Semrush Holdings, Inc. (SEMR) Earnings Call Transcript & Summary

[Audio Gap] Parker Lane, application software analyst here at Stifel. And joining me today are Evgeny Fetisov, Chief Financial Officer; and Eugene Levin, Chief Strategy Officer at Semrush. Thanks for joining.

Thanks for having us today.

Really appreciate it. Classic conference question, a good place to start would be an intro to the business. You went public last year. Maybe you can give us an overview of what Semrush does, who your target market is, and maybe an update coming out of the first quarter?

Yes. So in general, Semrush works in online visibility management space. So we have different businesses to get more customers online, increase their visibility, rank for more keywords, run more efficient advertising, improve their social media presence, get good reviews, get good listings and so on. So we provide a wide variety of different products that help businesses with this. We primarily focus on small and medium-sized businesses, but we also have a lot of big companies among our customer base. In terms of recent updates, I think, Evgeny, will know numbers a little bit better.

Yes. So we have like IPO-ed in March with like our -- last year revenue was $188 million. We ended this first quarter with $57 million in revenue and $234 million ARR, like run rate, almost close to being breaking even, and 14% free cash flow margin. So a decent growth rate at 32-plus percent. So year-on-year. So I think it's -- we are seeing good traction. So we've [indiscernible] to what we've seen in the market this day, so like everybody took a recession or a slowdown so far. I mean, we had a very good first quarter with a good exit rate. And in Q2, to date, we're also seeing numbers which will be very much in line with our expectations in terms of the, I would say, new customer uptick.

Great to hear. If we think about the core growth drivers in the business, I think one thing that is underappreciated is just the growth of the search market in general. Can you talk about how the recent trends in search growth and what that means to the way your customers are thinking about investing in a platform like Semrush?

Yes, absolutely. So I think there are 2 trends. So one of the -- is a kind of long-term trend, which is -- if you look at markets like the United States, right, there is a finite amount of attention that businesses can get online, right? People spend only a certain amount of time online. They choose to spend it across a variety of platforms, searching for things or interacting with content on social media, reading blogs, watching YouTube videos. But in general, the online population is fairly stable, and the amount of time people spend online is already at its peak, so to speak. So there is a finite amount of attention. There is increasing amount of marketing spend, increasing the amount of content creation. So more content competes for same amount of eyeballs, which means you're getting harder and harder to get this attention and businesses need sophisticated tools to navigate the landscape. And in general, for search engine marketing, specifically, it means it becomes more expensive over time. So CPCs go up because, as we said, more budget, it's more or less the same amount of eyeballs. And -- in terms of short-term trend, right, what we are seeing is also reallocation of budgets from different forms of advertising to search because as you know, with -- let's say, removal of cookies from certain browsers and unwillingness of website owners to use them as much as they used in the past, plus regulation in Europe that prohibits usage of cookies in certain cases and the same type of regulation in California. With all this, we see a lot of forms of advertising becoming less effective, and things like paid search be not impacted at all from an effectiveness point of view. So a lot of marketers move money from, let's say, Facebook ads or more of a programmatic advertising networks to Google Search. And -- yes, as a result, Google's advertising revenue goes up, right? But competition gets tougher, cost per click goes up, getting ROI is getting harder. So as we discussed people need kind of more sophisticated tools as well. So it's a combination of kind of long-term cycle and kind of short-term changes that are both beneficial to search market -- search engine marketing.

And as you think about trying to capitalize on these trends, the platform is very vast, right? You have over 50 products, tools, solutions out there in the market. Maybe you could help us understand a little bit more of how those are packaged up for customers? I know you've given some metrics in the past around the ARR contribution from those different tiers. Maybe an update on where that looks year after year for you?

