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

Good morning. Thank you, everyone, for joining us at the Morgan Stanley TMT Conference. My name is Elizabeth Porter. I'm an analyst on the U.S. software equity research team. And we are really excited to have with us today the Semrush team, CEO and CFO, Eugene and Brian. We are going to take audience Q&A. [Operator Instructions]. And before we get started, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And with that, Eugene, Brian, thank you so much.

Thank you for having us.

Awesome. So you guys have a lot of really exciting drivers in the business behind the enterprise SEO. You also reported Q4 results just last week. But -- and I do really want to dig into these. But before we do, for those people that may not be as familiar with the Semrush story, it'd be great to just get the background of the business. Semrush offers a very unique portfolio across the online visibility management space. So kind of what does that mean? Can you talk to some of the different offerings in the portfolio and the types of customers you serve?

Sure. Yes. So Semrush is a SaaS recurring revenue business focused on digital marketing. Our particular area of digital marketing is what we call online visibility. And we have 6 main channels that we focus on. First is search engine optimization. It's all about helping customers to enhance their digital assets so that they become discovered online. So when you're searching through Google or now Chat or AI-enabled search, your company will be found and ranks high in the organic search results. Another one is paid advertising. It's very expensive to do paid advertising now based on the keywords that are important to your business. The price continues to go up, and there's a lot of competition out there. So it's important that you're optimizing your investments and focused on the areas that have high attribution to driving revenue and growth for your business. Social media is a third. Businesses, just like individuals, want to be influencers. They want to be making sure that their message, their products and services are getting exposure on social media channels and that their social media posts are getting likes and shares and good favorable comments that create a favorable perception. Local marketing is another. We all use Google Maps, Apple Maps or Waze or different tools. And oftentimes, we're searching for a pizza shop or a business for a product or service that we need, and it's important to be in those channels and optimize for consumers that are searching there. Content marketing is another one and then data and intelligence to make sure that you're understanding your competition and the performance of your business out there. So we have 6 key channels, data and intelligence at the core and overall have a comprehensive digital marketing platform. In terms of company size, we just reported our 2024 results. We have 117,000 paying customers that's global. So we're in 150 countries. We span everything from small businesses or individual freelancers all the way up to the most well-known Fortune 500 brands like Amazon, Alibaba, Marriott, Samsung and a number of other Fortune 500 accounts. So our products have wide appeal. And we have 4 growth drivers. Our focus is on continuing to drive new customer additions to get above the 117,000 to continue to cross-sell and upsell. We've been able to double our average ARR per paying customer over 2 years, and we'll continue to drive that number up. We've also -- AI and enterprise enabled our platform to make sure that we have much more sophisticated features for the most advanced and sophisticated marketers and therefore, have created a good upsell and cross-sell potential for the company. And then we have good profitability and growing profitability that allows us to reinvest back into the company to continue growing customers and expanding our portfolio and cross-sell potential.

Great. And you mentioned data and intelligence really at the core of the business. Can you just spend a minute talking about what actually differentiates the data assets that you possess? I think we often think of Google or Adobe having similar data sets. But how is what Semrush delivering to customers different than what some of the large platforms provide?

I think the key is our ability to monitor a lot of interactions that happen on the Internet that you cannot really see using your own first-party analytics. For example, when people search your brand online or search certain products online, you don't really know if you're getting mentioned there or not and what is your share of visibility, right? At best, you can use something like Google Analytics to track amount of traffic that gets to your website. So what's different about Semrush is that we monitor everything and we can serve as a, let's say, a GPS of the Internet where when you need to get from point A to point B, we can tell you what is the best way for you to get there. And again, we know that because we know where you are relative to every other website in your market. in terms of your visibility, in terms of traffic, in terms of cures that you're targeting, in terms of content that performs well, in terms of ads that you're running. And with this kind of 360 view, we can give you insights that are pretty much unmatched. But what makes it even better is that we also allow you to connect your own analytics with our market intelligence, and that allows you to get even deeper insights about your performance. But what it also helps us to do as a business, it helps us to use information that our customers share with us to train our machine learning algorithms and improve quality of our metrics and accuracy of our insights. For example, the more information we have about total traffic on the website, the better we are at estimating and forecasting traffic for every other website. And so when people come to us for insights, they share data with us and then with more data, we improve quality of our metrics. And as our metrics improve, we can attract even more customers and that kind of creates flywheel where more customers drive more data, more data drives higher quality of metrics and higher quality of metrics drives more customers kind of reinforcing the flywheel and creating network effect.

