Good morning. My name is Denis. And I will be your conference operator today. At this time I would like to welcome everyone to the Semrush Holdings' Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. I would now like to turn the conference over to Bob Gujavarty, VP, Investor Relations. Please go ahead.

Good morning. I am Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings' third quarter 2022 results conference call. We will be discussing the results announced in our press release issued after market closed on Monday. With me on the call is our Chairman and CEO, Oleg Shchegolev; our CFO, Evgeny Fetisov; our President, Eugene Levin; and our CMO, Andrew Warden. Before we begin, I would like to highlight our participation in the 12th Annual Needham Virtual Software-as-a-Service One-on-One conference, and the Southwest IDEAS Conference in Dallas, both this week. 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, financial performance, and financial condition, expected growth, adoption and demand for new and existing products and features, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for the fourth 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 forward-looking 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 those forward-looking statements. For a discussion of the risks and important factors that could affect our actual results, please refer to our annual report 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'll 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 results in the third quarter. Despite a more uncertain demand environment, we experienced solid growth with revenue of $65.8 million, up 34% year-over-year, and up 5% from the previous quarter. As of the end of September, we had approximately 94,000 paying customers, and I would note that we had slightly more customers in the third quarter of 2022 than in the year-ago period. The strength in new customer additions was partially offset by lower expansion from existing customers, particularly those customers with larger average revenue per annum. And this team has done a wonderful job leveraging our high marketing expense to the new customer growth. We continue to fine-tune our go-to-market spending, and I am hopeful that we will continue to see solid new customer growth in the fourth quarter. On the product front, we rolled out a major update to our Social Media Management Toolkit, and I believe this update brings us closer to being competitive with the leaders in this space. We ended the quarter with over 50,000 monthly active users of our SMM Toolkit. And we estimate more than half of these users are dedicated social media marketing professionals, demonstrating our ability to expand our total addressable market beyond digital marketing professionals. As I mentioned, the team remains focused on user growth; however, we may introduce additional features in late 2023. In January of 2022, as we introduced our App Center, which allows our customers to use third-party applications with our platform for a variety of use cases. Despite relatively fewer new launches, our App Center continued to see strong growth in the quarter. We have a great lineup of apps set to launch in the near future, and this should boost App Center growth in the fourth quarter. Eugene will expand on our App Center in his remarks, but our goal is not simply to set up a tollbooth aggregation as some mobile platform providers have done. We see the App Center as central to extending the reach of the Semrush platform. It's clear we face a more uncertain demand environment compared to a year ago. However, I believe Semrush is uniquely positioned to continue to sustain our strong growth. Customers are looking for products that are easy to purchase, easy to use, and deliver quick return on investment; and our product checks all these boxes. This year has been full of challenges, but despite these challenges we delivered strong revenue growth and executed a substantial relocation program under budget and ahead of schedule. Semrush has always operated with efficiency, and today, being a successful public company, our focus remains on efficiency. We will pursue growth but growth underpinned by solid unit economics. I will now turn the call over to Eugene for a more detailed discussion of our App Center strategy.

Thanks, Oleg. Looking at the marketing technology space, what is immediately clear is that the market is highly fragmented, and therefore consolidation has been very slow. The fragmentation of the technology stack is a direct result of the varied preferences and use cases of marketing professionals. There are a handful of product categories that are large enough to give birth to successful public companies. For example, Semrush in SEO, through our social and social media management, Mailchimp, and email marketing are few such examples. But, most market vendors are small and remain focused on niche use cases. We leverage success in SEO to expand into new categories such as competitive intelligence, digital PR, content creation, and other areas primarily through internal R&D. As we look ahead, the use cases continue to expand but it is not feasible or practical for Semrush to build solutions for all the different use cases internally as our R&D resources would need to expand exponentially, thereby limiting our ability to invest elsewhere. This is the crux of our App Center strategy to address the fragmented market, including many niche use cases, and to offer a wide variety of product capabilities without overwhelming the capacity of our internal development. To solve this, we intend to offer third-party applications that address customer needs in instances where the third-party solution has wide adoption and we have decided not to build internally. Over the long term, we believe a substantial portion of Semrush revenue will be driven by products created by partners but only made possible by the Semrush platform. Another promising feature of the App Center model is the potential to monetize free active users. As many of you know, we have a large and growing cohort of free active users on the platform. These users may have very modest requirements, and the full functionality of the entry-level program may be overkill for their needs. They may be interested in limited functionality offered by a lower-priced app with the possibility to trade up to a Semrush subscription in the future as their use cases expand. As we continue to grow the Semrush platform, I believe partners, whether they be third-party developers or leading companies like Wix, will increasingly see value in collaborating with Semrush. The App Center is central to our wide platform strategy, a strategy that I believe will lay the foundation for our growth well into the future. Evgeny will now provide a detailed discussion of our financial performance.

