SEMrush Holdings Inc

NYSE:SEMR

Earnings Call Transcript 2021-Q1

[Operator]

Good day. Thank you for standing by and welcome to the Semrush Holdings First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please note that today's call is being recorded.

I will now hand the conference over to Mr. Bob Gujavarty, Vice President of Investor Relations.

[Bob Gujavarty, VP of Investor Relations]

Good afternoon. I'm Bob Gujavarty, VP of Investor Relations and welcome to the Semrush Holdings First Quarter 2021 Results Conference Call. We'll be discussing the results announced in our press release issued after market closed today. With me on the call is our CEO, Oleg Shchegolev; our CFO, Evgeny Fetisov; and our CSO, Eugene Levin.

Before we begin, I'd like to highlight our participation in several virtual investor conferences will be held during the second quarter. We will attend the Needham Virtual Technology and Media Conference on May 20. The JP Morgan Technology Media Telecom Conference on May 25, and the Baird Global Consumer Technology and Services Conference on June 10. Details on our attendance with these conferences can be found on our website, investors.semrush.com.

Today's call will contain forward-looking statements which were made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our expected future business, future financial performance and financial condition, expected growth, market opportunities and our guidance for the second quarter and the full year 2021 and can be identified by words such as expect, anticipate, intent, plan, believe, seek or will. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements.

Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. For a discussion of the risks, and important factors that could affect our actual results, please refer to our final perspective filed with the Securities and Exchange Commission our quarterly reports on Form 10-Q, as well as our other filings with the SEC.

Also, during the course of today's call, we will 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 after market closed today. And which can be found at our website investors.semrush.com.

And with that, let me turn the call over to Oleg Shchegolev.

[Oleg Shchegolev, Co Founder and Chief Executive Officer]

Thank you. And good afternoon to everyone on the call. I believe many of us joining us on the call today maybe new to Semrush story. So I would like to take a few minutes to cover our story and our product offerings. Later, I will offer some comments on first quarter and our outlook for the full year.

Semrush is a leading platform for online visibility management, which we believe is a new software category. The category with a total addressable market is nearly $13 billion and potentially greater. I believe we are well positioned to be chair. And since 2016, we have grown revenue at a compound annual growth rate of over 15%. While growing our beta customers count over 38%.

To-date an average consumer average spent more than six hours a day online and is overwhelmed by information. Businesses of all sizes factor to breakthrough this wall of noise to connect with potential customers. Our solutions help businesses breakthrough the noise and become visible to potential customers.

We offer a broad range of solutions and according to data from G2; we ranked a leader across 19 different categories, including SEO, competitive intelligence and social media and marketing. I believe the breadth of our platform is a key differentiator in the marketplace as many of our competitors on the offers point solutions today.

Semrush was founded by myself and my friend Dmitry Melnikov in 2008. In St. Petersburg, Russia, and we opened our first office in United States in 2012. Today, we are headquartered in Boston, Massachusetts. And we have more than 1000 employees in our offices in five countries. Working across large distances in various time zones has been part of Semrush DNA from very beginning. I believe this helped us acclimate quickly, to report pandemic work from home environment.

All the global workforce supports [indiscernible]. As of the end of 2020, we have customers in over 148 countries and approximately 55% of our revenue was generated from customers outside the United States. We have a very low friction sales stage, with a premium pricing model, users can try our products free of charge, but to access the full capabilities of our platform requires them to become a paid customer.

We have no specific customer or industry concentration, as we have built a business across customers of all types. Our platform is used by very large enterprises, which can drive an ACV well into the six figures, as well as small businesses on our entry level program at $120 per month.

I am very excited about the opportunity ahead of us. We have a large and diverse customer base, rapid growth underpinned by robust margins. And we have barely scratched the surface of what we believe is a very large market opportunity.

Looking at the first quarter revenue of $14 million was up 44% year-over-year, our best year-over-year growth since 2019. The growth pattern in the quarter was consistent with a pattern over the last few years, our paid users grew 31%, year-over-year, while every check grew by about 17% year-over-year.

