Similarweb Ltd. Q3 FY2021 Earnings Call

Good day, everyone, and welcome to the Similarweb Q3 Fiscal 2021 Earnings Conference Call. At this time, I am pleased to hand it over to your host, Annie Rosenberg. Annie, you may proceed.

Thank you, operator. During this call, we will make forward-looking statements related to our business, including statements related to the expected performance of our business, future financial results strategy, the potential impact of COVID-19 and associated global economic uncertainty, long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected or implied during the call. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements and reported results should not be considered as an indication of future performance. Please review our filings with the SEC, including our final prospectus and section entitled Risk Factors therein filed with the SEC on May 12, 2021, for a discussion of the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information to be available as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. As a reminder, certain financial measures we use in this presentation and on our call today are expressed on a non-GAAP basis. We use these non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. We believe these non-GAAP financial measures, when taken collectively, may be helpful to investors because they provide consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, results of operations or outlook. However, non-GAAP financial measures have limitations as an analytical tool and are presented for supplemental informational purposes only. They should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our investor relations website at ir.similarweb.com. With that, I will turn the call over to Or Offer, CEO of Similarweb.

Thank you, Annie, and thank you all for joining us here today for our Q3 2021 earnings call. It's great to be here with all of you this morning. Our team is executing at a very high level and we delivered a very strong result for the quarter. As a result, we are pleased to raise our revenue guidance for the full year of 2021 to $135 million, representing a 45% growth year over year. Q3 was a strong quarter in which we achieved several new milestones. First and foremost, I'm proud and excited to report that in Q3, we saw our ARR exceed $150 million just one year after we reached the $100 million ARR back in Q3 2020. Also in the quarter, our GAAP revenue increased 46% year over year to $35.6 million, this result exceeding our guidance. Q3 was a record quarter for us for both new customer acquisition and retention. Our customer base grew by 174 accounts, including the addition of amazing new logos across the diversity of industries, including Volkswagen Group, Toshiba Electronics, the London School of Economics, Royal Caribbean, Quest Diagnostics and News Corp Australia. Our most significant growth comes in our largest and most strategic customer segment, those companies that generate more than $100,000 in ARR. In Q3, we set a new record, adding 25 additional $100,000 customers, an increase of 48% year over year. These critical segments now represent over 50% of our total ARR for the first time. We're seeing strong momentum as our expanding product portfolio is contributing to greater velocity in our direct sales motion. In Q3, we set a new record for NRR, improving from the previous high of 106% at the end of Q2 to 110% in Q3 in that critical customer segment of accounts with over $100,000 in ARR; we improved the NRR to 122%, up from 118% in Q2, also a new record high. Those improvements are driven by expanding usage of our products as well as by our customers who purchased more than one of our digital intelligence solutions. As you know, we offer a complete suite of digital intelligence solutions, supporting a wide variety of use cases for digital marketing, sales, market research, e-commerce strategy, and alternative data for investors. Today, more than two-thirds of all of our customers are purchasing more than one solution. As an example of how our portfolio strategy is helping drive deeper customer penetration, in Q3, we completed one of the largest bids in Similarweb history, a combination of up-sell and cross-sell with a major multinational Internet technology company. This was a seven-figure addition to our existing relationship; making this the second consecutive quarter we have been able to announce an ARR contract of this size. This customer will be using four of our five digital intelligence solutions, representing a total of $6.5 million ARR contract. I want to focus for a minute on one of our five solutions—our new Shopper Intelligence offering. It is an exciting and differentiated solution, and we are seeing some amazing early success with it. Shopper Intelligence delivers powerful insight into e-commerce activity online marketplaces, enabling our customers to optimize their performance by revealing browsing and buying behaviors across online marketplaces. Our insights help them to shape their online sales strategies by optimizing product portfolios, benchmarking the competition, and improving sales and advertising performance. When we launched our digital marketing and digital research solution, it took us four years to get to our first seven-figure deal. With Shopper Intelligence, it took us just three months. And in Q3, we signed our first seven-figure ARR deal for Shopper Intelligence. Here are a few examples of how our customers use Shopper Intelligence. A large North American retailer reported that Shopper Intelligence helped them remain a product to better align with search behavior, resulting in a 20% increase in sales. In Q3, we completed a two-year deal of $600,000 with this customer. Also in Q3, Shopper Intelligence helped us win with a consolidative specializing in CPG. The deal expands our business with this customer by 6x to a $360,000 ARR contract. This customer uses Similarweb in a sales process to target and teach new customers, as well as advising its CPG's customer to optimize their partnership with a big box retailer. The customer has also agreed to be a referral partner for us and is now recommending Similarweb to its own direct customers. One more solution that is growing nicely is our self-intelligence solution that helps B2B companies that sell to digital players like e-commerce, digital publishers, and digital advertisers. For example, Postscript is a leading SMS platform that enables e-commerce businesses to communicate and engage with customers for text message marketing. Postscript needed to improve and automate its account targeting and lead