Earnings Call Transcript - SMWB Q2 2025

Operator, Operator

Greetings. Welcome to Similarweb's Second Quarter Fiscal 2025 Earnings Call. Please note that this conference is being recorded. I will now hand it over to Rami Myerson, Vice President of Investor Relations. Thank you. You may now begin.

Rami Myerson, Vice President, Investor Relations

Thank you, operator. Welcome, everyone, to our second quarter 2025 earnings conference call. Joining me today are our CEO and Co-Founder, Or Offer; and our CFO, Jason Schwartz. Yesterday, after market closed, we released our results for the second 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 at ir.similarweb.com. 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 on Form 20-F 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 release and the earnings presentation. We will begin with Or and Jason's highlights of 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.

Or Offer, CEO

Thank you, Rami, and welcome, everyone, joining the call today. I'm extremely proud of the second quarter financial results that we reported yesterday. Revenue increased by 17% year-over-year to $71 million, ahead of our expectation. Our customer base grew 18% year-over-year to almost 6,000 ARR customers at quarter end. We reported a seventh quarter of positive free cash flow and returned to positive operating profit in the quarter. We are also reiterating guidance for 2025 revenues and raising our profit guidance for the year. Customer interest in our Gen AI data and solution is amazing, and the revenues from our Gen AI data and new solution were approximately 8% of second quarter revenues and are growing. We are focused on three high-impact opportunities where Similarweb is uniquely positioned to lead. The first one is our Similarweb Gen AI Intelligence. In April, we launched AI traffic to show how much website traffic comes from Gen AI sources as well as the prompts and landing page driving traffic. In June, we expanded our product line with the AI brand visibility, giving companies daily insight into how often they are featured in AI chatbot platforms across key topics. The second one is our AI Agents. We are rolling out AI Agents to help our customers maximize the value they can extract from our data in the shortest time. We're receiving great feedback from our customers and usage is growing by 60% month-over-month since launch. And the third one is our generative AI and LLM data. We are supplying our unique and fresh digital data to companies that are building their own LLM and generative AI applications. Last year, in Q2, we signed a seven-figure ARR contract with one of our big tech customers to use our data to train and improve its LLM. This customer was already using four of our solutions across multiple business units and countries. After signing this contract, they became Similarweb's first eight-figure ARR customer. In June this year, this customer renewed and expanded the contract for Gen AI application and LLM data with a multimillion dollar ARR and a multiyear upsell. Contracts like this one demonstrate the durability of those AI transactions as a recurring revenue stream and provide me with the confidence in our ability to convert additional customers and expand our AI revenue streams. We continue to invest in our technology and expand and enhance our data to deliver the most comprehensive view of the digital world. In Q2, we expanded our product offering to empower customers with deeper insights across the digital landscape. We launched Similarweb Ad Intelligence, giving businesses a clearer and more complete view of the digital ad spend and paid marketing universe, leveraging the capabilities of Admetricks that we acquired in 2024. We also introduced additional models to our mobile app intelligence and Shopper Intelligence, providing our customers with more tools and data to succeed and win their markets online. The investment in go-to-market that we started in the fourth quarter of 2024 is ramping as planned and we're starting to see additional results. One of the KPIs we track for sales force productivity is the number of salespeople booking deals, and I'm super happy that the number of salespeople booking deals increased by 50% year-over-year in the second quarter. I'm also super proud; we continue to operate efficiently and return to profitability in the second quarter as well as reporting our seventh quarter of positive free cash flow. And as I like to say, we are just getting started. Thank you to everyone on the call for your continued support. And with that, I will turn the call over to Jason.

