Greetings, and welcome to the Similarweb Third Quarter 2024 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, Rami Myerson, Vice President, Investor Relations for Similarweb. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to our third quarter 2024 earnings conference call. Joining me today are our CEO and Co-Founder, Or Offer; and our CFO, Jason Schwartz. Yesterday, after market close, we released our results for the third quarter and published a discussion of our results in a letter to shareholders as well as an investor presentation with a strategic overview of the business on our Investor Relations website. Certain statements made on the call today constitute forward-looking statements, which reflect management's best judgment based on the currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release and our most recent annual report filed for more information on the risk factors that could cause actual results to differ from our forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on the call today. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings report and the earnings presentation. We will begin with Or and Jason's highlights in the quarter, and then we will open up the call to questions from sell-side analysts. With that, I'll turn the call over to Or. Or, please go ahead.

Thank you, Rami, and welcome, everyone, joining the call today. I'm extremely proud of the third quarter financial results we reported yesterday. Revenue growth accelerated again to 18% year-over-year growth in Q3, driven by an increase in annual customers and improving retention. Our total customer count grew 21% year-over-year, and the net retention, or NRR increased by 2 percentage points. This is the fourth quarter in a row that we reported accelerating revenue growth and the second quarter of accelerating customer growth. Similarweb is one of a small group of public software companies that have reported accelerating growth over the last year. This growth acceleration and the improvement in our NRR result from a number of initiatives we implemented over the past year. We have improved our marketing capabilities, driving more meetings for our sales team and increasing brand awareness. We built a strong customer success organization that helped turn around our NRR trend over the last three quarters and is now back up to 100% again. Susan Dunn, our new CRO, is driving a series of improvements in our go-to-market motion, and I'm happy with the progress she's making. It is great to see the success these initiatives are starting to deliver. Similarweb's mission is to help companies succeed in the digital world by providing them with the most accurate, comprehensive, and actionable digital data so every business can win in their market. For more than a decade, we have invested and continue to invest in a series of properties and capabilities that empower us to create our unique digital data. The continued customer growth and improved retention trends are indications of the confidence our customers place in the quality of our data and our ability to generate value from the data and the solution we provide. The significant investment we have made over the years to build Similarweb's unique digital data means that we are in a great position to benefit from the AI revolution. Right now, I see four distinct options for us to capitalize on and monetize the generative AI opportunity. The first one is that digital data is a critical and fundamental component of every AI and LLM tech stack, which is why many of the largest global tech companies are engaging with us to access our digital data to train their LLM and ensure their models are accurate and relevant. Last quarter, we announced our first 8-digit customer. And today, I'm pleased to share that during October, we secured our second 8-digit customer. This is also a big tech customer who has been with us for nearly 10 years and also uses our Web Intelligence, Sales Intelligence, and Shopper Intelligence through the platform and API integration across many divisions and geographies. It is now also using Similarweb digital data to train its LLM, and we continue to engage with several other companies on similar opportunities. The second motion where we see an opportunity for us in Generative AI is that we believe the changes that LLMs are already having on online customer behavior and the evolution of the journey from search to chatbots are more material and present a much more significant opportunity for Similarweb. We are engaging with several brands that are keen to understand how the transition from traditional search engines to chatbots for consumers to find information that leads to transactions will impact their business. The evolution of the customer journey and the risk of omission from the output of LLM is a growing concern for every brand around the world. Similarweb digital data can provide a range of insights that can assist brands in understanding the impact in navigating this new version of the way consumers gather information. I believe this is a great opportunity that we are uniquely positioned to capitalize on as the AI evolution evolves. The third way we are enjoying the evolution is, of course, by integrating AI into our own products and solutions to help increase user engagement and speed to insights for our customers. Last year, we introduced SimilarAsk and earlier this year, we introduced Sam, our sales assistant agent in our sales intelligence solution, while deploying and implementing more AI agents across all our solutions to drive higher customer engagement and accelerate the adoption and use of our solutions. The fourth area is, of course, integrating AI into our own internal processes and tools, driving more efficiency and reducing costs. We're already seeing improvement in the development cycle around our engineering and reducing our customers' support response time with these tools and implementations. There are many more enhancements to come to drive more cost savings and improve efficiency across our organization using AI. I'm very bullish about the opportunities ahead of us. We are gearing up our go-to-market teams to capture the big opportunity that we see at the top of our funnel and continue to grow. In Q3, our marketing team generated a record high of more than 500,000 registrations on our website and created a record-high number of meetings for our go-to-market teams. On the brand awareness side, I'm super pleased that Similarweb has been adopted by leading media outlets and corporate executives as their preferred measure of the digital world. Jeff Bezos and Elon Musk appreciate the critical importance of high-quality data and they, along with many business leaders, reference Similarweb when making observations about the digital world. Even this week, when Sam Altman, OpenAI's CEO, wanted to show how big the ChatGPT.com website is, he referred to Similarweb data in his tweets. We appreciate the confidence those leaders are expressing in our data. Our goal is to be the number one partner for digital success. I want to thank the entire team for another quarter of excellent results and great execution during a period of macroeconomic uncertainty and geopolitical challenges. We believe that we are still only starting to realize the potential of our data and the addressable market we serve. As I like to say, we are just getting started. Thank you, everyone, on the call for your continued support. With that, I will turn the call over to Jason.

