Good morning, my name is Rex and I will be your conference operator today. At this time, I would like to welcome everyone to the Semrush Holdings’ Second Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. Thank you. A transcript of the prepared remarks will be available at investors.semrush.com after the call. At this time, I would like to introduce Bob Gujavarty, VP of Investor Relations. You may begin your conference.

Good morning. I am Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings Second Quarter 2022 Results Conference Call. We will be discussing the results announced in our press release issued after market close on Wednesday. With me on the call is our CEO, Oleg Shchegolev, our CFO, Evgeny Fetisov, and our President, Eugene Levin. Before we begin, I would like to highlight our participation in The Goldman Sachs Communacopia and Technology Conference in San Francisco the week of September 12. 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 third quarter of 2022 and the full year 2022, and our ability to successfully relocate employees outside Russia, including executing our relocation plans on the timeline we expect and at the anticipated cost. 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 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 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 second quarter. We delivered strong growth with revenue up 39% year-over-year and solid new customer additions. As most of you know, our sales cycles are typically very short and our average deal size is relatively small. So despite complicated market conditions in Europe and delayed decision-making, it did not affect our second quarter results much. Listings were a standout performer in the second quarter, as revenue grew more than 70% from the previous year. Local listings are our second most popular add-on, but attach rates remain in the mid-single digits. We believe listing management alone is a $500 million market, and we have a long runway for growth. I'm pleased to see our customer mix continue to improve in the quarter. The number of customers who pay more than $10,000 annually was up more than 80% from a year ago. We remain focused on the SMB market, but we continue to share rated growth from mid-market and enterprise customers as well. I believe our brand marketing campaigns contributed to the new customer growth year-to-date. And I would like to provide insight on our plans for the second half of the year. We saw good success with our campaign in the streaming service haul, and we expect to expand to our streaming platforms in the third quarter. According to Nielsen, streaming is poised to become the most popular form of video consumption. And it appears to be a very efficient channel for reaching new customers. SMBs are facing a more challenging macroeconomic environment and we plan to adjust our campaigns to reflect the new reality. In the back half of 2022, we expect to have a more balanced spend between brand and product marketing with emphasis on value selling campaigns. Our focus year-to-date has been in paid traffic. However, we have not ignored investment in organic traffic opportunities as well. As many of you will recall, we acquired Backlinko in the first quarter. Backlinko is one of the most visited sites for SEO training. Our rationale for acquiring the site was that we could get better monetization of the traffic by improving our conversion rates. This played out in the second quarter, as we doubled the number of conversions from Backlinko as compared to the year ago. Finally, I want to highlight three key changes to the organization. First, we promoted Eugene Levin to the role of President. Many of you know, Eugene, and will agree he is intimately involved in operations and strategy at Semrush. His promotion reflects the reality that his contribution goes far beyond that of Chief Strategy Officer. In conjunction with that announcement, we also promoted Vitalii Obishchenko to the role of Chief Operating Officer. We are a product-led growth company and believe there is nothing more important to our future success than in registering compelling new products. Vitalii was previously Head of Product Development and has a track record of bringing great software products to market. In this new role, she will have more authority to make sure we execute on our product roadmap. Second, we have made key changes to our sales organization. We now have multiple teams dedicated to executing on our land and expand strategy. Andrew Warden, our CMO will focus on new customer acquisition. Brian Wool, our SVP of sales will focus on upsell of existing customers through new products and additional user licenses. And finally, Steve Murgo, our SVP of Retention will be focused on the retention of existing customers. Each of these sales motions requires a different skillset and therefore it was logical to create dedicated teams led by experienced executives. Third, we have made remarkable progress in the relocations. We opened multiple offices across Europe and relocated nearly all of our full-time employees. As of today, we have no operations in Russia. I'm extremely proud of the Semrush team; the complexity and scale of relocating so many people over a short period of time was immense, but we rose to the challenge and made it happen. I will now turn the call over to Evgeny for a more detailed recap of our financial performance and our forward guidance.

