Similarweb Ltd. Q1 FY2022 Earnings Call

Thank you, Operator. Welcome everyone to our first quarter 2022 Earnings Conference Call. During this call, we will make forward-looking statements related to our business. These statements may include: the expected performance of our business and our future financial results, our strategy, the potential impacts of the COVID-19 pandemic and its associated global economic uncertainty, our anticipated 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. Again, actual results and the timing of certain events may differ materially from projected results or the timing predicted or implied by such forward-looking statements. Further, reported results should not be considered as an indication of future performance. Please review our Form 20 filed with the SEC on March 25, 2022. In particular, the section entitled Risk Factors therein for a discussion of the factors that could cause our actual results to differ from the forward-looking statements. Also, note that the forward-looking statements made on this call are based on information available as of today's date, May 11, 2022. We undertake no obligation to update any forward-looking statements we make today except as required by law. As a reminder, certain financial measures we use in presentations of results and on our call today are expressed on a non-GAAP basis. In particular, we referenced non-GAAP operating loss, which represents GAAP operating loss, less share-based compensation, adjustments and payments related to business combinations, amortization of intangible assets, and certain other non-recurring items. We use this and other 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 on our earnings press release, which can be found on our Investor Relations website at ir.similarweb.com. Today we will begin with brief prepared remarks from our CEO, Or Offer, and our CFO, Jason Schwartz. Then we will open up the call to questions from sell-side analysts in attendance. Please note that we published a detailed discussion of our First Quarter 2022 results in a letter to shareholders for investors to reference, as well as an updated investor presentation with a strategic overview of the business, both of which are available on our Investor Relations website. With that, I will turn the call over to Or Offer, CEO of Similarweb.

Thank you, RJ, and also to everyone joining the call today. I'm happy to have you all here on our one-year anniversary of being a public company. We started 2022 strong, and posted excellent results. Revenue grew 51% over Q1 last year, and exceeded $44 million in the first quarter. Our customer base grew 27% year-over-year to nearly 3,700. And our average accounts spend nearly $60,000 with us annually. Furthermore, over 53% of our annual recurring revenue comes from customers who will spend more than $100,000 per year with us. Those results excite us as we continue to see momentum building in our business. The one thing that I think we at Similarweb do better than anyone else is predict how the internet behaves. In order to create this prediction of digital behavior, of how traffic moves in the digital world, we take vast amounts of digital signals generated from activity in the digital ecosystem and convert it into intelligence and market data. We process the data using advanced proprietary machine learning techniques to produce comprehensive and timely digital signals. The solutions that we built on top of the data enhance the essential revenue-driven operations team of our customers, which includes sales, marketing, analytics, e-commerce, and are designed to directly benefit a wide range of users from the C-suite to operational teams. The refined data and actionable insights we provide our customers give them a competitive advantage to win their market. We seek constantly how to innovate and improve our solution and our underlying data. This quarter, we made major investments and improvements in our mobile web and mobile app datasets across all marketing channels, which include referrals, keywords, and other topic metrics. We're also enhancing our solution to leverage data from Data.ai, previously known as App Annie, which is delivering app intelligent data, as well as launching new feature releases that constantly make our product portfolio more valuable to our customers. Our go-to-market execution continues to be highly efficient globally. 54% of our revenue comes from outside of the United States in the first quarter. The expansion of our global customer base, consisting of SMB enterprise and strategic accounts, looking to gain an edge in their markets continues to gain momentum. Today, 35% of our relationships consist of multiyear contracts, a metric that continues to expand year-over-year since 2020. Our customers appreciate the strong volume we offer, with nearly 80% of our customer base currently purchasing more than one solution from us. Before concluding, we would like to take a moment to recognize the contribution of our 65 team members in Ukraine, who continue to work when and where they can despite the extraordinary situation. Our hearts are with you, and you are inspiring us all. Again, we're off to a great start in 2022 and we are only just beginning to unlock our potential within a multi-billion-dollar market opportunity. Jason, I will turn the call over to you.