Great. That provides a great background to the business and some of your core competitive advantages. I wanted to ask about some of the metrics that you outlined at the 2024 Analyst Day where you segmented your business by different cohorts, the larger enterprise and where you had a net retention rate of 120 plus which looked very different than the SMB freelance segment that was around 80%, but that's been impacted by a lot of macro factors weighing on demand. So could you just start on kind of what you're seeing within the macro backdrop in early 2025 and including maybe some of the dispersion that you're seeing in the health of those 2 cohorts?

Yes, absolutely. I mentioned before, we have 117,000 paying customers all the way from solopreneur, freelancers and small business owners up to the most sophisticated brands. And of course, macro business performance, budgets and a lot of other factors vary across those different segments. So we're always looking at the different segments and obviously trying to understand strategically where we should be putting our investments in both go-to-market and products and focusing the efforts on the business. And the good news is every one of those cohorts over the years in good or bad macro environments are always very healthy businesses and ones that we want to continue to invest in and promote. What we did report at Analyst Day and then mentioned that during our Q3 and Q4 earnings is '21 and '22 were a time of accelerated demand, very cheap capital and a lot of SMBs and smaller businesses were spending quite a bit, and things are different now. We're in a little bit more of a high inflation environment, higher interest rates and the spending on the lower end of the market is impacted. To us, it's probably more of a normal environment where what we're experiencing in '21 and '22 was accelerated demand, and we've just reverted to a more normal trend. The good news is, overall for the business, we're growing over 20%. We're expanding our profitability, and we have really good accelerating growth in the enterprise based on the investments we've been making in our go-to-market and our product portfolio that's been able to offset that and allow the company to grow and scale in a way that's outperforming quite a bit of the market.

Great. And on that enterprise momentum, I mean, clearly, it's been showing up in results. You had 336 customers paying greater than $50,000, which is up about -- over 80% year-over-year. Even customers paying greater than $10,000 was up 40% year-over-year. So can you just dive a little bit deeper into how the investments you made are building out the enterprise go-to-market motion and allowing for these levels of customer growth?

Definitely. Yes, it's been performing well. It's the best-performing part of the business and something we expect to continue into 2025. And there's 2 key drivers for that. The first is our product portfolio. We've had a portfolio that spans all the digital marketing channels that I talked about when we first started. And that platform had wide appeal across companies of all sizes. In the last few years, we've focused on really building out very sophisticated AI-powered features that have enhanced the potential of our platform for the largest and most sophisticated brands. And we've been able to sell that enterprise feature at a price that's about 10 to 15x what our average is. So our ability to upsell and cross-sell that very sophisticated cohort has expanded significantly, and it's driving the growth in companies that are paying over $50,000 and $10,000. The second piece is our go-to-market. When Semrush first started, we were targeting the buyers as the users. So these are very sophisticated marketers who we wanted to empower with the right tools so that they could do their best work. We were targeting social media managers, SEO managers, paid advertising and digital marketing managers. Over the last few years, we've supplemented that selling motion with targeting leadership and positioning the power of our full platform and standardizing on that platform across their entire digital marketing team. And it's allowed us, coupled with the enhanced and more sophisticated enterprise portion of our portfolio with that go-to-market to overall expand our enterprise position in the market.

And you referenced the enterprise SEO product being 10 to 15x higher than your blended ARPU. And if anything, I think it's been trending more towards that higher end of the range. And so 2 questions. Maybe first for Eugene. What is it about the enterprise SEO product that's so different than the core solution? And then maybe for Brian, what is it that's enabling customers to be willing to pay so much more? Is it a dollar amount that they're displacing cost savings? Like kind of what is that uplift that they're willing to spend -- definitely more.

