Similarweb Ltd

NYSE:SMWB

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to your Similarweb Q2 '24 Earnings Call. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host, Rami Myerson. Sir, the floor is yours.

[Rami Myerson, executive]

Thank you, Karen. Welcome, everyone, to our second quarter 2024 earnings conference call. Joining me today are our CEO and Co-Founder, Or Offer; and our CFO, Jason Schwartz.

Yesterday, after market closed, we released our results for the second quarter and published a discussion of our results in a letter to shareholders as well as the investor presentation with a strategic overview of the business on our Investor Relations website at ir.similarweb.com.

Certain statements made on the call today constitute forward-looking statements, which reflect management's best judgment based on currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release and our most recent annual report filed on Form 20-F for more information on the risk factors that could cause actual results to differ from our forward-looking statements.

Additionally, certain non-GAAP financial measures will be discussed on the call today. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and the earnings presentation.

We have decided to shorten our prepared remarks, so we'll begin the call with Jason's highlights of the quarter, and then we will open the call to questions from sell-side analysts.

With that, I'll turn the call over to Or. Or, please go ahead.

[Or Offer, executive]

Thank you, Rami, and welcome, everyone, joining the call today. 3 years after ringing the bell at the New York Stock Exchange following a successful IPO, we are proud that Similarweb today is a growing profitable and cash-generating company. I'm super excited that this quarter our efforts to accelerate growth were successful. Our growth is primarily driven by improved go-to-market motion and the innovation that we're doing on our R&D side. As a result of those successful efforts, we feel confident in our continued business growth, and we are increasing our outlook for 2024 revenue and non-GAAP operating profit.

During the quarter, we were able to upsell and sign the contract with our first 8-figure ARR customer and increased our customer count to more than 5,000 customers. It is great to see the continuing demand for our data from both new and existing customers.

Last week, we launched our newest improved version of our digital data estimation. The new version significantly enhanced our accuracy and coverage of our data and provide broader insights for more than 30 million new websites that we added to our coverage in many more countries than we had included in our previous data version. We're excited with those new data improvement and the potential that they're bringing. This new improvement will increase our position as the leader in the digital market data, and we already got initial good and positive feedback from our customers.

We continue to benefit from the positive tailwind of the AI revolution. As part of the significant investments in AI infrastructure, many large global tech companies are engaging with us to access our digital data to fill their LLM model. Those companies recognized that LLM requires high-quality, fresh and scalable data to generate updated outputs and realize the potential of our data to feed their model.

They also recognized that Similarweb digital data is the most unique and high-quality data source in the market for their model. Some of the world leading LLMs already training on Similarweb data.

We believe there is even more ways Similarweb can benefit from the AI revolution. We're seeing that many of the large global consumer brands are eager to learn how the new world of AI and chatbot is changing their customer online behavior. And they are keen to understand how the path to purchase is changing where consumers are doing their research before making purchase decision and how the new AI chatbots are impacting this behavior.

This is where our digital consumer data is already providing a range of insights. And I believe that this is a great opportunity that can have a significant potential for Similarweb as the AI revolution evolves.

In July, we acquired 42matters, a Swiss app intelligence provider, to expand our app data capabilities in the rapidly growing app market. By combining 42matters and Similarweb, we have expanded our app intelligence offering across app store data, app engagement and app SDK data. We can now provide enhanced insights for the app developer and brands into the performance of their own app versus of the competitor and the markets.

We are also going to add the third market data to enrich all of our other solutions that will benefit from the combination of having web and app data in one platform. We would like to welcome the 42matters team to the Similarweb, and look forward to working together to build the #1 global app intelligence provider.

I want to thank the whole team for another successful quarter of excellent results and growing execution. We believe that we are still only starting to realize the potential of our data in the addressable market we serve. And as I like to say, we are on -- we are just getting started.

Thank you, everyone, for joining the call today and continuing your support. With that, I will turn the call over to Jason. Jason?

[Jason Schwartz, executive]

Thanks, Or, and everyone joining us on the call today to discuss our second quarter results. I'll provide the highlights of our financial performance, and then we'll open up the call to questions.

Revenue growth continued to accelerate to 13% year-over-year in the second quarter, driven by new customer growth and improving retention. In Q2 '24, we achieved an overall net revenue retention rate of 99% and an NRR of 109% for our over $100,000 ARR customer segment, an improvement relative to the first quarter of 2024. We believe this quarter's NRR demonstrates a change of the trajectory and expect further improvement in the quarters ahead.

