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

[Audio Gap] Parker Lane, software analyst here at Stifel. And with me today are Eugene Levin, President; and Brian Mulroy, CFO of Semrush. Thanks for joining.

You got it.

Thanks for having us.

Yes. Appreciate it. Eugene, let's start with you because Brian is a recent addition to the team here. Can you give us a sense of who Semrush is, why now is an exciting time in the company's journey?

Sure. The Semrush is an online visibility management platform. We help businesses of all sizes and from all industries to get more eyeballs to be more visible, easily discoverable to improve their online traffic and online presence, not just on their own website, but also when it comes to their business listings, Facebook pages or other social media pages and so on. And in general, we provide a software portfolio of over 50 different applications that help people with all aspects of online visibility, from checking their website, health and improving content, to write a new content and covering more topics, to posting on social media, reaching out to journalists, telling their story so pretty much everything that people need to get more traffic can be found at Semrush.

And that's extremely open-ended as far as what you're trying to do, and you have a product set that includes over 50 different tools out there. I guess from an opportunity perspective, what are people doing today? What are you replacing? And when you look at Semrush, what's the core advantage versus some of those individual competitors that you have in SEO and other markets?

I think there is definitely a benefit of having a platform. And historically, if you look at biggest success stories in MarTech, almost all of them, they won one particular vertical and then expanded into adjacent areas to build a platform. So we are executing the same playbook, find a lot of inspiration stories like HubSpot. So we're there, focused more on kind of CRM platform. We are focused more on online visibility management platform, where we help with all the things that happened before people even get to someone's website. But in terms of advantages and why choose platform versus point solution. Our platforms have a lot of advantages. Of course, the most simple ones are packaging and pricing advantages. You get more consolidated stacks, but the best things are, you have much better user experience, having everything in one place. Everything is integrated. Your teams are going to be less siloed because different teams can work in one place. And all the metrics they are apples-to-apples because they're built on same technology foundation. You don't have to take one metric from one place and then think how it's related to a metric that you took from a different system. Again, maybe not super -- everyone who worked in marketing with multiple products will know what I'm talking about. So again, there are tons of advantages of having our platform and like I said biggest success stories in MarTech are usually platforms.

Got it. And Brian, this is a company with a really interesting vision. Your joining -- I think you've been around 2...

2 months.

2 months now. What attracted you to the story when you were looking at the role? And what are you bringing from your past experience that can take Semrush going forward to the next level?

Yes. I think a couple of things. I think, first and foremost, the team is incredibly talented. We're founder-led. So the team has been here for a long time and working in this space. They are the market leaders. Eugene and I, will comment a lot of times the Semrush in general is recognized with 18 awards from G2. So a lot of good industry analyst awards that are reinforcing the talent and the vision that the company has here. The company has a really strong financial. So we still have every dollar that was raised from the IPO, $230 million on the balance sheet, and the company is really well positioned for growth. So really strong gross margins above 80% and really good opportunity to be able to gain scale and leverage in the business. And third thing is, I mean this is a CFO dream, the company is incredibly well diversified. So we're in about 150 countries. We scan across -- scale across every single market segment from individual entrepreneurs and small business owners right up through to global agencies and Fortune 500 accounts. So everybody is using Semrush, and we're in every single industry. So we're not in pockets of the market where they can be affected. Anyway, we're very well balanced. So -- and in terms of my background, I spent 10 years at Nuance and in the last couple of years at Microsoft. My time at Nuance was basically growing the business from about $800 million up to $2.4 billion. And then we were acquired by Microsoft. So the last couple of years, it was integrating them into the cloud and AI business at Microsoft.

And Brian, to that point you're making on having a very wide go-to-market lens, you can help the smallest of businesses you can help global agencies. How does that translate in the way that you guys actually sell your product? I know you have a very strong trial motion out there today, but it's probably a little bit different depending on where you are from an organizational standpoint. What does that look like on average? How are you guys evolving to go-to-market going forward?