generation, which was labor- and time-intensive. By implementing Similarweb's self-intelligence solution, the company now has access to Similarweb's e-commerce database in every region, automatically segmenting and prioritizing e-commerce leads and integrating them directly into Salesforce. The result was an increase in target account pipeline of 27% within just the first month. In Q3, we continued to make smart product investments to enhance our solution portfolio and make it stickier. Year over year, we doubled the size of our engineering team. And in Q3, we delivered hundreds of improvements across our portfolio of digital intelligence solutions that include major functional advancements in our competitive insight, killer strategy, and advertising intelligence features, to name a few. These improvements are driving more customer value and increasing our product stickiness, which is reflected in our consistently improving NRR numbers. It also reflects in the way our customers use our solutions, incorporating them directly into their business workflows. Indirect channels, referral partners, affiliate resellers, and OEMs are a new area of expansion for our business. For example, in September, we announced that we had been selected by Google to power its new Market Finders service. Market Finders help small and medium-sized businesses target and grow into new global markets. The service leverages Similarweb data to analyze the company's export potential, delivering an automated score along with customized and actionable recommendations to kick-start an international expansion plan. Google has told us that it was the unique accuracy of our digital data and insights and our data edge that fueled their decision to integrate with us. The win with Google reflects our growing relationship and also represents the increased potential we see to build OEM relationships where partners include our data and insights in their own product offerings. We also saw channel growth outside of OEM. In fact, Q3 was the first quarter in which our resellers outside of Japan contributed more than $1 million in new business. Overall, we have a strong opportunity for our indirect business and we plan to increase our investment in this area. Our data and insights are recognized by our customers, companies like Google and Postscript while referred today, as well as by the industry more broadly. In fact, last month, we were recognized by Hedge Week as the best alternative data provider in the 2021 America's Awards. Over the past 10 years, we have been working on solving the incredibly challenging problem of measuring digital behavior. We invest significant resources in our data assets and acquisition and we've built an amazing R&D team of top-notch data scientists and engineers. Those investments in technology are very difficult to replicate. We are proud of and confident in our data edge, and we have differentiated ourselves on the reliability and comprehensiveness of our data. However, we are always looking to innovate and improve on our measurement and insight creation. That's why today, as you may have seen, we announced the acquisition of MD Mobile, a San Francisco-based mobile insight provider and market leader in mobile audience analytics, consumer panels, and mobile sampling. We've been partners of MD for over a year, so we know them very well and we have been very impressed with the quality and depth of the data. MD's measurement approach is backed by a large-scale metered panel of highly engaged respondents. This approach complements our existing measurement strategies and will enable us to enhance our mobile intelligence offering with more granular data and more powerful use cases. Beyond this, we believe that MD will position us to introduce exciting new market research capabilities in the future. We welcome the MD team to the Similarweb family, and we are looking forward to working together with them to advance the state of the art in digital measurement. In general, we continue to benefit from the strong secular trend for digitization in our markets. Digital has become a preferred way to interact, contract, and deliver products and services; it is an important growth driver and strategic focus for most businesses today. Digital markets are highly competitive, and almost every player is looking for an advantage. Our digital intelligence solutions give our customers an edge of data and insights that enable them to understand their market better than their competitors, take action faster, and win. The more companies shift their business and become dependent on digital, the more mission-critical our offering becomes. Those trends are driving our strong growth and reinforcing our confidence in our opportunities, our strategy, and the investment we are making in our future. We have a massive market opportunity, which we believe today is approximately $34 billion of solution targets, the most essential revenue-driven areas of our customers: sales, marketing, e-commerce, and more. We sell across a wide variety of industries, ranging from financial services to retail, travel, CPGs, media, and many more. To summarize, we continue to execute successfully on our strategy. Since our IPO, we reached the $160 million ARR milestone nearly three months ahead of our plan, and we have delivered two consistent quarters of strong revenue growth, both north of 45%. We have grown our indirect channels, and we expand our data edge both organically and through acquisition in Q2 and Q3. We introduced new products and features that expand our TAM and enhance our ability to monetize those with significant new and upsell deals. Our combination of strong revenue growth and outstanding gross margin puts us among a small group of best-in-class fast-growing companies in the world, and we are very proud of this achievement. Finally, our execution and growth would not be possible without each member of our global team, each of whom works hard to achieve those results. We've built a top-class recruiting machine to drive and support our growth. We are currently signing new hires at the rate of 50 new employees per month. I am very happy that earlier this week, DNB recognized us as one of the top 30 tech companies to work for in England. Overall, I am pleased with the way our team continues to execute and our focus on helping our customers succeed and win in the digital world. We're heading into Q4 with a tremendous amount of energy and momentum, as you can see by our raising our guidance. And as I like to say, we are just getting started. With that, I will turn it over to Jason, our CFO, to review the financials.

