SEMrush Holdings, Inc. Q2 FY2024 earnings call

• CEO Oleg Shchegolev highlighted a strong second quarter with revenue growth, ARR growth, and improved non-GAAP operating margin. - The company expanded its enterprise SEO product, with initial traction and new deals from large companies like Digital Ocean, HSBC, etc. - Acquired a majority stake in Brand24 in Q2 to extend capabilities in Social Media and Brand Marketing, and acquired Ryte in Q3 to enhance Technical SEO capabilities. - Leveraged AI in the platform for personalized recommendations in keyword research and ContentShake AI, and was among the first to support Google's AI-powered search engine page result elements.

In the second quarter, Semrush delivered revenue of $91 million, up 22% year-over-year. Annual Recurring Revenue (ARR) grew 25% year-over-year to $377.7 million. The acquisition of Brand24 contributed approximately 2% of the reported ARR. The company added approximately 4,100 net new paying customers, with roughly three quarters coming from the acquisition of Brand24. Dollar-based net revenue retention for the second quarter remained at 107%. Non-GAAP operating income was $12.2 million, and non-GAAP operating margin increased to 13.4%. The calculated ARR per paying customer grew 12% year-over-year and is up over 50% since the beginning of 2021.

• For Q3 2024, expected revenue range is $96 million to $97 million, mid-point representing ~23% year-over-year growth, and non-GAAP operating margin expected to be approximately 11%. - For full-year 2024, raising revenue guidance to $373 million to $375 million (previously $366 million to $369 million), representing 21%-22% growth. Brand24 and Ryte combination expected to contribute ~200 basis points of growth. Full-year non-GAAP operating margin guidance remains 10.5%-11.5%, free cash flow margin ~8%. Factors include go-to-market investments, integration expenses, exchange rate assumptions (Euro rate 1.08), and no planned core price increase this year.

• Exchange rate risk as ~30% of expenses are denominated in Euros. - Pressure on ARR per paying customer growth due to no planned core price increase this year compared to last year's increase. - Temporary integration expenses related to Brand24 and Ryte acquisitions, and potential increase in general and administrative expenses due to transition to large accelerated filer status under SEC rules.

Q: Hi, everyone. Really nice results here this quarter. I just wanted to touch about the, I guess, touch on the demand environment and maybe what you're seeing with the enterprise solution, early in its stage, I think you talked about still being able to get pricing in the 10x to 15x kind of multiple of the core Semrush product, and that's excluding what you've recently acquired here. But were you able to see pricing kind of in that expected range here early on with this in the market?

A: Hi. Thank you for the question. Yes, absolutely. We actually increased prices a little bit after initial launch in May. We had some feedback from customers who were saying that sometimes we're a little bit underpriced and we could charge more. So we used this opportunity and now - it's still in the same range, 10x to 15x, but it's kind of a little bit closer to the higher end.

Q: Great. Thanks for taking our questions, guys. The first one is on the enterprise launch in May. Can you just give us maybe a little bit of an early update on what some of the features that you rolled out in that new SKU, people are most attracted to in the early going?

A: Yes, absolutely. So the three key pillars of enterprise product are number one, deep customization. So our SMB product is kind of like one size fits all interface. And of course enterprises, they know really well what they need, and they want dashboards to be exactly what they're looking for. And they also sometimes want to combine metrics in certain ways that, requires customization. So this is number one thing that they're really excited about. The second big one, is our automated and AI workflows. So, for example, there are a lot of tasks, you can do manually if you have a very small website. But if you have a big website, you need all this automation and AI. And a couple of good examples would be our forecasting workflow that, a lot of teams use to justify investments in organic search, and show ROI calculations to their finance teams. We also have really strong traction with our content marketing workflows that, can scan a huge website and make very specific suggestions, about what people need to improve in content, or in internal linking to drive better visibility. And then the third one is, our enterprise product includes services. Of course, Semrush is a software company. We don't provide services ourselves, but we connect our enterprise clients with leading experts in certain areas. And they can collaborate, through our platform. And that's the third feature that have been very well received.

Q: Great. Thank you so much. I have another question on Brand24 and Ryte. What is the opportunity to sell into the customer base? Is this applicable to all customers or should we be focusing more on just the larger customers to up-sell? And then, it sounds like there's a big opportunity again to increase ARPU per customer. So what are the signs that give you confidence that customers are willing to increase their spend kind of to this degree that we're talking about, kind of again, another 10% to 15% type levels on ARPU? Thank you.

A: Thank you. Great question. So I'll start with Brand24. So Brand24, they have two different products in their portfolio. One is focused on SMB. It's called Brand24. It's already available for Semrush customers in AppCenter. We're just expanding capabilities. And now because this company is sort of in the Semrush family, we will, of course, double down on bundling opportunities. We're having very strong traction, with our own social media tools. And Brand24 as a social media monitoring tool is really great addition to that portfolio and social media bundle. They also have Insights24 product that is less known, but actually very, very good media monitoring product for large companies. And they have customers like, one of the biggest automotive companies, who is managed by a very charismatic leader and so on. And then, Ryte is a little bit different story. So this is a product that is designed specifically for companies with very big websites. So, there is definitely big bundling opportunity between Ryte and our own enterprise SEO product. There will be, we'll need a little bit more time here, to fully integrate it into our enterprise SEO product. But overall, in terms of buyer persona, this is exactly the same buyer persona. And we're very positive about bundling here. And then in terms of average revenue per user, our estimates right now, are based on their current average revenue in this segment. That said, their revenue is a little bit focused on Europe, which is usually a little bit lower check than what you can get in the United States. Does it answer the question?

