Semrush Holdings, Inc. Q2 FY2025 earnings call

Bill's Remarks - Semrush had strong revenue growth and solid margins in the quarter. Enterprise segment performed well with enterprise SEO and new AI product. AI products continued to grow. There was softness at the lower end of the market due to declining unit economics, leading to a strategic resource shift. Believes in the changing digital marketing landscape and the opportunity ahead. ### Brian's Remarks - Second quarter results: revenue $108.9 million, exceeded guidance midpoint. Non-GAAP operating income $12 million, non-GAAP operating margin 11%. Cash flow from operations $0.7 million, free cash flow negative $3.6 million. Annual recurring revenue grew 15.3% to $435.3 million. Adjusted full year guidance due to near-term market conditions and resource prioritization. Third quarter revenue expected in range of $111.1 million to $112.1 million, non-GAAP operating margin at approximately 11.5%. Announced a $150 million share repurchase program.

Revenue in the second quarter was $108.9 million, representing 20% year-over-year growth. Non-GAAP operating margin was 11%. The Enterprise segment showed strong performance: enterprise SEO solution grew to 260 customers with an average ARR of approximately $60,000, and enterprise SEO is now the largest contributor to overall company growth. In June, the enterprise AI search product AI optimization was introduced, with over 30 enterprise customers purchasing it for a total ARR of nearly $1 million. The average ARR per customer was up 15% year-over-year, and the number of customers paying over $50,000 per year grew by 83%. The AI toolkit, launched at the end of Q1, is the fastest-growing product in the company's history, growing from 0 to $3 million ARR in a few months.

Full year 2025 revenue guidance adjusted to $443 million to $446 million (previously $448 million to $453 million), representing approximately 18% growth at the midpoint. Third quarter 2025 revenue expected in range of $111.1 million to $112.1 million, non-GAAP operating margin at approximately 11.5%. Full year non-GAAP operating margin and free cash flow margin still guided at 12%. Announced a $150 million share repurchase program commencing this quarter.

Softness at the lower end of the customer segment due to declining unit economics and increased paid search cost per click. Risks related to forward-looking statements where actual results may differ materially. Impact of foreign exchange rates on financial performance.

Q: I guess the first question I have is on the low end of your customer segment and some of the pressures that you're seeing there. Is the buying pressure, I guess, kind of pretty broad-based and widespread? Or are you seeing some of those pressures outside of the paid click items? But is the pressure pretty broad-based across all your products? Or is there something that's still selling reasonably well even in this environment?

A: Yes, a good question. It's fairly contained. It's something we've been talking about for some time about freelancers, which are impacted by a number of macro factors and then less sophisticated customers. That's been something we've been talking about for about a year that persisted through the second quarter. And in the second quarter was particularly impacted by the rising cost per click that Bill and I mentioned earlier. So fairly contained to that particular segment.

Q: I wanted to follow up on the downmarket piece. I believe around the Analyst Day, we've been talking around the opportunity for that down market to start to stabilize or maybe even get a look better, but it sounds like it's getting worse. And kind of we put that against an overall macro that seems to be holding in better than feared. So I just wanted to get a finer point of what drives your view that the down market weakness is something that is just more temporary in macro? Or what's the risk that you're seeing any changes in competition or that pressure could be actually more secular?

A: Yes. Thanks for the question. So I think what we're -- I mean, first of all, the data would show -- our data shows it is, as Brian just said on the last question, it is contained to that segment of the market. And look, I think post pandemic, there was a big boom in freelancers who are doing marketing, and I think that has largely subsided. So I don't think it's tied to the larger macro. I think the larger macro is -- we see it as pretty stable. We haven't seen any signs across the other segments. And we also know that from -- that the SEO demand remains high because look at what's going on with our enterprise segment in SEO. Those customers are buying our enterprise search engine optimization product, which is now our biggest contributor of growth. So it's really, we think, that dynamic of that kind of post-pandemic people leaving kind of the marketing space at that low end. Obviously, larger customers are still doing marketing and investing more. So I think that explains the dynamic.

