Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semrush Q1 2023 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. At this time, I would like to turn the conference over to Brinlea Johnson with the Blueshirt Group. Please go ahead.

Good morning, and welcome to Semrush Holdings First Quarter 2023 Conference Call. We will be discussing the results announced in our press release issued after market close on Monday, May 8. With me on the call is our CEO, Oleg Shchegolev; our CFO, Brian Mulroy; our President Eugene Levin, and our CMO, Andrew Warden. 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 our existing and any new products and features, investments and acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategy, market opportunities, our guidance for the second quarter of 2023, and the full year 2023, and statements about future operating results, including margin improvement, profitability and free cash flow goals that 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 most recent quarterly report on Form 10-Q and our annual report on Form 10-K filed with the Securities and Exchange Commission, as well as 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 yesterday 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 want to provide a few highlights on the quarter before Eugene talks about our 2023 strategic initiatives, and then Brian will discuss our financial results. Firstly, I am pleased to report first quarter revenue of $70.9 million, up 24% year-over-year. I'm also pleased with our strong customer growth, achieving the significant milestone this quarter of 100,000 paying customers. I believe that we have a variable runway for growth fueled by product expansion, record net new customer additions, as well as sustained demand, particularly surrounding interest in organic marketing. This quarter, we achieved a record in net new customer additions, and registrations and trials continue to reach new peak levels. We are achieving success with our targeted personalized promotions and are optimistic about our future growth, primarily based on record net new customer adds and our long history of customers returning to our platform. We serve customers in 150 countries across industries and market segments, ranging from small businesses and startups to Fortune 500 companies and global businesses. Our digital marketing platform features 55-plus tools that enable us to cater to a wide range of customer needs, positioning us as a leading solution in the digital marketing landscape. We continue to win because we are uniquely positioned and offer products and solutions that create value for our customers. Semrush is a unique software platform that enables marketing professionals to build, manage, and measure campaigns across all channels to improve their online visibility. We have a comprehensive offering of tools and features that cover search engine optimization, key research, rank tracking, bidding analysis, site audits, and on-page optimization. Our sticky products can generate tremendous ROI for our customers, leading to a very low churn rate. To demonstrate the significance of our platform, it is not unusual for us to see customers return to us following an initial pause or cancellation. We also see examples of individual users leaving their employment, only to later sign up as a new customer with their new employer. We believe our user dedication and dependency demonstrates the value of our product and its necessity to thousands of marketing professionals and organizations of all sizes. In closing, we are executing on our strategy of balancing revenue growth with a focus on profitability and remain dedicated to delivering shareholder value. With this in mind, we have made a number of improvements to our operating model, including adjusting our spending, and I am confident in our market position. Before I turn it over to Eugene, I wanted to welcome our new Chief Financial Officer, Brian Mulroy, to his first Semrush earnings call. Brian started in early April and brings an exceptional background to Semrush, with over 23 years of experience in finance and technology. He has already impressed us with his strong financial acumen and ability to get up to speed so quickly on our business. Brian, we are really excited to have you on board. With that, I’ll hand the call over to Eugene.