We continue to see an increasing demand for our higher tiers. I would say the biggest change since IPO in packaging was that we changed price and package a little bit to incentivize people buy more seeds. And we've seen huge growth in adoption of seeds, both in terms of number of people who buy extra seeds and revenue from extra seeds. So I think that has been a really big driver of average check but also growing since IPO and we've also seen very healthy take rate in add-ons, including new add-ons that we are -- have launched kind of right before IPO, such as Agency Growth Kit as well as some even newer apps that we released through our App Center.

Okay. And just to throw in some numbers there, the 2021 average check growth was about 20%, and then in Q1, it also was exceeding 1% a month. We continue to see this continuous flow from the lower price plans to higher price plans, [ plus ] purchase of add-on seeds and like usage limits. So all that contributes to the higher average check. And we'll continue -- as Eugene has mentioned, we'll continue to see the higher price plans contributing to a larger share of revenue, which right now is getting closer to 70% for the like top 2 tiers.

And how many customers or users actually inside of a customer would actually be touching Semrush on a day-to-day basis using it as a core component of their workflow? What does that look like based on the size of different organizations that you work with? And maybe from a brand perspective versus an agency perspective?

Yes. I think when you work across so many different types of businesses and companies of all sizes, usage patterns are going to be different across segments. So we're -- for agency, it's a kind of must-have product that they use to serve their clients, and they cannot run their business without Semrush, right? For a small business, usage pattern is going to be a little bit different. I would say -- we start with a very low price tier, right? People can buy product for $120. And when we look at this segment, a lot of people are going to be in very small businesses and maybe anywhere from 2 employees to 5 employees. And those businesses don't necessarily have full-time marketers. So the user is going to be a small business owner. And this type of persona definitely requires a little bit more handholds and a little bit more training. So that's why we have academy where they can learn, not just how to use the product, but how to run marketing because for many of them, this is the first time they're running marketing. And they probably cannot spend that much time in the tool because they have other things to do. They have business to run. So in the morning, they're going to be COO and then, in the middle of the day, maybe Chief Product Officer, and then Chief HR Officer closing to the end of the day. And then when there are a couple of hours left and they will do marketing, right, with the help of Semrush. And then once those businesses get to the level where they can hire dedicated full-time marketer, it definitely gets easier because now we have kind of champion in a company who is using product on a daily basis and ideally multiple times today. And that's where we see kind of an uptick in usage, retention, upsell and so on. So it's very important to help businesses when they're not at the level to get to the right level where they can hire full-time marketer and then fully benefit from the product. And then, of course, when we sell to large enterprises, buyer persona is also going to be different. It's going to be more of a kind of VP of Digital marketing person, which is -- it requires a little bit different sales approach, but then from upside point of view, those people run relatively large teams so we can sell more seeds. So it's a different sales motion, but the upside is there. And then also, frequently, we see that we may start with one part of organization, maybe in one country or maybe, let's say, content marketing division and then expand into other divisions, either geographically to other offices or kind of same country, but different group within one big organization.

I want to go back to your first point on the agency side of things. How large is that channel today as -- excuse me, as a piece of the business? What are you doing to target those agencies who have such a strong use case? And then Agency Growth Kit, what exactly does that do to make them more effective with the platform?

So in general, I would say, around 25% of customers are agencies, their average check is a little bit higher than our average. So they pay a little bit more than 25% of revenue. In terms of our approach, definitely, with them, it's more about explaining how their business will benefit rather than explain how they can use tools to solve certain issues or end problems, right? Because they hear more about, for example, using our products, during pitching process. When they meet the customer, and they highlight Semrush's data to explain future strategy that they will execute for this new client. So it's a definitely broader use case, not just improving the visibility but also gaining customers. And Agency Growth Kit. In general, our idea was to build something that would be like, let's say, Amazon Prime, so not necessarily just product features, but a lot of other benefits that people may have from using this product. So for example, we offer things like placements in directory, where our in-house customers, if they have some job that they need to outsource and find certified agencies that they can use to get this job done. Also, a lot of tools that are more workflow-related tools to communicate with their clients, for example, client portal, white label reporting, collaboration tools like lightweight CRM systems where their clients can assign tasks or request close for new tasks, and so on. So a lot of communication workflows. And for example, for European customers, we also provide access to those kind of tender databases where a government agency -- like government or agency published different requests and marketing agencies can compete with them and submit their bids. So this is also something that don't necessarily fit into narrow MarTech space, but it helps agencies to build better business. So I think that's kind of how we're thinking about this, something that just helps them to get healthier, better business, get more customers, get more happy customers versus just tools that help with online visibility.