Q: Just wanted to touch on that new product pipeline. You've launched several AI and enterprise-focused products and tools. And Bill, I think in your prepared remarks, you mentioned growing these to about $50 million by year-end. Just wondering if we can get a sense of how much of this is coming from your existing customer base with those 9,000 enterprise customers versus kind of net new customers?

A: Yes. That hasn't really changed from last quarter. It's still about, I would say, in the enterprise space, it's about 60% of those customers are upgrades and roughly 40% are new to the portfolio. So that continues to be the split. And I think going forward, a lot of that growth that we talked about getting the AI and enterprise portfolio up to $50 million ARR as we exit the year. Those most likely driven by the -- or most driven by the products that we already have in-house now that we've launched our AI optimization products in the enterprise space, but we will be introducing products both in Q3 and in Q4, both in the enterprise segment, but also in our product- led growth motion as well.

Q: Are the customer acquisition costs on the low end, is the fact that they are going up, is this driven by the AI search trends? Like is this being driven by the very thing that you're trying to help your customers solve? And if so, is this -- do you see your customer acquisition cost increases being more pervasive for other companies, either like in your sector or outside your sector?

A: Jack, this is Bill. Let me answer that question. So I think -- look, I'm sure you listened to Google's earnings a couple of weeks ago and saw their dynamic. Their ad business is growing very nicely. They're introducing -- I mean, AI now is probably about 30% of Google searches now has either AI overview or AI mode according to our own analysis. So that means less blue links, and that means those are -- from a paid perspective, the real estate has gotten more expensive. And so I think all kinds of brands are going to be trying to figure out how they show up. The most important thing is how they show up in the LLM portion, the AI-generated portion. And I think that's exactly what we do. And I think it's -- we see that showing up in the usage stats of our own products, where I mentioned on my prepared remarks that we see people -- a high correlation between SEO and AI toolkit and the usage between those 2 products. So I think that's a dynamic that all brands are going to have to deal with. And in my mind, it plays to our strengths.

Q: If I go back to Analyst Day, I think 50% of the business is still SMB or that solopreneur and freelancer part of the business. Brian, I know you said that the expectation is once you get beyond this year and some of the near-term softness, the expectation is that, that piece of your customer base is still a priority and you expect some stabilization there. How should investors think about that piece of your ARR and what the trajectory of that looks like going forward? And maybe just some of the puts and takes around that.

A: Adam, yes, as of now, the SMB, solopreneur and freelancer is about 40% of our business from an ARR perspective. And of course, that's still a strong business. The cohort that we're referring to is really at the very low end. So we still have really good strength and momentum with SMBs. They continue to adopt and use our SEO solution and our broader digital marketing platform. It's really the lower-end business owners who are untrained marketers and freelancers that are experiencing that -- where we're experiencing that softness. So we're very much invested in and continue to grow and scale our SMB business. As of now, momentum is building there across the mid-market and of course, enterprise and those that are adopting AI, and that will continue to be a priority for us. So the cohort that's really feeling the pressure is really at the very low end as we've been talking about since Analyst Day.

Q: Just following up on the last set of questions here. Is there a longer-term consideration that we should be thinking about as search itself evolves and we see fewer of those blue links beyond just kind of what we're seeing in the near term here?

A: Well, I think what we've seen, and I mean, there's been a lot that's happened since the last time we spoke together. But what's interesting is our own research says, as I mentioned, so look, you got about -- Google handles like roughly 14 billion searches and ChatGPT, maybe another 1 billion or so that are actual search related. And so in all, I think we're seeing like AI show up in between 30% and 40% of search results. What's interesting is our research says that blue links continue to convert, but the links that are in LLMs convert over 4x higher. So for brands, the priority is -- a new priority is like they have to understand how they show up in those answers. And as Google itself said a few weeks ago, there was a search engine roundtable and their own analysts set up, it's like the things that work for you in SEO are going to help you show up in LLMs. And again, that's what we do. So we're very confident we can help brands show up in LLMs. There's a much greater conversion rate when they click on a link in an answer than they did in traditional search. So brands are scrambling to figure that out.