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. 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.

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 that 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 at 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, 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 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.

Thank you. And good afternoon to everyone on the call. I believe many of us joining us on the call today may be new to Semrush's 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 the 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 has a total addressable market of nearly $13 billion and potentially greater. I believe we are well positioned to lead. Since 2016, we have grown revenue at a compound annual growth rate of over 15%. While growing our beta customers count by over 38%. To date, the average consumer spends more than six hours a day online and is overwhelmed by information. Businesses of all sizes need to break through this wall of noise to connect with potential customers. Our solutions help these businesses 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 offer 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 the United States in 2012. Today, we are headquartered in Boston, Massachusetts, and we have more than 1,000 employees in our offices across five countries. Working across large distances and various time zones has been part of Semrush's DNA from the very beginning. I believe this helped us acclimate quickly to the remote pandemic work-from-home environment. As of the end of 2020, we have customers in over 148 countries, and approximately 55% of our revenue was generated from customers outside of 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, they must become paid customers. We have no specific customer or industry concentration, as we have built a business across various types of customers. Our platform is used by very large enterprises that can drive an annual contract value 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 the pattern over the last few years; our paid users grew 31% year-over-year, while the average 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 product highlights from the quarter, we launched the App Center with two third-party apps initially and more underway. We want to unlock the creative potential of our partners, and the App Center is a key element of our web strategy. We offer access to our data assets to some customers today. However, the 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 datasets can help drive more value for our customers, and further differentiate our offering from that of our competitors. Finally, I want to highlight our ranking in G2's 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. Our 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, as is Semrush. With that, I would like to pass the call to Evgeny for a more detailed discussion of our financials.

Thank you, Oleg. Q1 revenue of $40 million was up 44% year-over-year and came in above our expectations. Growth was driven by a steady increase in internet users and an uptick in the average monthly recurring revenue per paying customer, or average check. I attribute the higher-than-expected check growth to a number of factors: price interactions, which lead to continuous changes in the subscription mix with more users moving to our higher-priced Guru plans, sales of additional user licenses and project limits, and lastly, a growing share of competitive intelligence add-on in the company's revenue. As a reminder, the new pricing plan applies only to new paid users and therefore impacts 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 baseline growth. Hosting fees represent our largest expense within cost of goods sold, so any savings in those fees played a significant role in improving gross margin. Operating expenses of $29.7 million in the quarter were up 29% from a year ago, but only increased slightly from the previous quarter. The year-over-year increase was primarily due to an increase in headcount to support business growth, as well as our transition to becoming a public company. I expect the pace of spending to accelerate across all functional areas for the remainder of the year, as we continue to invest to support our growth and incur additional costs associated with operating as a public company. The strong revenue growth combined with slower growth in cost of goods sold, and increasing operating expenses contributed to a net income of $1.5 million in the first quarter, an improvement from a net loss 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 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 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 the range of $175 million to $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 this growth. We expect these investments 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 Instructions] And our first question comes from Michael Turits with KeyBanc.

Hey, guys, congratulations on a great first quarter. I have two questions. One is on branding and the other on pricing. On branding, in terms of customers really talking to us, we always heard fantastic views of you guys and your name and 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 the pricing uplift this quarter and the revenue where that might go over the next year?

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 the market around us, and eventually when we think about the future points of our marketing, we see significant opportunities to invest more in branding.

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

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

So we clearly see a positive effect from the repackaging. The average check has increased significantly, basically close to what we've set for the pricing changes, about 15% to 20%. So the results are actually better than we anticipated in terms of the overall customer reception.

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 drove those strong customer adds in the quarter.

Thank you. First of all, I want to mention that we started to feel higher demand a few quarters ago, I would say in the third quarter, when we began to notice increased interest from our customers. I expect that such tailwind will continue. But at the same time, it's hard to say how long. We should be cautious with our expectations, as moderation in growth could occur in the next quarters. However, this brings us back to the previous topic of global digital transformation. This transformation began a couple of years ago, and we expect it to continue over the next few quarters and into the next few years.

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

No, sorry. Please go ahead.

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?

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. 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 the second question was on conversion rates. Yes, I can take this one. In terms of conversion from our premium model, we are very happy with how this model performs. We didn't see any changes in Q1, and our premium product continues to significantly contribute to user acquisition and overall demand generation efforts. I would say there were no material changes in Q1 compared to the previous year.

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, including the pricing change and migration of customers to higher price tiers. Could you break out the magnitude of those drivers for us? Additionally, how should we think about the sustainability of those drivers as we progress through the year?

Chris, thank you for the question. This is Evgeny again. There were a number of drivers as you mentioned, starting with the price increase, which may have been less pronounced in Q1 since it was just introduced and applied primarily to new customers. What we see driving the average check apart from the pricing repackaging is migration from lower price points to higher price points, a shift in the share of higher-priced plans in our overall subscription portfolio, sales of additional usage limits such as keywords or projects, and successful sales of add-ons. Our revenue from add-ons is growing faster than the company's overall revenue. All of these factors contribute to the growth of the average check substantially.