Q: Great and then - yes, it does. Thank you very much. And then just as a follow-up, I wanted to ask on monetizing AI. And you guys have a few different ways that you're monetizing, including one for AI being added to more of just the higher price tiers. And so first question is, are you seeing customers start to upgrade to higher tiers for those AI capabilities today? And then, how do we think about kind of a broader opportunity around an upgrade cycle, in order for customers to get access to AI? Is there any way to kind of segment the base of who might those more likely candidates be?

A: Yes, so we're really working on three different strategies to monetize AI. Number one strategy is, to start including it into base product offerings to improve conversion and retention. That's what we're doing with our copilot features in core SEO products. Seeing really good adoption. Over time, we will think how to maybe add even more functionality only on premium tiers. But right now, this part is really more about increasing conversion. Now, the second big driver of monetization when it comes to AI is, pushing some features on higher tier plans. For us, a good example is how we monetize our reply to review feature in local products, where you can buy entry level product for $20 per user per month, per location per month. And then there is a premium product that is $40 per location per month. And premium product includes AI features such as reply to review. And of course, it drives quite a lot of upgrades, because it's such a helpful feature. And then, the third way to monetize AI features for us is, just to launch standalone products that are, you know, solving particular large problem. And the good example would be our Content Shake AI product that people use to create content and blog posts. And this is where we not just use, AI APIs from companies like OpenAI, but we also combine it with our own proprietary data, to improve quality of the insights and recommendations and write content that really performs well, in search engines and social media. So that's an example of the third monetization strategy.

Q: Oh, thank you very much. So I wanted to touch on the net new ARR performance. It's quite strong in Q2. It's a bigger number than Q2 of the last couple years. How much of that would you ascribe to any upmarket traction versus any sense of stabilization in the macro demand? And then, should we think about that outperformance affecting how we might have modeled Q3 in terms of any deals that might have pulled forward, and closed earlier than expected? And I have a quick follow-up?

A: Mark, it's Brian. Good question. So I'd say a few things. First of all, some of the net new ARR performance, of course, was Brand24. So that's about a third, a little bit more than a third of the number. Independent of that, we did see a pretty significant increase year-over-year in our net new ARR growth. It is in part driven by enterprise, but we're still in the very early stages of that. So we just launched enterprise in May. We of course, do have some ARR contribution from that enterprise product. But I'd say the bulk of it is, we have a cohort of larger, sophisticated accounts who continue to adopt a larger and larger portion of our portfolio. We expand beyond SEO into competitive intelligence, local, social media, digital PR, content marketing, and of course, the AI products that Eugene just mentioned. So, we have a very extensive portfolio, and we're starting to see really strong traction in our ability to cross-sell and upsell into our install base. What you saw this quarter, we reported in the release that our customers that have more than 10,000 in ARR grew 37%. So that cohort of accounts are becoming an increasingly larger portion of our base, and helping to bolster ARR performance. I would say just in the second half and going into 2025 that, we do expect our enterprise product to start to gain some traction, and contribute to ARR. But it was smaller in the second quarter.

Q: Yes, I think in general, we're always looking for opportunities to accelerate our R&D roadmap and get faster from A to B. And sometimes M&A is the best way to get there. We have a very robust product roadmap. We effectively talk to our engineering teams. And if we see something that is a heavy lift and there is an opportunity to get it through acquisition. And the team is great, and there are a lot of synergies and chemistry, and the financial terms are reasonable or, like in recent examples attractive, we pull the trigger. We like to do partnerships and acquisitions when they make sense.

Q: Great. Thanks so much for taking the question. I'd be curious for an update on how you think about generative AI, and the impact on search engines more broadly, as it relates to SEO. I'm thinking things like no click searches that generative AI responses have to search queries, and other ways the search engines, search engines are incorporating generative AI. I'd just be curious how you and customers need to adapt, if at all, from an SEO perspective, if that continues to evolve?

A: Yes, great question. By now, we already have some time to monitor how new interface, such as AI overview impacts user behavior. And it's pretty much in line with, how we were describing this in the past. The way we think about this is that Google have been evolving their interface for many, many years. They've been always adding new search elements. And often those new search elements would reduce percentage of customers who click on links and visit another website. At the same time, because of those new search elements, Google became more and more valuable tool for many people. So the total traffic and total amount of time and total number of use cases would increase. And as a result, total number of outgoing clicks would also increase over time. So that's kind of a little bit of history of this phenomenon of introduction of new search elements. And we think the new AI overview element fits perfectly based on what we're seeing right now. It's really replacing feature snippet in most of cases. And it provides links to original source of content. And a lot of people click on those links. And the rules - that are applied to get featured in this AI overview are very similar to just general recommendations that we usually give people that they need to follow to rank high, or to be featured in a featured snippet. So from that point, it would really just one more step in a very long journey.

Q: Yes, it sounds like two questions. One is just on capital allocation. And then one in particular around the products and markets that we're targeting. So I'd just say in general, we have a very strong balance sheet, $230 million in cash and cash equivalents. As you've seen from our recent announcements, we have been active. We feel that the markets are favorable. There's really good multiples and a lot of good opportunities out there. So, we'll continue to put our cash to work in both investing in the business and whether that means organically through our sophisticated and talented R&D teams, strong partnerships, or M&A. We'll assess each equally and make sure we're focused on the one with the strongest ROI. Eugene can get into just specifics on which technologies and markets we're focused on today.