Earnings Call Transcript - SMWB Q2 2022

Operator, Operator

Greetings, and welcome to SimilarWeb Q2 Fiscal 2022 Earnings Conference 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, Mr. R. J. Jones, Vice President, Investor Relations. Please go ahead, sir.

R. J. Jones, Vice President, Investor Relations

Thank you, operator. Welcome, everyone, to our second 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 impact 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 the 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-F 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 available information as of today's date, August 10, 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 used in presentation 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 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 release, which can be found on our Investor Relations website. Today, we will begin with brief prepared remarks from our CEO, Or Offer and 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 second 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.

Or Offer, CEO

Thank you, R.J. And also thank you to everyone joining the call today. We posted an excellent result in our second quarter as we focused on more efficient growth for our company. Revenue grew 46% over Q2 last year to $47.6 million in the second quarter. The expansion of our global customer base consisting of SMB, enterprise and strategic accounts remaining strong. Our customer base grew 25% year-over-year to over 3,800 and our average account spend about $51,000 with us annually, up 16% in just a year since our IPO. Furthermore, over 53% of our annual recurring revenue comes from customers who spend more than $100,000 per year with us. Today, 36% of our relationships consist of multiyear contracts, a metric that has continued to expand year-over-year since 2020. As the global macroeconomic environment has become more uncertain, SimilarWeb's offering and solution have become even more important to our customers. The visibility into the digital ecosystem and how it behaves and changes is critical information in those times that helps our customers make the right strategic decision to navigate through economic stormy weather and be successful. As a reminder, we collect extensive online data, then we refine it and package it into a solution of actionable insights for our customers, which enable them to make better decisions in their competitive markets. The solution we built on top of our data impacts the revenue-driven teams of our customers, including sales, marketing, analytics and e-commerce and are designed to help a wide range of users from the C suite to the operational teams. Every quarter, we seek to innovate and improve upon our solution and add to our underlying data. Our customers look forward to our regular feature additions. This quarter, we took a major step forward that enables us to provide more value to our customer. First, we acquired Rank Ranger, which immediately enhances our SEO capabilities with the complementary technology and data. This acquisition represents a great example of our M&A as a strategy, which we aspire to continue. Second, we launched our App Intelligence product that incorporates data from our Data AI formal partnership, which gives our customers an expanded view of activity across the digital world. The initial customer responses are positive, and we plan to add more features over time. Lastly, we are in the middle of an exciting build cycle for our Investor Intelligence solution, which will deliver timely insights for a new experience to our investor customers. We anticipate we will bring the new experience to market in the back half of the year. Again, our customers greatly appreciate the value we deliver, especially in times of uncertainty, we are adapting to the macroeconomic environment with our customers as we continue to innovate and grow. We are also focusing more on operational efficiency that will lead us to becoming profitable. We are only just beginning to unlock our potential within a multibillion-dollar market opportunity. Jason, I will turn the call over to you.

Jason Schwartz, CFO

Thank you, Or, and thank you to everyone joining us on the call today to discuss our second quarter results. I will briefly address our financial performance, and then we will open up the call to questions. Our results in the second quarter continued to show our commitment to disciplined execution. Revenue reached $47.6 million for the quarter and exceeded our outlook of $45.9 million on the high end of our range. Importantly, our overall dollar-based net retention rate, or NRR, increased to 115% as compared to 106% in the second quarter of 2021 and for our $100,000 ARR customer segment NRR increased to 127% as compared to 118% in Q2 last year. Our remaining performance obligations or RPOs increased 53% year-over-year to $160 million, 87% of which will be realized over the next 12 months. As we exceeded our plans in revenue, we also exceeded on our bottom line. Our non-GAAP operating loss was $19.8 million, which was less than the $23 million loss on the low end of our guidance range. The two factors driving this result were sales above expectations and operating efficiency across the business. As a reminder, this result includes non-comparable expense impacts from our acquisitions as compared to the prior year. Turning now to Q3 2022, we expect total revenue in the range of $48.8 million to $49.2 million. For the full year, we continue to 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 third quarter is expected to be in the range of $20.9 million to $21.5 million and for the full year, between $80 million and $81 million. Compared to last year, our outlook includes impacts to cost of goods sold relating to our Data AI partnership and to the acquisition of MB Mobile. We anticipate non-GAAP gross margin will be approximately 74% to 75% in Q3 2022 and between 75% to 76% for full year 2022 as a result of these impacts. Our second quarter 2022 results indicate we are running our business very efficiently during times of increasing challenges globally. The decisions we are making reflect our focus on maintaining strategic flexibility and balance sheet resilience while pursuing profitable growth. With that, Or and I are happy to take your questions.