Thank you, Oleg. Q2 revenue of $65.6 million was up 39% year-over-year and up more than 9% sequentially. Growth was driven by an increase in the number of paying customers and higher average revenue per customer. Mix was again a tailwind as the percentage of revenue from customers on the business plans hit another record high. As expected, our dollar-based net revenue retention for the second quarter was down slightly at 125% after the easy comparisons of the COVID-impacted periods. Gross margin of 79.5% was up 230 basis points from a year ago and largely in line with the previous quarter. I expect gross margin of 79% plus or minus for the back half of 2022. Non-GAAP operating expenses excluding exit costs were $52.4 million in the quarter, up 53% year-over-year and up 11% from the previous quarter. Sales and marketing represented the largest increase year-over-year and sequentially. Sales and marketing was $30 million in the second quarter, up 67% year-over-year and up 18% from the previous quarter. The increase is driven by higher headcount as well as a full quarter of spend related to all brand marketing campaigns. We expect those brand campaigns to continue through the remainder of the year. Research and development expense was $9 million in the second quarter, up 58% year-over-year and 17% from the previous quarter. The year-over-year and sequential increase reflects higher headcount as well as an increased compensation expense related to hiring in high cost geographies. A full quarter of operating expenses also contributed modestly to the increase. G&A spending of $13 million was up approximately 26% year-over-year, but down 6% from the previous quarter. The year-over-year increase reflects high public company costs, while the sequential decrease was related to a one-time benefit that occurred in the second quarter. I expect G&A spending to increase in the back half of the year in absolute terms and as a percent of revenue. Strong revenue growth in high gross margins were more than offset by high expenses and contributed to a non-GAAP net loss of $6.1 million compared to non-GAAP net income of $290,000 a year ago, and a non-GAAP net loss of $1.6 million in the first quarter. I would note that exit costs represented more than half of the non-GAAP net loss in the quarter. This suggests that once we complete our relocations in 2022, our operating losses should decline reasonably quickly. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $249 million, down from $260 million in the first quarter. Our cash flow from operations was negative $4.7 million and we incurred approximately $2.3 million of capital expenditures. Looking ahead to guidance, we expect the current economic conditions to persist and therefore we're guiding for slower growth in the third quarter before rebounding in the fourth quarter. We expect third quarter revenue in a range of $63.8 million to $64.2 million, up 30% year-over-year. For the full year, I expect revenue in the range of $251 million to $253 million, which would represent growth of 34% to 35% year-over-year. We expect a third quarter non-GAAP loss of $13 million to $12 million and a non-GAAP loss of $32 million to $28 million for the full year 2022. We continue to execute well despite the more uncertain economic environment, and I believe we have good visibility to deliver another year of revenue growth well above 30%. With that, Oleg, Eugene, and I are happy to take any of your questions.

Your first question comes from Brent Thill from Jefferies. Your line is open.

Great. Hey guys, this is James on for Brent. Thanks for taking the question. My first is around the macro, whether you are seeing any impact in Europe specifically, and just in general, how that may have impacted new customer adds in the quarter. That's my first question. And then my second is just around Backlinko, you mentioned that as being more of a driver of growth, is there any way to quantify its impact on revenue or is it still pretty much immaterial today? Thank you.

Hi, this is Eugene. So in terms of macro, we're seeing some signs of softness in Europe, I would say especially around June. I wouldn't say it's really that much about new additions. Demand is still pretty strong. It's more of overall softness in the market. In the United States, we don't see anything like this. So, the U.S. seems to be very strong. Even some European, non-Euro markets are quite strong. As for Backlinko, yes, we definitely can quantify the growth internally, but it's not something we or probably other companies would report with this level of granularity. I would say it’s definitely material compared to the size of the acquisition. We believe we're getting really good ROI in this transaction, but as you recall, the transaction itself was not huge. So, that probably gives you some sense of scale.

Great. Thank you.

Your next question comes from the line of Parker Lane with Stifel. Your line is open.

Yes, hi guys. Thanks for taking the question. Just curious if you could give us an update on the performance of the Kompyte business and the demand environment you are seeing around competitive intelligence. It seems like it would be particularly relevant with the uncertainty out there in the markets right now. Thank you.

Yes. Great question. And I think you are getting this absolutely right. So competitive intelligence is definitely one of the verticals that is going to be impacted by uncertainties in the macroeconomic environment. We're seeing strong demand, especially with the cross-sell, and I think we're seeing good results because the business that we acquired is relatively small compared to Semrush. So, we already have a huge user base of people who are good leads for this new product. And compared to this difference in scale, any kind of softness in demand wouldn't be very significant. At the same time, yes, when we talk to customers, we hear some anecdotes about their plans to do budget cuts. Sometimes we start a conversation with an account, and then in the middle of this conversation, our kind of champion inside that organization disappears and gets laid off. So, that happens. But I wouldn't say that it's a reoccurring thing. I would say it's more of an anecdote that you can use to make judgments about the overall market environment, but in terms of numbers it doesn't really impact us just because Kompyte was so much smaller than the whole scale of Semrush and kind of potential cross-sell opportunity.

Yes. Makes sense. Appreciate you taking the question and congrats on the quarter.

Thanks Parker.

Your next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.