Yes. I can talk about 2 things. I mean our model, this is another thing I really like about it, has been really low-touch, frictionless selling motion. So a lot of our customers, we have 100,000 paying customers. They sign up through our website. In certain cases, they do start out by using a free version of the product and then their capabilities and their talents expand to the level where they would need to use the version -- the monetized version of it. In other cases, they're using free products and then start to expand and diversify the use of the portfolio. So we've got multiple entry points in from free and trials. But for the most part, our selling motion is really low cost, frictionless. We're, of course, going to be expanding into enterprise and leveraging different selling motions as we look to execute on our long-term strategy. So that will evolve over time, but it's impressive that Eugene and the team here have been able to scale the business to over 100,000 paying customers, over $300 million of ARR with a really low-cost frictionless selling motion. That's a great asset for us.

And Eugene, it was a record trials quarter in the first quarter. There's consolidation taking place in the MarTech ecosystem. There's thousands of different applications. And to your point, a platform approach just makes a lot more sense. Why are you seeing record trials in a tougher macro environment? Why are people not taking a more measured approach?

So I would say we definitely see a lot of demand for our products. Now I would say you're right. It doesn't mean everyone else in the space seeing the same, but we see a lot of people who previously would say, "Well, I want to buy 5 different things." And now when they start thinking about this under all the kind of budget optimization pressure that people have around, they're like, yes, but I also can just go and buy everything from Semrush. So why would I take a riskier path, right? And buy several different things that are harder to integrate. I'm taking integration risks, my colleagues just got laid off. I don't want to do this kind of risk. I'll just go and buy everything from companies that have been around for a little bit of time, that is well-trusted, that is considered to be a leader, and they offer everything in one place. So that's great. I'm taking no integration risk as well. So we see a lot of people making those decisions in current environment. And that's why I think you see even when everyone else is talking on a tough environment, hard to get customers, hard to convince them, we are seeing record net adds in Q1, record trials, all the top line demand metrics of the charts.

And how much of a reflection is that on the brand investments you guys made last year, I think it was in the summer time period when you first started talking about that versus word-of-mouth selling or using your own products to get people onto your website and discovering the tool?

It's a great combination of all of those things. So of course, doing what you preach is big part of our culture. So pretty much all the education materials that we publish, case studies. We've done this ourselves and find a lot of success before advising other people to do the same. So we always had a lot of success with organic marketing, word-of-mouth, product-led growth. So there is -- there are a lot of those marketing channels that don't really require constant investment once you -- you build them once and then they keep serving you in the future. At the same time, like I said last year, we also did a lot of investments in brand. And those are also long-term investments that are paying off now. They are not necessarily investments that we should keep doing this year as well. So we can optimize our budgets a little bit and enjoy better efficiency and acquisitions.

Yes. Got it. How about the persona of the individual using your tool? If you think about core SEO that is what you've historically been known for, but you also have market research, you got social media management. You've got a litany of different tools out there. Is the individual using your product tapping into all those individual products? Or are they sort of specialized in one of those particular areas?

So usually, a particular user will not use everything, of course, but they will use some unique combination, let's say, in a given month, people can use 5, 10 products. But also those products could be different month-to-month. Maybe they have a period when they're doing some kind of website migration from old architecture to new architecture, they will be focused more on technical aspects of their website. But then in the next 6 months, they realize they don't have a lot of content. They focus on scale and content production, so they will use a different set of tools. Maybe they have a competitor that is active in their space. So in that case, they will use more competitive intelligence to sort of reverse engineer their best campaigns, their winning tactics and start copying things that work for other people. So it's really, I think, unique in the way that you can have same persona using different tools in different points of time. That's why we think platform approaches -- but there should be no barrier to entry when people need to try new things, and you can achieve this only within the platform. But in terms of personas, right, to continue what Brian already said, we have small business owners. And when I say small, I mean like smallest, like people who are [ pro painters ], plumbers. At the same time, we have CEOs of publicly traded companies who use our competitive intelligence features. And a lot of them tell, well, I started using products myself 8 years ago when I was a marketer, I had a very successful career, got to this public company CEO role and now we still keep using your product because it's phenomenal is the best data you can get.