Thanks, Or, and good morning, everyone. I will now walk you through our third-quarter financial results before moving on to our guidance for the fourth quarter and full year 2021. As Or mentioned, in Q3, we delivered record revenue of $35.6 million, reflecting 46% year-over-year growth. This increase was driven both by an increase in our total number of customers, which rose by 27% to 3,242, as well as an increase of 16% in our average annual revenue per customer to $45,000. In our large customer segment, those who generate $100,000 or more in ARR, we increased the number of customers by 48% year over year to 245 customers. Once again, most of these customers began initially as smaller customers and have expanded through our successful land and expand motion. Today, this customer segment represents 51% of our ARR, while no single customer accounts for more than 5% of our ARR or revenue. The dollar-based net retention rate, or NRR, was 110% overall and 122% for our $100,000 ARR customer segment as compared to 101% and 114%, respectively, last year. The success of our land and expand model continues to prove itself as NRR not only improved substantially year over year but also sequentially as compared to Q2. As you know, substantially all of our revenue is ARR with minimum subscription terms of one year. We continue to increase the number of customers with multiyear subscription terms. As of the end of Q3, 1% of our ARR is generated from customers with multiyear subscription commitments compared to just 25% last year. This trend, along with our high NRR, reaffirms the value that our customers are generating from Similarweb and gives us visibility into the health of our ARR. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to the GAAP results in the earnings press release that was issued just before this call. Our gross profit totaled $27.9 million in the quarter, representing a gross margin of 78.3% versus 78% in Q3 2020. Operating expenses grew to $41.7 million in Q3, up from $21.4 million in Q3 2020, largely reflecting investment in personnel across the business from product and R&D, sales and marketing, and our G&A team to support our business growth. Employee headcount increased 69% to 864 employees as compared to 511 last year, which has fueled our top-line growth. The specific components of our operating expenses were research and development, $10.4 million versus $5.3 million in Q3 2020. This increase was driven primarily by growth in employee headcount focused on our newer solutions such as Shopper Intelligence. Sales and marketing was $23.2 million versus $12.9 million in Q3 2020, driven principally by increased investments in sales and account management headcount and marketing activities. General and administrative was $8.1 million versus $3.2 million in Q3 2020, which includes $1.2 million of additional costs for the quarter that we now incur as a publicly traded company. As a result, our non-GAAP operating loss in the quarter totaled $13.9 million, better than our guidance, increasing from $2.4 million in Q3 2020. Free cash flow for the quarter was negative $17.1 million compared to negative $2.3 million in Q3 2020, primarily as a result of the investment in employee hiring to drive our growth. These investments are already showing their value in the acceleration of ARR, customer growth, and higher NRR. Turning to the balance sheet. We ended Q3 with $159.1 million in cash and cash equivalents and no debt. We believe that our cash balance and our $75 million credit facility, totaling $234 million of available funds, provide us with more than enough liquidity to execute on our growth plans. Deferred revenue at the end of the quarter was $66.4 million compared to $43.6 million at the end of Q3 2020. Our remaining performance obligations, or RPO, totaled $114.1 million, up from $85.7 million as of December 31, 2020. We expect to recognize approximately 87% of total RPO as revenue over the next 12 months. We believe that the combination of deferred revenue and RPO are a good indicator of the health of our business. During Q3, we exceeded $150 million of ARR and continued to deliver strong and accelerating NRR and customer growth, both overall and from our $100,000 ARR customers. These trends and the continued momentum and demand in our business fuel our confidence to again raise revenue guidance for the year. For Q4 2021, we expect total revenue in the range of $37.5 million to $37.9 million. For the full year, we are raising guidance and expect total revenue in the range of $135 million to $135.4 million, representing 45% growth year over year at the midpoint of the range compared to 32% growth last year. Non-GAAP operating loss for the fourth quarter is expected to be in the range of $18.8 million to $19.2 million and for the full year between $52.1 million and $52.5 million. This includes approximately $3 million of incremental operating costs related to the acquisition of MD Mobile, which we expect to close this month. In summary, we have executed well since our IPO. Our business is tracking well across all of our major initiatives, and our financial performance and guidance indicate that we will end the year on a high note and head into 2022 with strong momentum. With that, Or and I are happy to take your questions.

