Greetings and welcome to Similarweb Q4 Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host RJ Jones, Vice President Investor Relations. Please go ahead.

Thank you, operator. Welcome everyone to our fourth quarter and fiscal year 2023 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 rising interest rates, rising global inflation, and current macroeconomic and geopolitical conditions including the current war in Israel, challenges in our business and in the markets in which we operate, 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. Further, reported results should not be considered as an indication of future performance. Please review the forward-looking statements discussion in our shareholder letter along with our Form 20-F filed with the SEC on March 23, 2023 and in particular, the sections entitled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors therein for a discussion of factors that could cause our actual results to differ from the forward-looking statements. Also note that any forward-looking statements made on this call are based on available information as of today's date, February 14, 2024. 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 profit or loss, which represents GAAP operating profit or loss, less share-based compensation, adjustments and payments related to business combinations, amortization of intangible assets, and certain other nonrecurring 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 in 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 publish a detailed discussion of our fourth quarter and fiscal year 2023 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 welcome everyone joining the call today. In Q4, we reported another quarter of growth and operating improvements. We grew our revenue by 11% over Q4 last year to $56.8 million. Our global customer base grew 16% year-over-year to over 4,700 customers and our average customer spends around $50,000 with us annually. The top of our funnel continues to stay strong. We had around 13 million visitors to our three tools at similarweb.com in Q4 and we expect 120 million visits to our tool in 2023. As a result, our pipeline remains robust and we are adding new customers and expanding our penetration into our market. The changes we made to packaging, insight, and navigation in the launch of Similarweb 3.0 in Q3 are bringing in new customers. We're creating upside from bigger average order renewals. We are excited to see all the new customers at our entry-level price points, especially in our monthly packages which are no-touch with low acquisition costs. Pricing alignment with our customer with 3.0 has greatly enhanced our go-to-market model and improved our offering to our enterprise customers. It is even better with our strategic customers who are reaching new heights with us. We closed a record number of seven-figure deals during the fourth quarter because some of the largest companies in the world are recognizing the value of actionable insights that can be extracted from our data at scale. We are rapidly becoming a go-to source for companies to power competitive advantages, especially for the largest companies, who are investing massive resources into generative AI. We believe that we are just getting started with what is possible with generative AI and are only beginning to see its tremendous growth potential for us. I'm very proud of our team as we achieved an important milestone that we wanted to reach this year. We were profitable on a non-GAAP basis in the fourth quarter and our Q4 non-GAAP operating margin shows a strong improvement of 30 percentage points compared to last year, leading us to achieve our first positive free cash flow quarter since our IPO. This is a great achievement for us and reflects a lot of smart work and discipline from our team. We want to continue to build on this performance in the coming year in terms of growth, profitability, and free cash flow. To do this, we are focused on execution in four areas. First, we intend to build on the positive momentum with our strategic accounts. We want to land and expand in those large global customers. Second, we are focused on increasing the net retention of our enterprise and SMB customers, helping our customers take advantage of everything in Similarweb 3.0 as a customer success priority for us. Third, we will enhance and innovate in our product line. One area where we have a great opportunity to drive market penetration is with our mobile data and app intelligence, as well as by unleashing our own generative AI capabilities with our data. Lastly, we will continue to operate efficiently. We will carefully invest where needed to support growth and create operating leverage. Thank you everyone for your continued support. We look forward to updating everyone on our progress. With that, Jason, I will turn the call over to you.

Thank you, Or. And thank you to everyone joining us on the call today to discuss our fourth quarter results. I will briefly address our financial performance and then we will open up the call to questions. Our performance in the fourth quarter reflects our focus on disciplined execution. Revenue was $56.8 million for the quarter and exceeded the high end of our guidance range. For our $100,000 ARR customer segment, NRR was 107% as compared to 120% in Q4 last year and now represents 57% of our total ARR. Closing out the longer sales cycles we have seen in 2023, customer acquisition and logo retention were steady in the fourth quarter. As Or mentioned, an area of strength for us was in our strategic accounts where we closed 10 seven-digit contracts during the quarter, an outstanding result that is fueling our positive momentum. As we concluded 2023, 42% of our ARR is contracted under multiyear commitments demonstrating the strength and longevity of our customer relationships and our remaining performance obligations also reached a new record of $195 million, a positive indicator of our performance durability going forward. While our results on the top line were better than planned, we also exceeded expectations on our bottom line. Our non-GAAP gross margin reached 81% in the fourth quarter. Our fourth quarter GAAP operating loss was $1.1 million, while our non-GAAP operating profit was $4.7 million. This resulted in a record non-GAAP operating margin of 8% and represented an improvement of 29 percentage points versus the prior year. Our focus on operating efficiency throughout 2023 drove excellent results culminating in us generating $3.5 million in positive free cash flow in the fourth quarter, a 6% free cash flow margin. We achieved our stated goal of becoming free cash flow positive as we enter 2024, which is a momentous result for our team. Turning now to Q1 2024, we expect total revenue in the range of $58.5 million to $59 million. For the full year of 2024, we now expect total revenue in the range of $242 million to $246 million, representing approximately 12% growth year-over-year at the midpoint of the range. Non-GAAP operating profit for the first quarter is expected to be in the range of $1 million to $1.5 million. For the full year, we expect our operating profit to be between $6 million and $8 million. In 2024, we are focused on achieving profitable growth and making progress towards the Rule of 40. We anticipate being profitable on a non-GAAP basis and generating positive free cash flow in all four quarters of 2024. As we navigate the current macro environment, we are building momentum and increasingly optimistic. We believe we are well positioned to take advantage of the mass adoption of Generative AI by the world's largest businesses, which is just beginning. We believe that companies that leverage our data and insights will achieve lasting data-driven competitive advantages that will be sustained with our unique and powerful offering in the near and long-term. And with that, Or and I are ready to answer your questions.