Thanks, Or, and everyone joining us on the call today to discuss our third-quarter results. I'll provide highlights of our financial performance, and then we'll open up the call to questions. We generated $64.7 million in revenue in Q3. As Or mentioned, revenue growth continued to accelerate for the fourth consecutive quarter to 18% year-over-year in Q3, driven by new customer growth and improving retention. Our remaining performance obligations, or RPO, totaled $212 million at the end of Q3, up 27% year-over-year. We expect to recognize approximately 76% of the total RPO as revenue over the next 12 months. In Q3, we achieved an overall net revenue retention rate of 101% and an NRR of 111% for our over $100,000 ARR customer segment, an improvement relative to the second quarter of 2024 for both metrics. We are encouraged by the change in trajectory over the last two quarters and expect further improvement in the quarters ahead. The increase in multi-year contracts to approximately 45% of our ARR demonstrates the importance and critical nature of our data, which we expect will contribute to improved retention rates ahead. Our operational performance in the quarter demonstrates our continued commitment to disciplined execution, and we delivered a non-GAAP operating margin of 7%, marking the fifth consecutive quarter of non-GAAP operating profit. We generated $9 million in free cash flow in the quarter, the fourth consecutive quarter of positive free cash flow. Free cash flow in the quarter was positively impacted by the phasing of customer seats that we had expected to collect in the fourth quarter. We expect to continue to generate positive free cash flow over the coming quarters and in future quarters as well. Following the results we reported yesterday, which exceeded expectations, we are raising our guidance for revenue and narrowing the guidance range for non-GAAP operating profit for the full year 2024. In Q4 ’24, we expect total revenue in the range of $64.7 million to $65.7 million, representing approximately 15% growth year-over-year at the midpoint of the range. For the full year 2024, we expect total revenue in the range of $249 million to $250 million, an increase of $2.5 million at the midpoint of the range relative to our previous expectations. Non-GAAP operating profit for the fourth quarter is expected to be in the range of $1.5 million to $2.5 million. For the full year, we are narrowing the range and expect our operating profit to be between $14 million and $15 million. Our guidance reflects increased operating expenses primarily related to increased headcount. As Or mentioned earlier, we have decided to accelerate our hiring to capture the opportunities presented by the growing demand for our data and solutions. After delivering four quarters of accelerating revenue growth, non-GAAP operating profit, and positive free cash flow, we remain focused on delivering profitable growth and making further progress toward the Rule of 40 over time, as well as achieving our long-term profit and free cash flow targets. 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. Our first question comes from the line of Ryan MacWilliams with Barclays. Please proceed with your question.

Or, great to see new customer growth accelerate. How do you attribute what drove the stronger new customer growth? I'm sure it's a mix, but is it maybe a better macro environment or is it more due to some of the changes Similarweb has made for market improvements?

Yeah. Thanks, Ryan. As I mentioned in the earnings call, our marketing team is doing an excellent job lately, driving more brand awareness, increasing conversion, and generating a significant amount of engagement, which has led to an increase in registrations, customer growth, and a very strong top of the funnel. Additionally, we've seen a lot of internal improvements made by the team.

Appreciate that. And then, Jason, any early insight into how we should think about our models for next year for revenue growth in 2025? I think you're certainly starting here, but how should we think about the key drivers of next year's growth?