Yes, one thing that we could also highlight is that we are looking at the number of customers on more expensive subscriptions that go beyond our three core plans. For instance, the number of customers who paid us more than $10,000 in the last 12 months grew by more than 50% year-over-year in Q1. This definitely provides more insight into the growth of the average revenue per user.

Okay, great. Thank you. Maybe just one quick follow-up. I think you called out the number of backlinks in the quarter announcement, the trillions, and it sounds like it's growing almost 50% year-on-year. Can you talk about how you're able to achieve that growth and how we should interpret that metric in terms of positively impacting your ability to acquire more customers?

Yes, this is Eugene; I'll take this one. When we think about the importance of the number of backlinks and why we are sharing this metric, it goes back to our product and how significant a part it plays in our overall customer acquisition strategy. In general, having a large database means that our customers will have more insights and more ideas about how to build links. Especially for small businesses, sometimes in checkers with fewer backlinks, they may not find relevant information about their business. However, in tools like Semrush with vast amounts of links, they will be able to discover more insights. This improves the overall quality of our product, opening up opportunities like backlinks analytics for a broader set of small businesses, which hopefully helps us to acquire more customers. Yet again, the primary objective is to enhance the overall product quality and provide a more complete picture of the internet.

Hey, everybody thanks for taking my questions. Congratulations on the IPO. I wanted to ask a question regarding the Semrush product portfolio and your holistic vision on short-term strategies compared to long-term strategies. As I think about how your potential and existing clients are reacting to short-term and long-term strategies, be it paid advertising for the short-term versus search engine optimization for the long-term, is there more emphasis on one or the other? Are you witnessing increased demand for newer solutions? I'd love to understand how the recovering economy is influencing the demand for digital marketing.

Thank you so much. Really good question. What we have seen indicates a trend that varies across segments of the market, not necessarily for the entire market. In general, people want to spend more on paid channels, but the problem with paid channels is that they are becoming saturated. Thus, we continue to see a transition from short-term marketing tactics towards long-term marketing activities across the board. If you speak to those who sell ad words, they might say they see huge increases in demand for search ads. However, since we have a broad view, we see increasing demand for search ads but even bigger demand for organic growth and long-term marketing activities. Yes, absolutely. We have done a really good job over the past couple of years in evolving our product portfolio, and some add-ons that you've mentioned, such as our Dot traffic analytics, are having great traction right now. Local listings also have impressive momentum, especially in the United States. We're also cross-selling new products that we acquired in September, and we are constantly developing new offerings. However, it's still early to see a material impact on our revenue from these new additions. One example is Split Signal, a new product that is currently in early beta, designed for larger companies with extensive websites and priced accordingly. We are constantly adding new products, but if you look at what drives our revenue today, those are primarily efforts established in the past.

First of all, any trends that you noticed in the quarter regarding growth? And I don't know if you had growth rates as they relate to what happened in those geographies?

Brent, unfortunately, could you please repeat the first part of your question?

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

This is Evgeny; we haven't seen any differences. We have been growing steadily across the globe in most of our top markets. The market share for our top countries remains constant for the quarter and has been fairly consistent over the last several quarters. We are experiencing broad and consistent growth globally.

And you highlighted that low-touch sales model. Are you continuing with that go-to-market model? Are you contemplating any changes such as adding inside or outside sales representatives to further penetrate this market?

Our market approach in the first quarter didn’t change. We have maintained the same signup flow. All our conversions and any aspects related to our go-to-market strategy and signup flow are consistent. We did not face any changes in this area.

Hi, good afternoon. This is Matt Cost, on behalf of Mark Murphy. Congratulations on the first quarter as a public company out of the gate. Just a question regarding retention; it's good to see that uptick. Do you think it'll return to the levels close to 120% that you saw in the prior year, once we've completely lapped the effects of COVID?

Matt, thank you for the question. This is Evgeny. While I would love to provide a precise answer, it's unfortunately challenging. For the retention rate, all things being equal, we expect it to rise as this past quarter moves from the numerator into the denominator of the calculation. I think for the next two or three quarters, we'll continue to see it increase, and then it may level out or move marginally down. I hope this helps.

Yes, that's helpful. And then Oleg, I think you mentioned to Brent's question that you have observed the same signup flow. I want to confirm that you haven't seen any change in the number of free users that you're bringing onto the platform?

Yes, you're right. We did not make any changes to user growth, and in fact, we anticipated a decline in new paying customers at the beginning of the quarter due to the repackaging. However, we did not encounter that, and all our metrics and conversion rates from free customers to paid customers remained consistent.

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.