Thank you. At this time, we will be conducting a question-and-answer session. The first question we have is from Arjun Bhatia of William Blair. Please go ahead.

Hey, guys. It's Rachel on for Arjun. Congrats on the quarter. I wanted to ask about linearity in the quarter and then into Q1 so far. It looks like some of the underlying metrics like RPO and then net new customers outpaced revenue growth. So, any color on linearity would be helpful. Thanks.

Hey, Rachel, it's Jason. Thanks for the question. Yes, we did see some more back end linearity, particularly with some of the bigger deals that were closed in the latter half of the quarter. So you do see some difference in the linearity over there. But we're really excited with the results that we had and think this is a good indication of what we should see going forward.

Awesome. And then just one more maybe about some of those bigger deals. Were those deals that got pushed out from earlier quarters? And anything specific you would attribute that momentum to with those strategic customers?

Yeah. So I think that a lot of those deals happened in Q4 and closed in Q4. I think that our strategic motion gets better and better. We did a lot of improvement in the past year around pricing packaging and introducing innovation with a lot of solutions. All of those are starting to yield results that we are very excited about. Jason, if you have something to add?

Yeah. And then we've been saying for the last couple of quarters how the sales cycles were elongated. Some of these deals have been in the pipeline for a while and just took a long time to close. We're very excited to see that those deals did ultimately convert and are providing us good momentum as we enter 2024.

Yeah. Makes sense. Thanks for taking my question, and congrats again.

The next question we have is from Surinder Thind of Jefferies. Please go ahead.

Thank you. I'd like to touch base on NRR and more specifically those customers that are averaging below $100,000 in contract value. Can you talk a little bit about the churn level there? It's continuing to decline at this point. Any color that you can provide there of where we think it should stabilize. It seems like it's stabilizing but I just want to kind of understand that cadence.

Hey, it's Or. It has stabilized. We see it stabilized and we see even a little bit of increase. If you look at the logo retention that I think is the best indication to see that there is shift momentum. So in the longer retention, you will see improvement in the retention rate. So, we're seeing this indication positive now.

Thank you. And then in terms of just as you think about the multiyear contracts, how do you anticipate that impacts the cadence of the recovery at this point? Obviously, there will be some clients that are coming up for renewal that maybe haven't renewed at the lower desired levels that they would have just because of being involved in the longer contracts?

Surinder, I think it is a bit complex. We are seeing multiyear contracts becoming a larger share of our ARR. However, the runway for those renewals is also a factor we’re carefully monitoring.

Got it. And then I guess the final question here. As you think about the rollout the initial uptake. How do you anticipate it impacts the payback period?

Yes, great question and thanks, Surinder. We actually started seeing the payback period improving as more deals are closing faster. In other words, the speed at which we're able to close deals will drive better ROI or recovery on the cash side. So we see that starting to impact and we should see more of that towards the middle or latter part of 2024.

Got it. And then the final related question just there would be as you think about the initial uptake, obviously, clients coming in at smaller package sizes. What is the path for the upgrade there to get them to more normalized or what you would call target account levels? How much of that is near-term macro driven? How much of it does it provide with you as an engagement point? Just any initial color there at this point of how those conversations are going?

Yes, we're very encouraged by what we're seeing with the 3.0 pricing. When we look at the 360-some-odd customers that are over $100,000, the overwhelming majority of those customers historically started well below $100,000. What we've done over the years is take customers through that journey starting with one solution, then going to better, going to best, and then going from one solution to a second solution, and third solution. I think what 3.0 really institutionalized that into best practices with scalable measures that make it easy and more seamless for customers to start at an entry-level price, which is easy for them to transact and grow over time. We're starting to see that play out and feel very encouraged that this is the right way to engage with our customers. We think that it will impact not only our ability to onboard customers like the 16% logo increase that we saw this year, but also the improvement in NRR over time.