Our operational performance in the quarter demonstrates our continued commitment to disciplined execution, and we delivered a fourth consecutive quarter of non-GAAP operating profit and a record non-GAAP operating margin of 9%. We generated $6 million of free cash flow in the quarter and $16 million of free cash flow in the first half of 2024. Our remaining performance obligations, or RPO, totaled $217 million at the end of Q2 '24, up 24% year-over-year. We expect to recognize approximately 75% of total RPO as revenue over the next 12 months.

Following the strong results that we're reporting today and that exceeded expectations, we are raising our guidance for both revenue and non-GAAP operating profit for the full year 2024. In Q3 '24, we expect total revenue in the range of $62.5 million to $63 million, representing approximately 15% growth year-over-year at the midpoint of the range. For the full year 2024, we expect total revenue in the range of $246 million to $248 million, a $2 million increase from our previous expectations.

Non-GAAP operating profit for the third quarter is expected to be in the range of $2.8 million to $3.2 million. For the full year, we expect our operating profit to be between $13 million and $15 million, up from our previous expectations of $7 million to $9 million. Our guidance reflects increased operating expenses primarily related to increased head count in which we intend to invest to further accelerate our revenue growth.

We anticipate being profitable on a non-GAAP basis and generating positive free cash flow in all of the remaining quarters of 2024. We remain focused on delivering profitable growth and making further progress towards the Rule of 40 over time as well as achieving our long-term profit and free cash flow targets.

And with that, Or and I are ready to answer your questions.

[Operator]

[Operator Instructions] We'll take our first question from Arjun Bhatia from William Blair.

[Arjun Bhatia, analyst]

Perfect. Congrats on a great Q2 here. One thing that stuck out to me in the shareholder letter and, Or, in your prepared remarks is that you're getting interest from some of these large tech companies to buy your data to train their LLMs. It sounds like you had that from that 8-figure customer you mentioned.

So when you think about just the economics of that, how do you make sure value is aligned? And how do you go about pricing, a use case like that? And it sounds like you're expecting more of these. So any insight into how that kind of flows through the business side for Similarweb would be very helpful.

[Or Offer, executive]

Arjun, thank you for the question. It's a good question. And I had two questions here. The first one is about the demand for this offering. So we do see increase of demand for consuming more digital data by those big tech companies that's building those LLMs. So we are expecting this offering to accelerate down the road.

And regarding pricing and packaging of this offering, it's a good question. It's new. And there is still few ways how you can price and package it. It's a lot about consumer, and there is many ways the customers would want to get the data. It's a lot -- very custom. And -- but I think we're doing a good job now building trust and working as a good partner with those companies to build a great solution for them.

[Arjun Bhatia, analyst]

Very interesting. Okay. We'll stay tuned on that. And the other one, I think when I look at your growth drivers, it looks like the 100,000 -- the revenue from 100,000 plus customers is growing above 20%, at least by my estimation from your disclosures, which is much higher than your overall revenue. So what is driving that?

And maybe can you just touch a little bit on the similarities and differences in demand that you're seeing from smaller customers versus larger ones? And how buying behaviors are maybe diverging between those two groups?

[Or Offer, executive]

Yes. We do see more success in the strategic accounts. In the past quarter or so, we become much better with serving those customers. As we announced, we've got our first 8-figure customer this quarter, that was super excited.

And we're becoming better with the way we serve them, the way we work with them, and because we do serve the biggest companies in the world and the appetite for digital data is increasing. So there's a lot of opportunity, and we're doing a great job now.

I don't know Jason, maybe you have anything to add on that?

[Jason Schwartz, executive]

Yes. I would probably just add that remember, part of that is also intentional. One of the things that we did with 3.0 was to make it easier for customers to get started with and onboard with Similarweb. And we know that because based on the history, and you see that in this 8-digit customer that we announced yesterday, was -- we started as a few tens of thousands of dollars and over time, grew 450x to an over 8-digit customer. And they have bought 4 of our solutions across multiple departments and multiple geographies. And that's the kind of journey that we see over and over again.

