some things in R&D that are more internal and development. So I think we have also, because we're very bullish on our product and our product market fit and our needs to our solution in those times, because we know that customers will need the market data more than ever now to adapt their plan for next year. We're still closing businesses. We're just aware that it's just taking longer and tougher to close new deals, but and we're still bullish on continued execution so we are as i said we didn't um we didn't cut in a way that we think that we need to be higher next year thank you our next question is from tyler radke with citigroup please proceed yeah thanks for taking the question uh
Jason
I just wanted to better understand exactly the timing of how you saw this play out, because I think it's obviously a pretty big tone change from the investment posture that you indicated at the beginning of the year. So was this something that you saw kind of play out in terms of slowdown in new customer acquisition in the quarter, and are you expecting it to get worse, or are you just kind of proactively – adjusting for the macro environment that you may anticipate over the next year, just given the headlines out there. Thank you.
Jason Schwartz
Thanks, Taylor. I would say that when I look historically on the quarter, I think Q1 was looking good for us. We were optimistic. We were still hitting our internal targets. And Q2, we already started seeing the slowdown, and we didn't know exactly to to understand what this means. I think it's just the beginning of the slowdown specifically to our sector. So we did some adjustment already in the end of Q2 in order to improve efficiency and marketing budgets. Once I understand it's going to be a slowdown, we didn't know exactly how tough it would be. And I think Q3 was a stronger indicator that there is a slowdown. And I think, again, I think probably it will be like that by the end of the year. As this company adapts to next year, I think there is going to be maybe more recovery in our sector. And so then we decided that basically we need to go and do this adaptation. and changed the strategy according, first of all, about market condition and also market motion and sentiment. We felt it was much better to push the company to possibility and adapt ourselves to a market that's going to be in the next few quarters more challenging to drive business, and we thought this was the right decision to change the strategy according to the challenging environment.
Jason
That's helpful. And maybe a question for Jason. Just as we think about cash flow break even next year, I think that's a much bigger change than at least the consensus numbers are indicating. Maybe just help us frame how we get there. I mean, should we think about revenue growth of teams or 20% and OpEx flat? Or just help us understand kind of the underlying assumptions to get us there. And then secondly, if you could just kind of indicate your view on when you would expect things to get better. Obviously, this is a difficult decision to reduce the headcount, but presumably you're not expecting things to improve anytime soon. Just any thoughts on when you would look to rehire should you see things improve. Thank you.
SimilarWeb
Yeah. So, Tyler, thanks for the call. I think... You know, our philosophy over here, and it's always been that case, is balancing growth and profitability. And, you know, even being before we went public, we had run the business efficiently and getting to cash flow, you know, profitability, break even and slightly positive right before we went public. And when we went public, the whole investment thesis was that we were going to accelerate that growth and know that we can return that investment over the next 24 months after deploying that capital. And we did a really good job at that. I think we were showing that growth. And what we've seen now, as Orr just mentioned, is we've seen that slowdown happening. And we, as a leadership team, always want to execute with that disciplined execution, that operating efficiency. You've heard us talk about our unit economics over and over again over the last number of quarters. And it's not just empty words with us. We take action. I think that's why you're seeing the improvement already having in Q3. Many of you have asked us before, are you able to adapt if you see the market changes? And we say yes. And here it is. We were able to do it. Today's decision on taking a reduction in force is a tough decision, but it's the right decision for the business as we see going in today's macroeconomic climate. We see still the demand is there. People are still buying. As you saw, people are even still locking in multi-year deals that our customers are telling us. that not only we need similar web, we can't afford to lose similar web from their budgets, and therefore they're locking that contract in for a longer period of time. What we're doing from a planning perspective is to make sure that we have the operational flexibility and the baseline from an expense side to be able to sustain cash flow positive Sometime in 2023, accelerating that from 2024, because again, we think that's the right thing to do. Thank you.
Operator
As a reminder to star one on your telephone keypad, if you would like to ask a question. Our next question is from Brett Noblow with Cantor Fitzgerald. Please proceed.
Cantor Fitzgerald
Hi, Oren and Jason. Thanks for taking the question. I guess given the growth reset, it kind of seems like we're walking back to that $450 million ARR target that you previously guided to by the end of 2024. I guess should we expect the growth rate that you guys are guiding to in the fourth quarter, call it kind of high 20% range? be the more normal over the next two years, or should we expect additional deceleration over the coming quarters or coming years? I guess just any help kind of framing the pace of growth over the coming quarters?
Jason Schwartz
No, I think we can expect to, as long as the market condition, what we're seeing today, we probably... think that looking at next year, we hope to look maybe two tough quarters, like maybe Q1, Q2, and then we hope that Q3, Q4, there is some comeback. So we're still optimistic about the execution. About what it means for growth for next year, we would probably... provide this guidance in the next selling call. And once we can have the full deal results.
Cantor Fitzgerald
That makes sense. And I guess, should we expect, um, I guess majority of the growth over the medium term to kind of come from you guys pushing on your existing customers. Um, and I guess to that extent, could you maybe talk about the adoption of your, um, at any premium add-on and what you're seeing with that and how receptive customers are to that product?
Jason Schwartz
Yeah, so we think the right strategy going forward in this environment, of course, is to double down on our own customers. We're lucky to have very broad product portfolios that we can introduce to them. And the premium model that you talk about is one of them. And we do see good traction there. So we do already have hundreds of customers upselling this module. And we have a strong pipeline. So this is one of the offerings. But again, we still have good innovation internally. And the shopper product for the e-commerce is doing well. We just launched a new investor platform for alternative data. that look very good, and we already onboard a lot of investor customers on that. And so there's still a lot of opportunities, as I said, in our portfolio, and we're very bullish around it.
Cantor Fitzgerald
And for the stock intelligence product, is that still in beta? I believe you guys kind of said in the press release that it was expected to kind of go live by the end of the year. I guess, is that live now, or is this something that will go live over the coming weeks?
Jason Schwartz
Yeah, it's already live. We're already starting first. I think we had tens of customers already starting, like, to try it. So we give them a trial to take a look. It's a really new concept, how you look at alternative data. And also, historically, we have tens of paying customers who were buying the data through Excel. And now they have a more sophisticated UI with more insight and information. And we are kind of shifting them to use the platform. And we've seen good traction.
Cantor Fitzgerald
And maybe just one last question on my end. I guess, have you guys been more accommodative on the pricing? I guess, pricing levels for your range of products, or is those held firm, and would you be kind of more accommodative on a pricing standpoint going forward?
Jason Schwartz
Yeah, so it's a good question, and it's also internal discussion that we have internally. If now is the time maybe to do some price increase, because the Forex exchange stuff and the And we're seeing that a lot of companies took this approach of doing price increase. But right now, we didn't get to the final decision. But we are much more flexible about payment terms. I think we understand our customers want to do some cost saving, etc. And I think we're still doing a yearly contract, but sometimes we're giving them maybe quarterly payments or monthly payment to make them feel more comfortable. So this is something that we did for all and now in a few regions.
Cantor Fitzgerald
Perfect. Perfect. Thanks, Orr. Really appreciate it. Thanks, guys.
Operator
We have no further questions. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
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