Jason E. Schwartz, CFO

Thanks, Or, and everyone joining us on the call today to discuss our second quarter results. I'll provide highlights of our financial performance, and then we'll open up the call to questions. We generated $71 million of revenue in Q2, a 17% increase relative to Q2 2024. Our revenue growth was driven by the 18% growth in overall customers and big tech customers who licensed our digital data for developing their Gen AI applications and LLMs. Our second quarter results benefited from one-time fees for customers who completed their evaluations at the end of the quarter earlier than expected. We are optimistic that these evaluation contracts will convert into ARR contracts during the second half of 2025. NRR for our overall customer base increased by 100 basis points year-over-year to 100%. Notably, our renewal rate in the second quarter was the highest in three years. NRR for the over $100,000 customers decreased by 100 basis points year-over-year to 108%. The NRR for the $100,000 customers reflects the significant upsells of a number of large contracts booked during 2024. These customer contracts are now included in the NRR baseline in 2025. We are proud that 57% of our ARR is contracted under multiyear contracts, up from 44% last year. We believe this demonstrates the durability of our revenues and the importance of our data to our customers. Our remaining performance obligations, or RPO, totaled $274 million at the end of Q2, up 26% year-over-year. We expect to recognize approximately 68% of total RPO as revenue over the next 12 months. Our operational performance in the quarter was better than expected. We reported a non-GAAP operating profit of 3% in Q2 as a result of our continued disciplined execution. As a reminder, over the last three years, we have improved operating margins by 4,500 basis points from minus 42% in the second quarter of 2022. This performance and our unit economics provide us with confidence in our ability to achieve our profit and cash flow targets. We generated $4 million of normalized free cash flow in the quarter, a 5% free cash flow margin and the seventh consecutive quarter of positive free cash flow. We plan to continue to generate positive free cash flow on a quarterly basis going forward. For the full year 2025, we are maintaining our revenue guidance and expect total revenue in the range of $285 million to $288 million, representing 15% year-over-year growth at the midpoint of the range and expect our non-GAAP operating profit to be between $5 million and $7 million, an increase from our previous expectation. For Q3 2025, we expect total revenue in the range of $71.5 million to $72 million. Non-GAAP operating profit for the third quarter of 2025 is expected to be in the range of $1.5 million to $2 million. We remain focused on delivering profitable growth over time as well as achieving our long-term profit and free cash flow targets. And with that, Or and I are ready to answer your questions.

Operator, Operator

The first question today comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow, Analyst

Congratulations to everyone involved. That was an impressive result. Can we discuss the large customer and how that situation has developed for you and how it might evolve in the future? I'm interested in understanding whether this was a proof of concept that the customer had to invest some funds in, leading to the fees you received, and whether the transition to a full contract will follow. Could you elaborate on the mechanics of that process and provide more insight into what the customer is doing? I also have a follow-up question for Jason.

Or Offer, CEO

Yes. Thank you for the question. Usually, when we engage with companies who want to train their LLM models, the process is that you deliver them a one-time bulk of data that they can test and validate that the data is improving their model and make it more accurate. They pay a one-time fee for this data for the testing. And after the testing and validating the data improves, we engage with them with long-term commitments, usually multiyear ARR deals.

Raimo Lenschow, Analyst

Okay. Perfect. So that would be something that not just one of these customers can do. That's actually something that a lot of them will benefit from, correct?

Or Offer, CEO

A lot of them can benefit and also there are multiple datasets that they can buy and use for multiple use cases around improving the LLMs. So the opportunity is in both fronts: more customers buying once it's proved that it can improve their LLMs, and the second one that they can get more data to improve other areas of those motions.

Raimo Lenschow, Analyst

Okay, that makes sense. Jason, regarding the NRR, it declined slightly and you mentioned the 2024 cohort. NRR is retrospective, so it doesn't provide much insight in that regard. How should I view that number improving in the future? Should I just focus on that cohort before things look better? Is that the right way to think about it? Also, could you share a bit about the strong new customer growth this quarter? What factors contributed to that?

Jason E. Schwartz, CFO

Thank you, Raimo. Regarding the Net Revenue Retention, as we've discussed, there was significant growth last year, and we are currently analyzing the cohort. The large expansion deals from 2024 are influencing us as we head into 2025. Your second point is quite telling. The overall number of new customers has increased by 18%. Specifically, for large customers with spending over $100,000, we saw a growth of 13%. In absolute terms, the total number of customers grew sequentially by 22, which is the highest sequential growth we've experienced in the last three years. This indicates that our land-and-expand approach is effective; we start them off with a modest Annual Contract Value and then see them retain, expand, and eventually exceed that $100,000 threshold.

Operator, Operator

Our next questions come from the line of Arun Bhatia with William Blair & Company.

Willow Miller, Analyst

It's Willow Miller on for Arjun Bhatia. Congrats on the quarter. So in your prepared remarks, you mentioned you're optimistic that the Gen AI and LLM-related data evaluations completed in the quarter have the potential to convert in the second half of the year. What do you think it will take for these AI data prospects to convert into paid customers?

Or Offer, CEO

And just the sales cycle, you engage, you get the data, they need to test, they need to validate. We feel very strong around that. We position as the number one digital data company in the world right now and the number one of web data; those LLMs do their learning and training on web data. So we feel very confident that we can build a very good pipeline and convert it down the road.