Yes. That's really interesting. And this is kind of a strategy and capital allocation question to take it how you will. Again, more than 50 products in the platform, what you're saying there is people could use any combination of these things at their disposal in a given week. How do you guys think about the further build-out of the platform from here, both from an acquisition standpoint, you've done a few you in the past or spending more on R&D to create some compelling new features inside of the platform.

So just I'll kick it off and Eugene can get more into the strategy on some of the targets, but we think of our growth strategy sort of with 4 pillars. So there's 100,000 paying customers today. We just had record net new adds in the first quarter, and we've got a long runway of growth opportunity just from that core platform. There's 40 million marketers out there and our path to 100,000 to capitalizing and getting conversion from a significant percentage. That's our core focus on making sure we can continue to drive adoption. We have over 50 tools today. So we also have a cross-sell upsell strategy. Our net retention rate is 116%. So it's really high. We have really strong interest in our loyal following of 100,000 paying users and in 900,000-free to continue to diversify their use of our portfolio so that would be another needs to be able to expand. We have an App Center where we're bringing third-party partners into the fold where they want to leverage our brands, our billing platform, our support capabilities and just, of course, gain access to our installed base to be able to accelerate and grow their business, and we'll take a percentage of that as part of our App Center. And then we have free users, 900,000 where some of the entry points are actually free products that we'll look to monetize over time. So we've got a really diverse growth strategy. And of course, M&A is a big part of that. So our continuation of expanding our portfolio from the 50 products that exist today to where we want to be. There's 8,000 apps that marketers use that are part of their workflow and add value to the work they're doing every day. And we're going to continue to push and use our R&D, use that third-party App Center and of course, strategically used M&A to also continue to expand that.

And I guess on the M&A front, what did Traffic Think Tank bring to the table? That was a deal that you more recently announced? Just be curious to hear.

So that's another way how we use acquisitions, maybe a little bit unorthodox ways. But often, we acquire not just products but also audiences and content. So in this particular case, we have a very loyal community of people who are also influencers opinion leaders in the space. And just having direct access to them has a lot of value because they can spread the message about new products we launch, new features and so on. So we're sort of using this as a channel. But at the same time, we also have a top-tier educational content that took years and years to create and that was created by some of the biggest tax versus in the industry. And now we think in -- a, we are going to open part of this content to attract even more demand, and we've seen a lot of success using educational content as a demand generation asset. But we're also thinking about having more premium experience for our bigger clients, both in terms of access to premium community, but also access to premium educational content. The way I'm thinking about this is you have Amazon and they have, of course, kind of e-commerce side of the business, but they also have this prime subscription, which includes all kind of things, not just fast delivery, but also video, music. So for me, educational content is additional part of experience, kind of like Amazon Prime, but for marketers.

Okay. Really interesting strategy. I want to pause and see if there's any questions here from the audience before I continue. All good? We'll shift over to AI. That's the big topic everyone's talking about. And it seems like it has a particularly relevant application in the marketing ecosystem. I would be curious to hear what you guys have been up to on AI and how your customers are thinking about it?