Thank you, Or. And thank you to everyone joining us on the call today. For those of you who have been on our previous earnings calls, you will notice that we are conducting things differently. Based on investor feedback, we are prioritizing spending time on answering investor questions and reducing prepared remarks. As part of this shift, we published a shareholder letter which discusses our results in detail as a supplemental part of our quarterly reporting. I will briefly cover a few clarifying topics now, then we will open up the call to questions. Our results in the first quarter continued to show our commitment to disciplined execution. Revenue reached $44.3 million for the quarter and exceeded our outlook of $41.5 million on the high-end of our range. Importantly, our overall dollar-based net retention rate, or NRR, increased to 115% as compared to 103% in the first quarter of 2021. And for our $100,000 ARR customer segment, NRR increased to 127% as compared to 115% in Q1 last year. Our go-to-market execution during the quarter was stellar as our remaining performance obligations, or RPOs, increased 68% year-over-year to $159 million. Our plans for 2022 include increased investment in customer acquisition costs ahead of our historical payback period. We are executing in line with our plan to remain below 18 months on average as indicators for returns remain consistent. As we exceeded our plans in revenue, we saw incremental gains flow through to our bottom line. Our non-GAAP operating loss was $19.8 million, which was less than the $20.5 million loss on the low end of our guidance range. This result includes non-comparable expense impacts from our acquisition. Importantly, we achieved an estimated 32% incremental non-GAAP operating profit margin from the midpoint of the ranges. Turning now to Q2 2022, we expect total revenue in the range of $45.5 million to $45.9 million. For the full year, we are raising guidance and expect total revenue in the range of $196 million to $197 million, representing 43% growth year-over-year at the midpoint of the range. Non-GAAP operating loss for the second quarter is expected to be in the range of $-23 million to $-23.5 million. And for the full year, between $-82 million and $-83 million. Compared to last year, our outlook includes impacts to cost of goods sold related to our Data.ai partnership and to the acquisitions of Embee Mobile. We anticipate non-GAAP gross margin will be approximately 73% to 74% in Q2 2022 and 75% to 76% for fiscal year 2022 as a result of these impacts. Our first-quarter 2022 results indicate we are starting on track to reach our three-year target of $450 million to $500 million in ARR and positive free cash flow as we exit 2024. With that, Or and I are happy to take your questions.

Yes. Thank you. At this time, we will be conducting a question-and-answer session. Please hold on while we poll for questions. Our first question today comes from Arjun Bhatia with William Blair.

Perfect. Thank you very much, and congrats on a great Q1, guys. I wanted to start with the net retention rate. Obviously, a lot of strength there. That metric continues to move up as up-sell and cross-sell takes hold. I'm curious if you can just dig into maybe the underlying drivers a little bit. Is it more seats, more data consumption, or cross-sell that's driving that? I know you didn't mention 80% of customers are using multiple products, but let's just unpack that metric and how high you think that can go if there's continued momentum there as the year progresses here?

Hi, Or speaking. Thank you for that question. So if I had to think out of my head about different methods contributing to the growth, I think all of them have a nice contribution. Some of that is the cross-selling of introducing new products, like the shopping or sales solution for our customers. Some of that is more about data consumption. And some of the users, we offer the tool and up-sell our API products, and then it grows with the consumption. And also, we have success with the meter approach, and that is more users and other up-sell capabilities that each one of the lines of business have. I think we will continue to have great momentum, and that's the way we're getting better. We continue to innovate and bring more solutions and improve our own products so our customers are happy and buying more.

Very helpful, Or. Thanks. And then what if I follow up working on the Data.ai partnership rather, can you just give us a sense for any updates on the development of that solution? On the mobile side, are we still set to launch by Q2 and would love to hear if there's any early customer commentary since the partnership was announced in terms of reception or potential deployments?