Yes, makes sense. Evgeny, one of the questions you always get with companies that start in the SMB and mid-market is when are you going to move upstream. Can you talk about why you don't necessarily have to move upstream to be successful? And just how large that SMB and mid-market opportunity is for the company for the next 5 to 10 years?

Right. So I'll start with saying that we're already servicing large customers. Like, we have 30% of Fortune 500 as our clients. So we have these big customers. And one of -- like or a few of our large customers will pay us 6 figures in numbers. So not -- the average is obviously lower. We like the SMB space because we believe their [indiscernible] TAM is much larger. So our estimate is it's anything between $13 billion and $15 billion, $16 billion. When we look at those SMBs [indiscernible] we'll say, a company with more than 1 employee, and then we'll look at the 50% penetration, then we'll say this is the potential TAM. Why we believe this is -- this TAM is reachable? We -- our average check is relatively low. So the entry -- like entry level is very accessible for any small businesses in any country. And the sales motion that we have allows us to service or to sell globally. So about 50% of our customers never talk to a salesperson. They just come to the website, they register, and they start using the product. So it's a frictionless model with a premium model where they can test it and then they can trial it and then they can become a big customer. And we sell to 140 countries. So we can -- like, we can be scaling up fairly rapidly, and that's why SMB space is very exciting. And we believe the product with the analogy, which we often are using is, if you think about Excel 20 years ago, it was a narrowly defined product for CPAs [indiscernible], right? Now, everybody is using it, the kids or grandmas, right? So we think that our product and the online visibility space will also be used very broadly in 10, 15 years where everybody will be managing their online presence in one or another way. So that's -- we are very excited by this large opportunity.

We compare the technology footprint itself, of the SMB to the enterprise. Is there a willingness or an openness on the enterprise side to go with a platform that has all these different types of features and solutions? Are they looking at you for sort of your core capabilities, first and foremost?

I think it definitely depends on the use case. I would say when it comes to data, so products like competitive intelligence part of our product and keyword research, and some other data-related products, then we definitely see our product being above and beyond anything people can buy. And -- there are a lot of publicly available studies that kind of confirm this view, right? And we like to participate in them and share data with the researchers because -- for us, it's very obvious that our data is broader and more accurate. And actually, in many instances, it's much harder to build SMB product than enterprise product. I can give you an example. If you're researching, let's say, a domain like amazon.com, and you want to find all the keywords they're ranking for in Google, right? You can have relatively small database and you will have 100,000 keywords for amazon.com and that could be enough for your research. Now in Semrush, you're going to have millions of keywords, right? But then if you do manual research, I mean, there is no big difference between 100,000 and 1 million, right? But when it comes to small business, if you have small database, for some domains, you will not find anything with a small database. And with a big database like Semrush, you'll have -- still find a couple of hundred keywords. So by building products that work for SMBs, we're building in general, better products that provide broader coverage and more accurate data and estimates. Now -- another example of products where even with SMB focus, you're going to have something that is very, very competitive in enterprise space is our [ Writer ] Assistant. So it's frequently used by media companies or any company with large text content production like companies with big blogs and so on, what -- that have a lot of editors. And there, again, they care about performance of the content and performance depends on quality of insights and quality of insights depends on data assets that are underlined under the hood, so to speak. And again, because we have better data, we provide better insight, so we have really good traction with these tools and enterprise segment. But I mean, of course, there are some tools where you have to choose, right? You have to make them either for SMB or for enterprise. And -- yes, those tools, even when we sell to enterprises, they kind of don't use those parts. So there is a little bit more concentration in usage in enterprise, where if SMB is going to use everything very broadly, then enterprise will choose certain areas primarily in content creation, competitive intelligence and [ secured ] research, reporting, and they will focus around those areas.