Great. Thank you so much. It's really impressive to see the higher priced plans had customers up about 25% year-over-year, just coupled with the overall strong new ads. And we've been hearing a lot about inflation and higher interest rates pressuring consumers and small business wallets. So my question is if you're seeing any sort of shift to Semrush from higher cost platforms providing any sort of tailwind for the business? And if there's a comment kind of overall on market share in there too that'd be great? Thank you.

I would say that it's a little bit early to talk about any kind of results here. We see some conversations related to it, but it's too early to talk about any kind of tailwind related to such things.

And this is Evgeny. I would just add a small point. In terms of market share, definitely something we will be looking for. At the same time, in the enterprise space with bigger accounts; those subscriptions are usually annual, so most of the customers haven't been through the renewal cycle during this economic environment yet. So we don't know to what extent we would be able to pull demand from more expensive platforms; definitely monitoring this and being optimistic.

Got it. And then just a quick one on cost, the net cost guidance could have been narrowed and it sounds like there is some lower cost from the relocation. But just curious to see if there's any other areas that you're seeing greater efficiencies in the business? Thank you.

Yes, Elizabeth. This is Evgeny. So there are a few good components to the improvement of the net income. One is the better performance on Q2; as you may have seen we've updated our expense outlook for the allocations which is better by roughly $5 million. And then the rest is the combination of improvement in the overall headcount outlook for the year, and then favorable Euro FX. So that's what affects our net income outlook. And one more thing, during my prepared remarks, I misspoke about the cash flow from operations number; it's negative $7.4 million, not 4.7. I'm sorry about that.

Got it. And thanks so much for the clarification.

Your next question comes from the line of Mark Murphy with JP Morgan. Your line is open.

Thank you, and I'll add my congrats. Could you say that you have no operations in Russia as of today? Just wasn't sure if I heard that correctly. And if so, could you clarify does that mean no offices or does that mean no people or how exactly are you defining that word operations?

Yes. So this is Evgeny. So we don't have any operations in Russia. We've sold our local subsidiaries and we don't operate there. So basically no presence. We have some people who have left; it's less than 5% of the total population, which would have most overseas they're in the process of migration, and that will take them a couple of months. They stay for different reasons, but otherwise we've exited the country.

Okay, understood. The second question was on the macro situation in Europe. If you could just clarify, I think you said demand is pretty strong, and then the next thing you said was there is an overall softness, and I'm struggling a little bit to put those two comments together. Can you just clarify what it is that you might have experienced in Europe because the overall results look pretty solid? And just also did that continue into July and August or has there been any change recently?

Yes. So great question. What I meant by the word softness is a number of things; for example, it takes longer than previously to renew accounts, or they start negotiating more favorable payment terms. Sometimes you have a deal that is sort of already verbally agreed, and then last minute they say, no, we probably are going to buy less. Sometimes you negotiate a deal, but then the person who is leading the process departs or has been laid off, and you have to deal with someone new. So that's kind of what I meant by softness. Sometimes customers just say they're under pressure from the management to be more prudent, to spend less; sometimes there are budget cuts. So, like I said, it's not something huge, and those things are more of an anecdote that wouldn't statistically impact our metrics, but in aggregate, that's what I call softness.

Yes. And that's extremely helpful. Thank you for that. Much appreciated. And just did that situation kind of status quo into July and August or is it stabilizing, degrading further?

So I would say – August started really strong for example. Year-over-year in July, I would say it was better than, for example, the end of the second quarter. But in general, you see the guidance that we provided. So that guidance was based on what we've seen so far in this quarter. But like I said, so far in August, I'm optimistic.

Yes. Okay. Excellent. Thank you and I'll have my congrats.

Thanks Mark.

Next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open.

Hello. Thank you for taking the question. I wanted to touch on the record $5.5 million of sequential growth in revenue. But the ARR in the quarter was actually lower than the year-ago period. I was wondering if that was reflective of this sort of discussion about maybe some softness towards June. Was it really better early quarter performance that drove that? And if there's anything to call out that was an impact that might not have been just linearity through the quarter?

Yes. This is Evgeny. Thank you for the question, Clarke. I think you're absolutely right. So it is a reflection of the beginning of the quarter and then a softer ending as Eugene has just mentioned. So June was, I would say, slower versus the overall quarter. So that's and that's the dynamics; it reflected in our Q3 guide?

All right. Perfect. And then any chance you could comment on what 10-K per annum customers grew in the quarter?

If I – for the quarter, I mean, I think that you disclosed the number for the year, which is above 80% growth – above 80% growth year-over-year for the 10-K plus customers.