Yeah. So we are also very excited about this partnership. The team here is working really hard as we quoted before, and it will be launched and introduced into the market in the next few weeks. The team is very excited about it. I think it's unlocked a lot of opportunities for us in specific regions, especially in areas like Southeast Asia where we have customers. Because it's more dependent on that ecosystem. So we're going to introduce this and, of course, I think there's also a nice contribution to the up-sell across the cross-sell motion as well.

Thank you. And the next question comes from Ryan MacWilliams with Barclays.

Thanks for taking my question. And just want to say I appreciate the shareholder letter on your website. That was definitely helpful when looking through the quarter. Jason, just on the full-year guidance and also just from this most recent quarter, was there any impact from FX or anything we should think about as we move through this year?

Not materially for us. Most of our contracts are denominated in U.S. dollars. So while there often is involvement in euro or otherwise, it wasn't a material impact this quarter.

I appreciate that. And then, look, sounds like RPO growth accelerated and there was some strength in net retention in your business. Before, while you guys may have seen any impact from macro headwinds at this point, how do you think about your exposure? Do you know the potential for a worsening macro-environment, and how do you think your customers would maybe interact more or interact less with Similarweb under those circumstances?

So that's a good question. From what we saw historically, even when we look into the COVID-19 period and there were a lot of uncertainties in the market, what we discovered back then and I can also think could happen if the world goes into another uncertain phase, the need for market data is growing because companies at that stage need more context about where they stand. If the uncertainty is hurting them more than others, they all go into re-planning their strategy and they need market data for that. So I hope that the engagement will increase. I hope that answers your question.

That helps for sure, love this format. Thanks, guys.

Thank you.

Thank you. And the next question comes from Jason Helfstein with Oppenheimer.

I have two questions. First, if we begin to see a decline in corporate spending, and given that companies are already discussing pausing and reducing headcount, what is the seasonality like for account renewals? When might we notice that clients are taking longer to sign up or renew, and how would that influence your usual upselling cycles? Second, the market is placing more emphasis on cash flow and its visibility. In your letter, you mentioned expectations for achieving positive free cash flow by the end of 2024. Is there any discussion on potentially accelerating that timeline, or any additional commentary on the matter? Thank you.

Thank you, Jason. Good to hear from you. So regarding the sales cycle, and as we evolve, 35% of the deals we have are multi-year. So this big chunk of the book of business, especially the big contracts, are already locked in for multiple years. The other accounts that are smaller, even if they're big companies, our average contract is around $50,000. I don’t think it's a significant amount of closed companies that could affect us significantly, as the core product is not that expensive. However, it may be too early to know what effect it could have. Regarding the cash flow question, we're looking at market dynamics and we did communicate our guidance for 2024, and we'll work toward that direction. Internally, we are looking at how we can be more efficient to adapt to market dynamics because we understand the tone of voice in the market, and we emphasize disciplined execution, making sure we do not spend money in places we don't need to. We have great momentum, and we will continue executing.

Thank you. And the next question comes from Brent Thill with Jefferies.

Jason, just on the economic environment, I guess when you think about raising guidance into the face of stiffening macro headwinds, are you assuming in the guidance a lower close rate on what you're seeing in the pipe, or are you assuming the same conversion rates as you go into the back half of the year? Meaning, is your pipeline that good and you're taking close rates down and you still can raise guidance, or are you keeping the same methodology in place based on what you see right now?

Yes. As Or said, we've got a very disciplined approach to execution and how we forecast. We have great visibility into our pipeline and also have great visibility into our backlog. Having that backlog and being a true ARR business, not just month-to-month contracts multiplied by 12, gives us that confidence to provide the guidance we do. We will be looking at the numbers, pipeline, and conversion rates from the first part of the year and current quarters, and using that to guide us to the guidance that we know we can meet.

Okay. Great. And just a quick follow-up, Jason, on the multi-product adoption by customers. Can you just give us a sense of the average number of adopted products versus past levels, and what you're seeing there? And maybe add on what's happening with Shopper Intelligence.