Jason E. Schwartz, CFO

I would like to add that, as stated in our letter, these deals typically result in seven-digit contracts once they complete the evaluation process, which does take time. Referring back to a question from Raimo, our first customer from last year completed their evaluation and signed a one-year ARR contract in Q2. When they moved into the second year, they not only renewed but also upsold into a multimillion dollar deal and extended their commitment for multiple years. This is the trajectory we envision for these deals.

Operator, Operator

The next question is from the line of Patrick Walravens with Citizens.

Nicholas Freeman Jones, Analyst

Fantastic. This is Nick on for Pat. A few months ago, you introduced your four new Agentic AI products. And I know it's still early, but could you share what customer conversations around these products look like? Are we seeing general interest in them? And among the four, which is seeing the most traction?

Or Offer, CEO

So definitely, the Gen AI has a lot of traction. I think it's the fastest-growing product we have currently in our product portfolio. And we're seeing a lot of demand for that and a very, very strong pipeline going forward. I think almost every one of our customers, when we present them, are trying and evaluating that solution.

Operator, Operator

Our next questions are from the line of Adam Hotchkiss with Goldman Sachs.

Greyson Hunter Sklba, Analyst

This is Greyson Sklba on for Adam. I wanted to start on the guide. Just looking at the Q3 guide and then the Q4 implied numbers, a bit of acceleration implied in the Q4 number. So I'm curious on what is driving your confidence there and how the ramping productivity from some of those new resources factors into that guide. And then I just have a quick follow-up.

Jason E. Schwartz, CFO

Greyson, it's Jason. Like we talked about in the letter - in the shareholder letter, we have a good pipeline that we've been talking about for a couple of months now. I think now you're starting to see these conversion of these large transactions coming through. And we've got some visibility. But as Or said, the sales team has got to close the business. But that's really what's going on to the back end of the year. This is what we've told you since early 2025. We said that we believe that the acceleration you would see happening in the back end of the year. And hopefully, that you're starting to see that stuff come through.

Greyson Hunter Sklba, Analyst

Great. And then I just wanted to apologize and let you continue.

Or Offer, CEO

No. Regarding the go-to-market productivity, we also see a nice improvement. We also shared that in the investor letter and we talked about it that we had a record high of salespeople closing deals. So you see that they start ramping up. And we're looking forward to them closing more deals in Q3 and Q4.

Greyson Hunter Sklba, Analyst

Great. And then I just wanted to touch quickly on profitability, nice beat in the quarter. Obviously, a nice flow-through to the full year number there. I'm just curious if there's anything to call out there or if that was just a function of some higher top line revenue than expected.

Jason E. Schwartz, CFO

Yes. Obviously, the beat on the top line obviously flows through to the bottom line. That's for sure. But again, our philosophy is to operate as a profitable growth company. And so that discipline that we've had for the last three years that showed that translated into a 4,500 basis point improvement over the last three years is something that we practice every single day. And so, you're seeing some of that disciplined execution come through as well.

Operator, Operator

The next question is from the line of Jason Helfstein with Oppenheimer.

Jason Stuart Helfstein, Analyst

The numbers, especially regarding RPO and billings, clearly indicate a business pickup, and several factors are contributing to this. Can you break down the sources of this success? You have enhanced sales productivity due to last year's changes, the introduction of new AI products, and new mobile products. I'm also curious if there have been any upgrades or modifications to the commerce tools. Can you clarify how much of the 9-point acceleration in RPO can be attributed to sales versus product? I'm not sure how detailed you want to be regarding the product side.

Jason E. Schwartz, CFO

Jason, sure. Without going into product by product, I think that there are a couple of things that are driving this. When you look at the RPO, there are new and exciting products, and we're seeing that already in the Gen AI products. I think the last quarter, we called out the app product, and we have already at that point, well over 400 customers who are using that new product and enhanced App Intelligence that we have. I've been on the road with our teams, and I sit here with the sales teams, and they say that the two things that in literally every conversation that people are asking about are the Gen AI suite and also the App Intelligence. And so that's definitely driving pipeline and conversion. On the flip side, when you look at RPO, I think that it's important to also look at, not only is the overall revenue growing, but when you look at the multiyear that is now up to 57% of our ARR, looking back just a year ago, it was only 44%. And I think that, that one gives also drives up the RPO overall, but secondly, gives us a lot of visibility and confidence into the durability of the revenues.

Operator, Operator

The next question is from the line of Luke Horton with Northland Securities.

