Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Semrush Holdings Q1 2022 Results Conference Call. All lines have been placed on mute, to prevent any background noise. A transcript of the prepared remarks will be available at investors.semrush.com after the call. Thank you. Bob Gujavarty, VP of Investor Relations, you may begin.

Good morning. I'm Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings' First Quarter 2022 Results Conference Call. We'll be discussing the results announced in our press release issued after market closed on Tuesday. 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 investor conferences in the second quarter. We'll attend the 17th Annual Needham Technology and Media Conference in New York City on May 17, the New York Stock Exchange Healthcare and Tech Investor Day on June 8, and the Stifel 2022 Cross Sector Conference in Boston on June 9. 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 statements concerning our expected future business and financial performance and financial condition, expected growth, adoption and demand for our products and features, expected investments and acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for the second quarter of 2022 and the full year 2022 and our ability to successfully relocate employees outside Russia, including executing our relocation plan on the timeline we expect and at the anticipated cost. These statements 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 annual reports on Form 10-K 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 today's call, we will 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 after market close, which can be found at investors.semrush.com. And with that, let me turn the call over to Oleg.

Thank you, and good morning to everyone on the call. I'm very pleased with our execution in the first quarter. We delivered solid financial results with revenue up 43% year-over-year and record new customer additions. Before diving into the results, I would like to speak about our decision to wind down our operations in Russia by the end of September. Bank sanctions were first announced by the United States and other countries. We quickly developed mitigation strategies and hoped that the situation would get better and would not last long. However, it has become clear that there is potential for a long conflict and further decline of the business environment in Russia. Looking at our performance in the first quarter, it's clear that Semrush is doing well despite all the uncertainty. However, we need to prepare for the possible new sanctions and reduce the potential impact on our operations. I believe ending our operations in Russia will not only help us to reduce these risks but also help remove the uncertainty for all our stakeholders. Early indications are that a large majority of eligible employees will relocate outside Russia. With the high level of employee well-being and our broad experience managing remote workers, we should help minimize disruption through the relocation process. Our goal is to wind down our operations in Russia by the end of September, but I'm hopeful that we can accelerate that timeline. The decision to leave Russia was a difficult one. It comes with human and financial costs. But we believe this is the correct decision and best for the long-term success of Semrush. We hope for a rapid and peaceful resolution to the conflict in Ukraine, but our plan still exists to leave us better prepared in case the conflict exacerbates. Now to the results. We had a solid start to the year. First quarter revenue of $57.1 million was up 43% year-over-year and up more than 6% sequentially. Our first brand marketing campaign launched in mid-March. It's too early to make conclusions, but I'm inspired by the initial results. We added more than 5,000 paid customers in the quarter, a new record as the growth was strong, extending beyond our largest markets. These are very uncertain times in the business environment right now, but we are gaining new customers and see trial subscriptions growing at a great pace. It gives us confidence in our growth outlook for 2022. On the product side, I want to call out the performance of our App Center. Last quarter, I mentioned that the Ad Clarity App exceeded $100,000 in gross bookings. In less than three months, I can report that App Center added $1 million in gross ARR in the first quarter, where the majority of growth was driven by a single app, AdClarity. I believe the growth of our App Center is proof that our platform approach will provide us with a competitive advantage compared to foreign solution providers. I have asked the team to accelerate the availability of new third-party apps and for our marketing teams to promote them more actively. Looking at our pipeline today, I believe the number of third-party apps will more than triple by the end of 2022. We closed the acquisition of Kompyte in the first quarter and I'm excited about the potential of adding new sales enablement and intelligent functionality to our industry-leading product offering. The Kompyte team is growing. We plan to advance their product but also to offer new products that we can cross-sell to similar platform customers. In conclusion, we delivered solid financial results and record customer growth, despite all the uncertainty in the market. I will now turn the call over to Evgeny for a more detailed recap of our financial performance.