Thank you, Oleg. We delivered a strong first quarter, starting 2023 with solid momentum. As I mentioned on our last earnings call, we are focused on enhancing our product portfolio and driving operating efficiency in 2023, and we are making progress on each front. Let me explain this in more detail. This quarter, we announced a small tuck-in acquisition of Traffic Think Tank, a leading marketing education company and community featuring premium content by and for world-class marketing and growth leaders. With more than 300 hours of content from over 90 industry experts, the Traffic Think Tank Academy is one of the most well-respected resources for digital marketing education in the world. We expect that the wealth of knowledge from their experts and their expansive content library will further enhance the Semrush Academy to provide new training for marketers and continue improving existing modules. Semrush has ambitious goals to establish a customized and best-in-class, self-paced training platform, setting a new benchmark for digital marketing education, and aims to deliver a premium experience for marketers globally. We believe that by adding Traffic Think Tank, along with ongoing enhancements to our academy program, we will inspire and educate the next generation of digital marketers. By adding additional educational content and an overall premium experience, we will make our product stickier and will be a necessary tool and resource for marketers worldwide. We continue to develop our platform by adding new apps, automating the onboarding process, and cross-selling our products. In fact, more than 20% of Semrush customers now buy multiple products. This success reinforces our commitment to our App Center and overall platform vision. We often get the question about what generative AI means to our business, and I would love to spend a couple of minutes explaining how generative AI presents new opportunities for us. First, we are aggressively adapting our product to incorporate new sources of data and improve functionality, with a particular focus on generative AI capabilities. This year we launched several important AI-powered apps in our App Center. For example, we released ContentShake, an app that combines Semrush data with GPT to create content optimized for virtually any audience or topic. We also launched Instant Video Creator that makes videos from blog posts in seconds, allowing our customers to repurpose existing text content for social media. We also have several apps that use AI to generate everything from social media posts and hashtags to ad copies and banners. We have an Analytics Narratives App that scans Google Analytics, extracts the most important information, and uses AI to present it as an executive summary that even a 5th grader can understand. Throughout the year, we plan to keep expanding our portfolio of products that use this technology both within our core products and in the App Center. Finally, we are focused on operating more efficiently. In marketing, we’ve completed several experiments from last year, and we are now seeing the benefits with sustained, higher levels of trials year-over-year. As a result of our experiments, we are launching stronger, more efficient campaigns. We continue to adjust our go-to-market strategy to invest in territories and channels to improve ROI. We’re bringing more balance between organic and paid marketing channels and already see strong signs of growth across both, with organic ahead of plan in Q1 and better-than-expected optimization of spending for paid channels. We will heighten our focus on automation, and we’ve seen record net-new customer adds. In our sales teams, specifically in expansion and retention, we’re committed to driving better efficiency with dedicated, automated ways to grow our customer accounts. We plan to focus sales efforts on expansion and increase sales team productivity for accounts that have higher average checks to drive overall growth. We are investing now in actions to drive stronger sales results and further efficiencies in 2023 and beyond. This year, as a percentage of revenue, we plan to spend less on sales and marketing compared to the prior year. Across the company, we intend to carefully manage expenses and are staffed according to the current demand environment. As a result, we expect headcount growth to be modest compared to 2022. I will now turn the call over to Brian, who will provide a more detailed discussion of our financial performance and guidance. Brian, it is great to have you on board for your first Semrush earnings call.

Thank you, Eugene, and thank you, Oleg, for the warm welcome and introduction. It has only been a few weeks, and I can already see that Semrush has all the attributes a CFO values - a high margin, growing recurring revenue business, and a loyal, committed customer base. We have a huge market opportunity and a truly diverse global business, serving customers in 150 countries, across all industries and market segments, ranging from small businesses and startups to Fortune 500 companies and global agencies. I am incredibly excited to join Semrush and to be working with an experienced and passionate management team. I look forward to helping drive the next phase of growth. Now, turning to our Q1 2023 results. Our Q1 revenue of $70.9 million was up 24% year-over-year and above the high end of our Q1 2023 guidance range. Growth was driven by record net new additions and continued growth in our average revenue per customer. Our dollar-based net revenue retention for the first quarter was 116%. We continue to expect our net revenue retention to remain strong as we execute on our up-sell and cross-sell strategies within our installed base. ARR was $293 million as of March 31, 2023. First quarter gross margin of 82.2% was up approximately 250 basis points from a year ago. Gross margin benefited from higher revenue and continued leverage from our hosting and third-party service costs. We continue to expect gross margin above 80% in the near term. Operating expenses were $69 million in the quarter, down 4.3% sequentially as we continue to drive efficiencies, carefully manage expenses, and drive towards sustained profitability. Non-GAAP net loss was $7.1 million and at the high end of our guidance range of $8 to $7 million. Turning to the balance sheet, we ended the quarter with cash and cash equivalents, and short-term investments of $232.3 million, down from $237.5 million in the previous quarter. Our cash flow from operations in the current fiscal year was negative $3.6 million. We also incurred approximately $0.3 million of capital expenditures and capitalized $1.1 million of software development costs. Looking ahead to 2023 guidance, I am confident in the underlying trends in the business and capabilities of our leaders to deliver profitability. We are committed to maintaining a disciplined and balanced approach to optimizing costs and improving efficiency and profitability while continuing to invest in future growth opportunities that we expect will drive long-term value. For the second quarter, we expect revenue in the range of $73.6 million to $75 million, up approximately 19% year-over-year at the midpoint. We expect the second quarter non-GAAP net loss of $3 million to $1.5 million. For the full year, we are reiterating our prior revenue guidance of $306 million to $309 million, which would represent growth at the midpoint of approximately 21% year-over-year. We continue to expect non-GAAP net income of breakeven to $3 million for the full year. Our non-GAAP net income guidance range assumes a euro exchange rate of approximately 1.06 to the dollar for the remainder of the year. With that, we are happy to take any of your questions. Operator, please open the line for questions.

Thank you. We will go first to Mark Murphy at JPMorgan.

Hey guys. This is Arty on for Mark Murphy. Just first one you guys paying customers are really impressive adds in the quarter. Anything to speak to that? And what's driving that kind of more specifically under the hood? Has the demand environment kind of improved quarter-over-quarter, has been stable or going a little bit worse? That part of what helped?