And so the customers start and we land with them, we could land with them in a more nominal number than the $100,000 [indiscernible]. But over time, they land, retain and expand and then you start seeing them when they get to that $50,000, $100,000 number, they start realizing that there are even more and more places where they can leverage our data, whether it's through their [indiscernible] solutions or the DaaS and integrations that Or was talking about.

[Operator]

We'll take our next question from Jason Helfstein from Oppenheimer.

[Steven Hromin, analyst]

This is Steve Hromin on for Jason. So just one question from us. Do you expect Similarweb 3.0 to continue sort of driving lower ARR per customer, given kind of the lower entry points to allow companies to kind of just start up quickly? And just a follow-up on that.

[Or Offer, executive]

Yes. And we took the strategy to make it much more easy lending. And this is why you're seeing a nice acceleration in our logo growth for customers. We're also seeing great success in our self-serve customer that can just put credit card trying to get familiar with this digital market data.

And then as they're getting more familiar, they're ready to move on from a real engagement. So we're seeing a very strong success development. So it's really proved itself to easy lending for our customers and then grow them over time.

[Steven Hromin, analyst]

Awesome. And just a follow-up. In terms of margins sort of on that kind of per customer, I was wondering for smaller customers, do you see that there is almost better margin there because there's a lot less that you have to spend to service them?

[Or Offer, executive]

Yes, on the self-serve customer, yes, for sure. It's a very good margin. And so you're right about it. It's probably what you're seeing increasing our overall AOV because we're getting much more customers in the lower part, but we're very confident on our ability to increase the AOV over time.

[Operator]

And our next question comes from Surinder Thind from Jefferies.

[Surinder Thind, analyst]

First question is just on the plan for increased head count. Any color that you can provide there in terms of is this more sales-focused, a lot more engineers? How should we think about the build-out of that part of the expense profile?

[Or Offer, executive]

Mostly sales-related. We're seeing strong momentum. Revenue is increasing. You can see that we're able to increase our growth in the past 3 quarters. From 11 to 12, now 13, we already gave guidance for next quarter.

Let's talk about 15, and it means that we need to hire more customer success to deliver the book of business. We're seeing a lot of opportunity ahead of us. So this is mostly the increase in the head count.

[Surinder Thind, analyst]

And then for the net revenue retention for when we look at clients that are smaller than $100,000. Any incremental color there? It seems like the trends are bottoming. Is that a fair read of where the data is? And what you're seeing at this point? We're also approaching the 1-year anniversary of the rollout of the new sales motion. And if that would somehow inflect the NRR number?

[Or Offer, executive]

Yes. So we're seeing a positive trend on the retention. As you can see in the numbers, we're still very happy about that. All of those efforts is, of course, efforts we started a year ago, and now we start to collect those fruits. So you're right about your assumption.

[Operator]

We'll take our next question from Ryan MacWilliams from Barclays.

[Ryan MacWilliams, analyst]

On the 42matters acquisition, Or, I would love to hear about just how you're seeing interest from customers on monitoring mobile app analytics at this point? And from Jason, how are you thinking about the top and bottom line contribution from 42matters? And is anything baked into the guide?

[Or Offer, executive]

Okay. So thank you, Ryan, and let me answer the first question. I'm going to let Jason answer the second one. For -- so from our customers, which we know for a while, the majority of our customers, when they operate in the digital world, they have usually website assets that they need grow, and a lot of them have app assets.

They also want to be successful. Sometimes the [ app ] is more for retention play. But I think that most of our customers want to do digitally. So digital investment. They want to see a holistic view about the digital world that is the combination of web and app together, and this acquisition will enable us to provide this holistic view to the customers.

And we see that there's probably a lot of cross-sell, upsell opportunities because the majority of our customers, doesn't matter if it's B2C, B2B or investor, you probably would want to have the access to both of those insights. So I'm very optimistic and bullish on that acquisition. And Jason?

[Jason Schwartz, executive]

Yes. Ryan, yes, we built that into the guide that we have for the remainder of the year. There were -- 42matters is a great team, a small business. So it has some incremental where, as Or said, bullish about the impact that it can have selling into our customer base.

On the bottom line, very small contribution there. The expansion on the profit guide is really the result of a lot of the activity and the efficiencies that we have going through the -- our core business on that.

[Ryan MacWilliams, analyst]

I appreciate the color there. And then just on the overall macro getting a lot of different viewpoints from investors and companies there, but with you guys improving RPO, improving NRR and improving net new customers, it just seems like you're kind of maybe bucking some of the more pressing macro concerns that we're seeing elsewhere in software.