I want to express my thanks to our employees, our customers and our partners, all of whom were key to delivering the strong results of our first quarter as a publicly traded company.

Looking at some of product highlights from the quarter, we have launched App Center with two third-party apps initially and more underway. We want to unlock the creative potential of our partners. And App Center is a key element of web strategy. We offer access to our data assets to some customers today. However, App Center will more easily allow third-party developers to innovate on top of our unique data assets.

On the topic of our data assets, we passed a milestone in the quarter, as our backlinks database now contains more than 41 trillion links up over 50% from a year ago. We believe our database is larger than many of our competitors in this space. Larger data sets can help drive more value for our customers, and further you can change our offering from rest of our competitors.

Finally, I want to highlight our ranking in G2s digital best global software sellers for 2021. We were ranked number 26 alongside leading brands like Microsoft, Google, Zoom, Slack, and others. This was a remarkable achievement given our size and our limited brand marketing efforts so far, and I believe our ranking speaks to the strength of our product and our relationship with our customers.

Where IPO was not the end, but rather the beginning of what I believe will be a very successful journey. Our platform continues to resonate with customers of all sizes and the category of online visibility management is poised for rapid growth and so is Semrush.

With that, I would like to pass the call to Evgeny, for more detailed discussion of our financials.

[Evgeny Fetisov, Chief Financial Officer]

Thank you, Oleg. Q1 revenue of $40 million was up 44% year-over-year and came in above our expectations. Growth was driven by steady increase internet users and uptick in the average monthly recurring revenue paying customer or average check.

I attribute the higher-than-expected check growth to the number of parties. Price interaction with too can generate continuous change in the subscription mix, with more users moving to Guru in that business, our higher price plans, sales of additional user licenses and project limits and lastly, growing share of competitive intelligence add-on in the company's revenue.

As a reminder, the new pricing plan apply only to new paid users and therefore impact only a small portion of our total 73,000 paid users. So pricing could prove to be a tailwind for the balance of 2021 as well as for 2022.

I would also like to note that our trailing 12 months revenue retention improved from 114% at the end of December to 116% at the end of March. I believe the decline in this metric from 2019 to 2020, was primarily the result of COVID-19 lockdowns in the first half of 2020, and trends in 2021, so far support this year.

Gross Margin of 78.2% was up 200 basis points from a year ago as the growth in hosting fees came in well below the base of railing growth. Hosting fees represent our largest expense within cost of goods sold, so any savings of those pieces played a significant improvement in gross margin.

Operating expenses of $29.7 million in the quarter were up 29% from a year ago, but only up slightly from the previous quarter. The year-over-year increase was primarily due to an increase in headcount to support growth of the business, as well as our initial public offering, as we transition to the public company.

I expect the pace of spending to accelerate across all functional areas, so the remainder of the year as we continue to invest to support our growth, and we incur additional costs associated with operating as a public company. The strong revenue growth combined with slower growth in cost of goods sold, and iterating the expenses contributed to net income of $1.5 million in the first quarter, up from a net worth of $1.9 million a year ago.

I believe the first quarter demonstrates the potential operating leverage of our business model as top line growth translated into better margins.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $171.9 million, up from $35.5 million a year ago. We generated $9 million of cash flow from operations and we received approximately $130 million of proceeds from the IPO net of expenses. The company also received approximately $10 million in April from the partial exercise of the Over-Allotment option granted to the IPO underwriters.

The first quarter was exceptionally strong as operating cash flow margin exceeded 20%. For the full year 2021, I expect the operating cash flow to be neutral or marginally positive, as the pace of spending will grow for the remainder of the year.

Looking ahead to guidance, I expect second quarter revenue in the range of $42.2 million to $42.7 million, representing 49% year-over-year growth. For the full year, I expect revenue in range of $175 million $177 million, which would represent 40% to 42% year-over-year growth.

As I mentioned previously, strong revenue growth allows us to make incremental investments in marketing and to a lesser degree sales to support revenue growth. And we expect this investment to weigh on operating income margin in the near term.