Okay. Maybe I'll squeeze in one more as a follow-up. You lay out these 19 MarTech categories that you're involved with, which of these segments are you most excited about in terms of taking share from pure-play players? With the release of the local listing product, it might move that category higher on the list, but just curious on your thoughts here?

It's hard to ask parents about who's their favorite child, right? So that's kind of how I'm seeing this. Of course, yes some children haven't been behaving as well as other children, but we like them all. I would say in terms of where we are spending more time and resources is probably not necessarily in areas where we already feel very strong but areas where we want to be much stronger, even though we have great previous results. There are other things to care about like market share and revenue. So I would say I'm extremely proud of what we are doing in the competitive intelligence space, especially after the acquisition of Kompyte. Now we have a really good self-service product for SMB in the mid-market, and we have this more enterprise-focused product for larger companies and not just marketing teams, but also sales teams and leadership teams. Local listings, I think have been one of the products that have been around for a long time. I was actually one of the people involved in launching this, so I was sort of a member of the first team. I think we've been developing it somewhat slower than we could primarily because we didn't launch a lot of global markets. We've fixed this now, so now I'm much more optimistic, but also we have a lot of great features in the roadmap. For example, we're always thinking how to go beyond listings and management. One of the next things we probably go into trying is review management. We already have some features in this direction and we'll probably keep developing them and double down. And then, of course, digital PR; I think it's a huge category that is not that competitive from a product point of view, as many other categories where we operate. We think we can be really innovative players there and disrupt the market. This year we have launched our media monitoring product, and while still very early, we have received great feedback from some customers as well as early signs of positive revenue trends. So I would highlight these categories as areas where we are focusing the most right now. But we're always trying to surprise people, and there are probably a couple of things we're working on that I cannot mention.

Appreciate it. Thank you very much.

Your next question comes from the line of Michael Turits with Keybanc Capital Markets. Your line is open.

Hi, this is Michael Vidovic on for Michael Turits, and thanks for taking my question. In your second half guidance, are you factoring in lower customer additions, or is it more just lower expansion in the near-term?

I think, Michael, I think it's a balanced combination. So as you can see, we've guided for at least slower Q3 and then acceleration in Q4; and we are looking at both I would say in the same direction.

Okay. And then on the $5 million reduction in relocation costs, are you saying heightened churn and employees relocating or what feeds into that change? Thanks.

Given this was an unprecedented move that we had to take, it was very difficult for us to be very accurate in prediction and how much we'll spend and where people will go, which countries they'll go to, et cetera. So all of this we've been able to clarify and narrow it down in terms of our future expected expenses, so that's where the savings are coming from.

Our next question comes from Scott Berg with Needham. Your line is open. Given this was an unprecedented move that we had to take, it was very difficult for us to be very accurate in prediction and how much we'll spend and where people will go, which countries they'll go to, et cetera. So all of this we've been able to clarify and narrow it down in terms of our future expected expenses, so that's where the savings are coming from.

Hi, everyone. Congrats on the good results and thanks for taking my questions. I wanted to start with the guidance. Obviously, we can all back into the fourth quarter guidance with your third quarter and full year. The numbers are relatively good, and I know the commentary was that you're expecting the macro to rebound a little bit in the fourth quarter. Can you help us understand maybe where that optimism comes in after expecting some slowness here in Q3? Thank you.

This is Oleg. Look, we have some very good results with marketing. We mentioned our experiment, and I believe such shifts, what we see right now obviously with changes in companies, could give us some positive results.

Got it. Helpful. And then I wanted to ask about partner impact and partner traction in the quarter. I've had a chance to speak with some partners that have provided very good feedback on your product and platform. But as you look at the macro slowness, how much of that is coming from maybe your own digital sales versus what you end up getting referenced to you and/or booked through your partner channel? Thanks.

Yes. This is Eugene. I just wanted to clarify maybe it was not very clear. We're not really seeing pressure on the demand side from new acquisition point of view; that's where we employ most of our partner tactics. So we haven't seen any kind of meaningful slowdown there; demand is strong. I would say if we speak about the affiliate marketing channel, which is also one of the partner instruments in our arsenal, we definitely haven't seen a slowdown there. Pretty much all our key channels grew this year quite well.

And maybe to add, this is Evgeny, to add the question on the Q3 versus Q4 dynamics. Q3 now feels like a typical summer for us; it's very seasonal in terms of what we see, and that's what we're building our expectations on. At the same time, as Eugene has alluded to, we're seeing August showing positive signs and traction. So again, if we exit the quarter with the right ARR that is based for a good Q4; this is how we think about the rest of the year.

Great. That's all I have. Thanks for taking my questions.

Thank you.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.