On the subject of building out the platform, you can obviously build tools yourself, but one of the vehicles is acquisitions. And you've made a few of them this year, Backlinko, Kompyte. Maybe you could walk us through what those brought to the table, who they're going after, what segment of the market? And then is M&A going to continue to be a vehicle to spin this cycle of product development alongside what your own teams are working on?

So -- yes, we always look for ways to speed up R&D efforts. And sometimes, it makes sense just to buy technology. If you have a team that have been working on something great for 5, 6 years, and maybe they're looking for a partner who can help them to scale their presence. It could be a win-win situation. So we always look for this. But at the same time, we are very picky. A lot of things need to align for us to sort of pull the trigger and do the deal. I would say we care a lot about team and culture. We care a lot about quality of product and R&D. So we do quite extensive product [indiscernible] so on. And we are looking for things that are very synergetic in a way that we have the audience for this product, and we can cross-sell and upsell this product into existing user base. We're not really doing deals for market consolidation, right? We like teams that are very strong in terms of product, but at the same time, not at a huge scale. Like, they've proven they can sell this product, there is a demand for this product, but they are sort of pre-scale. That's, I think, our sort of sweet spot. So Kompyte was this kind of deal and Prowly that we did before IPO was this kind of deal. And this allowed us to get faster into 2 interesting markets. So one is digital [ PR ] software market, And the second one is competitive intelligence, sales enablement market. And the reason we're really excited about this one because we have a huge user base of people who use our own competitive intelligence products. And they could benefit from this kind of more expensive, more robust solution targeted enterprises -- especially enterprises that have sales teams because big part of Kompyte is sales enablement functionality with battlecards. And actually, 80% of their user base are sales executives. And in general, we are very positive about sales enablement market because on a -- if you just look at the number of people, there are more people working in sales than in marketing. Most of SaaS companies price their products by seeds, right? So in general, it's a very attractive market. And then, Backlinko was a little bit different deal. Essentially, we acquired audience. So we're looking at this from a little bit different kind of workflow point of view. If we build those kind of content assets ourselves, it will cost us x amount of money per visitor, right? But if we just go and buy the same assets from them, we'll get some price per visitor that, over time let's say, over the course of 2 years; on average is going to be way, way lower than this x... And that's kind of how we made the thesis. And so far, we actually managed to even increase amount of traffic this website is getting and amount of traffic that is going from this website to Semrush and a number of attributable purchases. So also very positive, but a very different thesis.

One other thing Eugene hasn't mentioned, we also are very picky with the price. So we [indiscernible] deals.

Yes, exactly. I want to see if anyone here in the crowd has a question they'd like to ask the team. Got one here.

You mentioned Facebook ads and kind of shifting spend earlier. Has any of the regulatory stuff [ around pricing ] kind of impact on what you guys do [indiscernible]?

Yes. So in terms of what we do with our product, it had no impact. Now of course, we also have our own advertising budget, right, that we spend across different networks. And we had to adjust, but we did it very early. I would say even before IPO, we had conversations with our marketing team, where we said we need to leave in the world where cookies do not exist. So everything we do should be working with or without cookies regardless. And we shifted a lot of a lot of money from, let's say, programmatic advertising into content creation, for example. So we had a big uptick in organic traffic that sort of replaced the programmatic advertising traffic. So yes, right now, I would say, if there is any impact, it's largely positive because a lot of money moving from programmatic advertising into search marketing, into content creation, content marketing, social media marketing. So those are areas where we have really strong products and then we never had products for programmatic advertising.