Operator, Operator

Our first question comes from Ryan MacWilliams with Barclays. Please go ahead.

Ryan MacWilliams, Analyst

Guys just as we enter a more difficult macro environment. I appreciate you calling out in the prepared remarks that you're starting to see maybe a little more softness from customers in the EU and maybe those that are more focused on the SMB as well. Can you just highlight some of the things you're seeing on the ground and how that maybe impacts your strategy over the next 6 to 12 months?

Or Offer, CEO

It's Or speaking. We are noticing a softness in the market, and it seems a bit more challenging to conduct business as the deal-closing process is taking longer. There are several factors at play, such as customers changing jobs and budget allocations. We've observed this slowdown particularly in Europe, but also in other regions.

Ryan MacWilliams, Analyst

So much of what we're seeing with basically across the software universe and that makes sense. And for Jason, just on free cash flow in the quarter. Can you provide some puts and takes there? Any changes that are going out? And then how can we think about the path forward from here for the rest of this year, just on the free cash flow line?

Jason Schwartz, CFO

Yes, of course, Ryan. I believe you can see that through disciplined execution. We anticipate that the normalized free cash flow will not exceed $50 million for the year. As we reach the halfway mark, I think we've managed that effectively. Just to remind you, a significant portion of our renewals occurs in Q4 and Q1, meaning most of that cash flow will come in at the end of Q4 and the beginning of Q1 through April. We are approaching the slower billing period in our cash flow cycle. We typically analyze it on a rolling 12-month basis. Additionally, it's worth noting that we moved into our new headquarters in Israel, which involved cash capital expenditures related to the build-out that we mentioned a few quarters ago. You can see that reflected in this quarter's cash flow, where we provide both total free cash flow and normalized free cash flow details.

Operator, Operator

Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer. Please go ahead.

Jason Helfstein, Analyst

I would like to ask about your outlook for gross margins next year. There have been investments that have impacted gross margins negatively in the first half of this year. Do you believe that with your product pipeline, we can anticipate significant growth in gross margins next year? I am not sure if it will return to levels like 70 or 79, but could we expect something more in the high 70s, similar to what we experienced in 2020 and 2021? Additionally, how do you plan to approach sales and marketing investments given the current slower market conditions, and will this allow for more profits to flow to the bottom line?

Or Offer, CEO

So thank you, Jason, good to hear from you. So let's talk about the gross margin. The short answer is yes, we are hoping to improve the numbers. Not saying that we're going to get to 80 as the long-term model, but definitely improve most of the calls are coming from the operational data acquisition. This is the biggest chunk around that like about our cost there. And I think looking into the future, I think it's definitely not going to decrease. So we are in a very good place currently. So the answer is yes, and it probably will increase nicely. Regarding SMA, again, we make a lot of decisions to be more efficient. It's very important in this time. So we are optimizing and hopefully have also good improvement around spend in sales and marketing going forward. Jason, do you have anything to add on that?