So we've been very excited about development in generative AI space. We've been using GPT in some of our products since Version 2. And in terms of commercial success, even before ChatGPT, we had tons of success with those features. The way we are leveraging this now is, same approach that Microsoft is doing. So we're thinking about this kind of as a copilot. So the idea is that not to reinvent a lot of things, but look at places where people would benefit from additional AI layer and start building them there. One example, reports, right? So standard reports and you have a lot of pages of graphs and charts that are hard to read. And a lot of people have the sort of analysis paralysis where they like oh, I like all those pictures, I don't know what they mean. So instead of that, you can use AI to scan through the content and write maybe one paragraph of summary or one page of summary that takes only the -- talks about only the most important things. So we're doing that. We are also using generative AI in our outreach tools. So for example, we have a competitive intelligence product that has battlecards, we just released features that analyze everything that is happening online and then incorporate this knowledge into battlecards, so sales reps can be more effective selling versus competition. We have Digital PR product where we're starting to use GPT to write e-mail out emails -- outreach emails. And thinking about the same functionality in our influencer marketing tools available in App Center. And then, of course, we have this writing assistant products. Historically, it's been available on our Guru plan as a part of our content marketing toolkit. But our Guru plan is $230. So we started thinking, well, there probably should be a lower entry point for people who want just this functionality who just want to start writing content. So we released ContentShake in our App Center, which just really uses GPT in combination with Semrush data to give people insights about what to write about, how to write about and then uses GPT just to write. And you have to do minor edits. It's still -- humans still need to be in the loop, but it optimizes content production by 10x in terms of efficiency. So if previously, you would write 10 blog posts per month, now you can do 100 easily. So we see a lot of adoption. But if our goal -- what excites me is that I'm seeing people who previously wouldn't even start writing, maybe they didn't have time. Maybe they didn't feel strongly about their writing capabilities. I mean not everyone is Pulitzer award winner, right? But with this product, they can just create an outline and they can create outlines because they're subject matter experts, they know what they want to write about, then push a button and generate the content. They do minor edits and they don't actually have to be a writer. They don't have to be any good at writing to create really well-versed content. So I'm really excited about this as an enabler. Many people who previously wouldn't even try to do marketing, now do market, and we're seeing this change. We're seeing a lot of adoption. So very excited about the future and AI specifically. And like I said, constantly going through everything we build and asking ourselves, okay, can this thing benefit from AI.

I can tell you're very excited about the topic, and you guys have been doing a lot there. Can you help us understand that behavior and your customers' fronts like when you talk about people that have historically been writers getting involved, that could obviously be additive from a seed perspective. But how many of your customers are actively embracing generative AI tools today, testing that versus, hey, I'm going to wait and see how everyone else approaches it before I dip my toes in.

Yes. It's not really, not necessarily secret [indiscernible] metrics that we disclose. So I think it's okay if I say we have tens of thousands of people who use our paid AI-powered products. So a lot of adoption across our user base, we've seen people being very early adopters of those technologies. And it's actually funny. We did a research in collaboration with Wall Street Journal. And they were trying to answer the question how much content is created with some AI assistant. And they started research having an assumption that there is probably a relatively small percentage in some kind of novelty. And when we interviewed our user base and ran a survey, and we represent a lot of content creators. We have a lot of media companies, companies like Wall Street Journal, so on. We realized that 70% of kind of high-volume content creators, they already been using AI to some extent, including, of course, Semrush features. So I would say in our user base, we always had a lot of early adopters. But as we started pushing more of those features into production products, we saw even more adoption, even more excitement in the user base.

Got it. And Brian, ContentShake is one thing that we just talked about, a monetization path of AI. How are you guys more broadly thinking about monetizing these tools, if we're already at a point where 70% of organizations are already actively embracing something here, when does it become a true tailwind to the model? And how are you guys thinking about that trade-off of productivity in seeds?

Yes. I mean we're always looking, as I said, expanding the portfolio. And the good news -- the great thing about the company is we have unbelievable insights into our customer buying behaviors, patterns, their upgrade cycles, what products they're actually using to just have a really good platform that gives us those insights. So our strategy is, always going to continue to be to observe those patterns, be disciplined and prudent about our investments and analyzing trends to be able to figure out the optimal path to being able to monetize our platform.

Got it. Any questions from the audience? I just want to make sure I get everyone involved here, if they want to ask anything. Brian, sticking on you for a second. The company has made more of a pivot to profitability in 2023. Can you just discuss a journey there, what some of the primary levers are going to be that gets you more profitable from here?