I expect second quarter non-GAAP loss of $4.4 million to $4.1 million, and $7.9 million to $6.3 million for the full year. I am pleased with the company's performance in the first quarter as we delivered revenue acceleration and margin expansion. Looking ahead, I believe we are well positioned to continue to deliver strong revenue growth in 2021, while making the necessary investments to support our long-term objectives.

With that, Oleg, Eugene and I are happy to take any of your questions. Operator, please open the line for questions.

[Operator]

[Operator Instructions]

And our first question comes from Michael Turits with KeyBanc.

[Michael Turits, KeyBanc]

Hey, guys, congratulations on a great first quarter at the gate. I have two questions. One is on branding and the other on pricing. On branding, in terms of customers really talk to we always heard fantastic views of you guys and your name and your brand. But I'm not sure that investors have appreciated that or that that's completely widespread. Is there something that you can be doing to promote that brand even more so your differentiation stands out?

And then I was wondering if you could quantify that the pricing uplift this quarter and to revenue where that might go over the next year?

[Oleg Shchegolev, Co Founder and Chief Executive Officer]

Thank you. Yes, you're right. We have received a great opportunity in front of us to spend more on branding. We see a great opportunity to educate market around us and eventually when we think about futures point of our marketing, we have such opportunities spending more on brands.

[Eugene Levin, Chief Strategy Officer]

And this is Eugene; I'll jump in on another front. So we'll be spending more time visiting conferences and meeting investors. So I think that will be our contribution in promoting the company amongst the investor community. So we're going to be very active in the coming quarters as well.

[Michael Turits, KeyBanc]

And then on pricing, any qualification at all. How much spin uplift you've seen so far or a contribution for the year?

[Eugene Levin, Chief Strategy Officer]

So we clearly - this is Eugene again. So we clearly see a positive effect from the repackaging. So the average chips comes higher, basically close to what we've like change the notional pricing blends for I would say, like 15% to 20%. So the results actually better than we anticipated in terms of the overall customer reception.

[Operator]

And our next question comes from Brent Bracelin with Piper Sandler.

[Hannah Rudolph, Piper Sandler]

Hi, guys, this is actually Hannah Rudolph on for Brent today. Thanks for taking my question. First one for me, just wondering if you could talk about what you feel really drilled those strong customer ads in the quarter.

[Oleg Shchegolev, Co Founder and Chief Executive Officer]

Thank you. First of all, I want to mention what such higher demand we started to feel few quarters ago, I would say its third quarter, when we feel such high demand from our customers. I expect that such tailwind will continue. But at the same time, it's hard to say how long, I think we should be careful if our expectations and it could be some moderation in growth in next quarters.

But at the same time, it brings us to previous topic about the global digital transformation. And it started a couple of years ago. We expected to continue next quarters, next few years. I see…

[Hannah Rudolph, Piper Sandler]

Okay, great. And yes, go ahead. Do you want to say something?

[Oleg Shchegolev, Co Founder and Chief Executive Officer]

No, sorry. Please go ahead.

[Hannah Rudolph, Piper Sandler]

Oh, okay. And then second question is how was logo churn in the quarter? And then kind of a third question on to that. You talked about what you were seeing in terms of your premium motion and the conversion of free to paid customers in the quarter?

[Eugene Levin, Chief Strategy Officer]

Thank you for your question. Hannah, this is Eugene again. So on the logo churn; we saw that it was slightly better than we had in previous quarters. And you can see this in our trailing 12 months revenue retention, which nudged up to 116%. As we have mentioned in our remarks. So far, we see some improvement in how we retain our customers.

And then the second question was on conversion rates.

[Eugene Levin, Chief Strategy Officer]

Yes, I can take this one. So in terms of conversion, from premium model, we are very happy with how this model performs. We didn't see any changes in Q1. So still, our premium product contributes significantly to user acquisition and demand overall demand generation efforts. I would say no material changes in Q1 comparing to previous year.

[Operator]

And our next question comes from Chris Merwin with Goldman Sachs.