Jason Schwartz, CFO

Yes, I agree with you Or on that. And I think that one of the things is you're already starting to see that efficiency flow through this quarter. We have a 200 basis point improvement on the sales and marketing line and a lot of that revenue growth fell to the bottom line in this quarter with making decisions actively to be more efficient. It's part of the strategy, and I think you're starting to see that come through in the numbers already in Q2.

Operator, Operator

Thank you. Our next question comes from the line of Brent Thill with Jeffries. Please go ahead.

Unidentified Analyst, Analyst

This is John on for Brent Thill. So looking through the guidance for the rest of the year, it looks like Q4 implies similar growth to Q3. So wondering how you're thinking about how much macro is embedded? And also how to wonder how the trends are going so far in the quarter in July, August, what is notable change from, let's say, June? And then second part of the question, I wanted to ask about just in terms of the broader operational efficiency, how are you thinking about the cost structure, rest of the year into next year? Any change in headcount plans and so on?

Jason Schwartz, CFO

Thank you for the question, John. First, let's discuss the growth trend before addressing our approach to operating efficiency. As mentioned by Or, we are affected by the current macroeconomic trends, particularly in the longer deal cycles that now require more extensive reviews within the organization. We consider these factors as we prepare our guidance, and I’ve said before that we aim to provide guidance that we are confident we can achieve. Our assumptions are incorporated into that guidance. Regarding efficiency, we are actively making decisions to balance growth and cash flow while improving efficiency, and you can already see the impact on our performance. As we noted in the shareholder letter released last night, we are dedicated to disciplined execution with a focus on our unit economics to enhance operational efficiencies and achieve consistent cash flow. This focus is also part of our planning and guidance considerations for 2023.

Or Offer, CEO

I would add on top of that, that we did now look into the headcount plan for 2023 that Q3 and Q4 now is the time that we have started hiring and planning to hire the people for next year for 2023. And of course, we're taking into account because of the decision we made to be more efficient, it will probably impact the future of our hiring plan.

Operator, Operator

Thank you. Our next question comes from the line of Tyler Radke with Citi. Please go ahead.

Tyler Radke, Analyst

I was wondering if you could discuss your performance in other regions compared to your plan. We've mostly heard from companies about challenges in Europe, but I'm curious if you expect those conditions in Europe to affect other regions and what your projections are from a geographic standpoint for the remainder of the year.

Or Offer, CEO

It's an interesting question. We conducted an internal review and found that some regions performed well. Our operations in Japan and the U.S. had a strong quarter, with the U.S. now accounting for nearly 55% of our revenue, which represents a 50% increase. The performance in the U.S. was positive. In Europe, the situation was more complex. For instance, we have a strong scaling operation in Germany, but we faced challenges in the U.K. and France. I’m not sure if there’s anything else to add. Overall, this provides a good overview of the global impact.

Tyler Radke, Analyst

Yes. And sorry, Jason, maybe just what you're assuming on the guidance from a geographic perspective, if you're assuming things get a bit worse and investor kind of stayed the same?

Jason Schwartz, CFO

So, we've taken some assumptions over there based on regions and some of the things that we see in the pipeline already. Even in Europe, we've got still a good solid pipeline that's there. And so we look at all of those factors as we put together our guidance. So, there's some things that will be we assume will be similar, some things that we assume may worsen, and we want to make sure that we're always giving guidance that we can meet.

Tyler Radke, Analyst

Great. And from a hiring perspective, could you just give us a sense of what areas you're maybe slowing down or pulling back on the most? Is it primarily kind of marketing related? Or is it on the direct sales side? Just give us a sense of where you're spending less on from a headcount perspective?

Or Offer, CEO

So let me try to think about it. So I think on the marketing side, we did a lot of changes lately. I think we were to optimize our marketing organization as it was a little bit bigger than what we are planning. And so, we did probably need to come down in the marketing organization, maybe a little bit around client services and maybe a little bit in R&D areas. I think those are the major and also on each part of recruiting, when you have planned to recruit a certain number of people, the number of recruiters is now only doing adaptations to your higher income. So you can need less workforce to execute that.