Lucas John Horton, Analyst

Congrats on the quarter. Just wanted to talk about pricing on the data licensing side. So how are you thinking about pricing for these data licensing contracts? And you noted that this accounted for 8% of revenue mix in the quarter. So just curious how you think about this mix shift going forward.

Or Offer, CEO

So those are very big data deals also, not only by dollar, but also amount of data. So they start with usually seven figures and deals. And there is a lot of room for expansion. And as I talked a little bit before, because there are many different datasets that can be used on training those LLMs from web data, app data, consumer behavior data, etc. So each dataset is priced differently.

Lucas John Horton, Analyst

Okay. Got it. And then as far as mix shift, how you see that going forward, which accounted for 8% in the quarter? Is it a little too early to tell?

Or Offer, CEO

So there is a strong pipeline for those offerings, but it's not only the data for LLM; it's also the Gen AI model that helps track brand visibility on chatbots and the traffic websites get from Gen AI. And of course, the AI Agents. So we have three different offerings around AI that we're now bringing into the market. And it looks strong, and we're seeing great demand all across those three offerings.

Lucas John Horton, Analyst

Okay. Got it. Yes. And just kind of piggybacking off of that, with you guys have launched several AI Agents and products and enhancements throughout this year. Just wondering how much of the focus now is on continued new product development versus kind of selling with the current product suite and just kind of the focus between the two.

Or Offer, CEO

Yes. So it's a combined strategy. Basically, you take each one of the product offerings we have today and you add agents to it that the stickiness will go up, and ROI that customers are receiving from those solutions will go up. So those agents are integrated inside of our solutions.

Operator, Operator

The next question is from Tyler Radke with Citi.

Tyler Maverick Radke, Analyst

Or, could you talk a little bit more about the sort of licensing dynamics that you called out this quarter? How often do you see this? Is this a big part of the pipeline? And I guess, for Jason, any way you can sort of quantify the revenue impact in the quarter? I think people are just trying to understand big picture. Obviously, this is a good revenue stream today, but is there a risk that this is sort of a one-time deal and sort of just your confidence level in being able to sustain that as a durable subscription?

Or Offer, CEO

Thank you for the question. I don't think these engagements are meant to be one-time deals. The process involves a one-time payment to evaluate the data when Similarweb is needed to manage a large amount of data. After the data is uploaded to their servers, the evaluation begins. As they progress through this process and see improvements in their models, they engage for the long term. We have a history of long-term engagements with these companies. As Jason mentioned earlier, we have already renewed one customer for a multiyear commitment. We are very confident that our future pipeline is not only strong but also presents significant opportunities for growth.

Tyler Maverick Radke, Analyst

And Jason, any quantification of how big that was?

Jason E. Schwartz, CFO

Yes, it was a little over $1 million. The deals we had last year had already undergone evaluation and transitioned into annual recurring revenue, which we discussed in Q2, Q3, and Q4 of last year. These are recurring revenues that are coming in. One point we mentioned earlier in the shareholder letter is that the deal we signed in Q2 last year not only renewed but also was an annual recurring revenue deal at that time. It came up for renewal in Q2. They not only renewed but also increased their commitment with a multimillion dollar annual recurring revenue deal in addition to their existing baseline. Furthermore, it transitioned from just an annual deal to a multiyear agreement. This provides us with confidence that these transactions are not just one-time instances. The potential we have is not only to train the models but also to engage with them continuously, discussing both pre- and post-engagement opportunities.

Operator, Operator

The next question is a follow-up from the line of Patrick Walravens with Citizens.

Patrick D. Walravens, Analyst

Jason and Or, reflecting on the past three quarters, it seems like your stock has experienced a significant increase now, while two quarters ago it saw a major decline. Have you identified any lessons learned or things you might have approached differently to create a smoother experience for yourselves and your investors?

Or Offer, CEO

Yes. I think one of our biggest lessons is to do a much better job on communication. I think our strategy and our commitment to show and deliver what we say is on track for the past 4.5 years that we've been a public company. And I think that just being much better on communication, we can contribute a lot for that going forward.

Patrick D. Walravens, Analyst

Jason, any thoughts from your end?

Jason E. Schwartz, CFO

Yes. I think I agree with Or on that front. And as we look going forward, part of the additional color that we've given this quarter, hopefully, is appreciated and give some insight into how the continued growth is expected to be.

Operator, Operator

This now concludes our question-and-answer session. I'd like to turn the floor back over to Or Offer for closing comments.

Or Offer, CEO

And so thank you, everyone, for joining our call, especially our shareholders for their support. We look forward to speaking to you again over the coming days. Have a great week, everyone. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.