Yahoo Finance Semrush Holdings, Inc. (NYSE:SEMR) Q1 2024 Earnings Call Transcript
Semrush Holdings, Inc. (NYSE:SEMR) Q1 2024 Earnings Call Transcript May 7, 2024
Semrush Holdings, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello everyone, and welcome to the Semrush Holdings First Quarter 2024 Results Conference Call. My name is Drew, and I'll be the operator for today's call. After today's presentation, we will begin the Q&A session. [Operator Instructions] With that I'll hand over to Brinlea Johnson, Investor Relations. Please go ahead.
Brinlea Johnson: Good morning and welcome to Semrush Holdings first quarter 2024 conference call. We will be discussing the results announced in our press release issued after market close on Monday, May 6th. With me on the call is our CEO, Oleg Shchegolev; our President, Eugene Levin; and our CFO, Brian Mulroy. 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 condition, expected growth, adoption and demand for our existing and any new products and features, our expected growth of our customer base and specific customer segments, the expansion of our Contentshake tool, industry and market trends, our competitive position, market opportunities, sales and marketing activities, future spending and incremental investments, our guidance for the second quarter of 2024 and the full year 2024, and statements about future pricing and operating results, including margin improvements, revenue growth and profitability.
Forward looking statements are statements other than statements of fact and can be identified by words such as expect, can, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, and should not be relied upon as representing our views at any subsequent 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 most recent quarterly report on Form 10-Q and our annual report on Form 10-K, filed with the Securities and Exchange Commission, as well as our other filings with the SEC.
During the course of today's call, we refer to certain non-GAAP financial measures. There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued yesterday after market close, which can be found at investors.semrush.com. As I noted last quarter, our results for the first quarter and our forward-looking guidance uses our new non-GAAP definitions. We are no longer providing guidance for non-GAAP net income, and instead guiding to both non-GAAP operating margin and free cash flow margin. Definitions for these are presented in our earnings release. We have also updated our definition of non-GAAP income from operations, on which non-GAAP operating margin is calculated, to exclude amortization of acquired intangible assets, acquisition related costs, restructuring costs and other one-time expenses outside the ordinary course of business, for example, our exit costs incurred primarily in 2022, in addition to the current exclusion of stock based compensation.
The updated definitions are reflected in our first quarter 2024 financial results. All future financial statements will reflect the new definition for the current and prior periods. We are also providing a reconciliation from the old definition to the new definition for the periods presented. We believe this update allows investors to better understand our financial performance, better align with the measures used internally by management in operating our business, and permit a better evaluation of the efficacy of the methodology and information used by management to evaluate and measure our performance. Now, let me turn the call over to Oleg.
Oleg Shchegolev: Thank you and good morning to everyone on the call. In the first quarter, we delivered revenue of $85.8 million, up 21% year-over year and ARR growth of 21% year-over-year. We reported income from operations of $1.5 million and non-GAAP income from operations of $9.7 million in the first quarter. Importantly, we generated free cash flow of $12 million and a free cash flow margin of 14%. We exceeded our prior guidance and I am pleased to say we are raising our full year 2024 guidance. Our business is focused on driving strong, sustainable growth, while also expanding profitability and generating free cash flow. Before handing it over to Eugene and Brian, I would like to touch on a few highlights about our strategy to continue to scale the business and capture the significant market opportunity we see ahead.
We have strong competitive positioning as the platform of choice for businesses to improve their online visibility. There is a growing trend of businesses of all sizes investing more time, effort, and resources into enhancing their online visibility. We are leveraging our unique data sets to differentiate ourselves in the market. We continue to make progress on each of our growth pillars. In the first quarter, we reported nearly 112,000 paying customers and now have over 1,125,000 free active users. We believe there are millions of marketers and business owners who will benefit from our platform, and we plan to grow both our paying customers and our free active user base. We have an extensive, loyal install base that spans over 160 countries, across all industries and market segments from solopreneurs to Fortune 500 companies.