Sure. As we said in the prepared remarks, nearly 80% of customers today purchased more than one solution. Often times, that starts with both the Digital Research Intelligence and Marketing Intelligence because those two go hand-in-hand. We see more and more customers that are now getting onto a third solution as well, and depending on the business that they are in, if they're in a transactional like retail or CPG business, the add-on that they pursue afterwards is Shopper Intelligence. If they're a B2B or publisher business, the additional solution they add on thereafter is usually the sales solution. We see that trend and customer journey happening from one to two, and two to three based on these factors.

Thank you. And the next question comes from Tyler Radke with Citi.

Great. Thanks so much for taking the question. I wanted to unpack the improvement in net retention rate that I think you saw both from the $100K customers as well as the overall customers. What's the primary driver of that? Is it more on the gross retention side or is it just the cross-sell and uptake of some of the new products? And how are you thinking about the sustainability of that improvement as you think about the rest of the year?

I think the improvement comes from many angles. First, global retention is improving very well, and cross-sell and up-sell efforts have been successful. Customers are happier and our product has improved. We've been doing a much better job with our customers, putting a lot of emphasis in the past year-and-a-half, and really grew a top-notch customer success organization because customer service is paramount. We hired a lot of great consultants that work with our customers, helping them work on the system, get insights, and glean data trends. All of these efforts we implemented nearly two years ago are really starting to bear fruit now, which I believe is a significant part of our improvement. Jason, do you have any more thoughts around that?

Yeah, Or. I think you hit on that really well. It's both sides, from gross retention as well as the upsell that drives net retention. More and more, our customers are able to see and measure the ROI. It's great to mention the Forrester report that was available on our site, that we mentioned in the press release. It showed that we could deliver over 600% ROI for the customers that Forrester interviewed. I think it's a great metric for folks to consider. That quantifiable ROI drives growth for our customers and ultimately drives net retention that we're delivering in our results today.

And Jason, are you expecting that net retention to continue to improve from here, or is this a peak, just as you think about what's embedded in the guide?

We don't guide on net retention rate. We're very proud of our achievements, and we believe that this is a reflection of all the investments we have made over the last 12 to 18 months. Remember, NRR is a 12-month look back number, which directly relates to our disciplined execution. We recognize the importance of not only landing accounts but also retaining and expanding them. That's the model we've been deploying.

Great. And then I just wanted to follow up on Brent’s question about close rates. It sounds like you're saying that you have very good pipeline visibility, so you're not really making any material changes in your close rate assumption. I just wanted to clarify that that's what you meant. Secondly, if you could just characterize how you've seen the business environment evolve through April and May, if it's better or worse than what you saw in March. Thank you.

Sure. We're seeing activity continue in line with what we saw previously. Again, we're conscious of the macro headwinds, which we've factored into the guidance we've provided. The way we've been operating for a long time puts us in a strong position, and we are very pleased with the results we are able to deliver and report today, as well as the raised guidance. When we look back, considering the last 2.5 years since the start of COVID, we acknowledge the concerns about pipeline impacts and spending flexibility. However, our insights indicate that clients need Similarweb as much, if not more, in tough times than in good times, because in good times, the focus is often on growth, while in tough times, having good data to understand where they need to optimize becomes even more crucial. We've seen customers reflect this in their plans for the remainder of 2022 budget and into 2023 within the current macro environment.

Thank you. Our next question comes from Patrick Walravens with JMP.

Great. Thank you. I want to congratulate you on two consecutive quarters of over 50% growth. Also, my thoughts and well wishes go out to your team in Ukraine. Jason, can we discuss the cash situation and the burn rate? You have $120 million in cash and no debt, correct? Your operating loss for this quarter was $20 million, but you only burned $4 million, which is fantastic. How much should we anticipate you will burn for the rest of this year? Was this quarter particularly unique due to collections or any other factor?