[Chris Merwin, Goldman Sachs]

Thanks so much for taking my question. I wanted to ask about some of those drivers of the increase in check size. I think you mentioned a number of them, there was of course, the pricing change, there was kind of like there were some customers migrating to higher price tiers. As much as you can, can you break out the magnitude of those drivers for us? And how should we thinking about the sustainability of those drivers, as we progress through the year here? Thank you.

[Evgeny Fetisov, Chief Financial Officer]

Chris. Thank you for question. This is the Eugene again. So there were a number of drivers as you mentioned. So one is, I mean, the price increase will probably be a little bit less pronounced in Q1 because it was just, we just introduced it in and was clearly applicable to the new customers only. So what we see drives the average check apart from the price repackaging, is migration from a lower price points to the higher price points or shift in the share of higher price points and overall, like subscription portfolio, sales of additional usage limits, such as keywords or projects, plus successful sales of add-ons.

So our add-ons are growing faster. I mean, revenue from add-ons is growing faster than the total company's revenue. So that all of that contributes, I would say, more or less equally important to the growth of the average check.

And Eugene, you may want to add something.

[Eugene Levin, Chief Strategy Officer]

Yes. So one thing that I think we could also hear is that we are also looking at number of customers on more expensive subscriptions that go beyond our three core plans. So for example, we look at number of customers who paid us more than $10,000 in the last 12 months. And this number, for example, in Q1 grew more than 50% year-over-year. So that's also one of the kind of quantitative things that you can take. And hope it provides more color behind the growth of the average revenue per user.

[Chris Merwin, Goldman Sachs]

Okay, great. Thank you. Maybe just one quick follow-up. I think you called out the number of backlinks in the in the quarter announcement, the trillions and sounds like it's growing almost 50% year-on-year, can you talk a bit about, I guess, first of all how you're able to why those are growing as fast as they are? I mean, it's well in excess of your customer growth and how we think about a metric like that impacting your ability in a positive way to acquire even more customers to grow with your customers, just if you can add some more contexts around that number, if you could? Thank you.

[Eugene Levin, Chief Strategy Officer]

Yes, so I this is Eugene, I'll take this one. So when we think about the importance of number of backlinks and why we are sharing this metric, I think it goes back to our product, and how product is very relevant part of our overall customer acquisition strategy. So in general, when you have a big database, what it means for end customer that they will have more insights, they will have more ideas about how to build links, and especially if they're really small business, sometimes in checkers with less backlinks, they will not even find anything about their business. But in checkers like Semrush with a lot of links, they will be able to find something.

So what it means is that, people have will have more complete picture, which just improves the overall quality of the product. And then at the same time, it opens products like backlinks analytics for a broader set of small businesses, and hopefully helps us to acquire more customers. But yet again, primary goal is just to improve overall quality of product and have more complete sort of map of the internet.

[Operator]

And our next question comes from Tom Roderick with Stifel.

[Tom Roderick, Stifel]

Hey, everybody thanks for taking my questions. Congratulations on the IPO. I wanted to ask you question, just thinking about the Semrush product portfolio and you have kind of the holistic vision of short-term strategies, digital marketing strategies, long-term strategies. And if I think about how your potential clients and existing clients out there are reacting to short-term and long-term whether it's paid advertising on the short-term payback side or search engine optimization and long-term side.

How are they shifting the demand for either end of that, as the economy recovers? Is there more of an emphasis on one or the other? Are you seeing more demand for newer solutions would just love to understand how the improving economy is sort of impacting which end of the demand curve in digital marketing? Thanks.

[Eugene Levin, Chief Strategy Officer]

Thank you so much. Really good question. And I think I think what we have seen is going to be indicated only to the segment of the market. Not necessarily for the whole market. But what do we see is that; in general, people want to spend more on paid channels? But the problem with the paid channels is that they're saturated.

So in general, we keep seeing transition from short-term marketing accuses towards long-term marketing activities across the board. Yet again, if you talk to people who sell ad words, because they don't see other side of the market, they will probably say that they see a huge increase in demand for search ads.

But since we see all the sides, we definitely see increasing demand for search ads, but we see even bigger demand towards more organic growth and long-term growth activities in marketing.