Thank you, Oleg. Q1 revenue of $57.1 million was up 43% year-over-year and up more than 6% sequentially. Growth was largely driven by an increase in the number of paying customers, while we continue to see an increase in the average revenue per customer as well. The Kompyte acquisition closed in late March and therefore wasn't material in our first quarter results. Our dollar-based net revenue retention was 127% as of March 31, up slightly from 126% as of December 31. I expect revenue retention to moderate in 2022 as the base effect of easy comparisons wanes. I expect to see a gradual decline in the metric beginning next quarter and extending through the remainder of 2022. Gross margin of 79.8% was up 170 basis points from a year ago and up 140 basis points from the previous quarter. We saw some benefits in COGS primarily due to the lower third-party costs. However, I expect gross margin to be closer to 78% for the remainder of the year. Our non-GAAP operating expenses of $47.1 million in the quarter were up 62% year-over-year and up a more modest 5% from the previous quarter. Not surprisingly, the largest increase year-over-year was in G&A, driven primarily by public company costs. Sales and marketing were $25 million in the first quarter, up 56% year-over-year and down slightly from the previous quarter. As Alex mentioned, we launched our brand marketing campaign in March. We delayed the launch by several weeks due to the conflict in Ukraine. As a result, some of the marketing spend in the first quarter will be incurred in the second quarter. Research and development was $8 million in the first quarter, up 51% year-over-year and 20% from the previous quarter. The sequential increase was driven by a reduction in capitalized product development costs while the year-over-year increase was driven by headcount growth as we continue to expand our R&D teams with a focus on Western Europe. G&A spending of $13.7 million was up approximately 80% year-over-year and up 8% from the previous quarter. The sharp year-over-year increase is related to public company expenses as, a year ago, the company had just completed an initial public offering. Strong revenue growth and higher gross margins were more than offset by higher operating expenses and contributed to a non-GAAP net loss of $1.6 million compared to non-GAAP net income of $2.1 million a year ago. This is an improvement from the non-GAAP net loss of $2.9 million in the fourth quarter. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $260 million, down from $270 million in the fourth quarter. The decrease was largely driven by $40 million paid for Backlinko and Kompyte acquisitions, which was partially offset by $8 million of cash from operations. I'm very pleased with our cash generation this quarter. Despite an increase in spending and larger operating loss, cash flow from operations was down only slightly from a year ago. Over the last four quarters, the company has generated approximately $23 million of cash from operations even as we have investments in support of the business. Looking ahead to guidance, I expect second quarter revenue in the range of $59.5 million to $60.5 million, up 33% year-over-year. For the full year, I expect revenue in the range of $249 million to $251 million, which would represent growth of more than 33% year-over-year. Winding down our Russia operations will result in an incremental cost in 2022. As a result, we expect the second quarter non-GAAP loss of $9 million to $8 million and a non-GAAP loss of $46 million to $44 million for the full year 2022. The high incremental loss is almost entirely due to the relocation of our employees out of Russia, while stepped-up investments in Kompyte are a contributing factor as well. We delivered solid financial results in the first quarter with record revenue and gross margin. More significantly, we added more than 5,000 customers, which gives us confidence in our outlook for revenue growth well above 30% in 2022. The winding down of our Russia operations comes with costs in the short term, but we believe it is the best path forward for all of our stakeholders, including employees, customers, and shareholders. With that, Oleg, Eugene, and I are happy to take any of your questions. Operator, please open the line for questions.

Our first question is from Michael Turits with KeyBanc. Your line is open.

Congrats on putting up some good numbers, especially on the ad. So first, on the ads, can you tell us what really drove those? I'll just throw my follow-up questions, which are really on the relocation. Can you just run through the details on that in terms of just review what is the total number of your headcount, the number of employees in Russia, what the specific costs for moving them are? And what do you expect that schedule to be like, what are the risks there?

Thank you. This is Oleg. We are pleased to have gained 5,000 new paid customers in the first quarter. I believe this is linked to several experiments we completed in the fourth quarter. Additionally, the third quarter had a strong buzz around our acquisitions, with excellent support from our audience and experts. We launched our new brand marketing campaigns in mid-March, but prior to that, we conducted many related experiments, which I think contributed to our success. Now, Evgeny, please go ahead with your question.

So on relocation costs, starting with the overall number of employees, we had about 800 people in Russia and about 85% of these people will relocate. The relocation costs will consist of travel, accommodation, and relocation bonuses. So that's basically the core components affecting those one-off expenses.

Okay. And just to review, I guess, where you are in terms of total headcount?

Our total headcount is 1,200 to 1,300 people.

I wanted to add one more point. You reported an increase of approximately $23 million in operating loss for the year, which includes $15 million in costs related to the relocation. Additionally, you indicated a revenue increase of about $4 million. This results in a slightly higher overall net expense increase. Can you clarify what the additional increase in expenses is beyond the costs associated with the relocation in Russia, especially considering you already raised expenses last quarter for the brand campaign?

Yes. Michael, the difference is explained by our expectations that people who would move to higher, I would say, more expensive locations will be getting higher salaries. So that's our preliminary expectations over the higher run rate for different costs, which will incur of people staying in Western Europe.

The next question is from Tucker Lane with Stifel. Your line is open.

It's actually Parker Lane at Stifel. Thanks for taking the question. Guys, wanted to get a little more visibility on what's going into the brand marketing campaign that started in March. You obviously had very strong net adds and you're expecting that strength to continue this year. But what does that brand marketing campaign look like? What are some of the key components that we should be aware of?