Hey, Pat. Sure. I may take a step back on that and just talk about how cash flow works at Similarweb in general. There is some seasonality to the renewal cycles we have. Typically, Q4 and the beginning of Q1 see higher renewal cycles, bringing in more cash flow in Q1 and Q2. We usually invoice our customers a year in advance, leading to higher cash collections in the first part of the year than in the back end of the year. We aim to burn less than $50 million this year on an operating basis, and I want to clarify that includes the burn we had for this quarter. So we're talking we have more than enough. From a cash balance, we have $125 million plus an additional $75 million credit facility. We look at our available cash as being over $200 million and believe that's more than enough to sustain us until we reach cash flow profitability as guided, reaffirmed today, with targets around $450 million to $500 million in ARR.

Yeah. It sounds like it's more than enough. I heard Or's comments about looking for efficiency, but when you look at all the startups that are starting to say, okay, we're going to grow less fast and conserve our cash, do you guys think about that? How do you see your burn rate going down?

We don't think we should slow down, but we shouldn't speed up either. This is a different approach because we're seeing a huge opportunity ahead of us. As I like to say, we're all just getting started, and the market to capture our technology and offering is very unique. In a different world, we might even accelerate our growth. However, we realize we need to continue executing at the same pace. Jason, do you have anything to add?

I'll add to what Or said. When you look at the payback period, we shared in both the shareholder letter and in the investor presentation that we're tracking on a 15 to 16 months payback on a gross profit basis for customer acquisition. The second-year net retention rate gives us a better 45% to 50% contribution margin. That is, gross margin minus the cost of the sales and marketing resources—customer success we employ to retain and expand customers. This model is highly efficient, and we have focused on that. Right as we came to market with the IPO a year ago, we took the importance of cash flow seriously and aimed for break-even and slight profitability on a cash flow basis. We're growing at 32%, and as Or mentioned, we see the massive potential ahead of us. The model is efficient and our disciplined execution during the past years positions us to deliver cash flow profitability around 2024.

Thank you. The next question is a follow-up for Ryan MacWilliams with Barclays.

Back again. Thanks, guys, for taking the question. Or, I know last quarter you talked about your desire to further your market-leading position in alternative data intelligence. But with addressing Patrick’s question, some of the challenges that startups or late-stage companies are experiencing, are you tempted to be the market consolidator or add additional functionalities as we go through this year, maybe pick up some teams or products that might take longer to develop?

That's a great question. We're inspired to be the leading player in what we call the alternative data ecosystem. There's a growing market presence now within the public investment space, and we've already established great momentum. This quarter, we plan to launch a new platform dedicated to Investor Solutions, a platform that will allow you to track stocks—not just websites, as we have done in our apps and core products. This platform will facilitate faster integration for various data sources. It will help us get signals and data performance quickly. Once we launch and start rolling with this platform, it will enable us to integrate companies more quickly and thereby enhance opportunities for acquisitions and consolidation in this market. Stay tuned, as we focus on bettering this platform this quarter.

I appreciate that color. And Jason, just on the gross margin side, great to hear about the rebound and step-up plans for the second half. Can you just walk through some of the components of how you're getting more leverage on the gross margin line? Is this just more usage of Embee Mobile products or just more overall usage? Any additional color there would be helpful. Thanks.

Both the Embee Mobile as well as what will be the Data.ai license agreement that starts hitting across sales this quarter are fixed costs. Much like our other parts of data acquisition or assets that we build out, those are fixed costs that serve the same number of customers, whether that’s 50 or 500 or 5,000 customers. Therefore, as we increase the number of customers and revenue per customer, the overall ARR and revenue for the company increases, allowing us to leverage those fixed costs more effectively. This has been an ongoing trend, as seen before our gross margin rose from 54% in 2018 to 71%, to 77%, and then to 78% over the following three years. However, the Embee and Data.ai partnerships will present short-term hits as we integrate those costs into our data edge. Once we start delivering and attracting more and more customers, revenue should increase, allowing us to see further improvements in gross margin.

Excellent. I appreciate the color. Thanks, guys.

Thank you.

And that concludes the question-and-answer session, as well as the event itself. Thank you so much for dialing in. You may now disconnect your lines.

Thank you.