Thank you, Eugene. Third quarter revenue of $65.8 million was up 34% year-over-year and up 5% from the previous quarter. Customer growth of more than 17% was consistent with the previous quarter, but average revenue per user growth moderated due to lower expansion from existing customers. The product mix remained largely unchanged in the quarter, with growth only slightly favoring our entry-level pro plan. As expected, our dollar-based net revenue retention for the third quarter was down to 122% as we are comparing against the easy comparisons of the COVID impacted periods and also impacted by lower expansion from existing customers I mentioned previously. Non-GAAP gross margin of 81.2% was up over 400 basis points from a year ago, and up 160 basis points from the previous quarter. We are achieving strong leverage in our cost forecasting services. However, I expect gross margin will decline slightly in the fourth quarter. Total non-GAAP operating expenses, including exit costs, were $55.8 million in the quarter, up 48% year-over-year and up 6% from the previous quarter, with the majority of growth coming from investment in sales and marketing. Sales and marketing were $31 million in the third quarter, up 48% from the previous year, but essentially flat from the prior quarter. The year-over-year growth was primarily due to increased investment in brand marketing and headcount. Research and development expense was $9.8 million in the third quarter, up 61% year-over-year and up 5% from the previous quarter. The year-over-year and sequential increase reflects high headcount as well as increased compensation expense related to relocating development resources to higher-cost geographies. G&A spending of $15.6 million was up approximately 43% year-over-year and up 23% from the previous quarter. The growth is primarily related to higher headcount and the cost associated with relocating key personnel to higher-cost locations. Investment to support more robust IT systems and a wider geographic footprint also contributed to the increase. Strong revenue growth and higher cost margins were more than offset by higher expenses and contributed to a non-GAAP net loss of $7.1 million, compared to a non-GAAP net income of $12,000 a year ago, and a non-GAAP net loss of $6.1 million in the second quarter. I would note that exit costs represent more than 80% of our non-GAAP net loss in the quarter. Turning to the balance sheet, we entered the quarter with $247 million of cash, down only slightly from $249 million in the second quarter. Our cash flow from operations was negative $500,000, and we incurred approximately $500,000 of net capital expenditures. I am pleased with our ability to minimize our use of cash in the quarter and expect our cash generation will continue to outperform our non-GAAP operating income in the fourth quarter. Looking ahead to guidance, although the fourth quarter is typically a strong quarter for Semrush, we believe it is prudent to be slightly more cautious given the more challenging economic environment that we believe impacts the demand for our products. We expect fourth quarter revenue in the range of $67.25 million to $67.75 million, up approximately 26% year-over-year at the midpoint. For the full year, we expect revenue in the range of $252.8 million to $253.3 million, which would represent growth of 34% to 35% year-over-year. We expect a fourth quarter non-GAAP loss of $12.5 million to $11.5 million on a non-GAAP loss of $26 million to $25 million for the full-year of 2022. The incremental spending in the fourth quarter is primarily due to the full-quarter impact of the employees we relocated from Russia, and to a lesser extent, the additional hiring at these two new locations. We expect to incur higher payroll and benefits expenses, as well as increases related to supporting multiple new office locations. We continue to execute well, and although we are not immune to macroeconomic headwinds, I believe we are well-positioned to deliver another year of solid growth. With that, we're happy to take any of your questions. Operator, please open the line for questions.

And your first question comes from the line of Elizabeth Porter with Morgan Stanley. Please go ahead.

Great, thank you so much. I just wanted to touch again on the macro. We've heard from a lot of companies about customers scrutinizing spend more, but it seems like Semrush is a little bit more insulated from the dynamic just given the small deal sizes and short deal cycles. So, what exactly are the changes you're seeing, and when did they start to occur? I believe August was an improvement from July, so did they start to happen at the end of the quarter? Thank you.

Hi, this is Eugene. In terms of the macro environment, we are seeing an impact in larger accounts. However, there is not much difference in the performance of our core base. Surprisingly, our small business segment is performing quite well, which seems counterintuitive based on conversations with various app stores. Currently, the challenges are mostly affecting larger transactions, primarily with existing customers going through the renewal process. This sometimes takes longer than usual, and rather than increasing their purchases, some customers are maintaining their current subscriptions or downsizing due to layoffs. This is what we refer to when discussing macro situations. However, looking at the total number of expansions, our small business segment is doing fairly well. Does that answer your question?

Yes, it did. And then I believe, last quarter, you mentioned some changes in sales leadership, segmenting around customer acquisition versus upsell versus retention. So, I wanted to ask if there were any disruptions from those sales leadership changes, or alternatively, what are some of the improvements that you've seen since you've reoriented sales? Thank you.