Operator, Operator

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

Arjun Bhatia, Analyst

Perfect. Thank you guys for taking the question. I think you mentioned a couple of times in your prepared remarks and in the shareholder letter that demand could increase in uncertain times, certainly makes sense as customers rely on data to drive their business a little bit more. Could you just maybe dig a little bit deeper into how that's actually coming through? Are there certain products that you expect will benefit more than others in a more uncertain environment within your portfolio? Do you think it's going to be more concentrated in new customers versus existing customers? I'm just curious how you're thinking that might play out?

Or Offer, CEO

Yes, certainly. In the past, we've observed a similar pattern during the onset of COVID-19, when many sectors were under stress, particularly travel. Initially, we feared significant losses, but those sectors rebounded and adapted their strategies. We believe we may see a comparable situation now as market conditions become more challenging. Currently, we notice an uptick in demand within the investor sector. Public investors are increasingly trying to determine the right moment to re-enter the market. The more insights they receive about improving conditions, the better they can plan their reinvestment strategies. Additionally, SimilarWeb provides valuable data that can indicate these trends, especially in digital performance. We're starting to witness heightened interest in obtaining more data and services from us. I believe these are the initial sectors looking to leverage the current situation, and we expect heightened demand for digital marketing solutions during this time.

Arjun Bhatia, Analyst

Got it. That's very helpful. Maybe one for Jason. Your net retention rate is clearly performing well in this environment. Can you provide insight into how you expect that to play out for the remainder of the year as the macro backdrop becomes more challenging? Additionally, do you have any more detailed information on that metric regarding which customers are expanding and how gross retention might be changing, if at all?

Jason Schwartz, CFO

So Arjun, it's great to hear from you. The gross retention numbers are actually, for the most part, pretty stable. The thing I think that we look at is really the rate of expansion and the buying power that a lot of customers have. One of the things that gives us some confidence in our numbers and the durability of our ARR is that already 36% of the ARR is signed up for multiple years. So those are things, even though we report and think of our business as an annual recurring revenue business, having already 36% of that signed up on multiyear deals means that that's revenue that is not up for renewal during that period of time. And so that gives us that confidence. We're seeing in a number of the large customers that the things that they need are getting more detailed, as Or mentioned, being able to get that intelligence in different regions. So people are expanding within products to additional regions. We're also seeing more and more customers integrating our solutions into their platforms, and we're seeing some great movement on our OEM strategy as more and more customers are integrating SimilarWeb into their products. So those kinds of things, and to the extent that they continue during these kind of macroeconomic trends, we think are going to be upsides to the number and things that we continue to watch for.

Operator, Operator

Thank you. Our next question comes from the line of Noah Herman with JPMorgan. Please go ahead.

Noah Herman, Analyst

Hey guys. Thanks for taking my question and congrats on a solid quarter. Can you provide us any color on maybe customer usage on the platform? What are your expectations for pricing going forward?

Or Offer, CEO

Sizing on the platform. Can you repeat the question?

Noah Herman, Analyst

Yes. Just any change in maybe pricing? Or maybe if you could touch on any maybe pricing power you have for the platform itself.

Or Offer, CEO

Pricing and packaging. I think it's an area that we are still not optimized as well as it needs to be. And I think that the more our solution deepens and becomes more holistic, the better we can introduce better pricing and packaging to our customers to create a win-win scenario. We strongly believe that as we deliver more ROI on the platform, we can increase the price. So, we are thriving in an area where each of our lines of business, we have five of them, will have a very strong approach on top of that to have good, better, best options for each one of them, along with add-ons. So I'm not in a perfect place, but we're always optimizing and have just hired a director of pricing and packaging. So I really hope that there's a lot of leverage to get more efficient in the future, and I hope that answers the question.