Evgeny, you talked about seasonality and net adds. I know you talked about it last year, and you're sort of giving somewhat guidance framework around the rest of the year. Coming out of that environment we were in, in 2020 and 2021, everyone is trying to digitally transform their business, what does the seasonal trend of net adds to look like in the base?

So 2022 looks very much like a normal year where we started strong going to, say, March, April, May. Then we are seeing a normal, I would say, seasonal slowdown as we go into the summer. And then we expect that we'll be seeing a pickup like early in the middle of Autumn, in fall.

Okay. Eugene, the App Center, that's an area you've been investing a lot. What are some of the successful apps you've seen so far? How big is the opportunity there? And how are you trying to attract people to that App Center?

So it's still very, very early, right? We launched it less than a year ago. When we launched it, we had 3 third-party apps. Now we have over 10. So it's a big growth since launch, but in terms of what we want to achieve, it's still very, very early. 10 apps is really more of a -- I think it's still more of a proof of concept stage of development. But we are very positively surprised with the traction we're seeing in some apps. Now obviously, any marketplace is going to work on, let's say, 80/20 principle. So they are going to be 20% of apps that drive 80% of revenue. We're seeing somewhat similar picture with, I would say, 3 companies that -- or 3 products that kind of definitely show better traction than the rest. And some of them shown phenomenal traction, I would say, faster than some of our own add-ons grew at the same period of time since launch. In general, like just in Q1, the App Center gained over $1 million in gross ARR, considering that -- in terms of marketing, we are not investing a lot yet. In terms of supply, there are only 10 apps. Seeing this kind of growth just in 1 quarter is very encouraging. So we think we found something that is right. And right now, we're mostly focused on managing supply-side relationship in a way that we can onboard new partners faster. We have a backlog of partners. But right now, to add new partner into App Center, we need to do a little bit of manual work. It's not fully self-service. And that's, I would say, the factor that we need to deal with. And before we get there, I'm still considering this is a very early stage of the project, and we're probably going to hold demand generation a little bit. Once we solve this and it's much easier to submit new applications, we'll start more aggressively advertising this new product. But as I said, even what we've seen already considering that sell very early stage of the project is very, very encouraging. So I think we're into something just need to kind of focus on the long-term goal for this and keep executing.

Yes, good initial traction. Definitely. Just about 1.5 minutes left here. So I wanted to hit on one thing that investors ask a lot about, which is the significant relocation effort of your employee base. How is that tracking from the cost perspective? The onetime cost that you outlined in the last earnings call, do you anticipate meeting that timeline? And then I think more importantly, structurally, what is the cost of that employee base that's moving look like when they sort of distribute throughout Europe?

So we had about slightly more than 60% of our employees in Russia, which we're relocating -- which we plan to relocate until the end of September. that's our timeline. We are aiming to do this sooner, but I think we'll hit the goal which we set. The cost to relocate this year will be about $25 million of one-off expenses to move people, to pay the relocation bonuses, to pay for tickets and everything which is associated with that. We have a very good [ take ] rate. So we're moving about 80% of our employees. So 10% -- like of the 100 which is staying is very local. So we don't need to move them. And 10% cannot go for one or another reason. So we have a lot of support from the employee base. We don't expect, I would say, any significant disruption to the business, to the product rollout plan. And as for the cost impact go into 2023, I think it's slightly -- or a little bit too early to estimate it. My rough estimate is that the increased cost in new higher priced location will probably push back our breakeven point by maybe 3, 4 quarters. So that's like a rough estimate. So we were getting close there. We'll probably be slightly later. But -- so we'll have better visibility, I think, as we go into Q4. So when we move everybody, everybody is settled, then we'll see -- like we'll see more stable construction. We'll be able to build our estimates of that.

Yes. Okay. Well, I think we're out of time. So we'll leave it there. Please [ thank me in joining ] Evgeny and Eugene from Semrush.

Thank you, everyone.