Good morning. This is Oleg. Yes, you're right, all the time changes are being some concerns for people in selling, but I would say sincerely again I don't see a big impact from such changes to what we have right now. I would connect current results more to macro.

Our next question is from the line of James Heaney with Jefferies. Please go ahead.

Great, thanks. Just another one on the macro, curious what you're assuming just for Q4 in terms of the guidance, do you assume it gets worse or things are relatively stable? And then my second question is just around headcount, how you're thinking about that for next year? You talked about, obviously, the relocations, but are planning on adding any incremental headcount for next year? Thank you.

Related to our fourth quarter, look, from one side we feel some positive signals from demand, and we are very, very optimistic about our long-term future. At the same time, the last couple of years have created some sort of new seasonality before these COVID circumstances. And it's hard to imagine what we will face in the holiday season this year. As a result of it, we want to be a little bit cautious with our expectations for the fourth quarter. And regarding the second question related to our headcount next year, there are many companies around us who are doing layoffs, and we don't expect any such actions on our side. This year was primarily about the relocation process, and because of the circumstances from Russia, our hiring was almost frozen. I think right now it's not necessary to put our hiring on pause; we are in a good shape.

Thank you.

Your next question is from the line of Mark Murphy with JP Morgan. Please go ahead.

Thank you very much. Just following up from an earlier question, I'm curious, Evgeny, can you compare the demand environment, what you observed back in July and August starting in Q3, and if you compare that to what you saw in September and October? Is it safe to assume it's getting a bit tougher out there demand-wise as you head into the winter, or does it feel like that the environment has maybe stepped down a bit kind of back in the summer and just remains at that level?

So, this is Andrew Warden, CMO here at Semrush. I would say just commenting on the demand environment, so pointing to the summertime, actually August was one of our record years in terms of demand; August is typically one of our lowest months in terms of demand, but we were surprised by and saw that pivot. The second piece is, as we go into September and October, demand continues to be very strong, but I will say, again, in this environment, one week we see a little bit of pressure, then another week, when we launch another experiment, we see an upswing in demand. So, right now, that's why we point to being cautious, but we're optimistic.

I am feeling cautious but optimistic. Demand has been fluctuating; at times it's stronger and at other times it's weaker. I'm trying to understand how the environment is shifting. Do you think the situation is getting worse over time?

I don't see at this point any sign that anything is degrading for us.

Okay, understood. Then, can I ask you, as you look into early next year, and we think about the seasonality of bookings? It has been pretty first-half weighted in 2021 and 2022. And I think you've had various reasons there. We have the COVID environment; there were some pricing and packaging changes in some of those years. Do you expect that type of trend to continue into 2023 where you're booking a little more business in the first half, or do you think it's going to revert back to something more normal, perhaps with higher bookings in the second half?

Yes, so we think there will be somewhat similar seasonality, but I think next year we would expect it to be a little more flattened because, like you said, for the previous couple of years we had some unique events plus a lot of our campaigns have been executed unequally during the year. There have been some spikes in our spend, especially when it comes to brand campaigns. I'm sure Andrew can provide more details around that if you would like?

I would be happy to provide the additional comment. So I think that, especially when we look at 2022, we were delayed in launching some of our larger campaigns until the first week of March, which were planned earlier in the quarter. We are now in a different position and already set up for Q1 for campaigns to launch very, very early in the season or early in the quarter. Again, we are optimistic that we will be pushing more into the markets, and we expect to see demand continue.

Thank you.

Your next question is from the line of Scott Berg with Needham. Please go ahead.

Hi, everyone. Congrats on the good quarter. Thanks for taking my questions. I just have a couple here. I wanted to start with the App Center commentary because I think some of the comments there were new. Wanted to help better understand how you ultimately monetize some of the free users on the platform. And if we think about the functionality that those partners will bring, what's the kind of long-term revenue opportunity that's possible to generate with your strategy here, because I think the comment was you expect to make a significant amount coming from that product?

So, first of all, thank you for the question because that's one of the topics that I like to talk about. In terms of monetization of free users, the way we think about this is that our entry-level products start at $120 per month. For many people, this is a reasonable price to pay for a starting package; for some people it is not. Maybe they're very early in their marketing journey, they don't expect to invest that much money, maybe their business is struggling, and they just don't want to spend that much. Also, a lot of them don't need all the functionality that we provide even on our entry-level plan, which is quite robust. So, with the App Center, they could start with something smaller, let's say for $20 or $50, and we believe that would increase the percentage of free active users who start paying something. Over time, as they learn more and as their businesses grow, they will probably buy more. So, that's the idea around how the App Center helps to increase conversions from free active users to paying customers. In terms of long-term potential, of course this is very early for us, and so it's very hard to say. But the way we are thinking about this is that it’s a fragmented market with many different use cases covered by a lot of different products. We find a lot of inspiration in business models executed by companies like Amazon or, if you're familiar with the gaming market, there is Steam marketplace for gaming. Those are companies that inspire us in terms of marketplace models. In the SaaS world, there are other examples like Shopify, which has a really good ecosystem of apps within the SaaS space. I think looking at those examples you can see what percentage of revenue is feasible for app centers like ours. My point is we are very optimistic, but it's too early to say.