So in terms of differentiation, our PLG platform already have been extremely popular among companies of all sizes, including about 40% of Fortune 500. So it was a fantastic product and still is. And data is unmatched, right? And that's why even a lot of larger companies always used it despite maybe not having exact things that they wanted to have. And then over many years, our large customers were sharing feedback with us and asking for certain features, especially different kind of reporting and more customization, different data pipelines. And of course, certain workflows that small companies don't need, but large companies cannot do their SEO without them. And we were really collecting all this feedback. And at some point, we looked at it and we said, why not? We'll build it if they're willing to pay us the right amount of money for the subscription. And it took us about 2 years. We've added all those functionalities, a lot of customizable dashboards with not just custom views, but also custom metrics, custom analysis, custom data pipelines that you can have for each customer. A lot of those things can be achieved with no code so even if setup was very complex CSMs can just do this without any involvement of engineering teams that's kind of one side of this. The second side is of course AI workflows. So a good example would be something like our internal linking workflow. So if you have a small website and you need to figure out how to connect different pages, let's say, you have 20 pages you can put all them on white board and if you know how to do internal linking you just connect them and it kind of works usually. The problem is, let's say you have 1,000 pages, let's say you have 100,000 pages. Well, and then some of our customers have millions of pages. How do you figure out, how to connect them? You need something very sophisticated. And when they try to do this analysis manually themselves, it almost never works. It takes too much time. And by the time they're done, something have changed either external linking profile or architecture of the website or the way Google ranks things. So they have to redo the whole thing again. And with our internal linking tool, you push a button, it crunches the numbers, and it gives you the perfect output that is designed to maximize traffic for your critically important pages. And you can, of course, just download this and give it to your engineering team, but some of our clients even go one step ahead and they just integrate APIs with their CMS systems and they programmatically change internal linking of the website. And just this workflow alone can drive 15%, 20% increase for a website that have never done sophisticated internal linking. And that's just one out of more than 10 different workflows that are similar -- designed in a very similar way to do things that big websites need while small websites may not need that. And then in terms of willingness to pay like I said, each workflow, if implemented properly, more than pays for the whole subscription, but I think Brian can share more details.

Yes. Two things. I mean, as a CFO, I'm always challenging my team to bring technology and enhancements to processes that overall drive growth and do so at a pace that is faster than our competition. So this enterprise SEO solution, it gives companies the edge to be able to do things quicker to respond to their competitors' moves and algorithm changes across all the digital marketing channels faster so that they can maintain their position in all these digital marketing channels. The second piece is about cost. We mentioned at Analyst Day that on average, companies are spending about $300,000 on SaaS subscriptions. These are fragmented point solutions that different marketing resources use. They don't talk to each other. And to the extent that leadership wants to get insights about the performance of their business across all these digital marketing channels, they need expensive technical and creative resources to bring it all together. Semrush replaces all that. So in addition to there being an acceleration in growth of revenue, which is the more important one, there's also a total cost of ownership advantage by standardizing on Semrush as well.

Great. And I do want to switch gears for a minute and get your view on a key question that I was getting asked a lot post the print, which was with all this enterprise momentum, the Q4 results were a little bit mixed. And so with all this goodness around enterprise, SEO, is there any sort of leak in the bucket as it relates to any change in core or core business that made the headline numbers look a little optically soft?

Yes. We grew 23% in the fourth quarter, 22% overall for the year. I think that's strong and a good report. And we did so at a 12% operating margin and good free cash flow margin that we'll be expanding in 2025. There's always portions of the business that are stronger than others. Our enterprise business is performing well. It's growing 30% plus. The number of customers paying over $50,000 and 10,000, respectively, are both growing by significant amounts. And we're at -- the business overall is growing 22%, 23%, depending on if you're looking at the quarter or the year, which is strong. The reason why we're not growing 30%, I don't think anybody is, but the reason why we're not is, there's a portion of the business, the low end, what we call solopreneurs and freelancers or the low end of the SMB market that was very strong in '21 and '22. And we're seeing a little bit of that demand work its way out of the business, revert to more of a normal trend. And in the current term through 2024, we saw that offset some of the strength we saw in enterprise, but still got us to a pretty decent overall growth for the year.

Great. So kind of with a kind of better understanding of the enterprise -- the weakness kind of more in the SMB side, I think we can focus more on the enterprise SEO opportunity. And you said you closed more deals in Q4 than you did in the entire rest of the year combined. I think it was 40 deals alone in the month of December. So how should we think about this go-forward pace? Is it 144 in half the year goes to 300? Do you like run rate the December month? Just how should we think about the pace of ads in 2025? And maybe what do you guys embed in your outlook?