Yes, yes. I mentioned before, we have the 4 growth pillars. So our focus for sure, is always going to be on growth, and we believe we have a long runway of meaningful double-digit growth ahead of us and a really good strategy to be able to execute and capitalize on that for a long time. But profitability is important, too. And we're being disciplined and balanced in our spend, making sure we're prioritizing investments that will drive long-term value and growth and really leveraging the analytical capabilities and insights we have into the company. I mean we are an online presence and awareness business. We've got access to a lot of data. So we know and have capabilities to be able to analyze our marketing efforts, our selling efforts and really understanding attribution and success of those investments. And our focus is making sure that we're putting the money in the right places and being disciplined and optimized in our sales and marketing. The second piece is we have over 80% gross margin, so an unbelievable scalable platform. We're bringing in a lot of data. We've got over 100,000 paying customers and 900,000 free users. But in spite of that, we're still able to generate really good margins, and we'll be able to leverage and scale that over time. And we're only 2 years post IPO and haven't quite digested all the G&A costs. So over time, we'll continue to gain scale and leverage out of that. As the company grows, we'll keep G&A relatively flat. We've made the investments in our systems and process and accounting capabilities, and we'll be able to take advantage of that and scale the business on top of that for a long time. So a combination of those things, driving revenue growth, leveraging our strong gross margins, being disciplined and balanced in our sales and marketing, continuing to invest in R&D and bringing new products to market that will accelerate and provide tailwinds, to your point, to our growth and then, of course, just gaining scale and leverage out of G&A. That's our path to profitability at this point. And just to kind of confirm numbers for anyone that's new, we're going to be non-GAAP net income positive this year. And we'll start to disclose our numbers around operating margin and EBITDA margins, but you're going to see about an 18-point improvement between the fourth quarter last year and fourth quarter this year with a significant shift in our profit margins.

Yes, really tremendous. Eugene, I wanted to get you a couple of more strategy questions here before we run out of time. When Microsoft launched Bing with the GPT features included, there was a lot of excitement about potential share-shift and disruption in the search ecosystem. Can you talk about if that's a tailwind, if it's a headwind, why you may be agnostic to what's going on in the search market?

We were definitely excited and hope that Bing would get little bit more market share. It would be, I would say, healthy pretty much for everyone in the space, including Google, by the way, I think they wouldn't mind having someone more meaningful, so they have less antitrust issues. But so far, we've seen some moves in traffic that Bing has on a monthly basis, but they were not, I think, substantial enough to really move the needle. Yet we keep monitoring the situation. But so far, I don't think Bing really increased their market share in a meaningful way. For us, of course, if they can get there, that presents a great opportunity. We're selling a lot of products that help people to optimize for one search engine. So we charge x amount of dollars. I think if there are 2 search engines that people care about, we can sell products for both of them, not saying it's 2x, but it is multiple an x. So again, keep in mind transformation, we're very excited to see first attempts to challenge the monopoly. I think -- like I said, I think it would benefit everyone in the space. And for us, every time we see moves in the marketplace where people need some insights and need to understand what's going on and need advice. We see an influx in demand for all products. So for us, almost all those things are kind of tailwind. So let's see how it develops.

Yes. And final question here. You've laid out the growth pillars of the business. What would you be most excited about from a pillar perspective in 2023?

We love all our growth pillars. Yes, I mean we -- I mean the 2 key ones, of course, are just continuing to gain loyalty and adoption of our core platform. So we have, like I said, 100,000 paying customers. We have a long runway of growth to be able to continue to drive adoption there. I was -- I went out to a restaurant with a couple of colleagues with my first week, a couple of them were wearing Semrush hoodies and people came up to us in the Street and said, "We love Semrush." Everybody -- a lot of investors we've talked to today said they've used it, everybody we run into has heard of it, they love it, and we like to hear that and see that. So we want to continue to see that brand and the platform continue to drive adoption. But of course, continuing to diversify the portfolio and expanding our presence around Digital PR, content marketing, advertising, online presence and awareness. Those are all channels that we're going to continue to push and drive adoption with our portfolio and continue to leverage our strong net retention rate to cross-sell and upsell within the base. So we love them both, but of course, we want to see more users and more interest and more loyalty in the platform is pretty much our primary focus.

Great. I think that's a good note to wrap up on. So please join me in thanking Eugene and Brian from Semrush.