Our first question comes from Bhavan Suri.

Thank you and congratulations. It was a great quarter and certainly the NRR junction rate was phenomenal. I guess let's focus on that acceleration you're seeing with NRR hitting high watermarks. I guess both Or or Jason, I'd love to understand what drove the customer expansion? Are you seeing customer budgets expand? Was it an operational go-to-market change to highlight? Or are the new products being adopted as those products get rolled out? Help me understand what drove that acceleration in the quarter that we've seen now for a couple of quarters.

Hi. Thank you. It's Or. I think there are many elements contributing to the growth of the NRR we're seeing over the past quarter. I can assume that the majority of the impact comes from improvements that we're making on the product, plus introducing new products to the customers and driving upsell and cross-sell as the customers buy more of our product portfolio offerings.

Got you. And then Or, maybe a little more technical one here. So you mentioned that MD collects data through panels. Can you talk a little bit just in more depth about the types of data that can be collected in the solution? And then how does that data fit in with your existing data modeling process?

Yes. So MD is really an expert in the metered panel world for mobile and has great data assets. So their data is a great enrichment for two areas. First, improving our mobile web to enhance the estimation on the website to have better web and mobile web estimation. And the second part is improving our app offering. So they also have great app information like downloads and usage for that ecosystem. More than that, they also have the technology that can see ad exposure, etc., around the mobile ecosystem that is something that is very unique.

Our next question comes from Sterling Auty.

Yes, thanks. Hi, guys. So wondering, in terms of the increased usage part of the NRR specifically, what programs or things are you doing differently now than maybe a year ago to help motivate that increased usage into your customers?

I don't think we did anything special in our go-to-market. I think it was mostly natural. It was not like anything aggressive from our side. I think just more improvement on our product, more listening to our customers, understanding what they need to do the right improvements in the product, and then introducing exciting new features and solutions is what's driving this growth.

And then if it's kind of just organic adoption on your customers' part, are you finding that the increased usage is spreading across different types of departments within those customers? And is it hitting different budgets than maybe just a marketing budget where you might land initially?