I guess are there any key trends that are driving your improvement quarter-to-quarter? And I guess, how do you guys feel overall about how macro is impacting your business at this point?

[Or Offer, executive]

Yes. So it's a good question. I think as I talked a little bit earlier today, we did work improving our [ strat ] motion and our self-serve motion that are doing extremely well driving great growth and success. And all of those efforts, we are basically improving. And we always saw the demand we had on top of the funnel, for us, it was mostly just executing right and we can drive a lot of growth because we really operate in a very big [indiscernible].

Now regarding the other question about market dynamic. I think it reminds me a little bit about when COVID came. I think that when markets are struggling and you have a tough dynamic, maybe recession, maybe not, a lot of companies tend to double down and get market data to understand their positioning.

So we think that we have a benefit here, as our solution help get the company's visibility about market dynamics and where they are positioned in this hostile environment. So I think that those stuffs are kind of giving nice tailwind to business like us.

[Operator]

We'll take our next question from Brett Knoblauch from Cantor Fitzgerald.

[Brett Knoblauch, analyst]

Congrats on the quarter. I guess as you look at your broader product portfolio, where would you say you're spending the most time? Or I guess where do you think demand has really inflected higher across that product portfolio? And any update on shopper intelligence and how the demand is looking for that?

[Or Offer, executive]

Yes, we saw nice demand mostly a lot about our DaaS, Data-as-a-Service. People want to be more recognized us as the leading digital data market provider. They want to implement our data into their own dashboarding system. So this was -- this line of business had a good success. And our stock intelligence and the product that we sell for public investor is doing quite well this quarter as well.

The more we're able to productize it and introduce it into the market, we're seeing great success there as well. So those two lines of business did really well this quarter.

[Brett Knoblauch, analyst]

Perfect. And then just on the acquisition, I guess, is there any way to quantify how much of maybe the full year guide is coming from this maybe, call it, organic demand versus some of the inorganic revenues? Or would you say maybe most of the guidance is from the core business doing better and not so much from the acquisition?

[Or Offer, executive]

So the acquisitions are...Go ahead Jason.

[Jason Schwartz, executive]

So the acquisitions, for the most part, have been small businesses. So there is a contribution that they will add. But we're actually seeing good momentum in the core organic business. You see it in the number of customers. You see it in the RPO. You see it in the NRR.

And so every time you add a small business in, there's going to be some additional top line growth with that. But overall when you look at the total revenue for the year, the contribution from these acquisitions is really not material.

[Or Offer, executive]

I think to add on top of that, that our strategy is to find mostly strong team with entrepreneurial spirit that have great data assets. If we know that if we will invest and prioritize and match with our core offering, it can scale. And so this is the assumption. So they're usually very small businesses.

[Brett Knoblauch, analyst]

Got it. And then maybe just one last question on the 8-figure deal. I guess could you maybe help quantify like what that deal went from? Before 8 figures, I guess, how much of an uplift was that?

[Or Offer, executive]

It was a 7-figure deal before, but we were able to significantly increase it. Now, Jason?

[Jason Schwartz, executive]

Yes. And what I would say is that, again, when it started, this customer started as a -- 9 years ago as a Similarweb customer, they were a few tens of thousands of dollars of ARR. And today, it's well over 8 digits at a steady grower and user of multiple products from Similarweb across many, many different departments and geographies.

[Operator]

[Operator Instructions] Next, we'll go to Patrick Walravens from Citizens JMP.

[Nicholas Lee, analyst]

This is Nick Lee on for Pat. With the new data version you guys mentioned in the shareholder letter, is there a way to quantify how much more accurate this new version is compared to the old one?

[Or Offer, executive]

Yes, of course, we have our internal measurement. It's significantly better, improved dramatically. There's many ways to look on the measurement. It's by country, by size of website, by vertical of website, but we'll increase accuracy all across the board and also increase a lot of coverage.

As I wrote, we had more than 30 million more websites that we're now adding to our estimation, and we were super excited. For us, it's a big thing to do such a big update, and we do it once in a while after we did a lot of testing to see that it's significantly improving our digital estimation.

[Operator]

[Operator Instructions] There appear to be no further questions at this time. Ladies and gentlemen, this does conclude today's Similarweb Q2 '24 Earnings Call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.