Yes. We'll give full guidance on 2025 at the beginning of the year, but I think that the momentum you're seeing and the exit rates are good indicators of the momentum that we intend to see going forward. So as we've said, we're going to continue to focus on profitable growth, keeping both operating and cash flow profit on a quarterly basis moving forward as well.

Our next question comes from the line of Jason Helfstein with Oppenheimer & Co. Please proceed with your question.

Two questions. Or, from a product perspective, how has the mix shifted, whether it's product categories or customer segments? And where are you seeing the most interest? Obviously, you highlighted AI, but it's still super early. But within the other products, what seems to have the most momentum from a business standpoint? And then as a second question, Jason, can you unpack the revenue volatility a little bit between the 3Q year-over-year and the 4Q guidance year-over-year? Does it have to do with the spike in the billings in 2Q, the way it flows through the accounting? Can you elaborate on why we're seeing a potential revenue slowdown in the fourth quarter based on accounting?

Jason, good to hear you. Thank you for the question. From a product perspective, we're seeing strong performance in three areas in the past quarter. Our core product, Web Intelligence is doing exceptionally well. We're seeing increased demand in the SEO area due to significant improvements we made in the past year or so. We also had a strong quarter with our Sales Intelligence tool, with high demand and successful progress thanks to the sales assistant AI agent that provides better insights. Finally, our Advisory Services organization has observed a lot of demand from large brands seeking sophisticated insights into digital activity. Thus, those three products are performing notably well.

And regarding the guidance, we strive to provide guidance that we can reliably meet. Our business operates on an ARR model, so the visibility you have between RPO and deferred revenue flows through our accounting. That's how the revenue recognition works.

Okay. So this is really not representative of any kind of trend as we're thinking about into next year?

No, I don't think so.

Thank you. Our next question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Congrats, guys, on the acceleration this quarter. Very nice to see. Or, if I can start with you, this is the second big deal that you've announced with a major tech company to use our data to train LLMs. Can you provide insight into what makes Similarweb data so special and unique that attracts these companies to license it for LLM training? Also, can you touch on these contracts and whether we should expect them to be recurring, needing continual data updates over the coming years as these models mature?

To explain further, we have announced our second 8-figure customer. Beyond this, we have closed more than two deals involving significant companies who are keen to work with us. This initiative is growing nicely with the AI evolution. In terms of our LLM use, it's essential to understand how to build an effective chatbot. You need to feed the model with three types of data sets. The first data source is internet data or web data, which includes all the content that helps the model learn and gain knowledge. The second is conversational data, which typically comes from social platforms like Reddit, providing human-like dialogue patterns. The third element is current data to keep the model updated on current events. Our digital data is vital for this aspect, as it conveys what's happening in the world, what people are searching for, and what they're reading and discussing. Thus, our dataset is crucial for feeding trends into the chatbot, maintaining context in dialogue.

Yes, that's very helpful. And then, Jason, if I can come back to the previous question on the fourth-quarter revenue guidance? I think your guidance appears more conservative from a sequential perspective when we compare Q3 to Q4. Additionally, it sounds like some of these new LLM contracts should start to go live in the coming quarters. Is there some extra conservatism in the Q4 number, or anything else we should be aware of regarding the timing of revenue recognition next quarter and beyond?

I think it comes down to when these deals come in or go live, and how the revenue recognition flows through. In general, for us, once customers start utilizing the data, we recognize revenue based on the subscription term. This reality, along with Q4 bookings we anticipate, will influence what we can recognize in the quarter. We consistently apply the same methodology for guidance and aim to provide figures we are confident we can meet.

Thank you. Our next question comes from the line of Scott Berg with Needham & Company. Please proceed with your question.

I have two questions. Or, in your pre-scripted remarks, the second option that you're trying to capitalize on in the Generative AI area caught my eye, suggesting that LLMs could change online customer behavior. How much of that are you currently seeing in your business, with customers wanting to capture and better understand that data? Is this a trend impacting the business more now or will it be more impactful going forward?

Thank you for the questions. We're starting to see more brands realize the changes in consumer behavior regarding how they consume information. For example, if I want to plan a vacation to Miami or Hawaii, the majority of the initial search starts within a chatbot today, guiding me to top hotels or restaurants. This shift signifies a change in how brands need to understand their visibility in this new landscape, alongside the consumer behavior changes driving actions and transactions. More brands are seeking market data and digital data to understand their recommendations and their market standing. We regard ourselves as the best company globally capable of providing this information and assisting them in making the right decisions.