I think the answer is yes. Yes, when we usually introduce a new solution, it's basically to a new department. If we take CPGs as an example, they usually land on our research solution that comes sometimes from the data team's budget or the marketing budget. When we introduced our new Shopper Intelligence solution, we're already talking about different things like the e-commerce team, and product buying teams. So it's different budgets, usually.

Our next question comes from Brent Thill.

Hi, guys. This is David on for Brent. Thanks for taking the question. I guess the first one, if you could maybe discuss the MD acquisition and how it's going to position you guys in the mobile area and the app data spot area, especially against competition?

So I think it's a great boost to our entire mobile and data infrastructure, and we feel highly confident. We've worked with MD for more than a year as a partner, so we were very familiar with their offering, data quality, and we were highly impressed. We feel that not only by joining forces with them, we can introduce much better mobile data quality, but we also believe that we can accelerate their business and their operation. They were a small start-up, 16, 17 employees who were doing a good job, but with Similarweb's resources and infrastructure behind them, we can really scale the operation and basically boost them. The technology and the metered panel will cause Similarweb to serve a really strong mobile offering.

Got it. Looking forward to you guys integrating that into the platform and getting — being able to use it. And then maybe just one more on headcount. I think you guys said headcount was up 69% year over year. Could you touch on what areas of the business saw the majority of the headcount growth and maybe going forward, where are you guys focusing on hiring?

I think across the company; we're seeing great growth. So the growth in the past year was in all departments. We have grown from our G&A to be ready for the IPO and a public company, we doubled our R&D organization, which still needs to support all the success we're seeing with their new solutions. And of course, our go-to-market team continues to execute amazingly, and we need to hire more people to drive the growth we're looking for.

Our next question comes from Jason Helfstein.

Hey, thanks. Hey, guys. I guess, to maybe talk a bit more about the iOS roadmap, how the acquisition is fitting into that? And relative to what you were doing organically, and then how you think about that relative to what's happening in the market with like IDFA and how that's either positive or negative for you? And if you even want to talk about how the ultimate removal of cookies ends up playing out for you? And then secondly, just how do you think about just the tailwinds around video for the business? So meaning, obviously, a massive shift to video from a consumer standpoint. How does that impact your clients and how they spend on you and think about your products? Thanks.

Thank you, Jason. Good to hear from you. So I will try to answer all of the questions. I think regarding your first question about iOS and mobile strategy. As you can see, we are being serious about this and doing our first acquisition, which will drive the entire mobile strategy, Android and iOS. We're going to go all-in and will accelerate the roadmap. A lot of new improvements will come in the next few months and you will see them, and I'm sure you would like them. The second question about IDFA and how it impacts our market and how we're observing it. The IDFA removal and the trend of removing cookies on the web are basically to make it more difficult for the networks to track users and target them online. This motion is not impacting our industry negatively. We are doing more measurements and statistical market research about the Internet. So we don't use cookies or IDFA when we're building our measurement. What I think will happen once these tracking features are removed is that advertisers will have a much harder time measuring themselves and understanding ROI on marketing. It might feel more like TV advertising, where the advertiser has little information. In this situation, they will need to rely more heavily on data and insights from market research companies like ours to drive their marketing strategy. And regarding video, we do have a video intelligence offering in our platform that can enable our customers to see what is the video advertising strategy of their competitors. So we are touching on it lightly, but we don't do video measurement. We support the marketing acquisition team on the video strategy but not in the measuring of video ads.

Our next question comes from Tyler Radke.

Hey, good afternoon, Or and Jason. I wanted to ask you just around the strength that you saw in large deals. I think you talked about a $6.5 million ARR deal. What are you learning from some of these larger contracts just from a closing and go-to-market perspective? And just how are you thinking about the large deal pipeline as you head into Q4?