Thanks very much for the question. This is Andrew. So, I would say that the record net new adds is really a product of the experiments and the growth that we invested in last year, primarily in organic marketing channels as well as our paid experiments last year. Those continue to drive those numbers that you see in Q1. I would say it's a similar demand environment from the last reporting cycle. We've continued to see strong tailwinds from those investments, but we also believe that there's a stickiness that we have for our product going forward. Overall, I'm confident in our demand generation motions and we believe that we're positioned for a balanced approach.

Great. Thanks. And then to follow-up because I know some pretty exciting generative AI tools. Interesting would be to just now how are these translating from kind of hype to actual usage? Are you seeing customers really take these and adopt, or is there kind of a learning curve they're still going through? Thanks.

This is Eugene. So, we definitely see a lot of usage. And I just want to give you kind of a bigger background here. We started implementing some GPT-based features even from early versions of GPT, so GPT-2 and so on. And that happened roughly two years ago. Implementation was primarily in our writing tool that was available only for Guru users. So, usually, it was somewhat limited to the higher end of the Semrush user base, but we had a lot of usage for a while. And right now with new changes, we realized that there is a much broader audience for those kinds of products. So, we started opening up a lot of those features throughout our center, including the launch of ContentShake. We also encourage a lot of partners who work in the generative AI space to build apps. We are seeing quite good traction in terms of usage in all of those directions. I think it's maybe a little bit early to say how much usage is where we're going to see moving forward because it's such a hot topic. A lot of demand is really coming from people being excited about new generative AI capabilities and wanting to try them. But I think the traction we are seeing right now is very encouraging, especially in terms of usage.

Very clear. Thank you.

We'll move next to Scott Berg at Needham.

Hey, this is Rob Morelli on for Scott Berg. Continuing on the topic of the generative AI functionality, are you guys looking to monetize this as a separate module, or is it more about driving incremental functionality just to stay ahead competitively?

We're definitely going to see how the market develops to understand to what extent we can apply monetization. But the features that we have right now are monetized. There are some things you can do in the free version, but once you need to generate a lot of content, we will ask you to start paying. So, monetization is already implemented in those features as of now.

Got it. And then with the guidance it implies a modest level of revenue growth acceleration. What gives you confidence in that guidance versus macro that is still a bit soft?

Hey, Rob, it's Brian. So, yes, we're guiding $306 million to $309 million for the year. It does assume that we have some leveling off in growth in the second half. I think some of the comments that Andrew made earlier were really driving the confidence in that we are seeing strong demand. So, that is continuing into the second quarter. Our expectation is that we'll drive some leveling off in the growth rate in the second half which will allow us to achieve that full year guidance.

Next, we'll move to Parker Lane at Stifel.

Hi. This is Matthew Kikkert on for Parker. To start, to what degree are you seeing the macro driving vendor consolidation? And how much are you planning to benefit from that trend?

I would say vendor consolidation has been a big trend across the industry. If you follow other companies in the space, such as HubSpot, they've been mentioning this for a while as well. Definitely something we're seeing in an environment like this; people don't want to overspend and they want to buy platforms that provide the best value for money. We can provide anecdotal evidence that this is happening based on conversations we're having with customers and how they choose vendors now. I just don't think we could quantify this, but it's definitely something we are hearing from other players in the industry and from our customers as well.

Okay, understood. And then secondly, you've shown great progress on the App Center. You now have 50 apps. What is the company doing in terms of R&D or working with other developers to keep increasing that number? And how should we think about the App Center as a revenue contributor going forward?

So just again to give historical background, this is something that we started doing not long ago. The App Center was launched in 2021 and was really more of an experimental product where we were trying to see if it was a viable go-to-market strategy. We were really excited about the success we've seen early on and started doubling down on this. In terms of allocation of resources, we're probably still a little bit behind compared to where we want to be. We are committing more and more R&D resources to our App Center. In terms of what we're doing now, we are investing a lot in infrastructure for apps, especially in billing systems, so there is greater flexibility in terms of how those apps can be monetized. We are adding engineering resources in this direction, and then in terms of partner sourcing, we actually have now established a team dedicated to partner sourcing. Our goal is to bring not just more partners, but of course, partners that are more established as businesses. We are very excited about the partners we have now, and they are doing a great job building great products. We think for a new batch of partners, we also want to have a couple of big names. So that's what we are aiming for in terms of App Center development.

We'll move next to Michael Turits at KeyBanc.

Hi. This is Michael Vidovic on for Michael Turits. I guess just to start, could you talk about broadly the change that you saw in the overall macro environment in the demand environment between Q4 and now?