Thank you. That’s it for my questions.

Thank you.

The next question we have is from Ryan MacWilliams of Barclays. Please go ahead.

Hey, guys. This is Damon Calvin on for Ryan. Thanks for taking the question and congrats on the results. We noticed the comment in the shareholder letter that Q4's performance from both logo retention and upsells should affect NRR positively in future periods. Should we take that as Q4 being the potential trough with some stability in Q4 and 2024?

Yes. We think that we have hit the trough and we're looking forward to seeing that metric continue to expand and grow over the year. It's a focus area for us to drive that improvement as well.

Excellent. And also great to see momentum and improvement in overall net new customers. Do you view this as maybe a budget flush at year-end or just potentially a sign for positive trends in customer buying behavior?

I don't think that was a budget flush. I think that it was more about buying patterns. I think again the simplicity that we've introduced with 3.0 and the packaging that we have makes it easier for people to get started. And you see that impacting the number of logos that we're able to onboard and we're very excited about that.

Perfect. Thanks, guys.

The next question we have is from Jason Helfstein of Oppenheimer. Please go ahead.

Hi. This is Steve on for Jason. So I have two questions. Number one is you added 341 accounts quarter-over-quarter. That's the highest in your time as a public company. Was the strength solely driven by customers signing up for and utilizing Similarweb 3.0 at lower pricing? Or was there something else at play? And then secondly, where do you see the most upside within your products e-commerce, app store or competitive benchmarking. Thanks.

Yes, Steve, I think the strong momentum is due to very good execution from our team. Also, we have the self-serve offering that a lot of customers choose to buy yearly, providing a nice boost. Going into this year, I see good momentum. First, on the core competitive intelligence use case is strong, and a lot of improvement, particularly in our e-commerce solutions, is doing well too. I think all of them have great momentum right now as we're going into 2024.

The next question we have is from Tyler Radke of Citi. Please go ahead.

Yes, thanks for taking the question. Good morning. So I wanted to go back to the large seven-figure deals that you saw in the quarter. Can you just talk about what industries you saw those in? Was this kind of more within the investor intelligence space or more B2C, B2B? And could you just provide some color on which segments are getting better or worse or staying the same just so we can kind of think about the moving pieces on the demand side? Thank you.

Hi Tyler. The momentum we've seen in our strategic accounts spans across various sectors. The sectors we serve include CPG, telco, financial services, and big tech, all of which are performing well. We made great changes with the way we operate our strategic motion, focusing closely on our large accounts. So all across the board, we're seeing good momentum there.

Great. And then maybe a question for you, Jason, on the expense side. Operating expenses were down 14%, which is pretty significant. How are you thinking about your spending forecast for next year? What areas are you comfortable deploying incremental investments in? And where are you still being cautious?

Yes. Thanks for the question. We are using the Rule of 40 as a guide. We think, as we've said before, that now that we've got profitability, we intend to stay there. But we still believe that we're just at the beginning of penetrating the total addressable market we see in front of us. We will continue to be profitable on both a cash flow and operating basis, but if we see opportunities to invest in the business that will drive more top-line growth, we will continue doing that both in sales, marketing, and R&D.

Thank you.

The next question is from Pat Walravens of Citizens JMP. Please go ahead.

Great. Thank you, and Happy Valentine's Day guys. I have two questions. The first one is I was talking to a partner at a big venture fund who said a year ago, it was all about cutting costs. And now we're starting to think about growth again. Is that part of what's going on with you guys?

Yeah, yeah. I think we've been in a process of cutting costs to turn the company profitable. Now that we're done with that, all hands are on driving growth, but profitable growth, as Jason said. We're accelerating growth again while maintaining profitability. As we said in the earnings call, we expect to produce free cash flow every quarter during 2024.

But I'm wondering are your customers starting to shift from cutting costs to thinking about growing and investing again?

I wouldn't say that. You're probably right. I would say that a lot of the market are going through similar conditions. Most corporates are finishing cost optimization, and now all eyes are on responsible growth strategies.

Yes. Yes. And then Or, can you just give us an example on the generative AI side and how your data fits in?

I think that AI is driven by unique data that is needed to train models. Some companies are using our data to train their machine learning models, making them smarter and better at understanding insights. Another angle is that consumer behavior is changing; with generative AI, people are searching and behaving differently. Many companies are implementing AI solutions, which is generating a lot of demand for market visibility to understand these behavioral changes. This is where Similarweb excels, providing visibility on how behavior is shifting. These two factors are driving positive momentum for our business.

Awesome. Thanks again.

We have reached the end of the question-and-answer session. And this concludes today's conference. Thank you for joining us. You may now disconnect your lines.