So simple answer is '25 will be more than '24. Obvious. We're not quite ready to guide the enterprise specifically. We want to make sure -- my guidance philosophy is to be prudent, making sure that we're setting up Semrush for success and ensuring that we can deliver on our commitments. There's a lot of year left. There's a lot of macro, geopolitical and other dynamics that we're all hearing about. So it's a long year ahead. And enterprise is different, and it's something we've been doing for a few years, but still a little bit newer for Semrush. We don't want to get too far ahead of our skis where we're making commitments about how long it's going to take to close deals or demand generation engine. So we're not quite guiding it separately, but it will be strong. We believe it will continue to grow sequentially and continue to expand in its influence and drive overall growth for the company at a greater clip than it did in 2024. We're investing quite a bit. We're continuing to enhance the number of enterprise sellers and expand the overall go-to-market. We're firing up an enterprise demand generation engine that will generate leads. And we've been at this for a long time. Our business is in enhancing online visibility and demand and doing that in an automated and scalable way. So we're putting that -- the power of that platform to use for our own internal execution priorities and making sure that the market overall is aware and understands this enterprise solution, and we believe we'll have a pretty strong successful year in '25 because of all that.

Great. And you have about 8,000 enterprise customers today that are using Semrush. Specific to this new enterprise SEO product, you have about 144. When we think about that base of the 8,000, is there a subsegment that we should be thinking about as who is the more likely user of this product over time, understanding there's difference in sales cycles and integrations. Like, could that 8,000 base be all users of a new solution over time?

Well, we think that definitely not all businesses are equal. And our definition of enterprise segment is based on headcount. So I would say, theoretically, you could have a business that has a lot of people, but not that much online presence, let's say, taxi company, right? They may have a lot of drivers, but they're not depending that much on online demand generation. That said, I think if we look at our user base, that's an almost insignificant fraction. Most of the existing customers are businesses who deeply care about their online visibility. They've had a lot of success using our PLG product. They like it. They're using it very actively to grow their business, and they would be all very good targets to upgrade to a bigger plan. What we ask ourselves is usually do they have big enough online business? Is it an important thing for them? And answer is almost 100% of the time, yes. Do they have right team that can benefit from our enterprise product? And the answer most of the time for those larger companies, almost 100% of time is, yes. And then the third one, is it a priority for them this year? Do they have budgets and so on, that's where we sometimes need to work with them to make a business case. And it's always an easy business case, but you also need to work with your kind of champions inside of those companies. And that said, there is, of course, a huge opportunity outside of our own bubble, right? So we have this 8,000 accounts already, but we also closed a lot of deals with new logos who were not existing customers like Semrush. And that kind of shows that there is also a big greenfield opportunity in enterprise as well.

Great. And then even outside of enterprise SEO, there's a lot of opportunities for you guys to expand ARPU. Can you just talk to us about some of the ability to do cross-sell and upsell of products into your existing customer base? You referenced your average ARR per customer is about $3,000 a year, and you've seen that grow pretty consistently. So what's your landing with the customer? What are some of those key areas that you're excited about expanding?

Yes. We -- since 2018, we've doubled our average ARR and believe we can do that again, particularly in the enterprise. The cross-sell, upsell opportunity is many companies come in with a need to be able to enhance their online visibility through one digital marketing channel, either social, local, search or paid. And over time, as they grow in their sophistication and start to stabilize their visibility in one channel, they'll look to leverage another. And it gives us an opportunity to cross-sell the digital marketing suite for that -- for the remainder of the platform. So we've been doing that for many years. Companies land in one channel and then we continue to grow and expand. We are seeing in certain cases as we position the platform more holistically that we're landing bigger. And then there's an opportunity with more sophisticated AI and enterprise-grade capabilities that we can upgrade them from our core platform up to this enterprise platform, which creates another cross-sell, upsell opportunity for us. So expanding our ARR per paying customer is a key strategic priority, something we're very focused on and believe will be a strong contributor to growth over the next few years.

And you referenced AI features and functionality. The industry is certainly poised to undergo a very significant shift as it relates to moving from traditional search to these more generative AI platforms. So how will the evolution of generative AI impact your SEO business? Ultimately, is this a headwind? Or does AI disruption to the nature of search actually present a tailwind for you guys? And if the later, kind of what gives you the right to win to help customers navigate?