Noah Herman, Analyst

Got it. And just maybe any color on what you're seeing in terms of usage from customers maybe over the past few months and what you've been seeing heading into the most recent quarter as well?

Or Offer, CEO

Usage is going up always. And we are putting a lot of effort into our product to improve discoverability and ease of use on the platform. So, we have ongoing teams that are always working to improve usage, and not only day-to-day usage but also to help customers discover more and more features. We have a very good platform with many functionalities. So, it's something that we are working on continuously, and we're having great success.

Operator, Operator

Thank you. Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Brett Knoblauch, Analyst

Jason, thanks for taking my question. I was just wondering if you could provide some incremental color on the demand you're seeing for your app intelligence product. Is that exceeding your expectations? And then similarly, an update on maybe adoption of your Shopper Intelligence product as well as that has much higher ACBs. How is the sales force thinking about selling those? Are they prioritizing either of them, or are they still landing with your core digital research and digital marketing products?

Or Offer, CEO

Yes. So first of all, thank you for the question. So regarding the app intelligence model. The first initiatives were great. So, we have hundreds of requests from many customers to see more and more information on this offering. It was a very good indication, and we have already closed a number of deals. So it's a good momentum, but also as the market dynamic becomes tough, we are seeing that it takes longer to close this pipeline. Part of the market dynamics is also stating that the first initiatives were great, and we're excited about this offering going forward. Regarding Shopper Intelligence, so indeed, it was launched to the market with very high ACBs primarily because we didn't structure the offering well initially. We set it at a single large price point. It had good momentum in the beginning, but down the road, it became tougher to maintain because every industry or sector requires different aspects of the platform and it was challenging to charge them full price. A few months ago, we changed the structure to allow us to slice and dice the Shopper offering to introduce a good, better, best model, helping us scale the logo acquisition for Shopper this quarter, which was significantly better compared to the previous quarter. Our core products continue to perform well as always.

Jason Schwartz, CFO

Yes. So, we look at the backlog and the deals that we've got in place and the discussions we're having. We put all that together, and that helps us form our guidance and confidence that we have to put that together. Our goal is to always aim to give guidance that we know we can meet, and we continue to do that through these times as well.

Operator, Operator

Our next question comes from the line of Patrick Walravens with JMP Securities. Please go ahead.

Patrick Walravens, Analyst

Great. Congratulations on the continued growth. Jason, let's discuss cash. You currently have $94 million on the balance sheet and have burned $19 million on a normalized basis. While I understand that collections are expected to improve in the latter half of the year, the operating losses you’re projecting are still around $20 million per quarter. It's worth addressing the less favorable scenario, which implies that you have about five quarters of cash. Although I don’t believe that’s the situation, we should still discuss it. Additionally, you haven’t provided guidance for next year yet. What can you share about where you feel comfortable maintaining that cash balance? When do you anticipate becoming free cash flow positive, and when do you expect to make those decisions?

Jason Schwartz, CFO

We finished the quarter with nearly $94 million in cash on the balance sheet and an undrawn credit facility of $75 million. This positions us with over $160 million in liquidity, which makes us feel confident about the cash and resources we have to execute our plans. We remain focused on maintaining disciplined execution, similar to what we did before our IPO. Back in 2018, we were burning $26 million in cash, but we reduced that to $11.5 million the following year and less than $5 million by Q1 2021, just before going public, when we transitioned to generating positive free cash flow. Currently, we are continuing to balance growth with cash flow, making proactive decisions to enhance efficiency. This quarter, you can already see improvements in our margins across the profit and loss statement. We believe these metrics will draw attention from the investment community as they reflect our focus on operational efficiency and achieving sustainable free cash flow. We began discussing our 2022 guidance earlier this year and will maintain our focus as we plan for 2023 and beyond.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes the question-and-answer session. On behalf of SimilarWeb, that concludes this conference. You may disconnect your lines at this time. Thank you for your participation.