We continue to deliver higher value to our customers by cross-selling and upselling within our base and as we increase our focus on moving upmarkets, we expect to drive an increase in average ARPU, which as reported today, is nearing $3,200. Our strong profitability, deep competitive moat and attentive loyal base allows us to continue to reinvest in the business. We continue to build on our technology and customer foundation with investments designed to further our business objectives. Our reinvestment priorities include launching new AI-based tools like Contentshake and expanding into enterprise. As we highlighted last quarter, we officially soft launched an enterprise SEO product into the market in late October 2023 and we are pleased to announce that it is now generally available.
It is already being used by a select number of large-scale business customers, including one of the largest apparel companies and one of the largest market research companies. While we are still in the early stages, the initial signs we are seeing are very encouraging. Importantly, our enterprise offering has the opportunity to create a meaningful inflection in our ARPU, as this product carries ARPUs that tends to be 10 to 15 times our company average. We believe our early adopter customers are experiencing significant returns on their investments after migrating to the platform. Features like automated workflows, corporate-level access controls, customizable dashboards, and a built-in professional services network are helping our customers drive meaningful improvements in efficiency while also delivering significant time and cost savings.
In 2024, we remain focused on continuing to grow our core business, upselling and cross selling our offerings, and expanding our platform. In conclusion, I am very pleased with our start to 2024 and I am optimistic about our ability to capitalize on future growth opportunities throughout the year. I will now turn the call over to Eugene and Brian to discuss the results of the quarter and our outlook in more detail.
Eugene Levin: Thank you Oleg. We delivered another solid quarter and I am increasingly optimistic about our ability to deliver durable growth over the long-term. I want to start with the migration Semrush is making upmarket. Last quarter, I discussed a segment of our customer base, sophisticated accounts, that we believe represents a significant growth engine for us. Companies that fall into this broad segment are businesses that tend to have multiple marketing team members that are each Semrush users and they generally have significantly higher ARPU, or average revenue per user, than our average and meaningfully stronger net revenue retention than our average. The relative strength of this customer set gives us increased confidence that our new enterprise product will be met with strong adoption, further supporting our goal of driving strong, durable growth on both our top and bottom line.
To service these upmarket customers most effectively, we have been making several important adjustments to our go-to-market model to optimize LTV-to-CAC ratios over the past several quarters. We are leveraging our product-led, low-touch sales strategy and shifted more of our investment focus to the high-value enterprise area. First, we have been realigning some of our sales investment from the SMB sector into this upmarket category to focus on converting our existing enterprise customers to use our new Enterprise SEO product. Second, we have been making investments in our quote-to-cash process to properly handle the complexities that often surround enterprise clients. These are things like establishing a deal desk and building out the proper discipline around large deal sales funnels.
We have been making these investments for some time and the significant presence we already have in this segment gives us confidence in our ability to successfully handle the ramp that we foresee from our enterprise product. In addition to enterprise products initiatives, we continue to leverage AI in our platform. We continue to see excellent adoption of some of our AI products and features, including our recently released AI-powered content creation tool called Content Shake. Content Shake is a smart writing tool that combines AI with real-life competitor insights. It guides you from ideation to publishing directly to the blog, generates SEO-friendly articles, creates personalized content ideas, composes copy with AI, and helps you optimize for organic traffic, engagement and rankings.
We are monetizing Content Shake on its own, but it’s important to understand that we are also monetizing AI in several different ways. First, we have AI features built into all of our tools and the inclusion of these features helps drive new client acquisition and also aids in retention as they improve the customer experience. Second, we have structured some of our product tiers to only include the AI features in the higher-priced tiers. This attracts clients to the higher priced tiers and contributes to overall ARPU growth. And the third way we monetize AI is through separately sold subscriptions like the Content Shake product I just mentioned. We are also using AI to help drive efficiency in our own R&D department and we have recently seen success using our AI tools for our own marketing efforts where we are not only producing more content, but we're also making higher quality content that ranks well and drives improved engagement.
In summary, I am confident in Semrush's positioning in the search market and our extensive product portfolio. We are seeing increased adoption of our AI products and continue to innovate and bring new offerings to market. Our sophisticated accounts are growing and helping to fuel ARPU and strong net retention and I am very excited about our ability to service upmarket customers and continue to expand our portfolio of offerings. 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.