The new marketing campaign is more focused on value. I think in the past, in our marketing campaigns, we were more focused on our product offerings and product features and so on. Right now, we want to address a much larger market. Because of that, we want to talk more about the value our customers can get from it without talking about features. Most focus on value, not on features, not on product.

Got it. Understood. And then just so we're clear, as far as those employees that are relocating, can you give us a sense of what roles they were serving inside of the organization? And are those going to remain the same upon relocation?

Sure, Parker. So the majority of those will be developers. There will be marketing people, finance, and admin. There will be some salespeople. It's a different mix of the functions that we had in the Russian location.

Got it, appreciate it. Congrats again for the quarter. Thank you.

The next question is from Scott Berg with Needham. Your line is open.

Hi, everyone. Congrats on the nice sales quarter and thanks for taking my questions here. I guess a couple of them. We've been doing some recent work in the space and one of the things or items that came up was your ability to sell up market and scale where other competitors have not scaled well in terms of functionality. If you look at your 5,000 customers that you signed in the quarter, how should we think about the distribution of those customers kind of across different customer sizes? Just trying to understand if you're having a similar traction up market as you are down market.

Thank you. Evgeny, please take the question.

Yes, Scott. So what we saw in this quarter, the largest adds were with higher-tier customers, which would be above $2,500. To give you a sense of the numbers, the customers with more than $10,000 per annum grew about 17% quarter-over-quarter. I will say there was a similar growth rate with medium-priced years. So it's a good correction with lending lower-priced customers and then upgrading them as their relationship matures.

Okay. Fair enough. And then on the Kompyte acquisition, I know some of the costs are embedded there. Is there any revenue contribution from the acquisition for the year that we should be aware of?

So far, it's minimal, right? There will be some revenue, of course, but it's irrelevant to the overall numbers at this point of time.

The next question is from Mark Murphy with JPMorgan. Your line is open.

Yes, thank you. At a high level, to what do you attribute being able to show this improvement in the net customer adds, also in the net new ARR and also the retention happening simultaneously against this backdrop that you mentioned as being more volatile with the macro and also the war in Europe? I think that's the element of this that is surprising just given the circumstances.

Thank you. Look, I would avoid commenting on macro matters. I'm not a very big expert in this topic. But business is very strong. We have a very, very strong business model and a focus on retention and research, with a focus on delivering value for customers and education provided to customers. I think it helps. My understanding is that it's about our business model. We have a strong business model and a great market.

Okay. And Evgeny, any all else equal, when we think about your operating losses, would you expect them to improve by the $15 million in 2023, which is that one-time relocation cost? Or are there additional margin improvements that we could consider factoring in as well for next year?

Mark, I mean, I would say this is too early to go into much detail about 2023 because there are many moving parts. We will need to see how this relocation settles down, where people land, and what the run rate expenses would be for those different locations. Clearly, the R&D expenses will probably be at a higher run rate as we go forward into 2023. More close to the industry standard, given that our developers will now be more expensive. The $50 million one-off will not be there, and we will also be looking at efficiencies on the G&A side as we finish with relocation. So again, I won't be able to give a precise number at this point in time. But probably we'll have better visibility during the next quarter call.

One last one. The two acquisitions, we understand they're very small, but I'm wondering just how much net new ARR those might have contributed to the number here in Q1?

Thank you for the question. So in Q1, we're really not attributing any meaningful revenue to those transactions. I also want to highlight that the Kompyte deal was technically closed very late into Q1. So even if we wanted, there is nothing really to recognize just based on the time line. The first acquisition we made in Q1, Backlinko, was not really for revenue. We made the acquisition for audience. While we're definitely seeing a strong demand coming from this website and we are changing content on the website to generate even more demand, it's not really directly attributable to revenue. It's more of the number of leads that we see and the number of registrations, audience reach. So those are the metrics that we are focusing on when we think about the value of this transaction.

I appreciate the clarification, Eugene. What I'm asking about is not the in-period revenue for Q1. I realize that one of those deals closed late in the quarter. I'm referring to the actual ARR book, specifically the run rate of ARR that would have rolled over and contributed to your Q1. I know it's a small figure, but I don't have much insight into that.

So as I said, at the beginning of Q2, we were still in the process of transferring contracts because we did an asset sale. So it's a little bit more complicated question. But if you think about the overall scale of the operation, right, it's a business that had roughly 20 people. If you just apply some industry standard ARR per employee benchmark for those businesses, you'll get close. So we're not disclosing actual ARR for this particular line of business. But as said, if you look at the number of employees and just apply some standard multipliers, you'll get very close.

Okay. So something like $200,000 per head, run that through and will be in the ballpark.

It's going to be in the ballpark. I would be happy to disclose it later. If Evgeny allows me, maybe closer to Q4. But right now, we're not really providing a lot of color on that one. But I think in the ballpark, you're right.