Sure, this is Andrew. I'd be happy to take the question. Thank you for it. So again, we see just as we reported in our previous cycle, we do see elevated and sustained demand, particularly registrations, trials, and net new customer adds, as I mentioned before. A couple of things are driving this, not only the investments from last year in multiple channels for growth, but I also would say particularly in Q1, we've activated new audiences with the first-ever campaign focused on a real customer. This has struck a chord with our existing and new audiences, which is driving some of our best-ever results at the top of the funnel further on down. So I think going back to your question, the demand that we continue to see is supportive, it's strong and we will continue to drive high visibility and high impact programs for the rest of the year to sustain that.

Great. Thanks. And then just a quick follow-up on the customer adds. I guess how sustainable is that level? I know you've talked about 3,000 previously. I guess was that abnormally high above your expectations and not re-achievable, or what are you expecting at this point?

I think it's in line with our expectations. I think that we just need to remember that everything is according to our guidance. Our business, like others, has seasonality. I would just look towards the guidance that we've given.

And our next question comes from Elizabeth Porter at Morgan Stanley.

Hi. Thank you so much. I wanted to follow up on the NRR of 116. You noted you expect it to remain strong benefiting from some of that upsell and cross-sell. So could we see it stabilize at this level for the remainder of the year? What are the risks to the downside of the upside as we move into the year? And were there any inter-quarter trends in NRR that you could speak to from Q4 and Q1? Thank you.

Thank you for the question. This is Eugene. We may not be communicating this well, but the thing is, just based on how our formula is calculated, there is certain math that just makes it go down this year and will continue until the end of the year, and then it will start going up. Sometimes you have those fluctuations just because something moves from the numerator to the denominator and continues to do that for a year. In terms of where this number is going to be, it will keep slightly declining until the end of this year, and then we expect it to start growing back. And I think we were saying that for a normal environment when you don't have those fluctuations, it's reasonable to expect it to be somewhere in the 114 range. Of course, if it's better, that's great. But right now we have expansion numbers in the denominator and it will continue to be there for the remainder of the year. Unfortunately, we haven't done this calculation for intra-quarter details, but we would be happy to follow up later.

Got it. Thanks for the clarifications. And then just as a follow-up on the consolidation theme. You mentioned greater than 20% of customers are buying multiple products. Any color on how that looked a year ago and where it could go over the next few years? And what are the specific go-to-market motions you're driving to drive that improvement? Thank you.

I would say that I don't have the number just in front of me about last year versus this year, but I would be happy to follow up on that. But I would say that over time, particularly when we look at the over 55 tools that we have in our overall platform, we continue to invest particularly in those accounts that show even more promise to expand. We absolutely are investing in more and more activities to grow those average checks. At this point, we can't give specific guidance on where that number could improve from 20% and onwards over the next couple of years. But I can tell you that it's absolutely a priority for us.

We'll move next to James Heaney at Jefferies.

Thank you for taking my questions. You mentioned in the letter that you're focused on upgrading your product offerings. Could you just talk more about what some of those upgrades are and when we should expect those to show up? And then my second question — just if you could elaborate on your comment around the number of customers paying over $10,000 growing over 45%, just how much of that was adding new clients at a higher average selling price versus upselling customers into the higher-priced tiers? Thanks.

Let me start with the last question. So in terms of how people get into this bucket, I would say the normal path is through upgrades. People would buy something and then eventually get into these higher tiers or buy more. I would say that's the majority of those cases. That said, sometimes this path is really short, so it can happen within the first couple of months. I don't know where it would qualify on your scale of whether it is a new customer if it came just a couple of months before or an existing customer that got expanded, but I would say this is also quite a big bucket. People who started with something small just to try the product quickly realize they need more and started a normal kind of buying process that larger companies do when they need to write bigger checks. In terms of ongoing product improvements, I think the list is going to be huge if we have to mention everything, but on the SEO front, we've launched several really innovative features, for example, a pure class ring feature that utilizes AI to semantically analyze sets of keywords and bundle them together in groups that makes the most sense in terms of covering a particular topic and creating a blog post. We've released a really unique and new algorithm to estimate organic traffic based on SERP features. This is really in line with the overall search trend, where in the past you could have 10 blue links, but now every search is unique with a unique combination of SERP features, and our traffic estimation algorithm now takes this into account. I don't know any other company that is doing the same. So really a lot of innovation is happening across our entire portfolio of products. We mentioned a couple of things we launched that are primarily focused around AI, but there are tons of other products that we didn't mention just because they're not utilizing AI that much. At the same time, we're seeing a lot of traction with those products as well. So tons of stuff is happening. We'll have to narrow down the question if you want more specific details.

And that does conclude our question-and-answer session. At this time, I would like to turn it back over to management for any closing remarks.

Thank you for your questions. In closing, we want to say we delivered a strong start to the year and achieved a very important milestone: 100,000 paying customers. It's a very important milestone for us. We are very committed to making online marketing easier for businesses of all sizes. Thank you for your support. We look forward to keeping you updated on our progress. Thank you.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.