Got it, very helpful. And then, Jason, you talked about the recovery in net revenue retention, which saw a nice increase this quarter. You also mentioned you expected further improvement shortly. Though not predicting, can we think about the trajectory of NRR? Can it return to levels seen in 2020, '21, or '22, or do you see a settling point somewhere between those levels and where we are now?

Thank you, Scott. We appreciate the momentum we're seeing in both retention as well as upsells and cross-sells with customers. The confidence stems from two main factors: first, 45% of our revenue is under multi-year contracts, which gives us assurance about maintaining our book of business. Secondly, we're encouraged by the significant deals we discussed earlier, showcasing our ability to land and expand customers from lower to higher-value engagements ranging from thousands to tens of thousands and into seven-figure accounts. This is a positive trend we are focused on.

Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Please proceed with your question.

In terms of the two large 8-figure deals that you currently have, can you walk us through a bit about the journey they took to get there? Not necessarily over the past ten years, but more in the short term. Is this a jump from $8 million ARR to $10 million ARR or how should we perceive the latest upsells?

What stands out about these two 8-figure deals is the remarkable long-term relationships we maintain with these companies. They began working with us when they first engaged with our Web Intelligence offering and digital visibility almost ten years ago. Over the years, they steadily increased their purchases of our solutions, including Sales Intelligence and Shopper Intelligence, building trust in our data and capabilities. As a result, we've developed advanced relationships that have transitioned to these large deals. We're optimistic about the potential for similar deals in the future, especially as more companies rely on digital resources to advance their revenue and overall business success.

Could you share insights on your sales force hiring acceleration and where your focus lies? Is it primarily about bringing in new clients or are you seeing enough demand from existing clients for meaningful upselling opportunities?

Yes, thank you for the question. We see two significant areas where we can ramp up our go-to-market expansion. First, we want to hire more salespeople to handle the increasing number of meetings and demand we observe at the top of the funnel. This addresses the rise in inbound leads. Second, we aim to strengthen ties with existing enterprise clients. With over 5,000 customers today, we identify specific industries where our solutions are needed, and we want to actively engage those clients, educating them about our offerings and helping drive more growth on the enterprise side because our market potential is extensive. We truly believe that every company operating online has a need for our solutions to succeed in driving more market share and growth. By presenting them with our capabilities, we can bring them onboard and influence their strategies positively. Additionally, given our evolution as a multi-solution company, we can approach clients with combined offerings, which has recently generated good momentum.

Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question.

Great. I have one for each of you. But first, Or, how is your new head of sales, Susan Dunn, doing? What changes has she made, and what is she most focused on?

Susan is amazing. We feel incredibly fortunate to have her on our team. She's a true industry leader with an impressive background. She comes from a successful tenure at Discover and Nielsen IQ, a $5 billion ARR business. For over 20 years, she has led large teams and has extensive knowledge around the CPG ecosystem. She's making the right moves in building our go-to-market strategy as we prepare to capture growth opportunities ahead, and we're very excited about her contributions.

Awesome. And then, Jason, for you, if I look on Page 25 of your slide deck at that long-term model, where you get to a 25% operating margin, remind us how we think about when or at what level or what size we get to that long-term model?

Sure. That level is between $400 million to $450 million. The long-term model reflects 85% gross margin, a 25% operating margin, and 30% free cash flow. This means, at that range, we anticipate producing approximately $120 million to $135 million in free cash flow. We're looking forward to reaching that milestone.

Thank you. Our final question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Going back to the questions around some of the AI use cases and AI deals, could you remind us about the structure of those deals? For contracts that involve AI usage, whether consumption or data access, what is the trend we're seeing in terms of average deal sizes? How much larger are these compared to traditional Similarweb deals?

Regarding AI deals, we're discussing two different products. The first one involves training LLMs, utilizing digital data to enhance chatbots' ability to stay current. Each data set assists the LLM in becoming more knowledgeable about diverse topics. Typically, these deals begin at six figures and can grow significantly as we add more data streams. The second product provides brands with insights into their reputation in the context of consumer usage of chatbots. These agreements typically start from five figures and can likewise escalate based on increasing demands across regions and platforms.

To add on, these contracts feature subscription or recurring revenue components. We expect their need for continual data updates, especially given the value derived from fresh data.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Offer for any final comments.

Thank you. Thank you, everyone.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.