I think it's a great question and space evolves really fast. And if you asked me this question last year, I would say something like there are still a lot of uncertainties, right? Because same time last year, Google didn't even launch AI Overviews yet. ChatGPT didn't even launch ChatGPT Search yet. And as of today, those are normal things that we already use a lot and they're part of the life. And so because pace is so rapid, I want to make sure we're not making any statements that are not backed by data. And so when we look at data, today, we are starting to see certain indicators that tell us what to expect. So one of the indicators we spend a lot of time looking at is usage of Google traditional search. And we look both at traffic, just in general activity, which is very stable, and we look at referral traffic that Google sends to an average website. And it also have been very stable despite all the recent changes. And as of today, Google is by far the biggest source of referral traffic for an average website, especially organic traffic. And we don't see why this would change anyway because the biggest question was what will happen after AI Overviews, and it didn't do much in terms of traffic and so on. Rankings have changed. So the rules of being featured in AI Overviews are different than they were for other search elements. But in terms of value that Google brings to an average business, on average, again, market is exactly where we have seen it a year ago. And the cost and value of clicks only went up because you see their revenue reports, their advertising revenue is growing on roughly the same number of clicks. So that means price of click or value of click only goes up. And then on top of that, we start seeing a lot of usage in, let's say, ChatGPT and ChatGPT Search. And we see that as an expansion of the pie, so to speak. And the reason we see it, well, of course, there is growth in traffic. Of course, it starts generating additional referral traffic to different websites and for some of them, it starting to be meaningful. But above all, we see that about 70% of interactions in ChatGPT are different search intent -- something that we haven't seen in Google. And so as those systems get more and more sophisticated and can answer more broad questions, especially multimodel search, we see that people will do with those systems, things that they haven't done before and businesses will need to optimize for those new use cases. And again, that's one of the reasons we think that pie ultimately gets bigger. And the final piece of kind of information that we are seeing is that a lot of marketers, especially ones from big companies now stepping forward and saying, "No, guys, can you help us figure out how to optimize for this? Can you help us monitor our performance? And the most interesting thing, they care not just about clicks, not just about visibility. They're also interested in what exactly those AI agents tell about their products and their business. It's almost like they want to monitor sentiment of AI the same way they would monitor sentiment of their customers. And that's, from my point, creates almost a new discipline that is kind of between SEO and brand marketing, where, yes, you want to optimize your visibility in those platforms. Yes, you want clicks, but also you want to influence what exactly they're saying about your products.

Interesting. Yes, that's a super exciting opportunity for you guys. And you started to capitalize on this with just last week announcing your AIO product. And it was priced about $99 a month. So can you just elaborate on the key features of that product and how it differentiates from existing AI solutions, if any, in the market today?

So the goal is to give people, first of all, an understanding how their brand is presented. And so the setup is very simple. You give us your website. We analyze your website. We drive conclusions about your portfolio of products and services. And then we say, okay, so we believe that when customers ask for certain things, you should be featured in the answer. And so then we run those questions. Sometimes we ask LLMs. Sometimes we ask ChatGPT Search and their index specifically depends on the intent of the query. And then when we ask all those questions, we summarize them in insights. So for example, if on questions about the price, AI systems say that your product is a bit expensive or maybe more expensive than competition, we would highlight as an insight we say, well, they recommend you, but they kind of say you're more of a premium brand. Is it in line with what you're trying to achieve. And so marketers can both measure their visibility, they can benchmark themselves against competition. They can measure their share of voice, but they also can see, okay, does the profile that AI system, LLM or ChatGPT Search has about my business, does it match how I see myself? Does it match the message that I'm trying to deliver to my customers? And then if there is a disconnect, we can also show you what specific content influenced this statement made by LLM. And where do you need to work? Like who do you need to work with to change the narrative? Almost like doing a PR, but not for people, but for AI.

Great. So I do have a lot of questions left, but we have about a minute left. So if there was anything burning from the audience, wanted to give you guys a chance to get that in. We got one here.

One of your most notable competitors also sort of enhanced their efforts in the enterprise, hiring a new CRO, adding more expenses this year to get up market. I was wondering if you're seeing more competition upmarket, more head-to-head, just anything that you can sort of talk about competition there.

No, we don't see a lot of competition upmarket. I think, primarily because the typical deal of our enterprise SEO product is not against particular software. It's usually against the implementation that they have at this moment. And implementation would usually consist of some legacy SEO vendor or maybe multiple point solutions, but then there would be a layer of connective tissue that is just your normal knowledge work software. So spreadsheets, maybe some Python code, BI systems, sometimes some kind of database. And it all poorly connected, was built through many years by different people. Some of them don't even work in the company anymore. And our goal is really to displace this kind of patchwork of solutions with purpose-built enterprise platform. And then sometimes as we do that, they don't need legacy software that they've been using. So it becomes a displacement as well. But we don't target a particular vendor. We target the whole implementation and manual work primarily.

Great. With that, we are over time already. So Eugene, Brian, thank you so much for joining us today.

All right. Thanks, Elizabeth.

Thank you. Thanks, everyone.