[Tom Roderick, Stifel]

Yes, that's excellent feedback. And I appreciate the view towards longer term. As you look at some of the newer solutions, whether it's on the conversion or loyalty side, or perhaps even just other core search engine optimization side. Can you point to some of the newer solutions, the upsells, that Semrush has been offering in the market, is that are starting to impact the deal size of customers and starting to have some real traction? Anything on the newer front that you've rolled out in the last couple years on the add-on front? Would love to hear more about that. Thank you.

[Eugene Levin, Chief Strategy Officer]

Yes, absolutely. So I think we did really good job during previous couple years in building this product portfolio. And building those add-on some of them that you've mentioned, for example, our Dot trans [ph] add-on the previously was called traffic analytics is having great traction right now, local listings, also has really good traction, especially in the United States.

We also started cross selling probably new product that we acquired in September, and we are constantly building new things. But for them, it will be too early to have material impact on our revenue. But one of those things, for example, is split signal, new product that is really in early beta. And this product is designed for bigger companies with large websites, and also priced differently at a higher rent.

So we are constantly adding new products. But I think if you look at what drives revenue today, those will be things that we already done in the past. And right now we are more of a leveraging all the hard work that our product teams have done previously.

[Operator]

And our next question comes from Brent Thill with Jefferies.

[Brent Thill, Jefferies]

First of all, any trends that you're the solder in the quarter in terms of the strength? And I don't know if you had growth rates as it relates to what happened in those geos?

[Evgeny Fetisov, Chief Financial Officer]

Brent unfortunately, what's first part of your question, can you please repeat this one?

[Brent Thill, Jefferies]

Just overall growth in U.S. versus the rest of the world? What did you see any material changes or differences in each of those regions?

[Evgeny Fetisov, Chief Financial Officer]

This is Evgeny; we actually haven't seen any differences. So we have been growing fairly steadily across the globe in most of the - I would say top markets that we had. So the market share for our top countries remains the same for the quarter and actually was fairly consistent for the last several quarters. So it's a broad, like broad, consistent growth globally.

[Brent Thill, Jefferies]

And you highlighted that low touch sales model. Is there any changes as it relates to the success you've had with this model? Are you continuing with that go-to market model? Are you contemplating any changes on your go to market in terms of adding inside sales reps or outside sales reps to further penetrate this market?

[Oleg Shchegolev, Co Founder and Chief Executive Officer]

It didn't change our markets in first quarter. And we have the same signup flow. And I think all our conversions, all our things related to go-to market and signup flow very consistent. We didn't face any changes here.

[Operator]

And our next question comes from Mark Murphy with JP Morgan.

[Matthew Cost, JP Morgan]

Hi, good afternoon. This is Matt Cost, on behalf of Mark Murphy, congrats on the first quarter as a public company out of the gate. Just a question of retention, it's good to see that uptick. But do you think it gets back to the levels you saw in the prior year like close to that 120% range at some point once we're once we've completely lapped the effects of COVID?

[Evgeny Fetisov, Chief Financial Officer]

Matt, thank you for the question. This is Evgeny. We'd love to be able to be very precise in terms of the number, I cannot do this unfortunately. So what do we expect to happen is that for the retention rate, all things being equal to continue to go up as this past quarter move from the numerator into the denominator of the calculation? So I think for the next two or three quarters, we'll continue to see it going up and then leveling out or maybe moving marginally done. So that's the expectation. I hope this is helpful.

[Matthew Cost, JP Morgan]

Yes, that's helpful. And then Oleg, I think you said to Brent's question, you saw the same signup flow. And I just want to make sure so you haven't seen any change to the number of free users that you're bringing onto the platform is that correct?

[Oleg Shchegolev, Co Founder and Chief Executive Officer]

Amount of users growth, yes, you're right, we didn't change our signup all, and even more, we mentioned already our packaging. And we expect that in the beginning of this quarter, we expected some decline in new paying customers because of such repackaging, but we didn't face it, and all our metrics, all our conversion from free customers to paid customers consistent.

[Operator]

And there are no further questions at this time. And that does conclude today's conference call. Thank you for your participation. You may now disconnect.