Brian Mulroy: Thank you, Eugene. As Oleg and Eugene mentioned we had a strong first quarter across the board. Our revenue was $85.8 million, growing 21% year-over-year. Growth was driven by new customer additions and expansion of our average revenue per customer as we continue to execute on our cross-sell and up-sell strategy. Annual recurring revenue for the quarter grew 21% year-over-year to $354.2 million. There are several factors that can cause our net new ARR to fluctuate from quarter-to-quarter and as a result, we believe ARR trends are best observed on an annual, rather than quarterly basis. Our calculated ARR per paying user grew 9.8% year-over-year and our dollar based net revenue retention for the first quarter was 107%.
We believe our dollar based net revenue retention has troughed and over time should begin to trend back up, particularly as our more sophisticated accounts increase as a percentage of our mix, since these customers have higher net retention than our company average. We recognize the importance of having strong retention metrics and accordingly have recently made some changes to our sales teams' incentives that we expect could exert some gentle upward pressure on these figures. Moving down the income statement, during the first quarter we had positive non-GAAP operating income of $9.7 million. We reported another significant improvement to our non-GAAP operating margin of 11.3%, which was up over 2,000 basis points year-over-year and surpassed our guidance for the first quarter.
This improvement is the result of a number of factors. First, our gross margin improved nearly 80 basis points year-over year to 82.9%. Gross margin benefited from higher revenue and our continued ability to gain scale and leverage from our efficiently engineered platform. We continue to expect strong gross margins above 80% in the near term and view the way in which our stack is engineered as a key competitive differentiator. Our healthy gross margins also provides us the flexibility to invest below the gross profit line, which gives us a structural advantage in the market. Second, we continue to execute on our commitment to drive efficiencies while also pursuing growth. It is important to note that we have been able to increase our operating margins while making go-to-market investments for our enterprise product.
We expect that we will continue to be able to make incremental investments to strengthen our position here while also driving further operating leverage in the business. And we don't expect to see any headwinds to our more traditional SMB business as we realign these resources. This is because we pursue a product-led growth strategy that leverages a self-service sign-up process and drives meaningful leverage that we're able to reinvest. Turning to the balance sheet, we ended the quarter with cash and cash equivalents, and short-term investments of $243.1 million, up $4.6 million from the previous quarter. Our cash flow from operations in the first quarter was $14.8 million. Turning to guidance. I am confident in the underlying trends in the business and capabilities of our team to continue to deliver strong growth and profitability.
Our business is off to a strong start this year, and we are encouraged not only by what we have accomplished so far, but we are optimistic about what we see as the opportunities in front of us. For the second quarter of 2024, we expect revenue in a range of $89.1 million to $90.1 million, which at the mid-point would represent growth of approximately 20% year-over-year. We expect second quarter non-GAAP operating margin to be approximately 11%. For the full year 2024, we are raising our guidance and expect revenue in a range of $366 million to $369 million, up from our prior range of $364 million to $368 million, which translates to growth of 19% to 20% and represents a $1.5 million increase at the midpoint. We expect full year 2024 non-GAAP operating margins to be between 10.5% and 11.5%, up 50 basis points from our prior guidance range, and full-year free cash flow margins to be approximately 8%.
To help you with your modeling, the difference between our non-GAAP operating margin and our free cash flow margin is the result of interest income offset by capital expenditures and cash taxes. Finally, our guidance assumes a Euro exchange rate of 1.08. As a reminder, approximately 30% of our expenses are denominated in Euros. In closing, we are confident in our ability to grow and scale our business, and remain committed to a disciplined and balanced approach to spending. We are focused on driving improved efficiency and profitability, even while we invest in future growth opportunities that we expect will deliver long-term value to our shareholders. With that, we are happy to take any of your questions. Operator, please open the line for questions.
Operator: Thank you. We will now start today's Q&A session. [Operator Instructions] Our first question today comes from Scott Berg from Needham. Your line is now open. Please proceed with your question.
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