Tyler, this is Jason. So yes, we're really excited about those large deals. When we talk about our land and expand strategy, that's really what we do. Our goal is to land with the customer at the right price point for them. Over time, we then upsell and cross-sell them. That's what you saw in both last quarter and this quarter, and you're seeing that in the increase of those $100,000 customers. We're seeing more and more of those—sorry, I'm getting feedback—more and more of those in our pipeline. In other words, the existing customers that we have are expanding both in terms of usage in different departments and expanding in terms of more solutions that they're utilizing with us, and we think that this trend is going to continue.

And I wanted to ask you about the OEM arrangement that we signed with Google. I think their Market Finder service. How is the revenue sharing going to work on that deal? And are you seeing any color you can provide on this kind of early traction and what the size of potential end users using that service is?

So it wasn't a revenue-sharing model. Basically, it's pay on consumption. So they're buying access to our data, and then they can build product on that. They give this product for free, so they are not selling it. And this is how it works. We think that there's a lot of opportunities in this entire OEM ecosystem. There are endless amounts of companies building products that can gain great value by using Similarweb data in their workflow offering. So we're seeing a really great potential, and we're now seeing Google building products that are using our data. It's a very exciting moment for us.

Our next question comes from Ryan MacWilliams.

Thanks for taking the question. I'm happy to hear about the strength across the business. So if I could just share more on your Shopper Intelligence product. You mentioned already winning a large deal since the product launched. How do you think about the addressable opportunity for this product? And how can the solution drive larger deal sizes?

Yes. First of all, my personal belief is that the TAM for the Shopper Intelligence is massive because this product tells you what people are buying online. If you compare it to similar products, the old traditional market research tells you what people are buying offline—the point of sales. This is a huge market—that might be a double-digit billion-dollar market in the offline world. With more companies moving online and more consumer spending online, the access to this data becomes crucial. The budgets will shift toward this market, which is massive. I think our offering and position there are unique; the quality of the data is unparalleled. The average deal in Shopper Intelligence is already six figures, and after only three months of launching this product, we managed to close a seven-figure deal. It took us four years with our digital marketing and digital research solutions to get to a seven-figure deal. With Shopper Intelligence, it was just three months; this shows the quality and demand in the market for this valuable data and insights.

I appreciate that color. It seems like a logical upsell for some of your transactional customers. Jason, one for you. A lot of the questions have been on net retention doing very well in the quarter. Should we consider this a new level for net retention as we try to model your growth out? Or anything maybe to call out here year over year or what went into those metrics? Thanks.

Yes. I think so. I think we've gotten to this new level, and I think that's a trend going forward.

Our next question comes from Pat Walravens.

Hi. This is Joe Goodwin on for Pat. Thank you so much for taking our question. Can you please talk about the advisory services that you offer to your larger customers? And just maybe how that's going and how large that is from an ARR perspective today?

Yes, for sure. Advisory itself is something that we introduced this year; a very exciting motion. Basically, it's an add-on for most of the customers who buy into our software. A lot of our customers, when they start building their market share dashboard with our data, often want more granular data on specific strategic questions they want to know about the digital world that you cannot carve out from the platform because we didn't release those specific data sets out there. So usually, they will contact us to provide custom data fields or reports. The interesting thing about the advisory services is that we saw, I think, Jason, correct me if I'm wrong here, that 80% of the deals are recurring because they love the data and insights they're getting and they are subscribing to those insights. Jason, what's the size of the advisory itself?

I'd say it's a few million dollars. But like Or said, substantially all of them are recurring revenue there by design, similar to our other contracts—all ARR-based—but they provide additional insights for things that have not yet been productized in the platform.

Yes. I would add that the advisory services are very strategic because we usually work with our largest accounts and those data and reports we produce go all the way to the C-level. It's also increasing relationships with the C-level executives by answering many strategic questions. This offering has been a huge success this year, and we expect this to drive nice growth for next year.

Great. Thanks for that color. And then just on—have you guys made any pricing changes to your solutions? I understand there are different pricing strategies across use cases and solutions. But have there been any significant pricing changes that might be leading to some of the extended use of your products that you've seen?

No, nothing that I think of. We didn't make any drastic changes; maybe more crystallized. But I don't think we did any significant change in pricing.

At this time, there are no further questions. This concludes today's conference.