Fair enough. And then for my follow-up question, if we look at the cost structure in Q3, most of your relocated Russian employees are likely in their new locations here in Q3. And I'm sure there's a little bit of trickle that fell into Q4. But if we look at the cost structure in Q3, and what's effectively $65 million worth of operating expenses excluding the exit costs, is that the right way we should be thinking about the model into next year, or are there some other factors to consider?

So, Scott, this is Evgeny. So, Q4 will be the quarter to be using as a baseline for next year because in Q3 people were still moving; some of them were in transit or in buffer locations. So, Q4 will be the proper base to start modeling next year; that's when we will start incurring our full cost of people being in their final locations.

Great, very helpful. Thanks for taking my questions, everyone.

Thank you.

Your next question is from the line of Michael Turits with KeyBanc. Please go ahead.

Hey, guys. One on the App Center, so, Oleg, can you talk about the decline in the ARPU growth and the decline in the expansion rate? Can you parse that? I am not sure if you commented. But what happened with the gross retention rate this quarter? Can you try and review quickly what the issues were around expansion, and how do you believe you are addressing them?

Michael, this is Eugene. So, the gross expansion rate didn't change much versus last quarter. What we saw is, I would say, higher demand from the new cohorts which start with lower average checks, and that diluted the overall growth rate. A strong demand from initially lower-check customers affects the blended rate. However, despite this, we have our higher-tier customers growing quite well; our 10k per year customers are growing 12% quarter-over-quarter, which is more than 70% year-over-year. So, there is substantial growth in higher-priced accounts, but as new cohorts enter the client base, that leads to slower growth of average check.

Okay. So, in other words, the lower-priced ads are still coming at a higher rate, but they’re diluting more because of that at this point?

I think that's right.

And then what about on the expansion side in terms of the lower net expansion rate?

I am happy to provide more details around expansion. Yes, like I said, it's really more about the behavior of existing customers who already buy a lot. And, sometimes deals take more time. Some of them remain on lower-tier subscriptions for longer, some of them are locked in expenses, and some of them have different procurement requirements compared to what they had a year ago. It's more of a softer environment. We don't see a drop in their subscriptions. But if people experience layoffs, they tend to buy less; that contributes to lower expansion. In the SMB segment, where most of the transactions are self-service, we don't see much difference, but on the higher end, we're still seeing total number growth, but some of those high subscription tiers are a little reluctant to buy more where previously they would be much more eager to do that.

Okay, thanks. And then on the App Center side, what compels third parties to build on your platform? I mean obviously you're already bundling your brand name so there is commercial logic to it. If there is a real product or technical logic for them running on your platform, that would make it sticky and keep them loyal to running on your platform versus alternative channels for them?

I would start by saying that the market is very fragmented. This fragmentation means that it's much harder for software developers to gain access to an audience, and it's more expensive for them to advertise. It's challenging for them to explain the value of their product and to gain brand recognition and trust upfront. Partnering with Semrush provides enormous value to all new app developers. We have over 94,000 paying customers and over 750,000 free active users, which is a huge asset that attracts app developers. There is high demand to partner with us, and we have a queue of developers who want to integrate with us. Currently, our technical ability is the only bottleneck to launch partnerships. We not only provide access to an audience but also have valuable data assets, which powers many third-party applications. Sometimes, buying data from us is prohibitively expensive, and many developers prefer to partner with us to build apps for our App Center where we have more favorable terms for our data partnerships.

All right, thanks.

Your next question is from the line of Parker Lane with Stifel. Please go ahead.

Hi, it's Matt Erasmus for Parker Lane. Thinking about the top line for this year so far, can you give us a sense of any contribution from acquisitions that's plugged into the top line?

It's very minimal, Matt. I would say less than 1 percentage point. So, most of our growth is organic.

Okay, great. And then, going back to one of the first questions, did you say that lower expansion activity was more in the larger customer base and that the smaller customers have been consistently growing? Or did I hear that wrong?

Yes, that's correct.

Okay, got it. Thanks. That's all from me.

And at this time, there are no further questions. And this will conclude today's conference call. Thank you all for joining today. You may now disconnect.