The next question is from Brent Thill with Jefferies. Your line is open.

Hey guys, it's James on for Brent. Thanks for the question. Can you talk about just the disruption that you'd expect to see from the employee relocation? It looks like you're still expecting pretty robust top line growth for '22. Curious if you're maybe expecting any potential disruptions to the overall top line as a result of the relocation. And just a quick one on customer growth. Are there any particular markets that did particularly well or others that were a bit weaker? Any color there would be great.

I don't expect any significant impact on our operations because of such relocations. COVID has helped us considerably. We have developed a strong culture and a remote work approach during that time, which has been beneficial for all companies. With our emphasis on self-organization and autonomous teams, I believe we will not face any disruptions in this area.

And then just around the customer growth, any particular markets that did well or others that were a little bit softer?

It's aligned with our expectations. There are no surprises here. It's very, very stable. Even with some macro conversations around us, we don't see anything related to our current cohort numbers. It's stable.

Great. Thank you, guys.

The next question is from Clarke Jeffries with Piper Sandler. Your line is open.

Hello. Thank you for taking the question. Net retention ticked up again this quarter. Wondering if there was any kind of particular products or upgrade paths, whether that was users or otherwise that are emerging that is really helping drive that metric cohort?

Yes. Thank you for pointing this out. Definitely, one of the metrics we're really proud of. One of the big factors is, of course, the expansion of seats that we started seeing early last year, and it continues today. More and more people buy subscriptions with multiple seats or expanding usage of existing multi-seat subscriptions. I would say this is definitely a contributing factor. Obviously, other factors, like strong sales numbers for our add-on products and App Center that Oleg already mentioned, contribute as well. But if I had to pick one, definitely the expansion of seats.

I was going to ask a follow-up question regarding the $1 million gross annual recurring revenue in the App Center. Can you remind us of the revenue or economic model for that? Is it based on a revenue share marketplace for some of the partner products that are expected to triple?

That's correct, we use revenue share. Now, specific percentages could be different for different partners. But I would say in the ballpark, we always aim for something around a 40% take rate, which I think is more or less standard for this kind of relationship.

Understood. And if I can squeeze one more in. You mentioned improved search volumes in some of your largest markets, more to roll out during this year with the recent acquisition to add some more volume to SEO capability. How do you view that competitively? Do you feel like you're really outpacing the competition in terms of scale and accuracy of search estimates?

Yes. This has definitely been a big focus of our R&D team. I personally was involved in the development of the algorithm and tests. This was definitely a high priority because marketers need to make right decisions, understanding what people are searching for, and they need accurate data. As part of the rollout, we tested our search volume estimates against a source of truth data that we were able to collect from Google Search Console, and the results were better than anything else we could find in the market. We really tried to harden our models and didn't leave any stone unturned. To the best of my knowledge, what we have today is the most accurate metric for search volume for keywords. Right now, it works in the United States and Australia. Of course, there are plans to roll it out to other locations.

The next question is from David North with Due North Capital. Your line is open.

Hi, and congrats on a good quarter. What countries will the relocated employees be moving to? And will they be moving to locations with company offices? Or will they have the ability to work remotely? I'd like to know how much the cost of these employees will increase and whether your key advantage of having lower cost software engineers is still intact.

Thank you. This is Oleg. Last year, we decided to open offices in Barcelona, Spain, Amsterdam, Netherlands, and Berlin, Germany. Our product teams are mostly relocating to these locations. But because of the circumstances, we decided to open our office in Armenia and Serbia. Some marketing groups, some revenue groups, and customer success groups will be moving to such locations, Armenia and Serbia. It's more relevant to their service and cost. Also, we are relocating our employees to our offices in Cyprus and Prague, Czech Republic. We opened these offices about seven years ago, and right now, it's a really attractive location.

On the cost side, we expect that our R&D, as I mentioned, R&D expenses will go up because of the cost of living in those countries. We are more focused on Western Europe for developers. For other functions, we will be targeting locations closer in terms of cost of living, such as Armenia or Serbia. While there may be a slight increase in cost for those functions, overall, the run rate impact will probably be there this year, and we will have to work it through in 2023.

Okay. Thank you.

The next question is from Michael Turits with KeyBanc. Your line is open.

Just a quick one. I think we're expecting to be about free cash flow breakeven previously. Any sense for where that falls out now and how we might think about it into next year?

So Michael, at this point of where we are doing our estimates, we're clearly implying an increase in net loss to our free cash flow projections. So we don't have very accurate assumptions given the many moving parts. I would probably expect us to be cash flow negative for the full year, given the increased estimate for the loss.

Okay. I think it's realistic. Just think about that improving or maybe breakeven next year?

Yes.

Yes.

We have no further questions at this time, and this will conclude today's conference call. Thank you for participating. You may now disconnect.