Similarweb Ltd. (SMWB) Earnings Call Transcript & Summary

Greetings. Welcome to Similarweb Second Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded. With us today are Or Offer, Co-Founder and CEO; and Jason Schwartz, CFO. At this time, I will turn the conference over to Annie Rosenberg with Investor Relations. Annie, you may now begin.

Thank you, operator. During this call, we will make forward-looking statements related to our business, including statements related to the expected performance of our business, future financial results, strategy, the potential impact of the COVID-19 pandemic and associated global economic uncertainty, 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. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please review our filings with the SEC, including our final prospectus and the section entitled Risk Factors therein filed with the SEC on May 12, 2021, for a discussion of the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. As a reminder, certain financial measures we use in this presentation and on our call today are expressed on a non-GAAP basis. We use these 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 at the conclusion of our earnings press release, which can be found on our Investor Relations website at ir.similarweb.com. With that, I will turn the call over to Or Offer, CEO of Similarweb.

Thank you, Annie, and thank you all for joining us here today for our Q2 earnings call, which is also our first as a public company. It is a real privilege to be here with all of you on the call today. Our recent IPO was an exciting milestone for our employees, customers, investors, and partners, and I want to thank them for their confidence in us over the years. I also would like to welcome our new investors to the Similarweb family. During today’s call, Jason, our CFO, and I will provide details of our Q2 results as well as provide Q3 and full year guidance for 2021. I will start today by covering highlights of our financial performance. Q2 2021 was a record quarter for us. And I am pleased to report that our revenue increased 49% year-over-year to $32.5 million. We are also very happy that we were able to accelerate our growth versus Q2 2020. Continuing our trend of accelerating growth, we also took advantage of a strong demand for our solutions, as companies across the globe focus on digital transformation. In Q2, we also improved our gross margins by more than 250 basis points year-over-year to 78.5%, highlighting the scalability of our platform. Our free cash flow was negative $3.3 million, reflecting the strong fundamentals of our business, even as we expanded our operations. I want to expand further on those results, and also touch on a few key trends that we see as exciting for our business. But first, since many of you are new to Similarweb, I wanted to spend a few minutes talking about our business and market opportunity, and how we believe our offerings are disrupting traditional markets and helping businesses compete and win in the digital world. Similarweb was born out of my own personal pain, when I was trying to do some market research for my offline business many years ago. But no matter what I searched for, I couldn't find anyone with the insights I needed. I saw a market opportunity, and 14 years later Similarweb is a leader in market intelligence for the digital world. Today, our customers are some of the largest and best brands, leaders like Walmart, Google, Publicis, Merck, DHL, and CNN and many more. A lot has changed since we wrote our first lines of code. Digital has become a preferred way to communicate, transact and deliver products and services. It is an important growth driver and a strategic focus for most businesses today. At the same time, it's made every market much, much more competitive. In this environment, businesses have no visibility into the online activity of their customers, prospects, partners and competition. In reality, they are flying blind. Similarweb cuts through the lack of visibility, delivering a comprehensive view of the digital world to our customers, providing them with market data and insights to help them win in the digital world. The data, and more importantly, the actionable insights, that we provide, empowers our customers to be more competitive in their markets. We call this digital intelligence. Digital intelligence is embedded in critical business processes. It gives organizations the means to understand and gain insight from all relevant digital activity. It creates a powerful competitive advantage. It empowers companies to make better business decisions, increases their confidence and help them win their markets. Sometimes, it can mean the difference between business success and failure. To paint a picture of how digital intelligence can make this kind of impact, I want to share a conversation we recently had with one of our customers, the Head of Digital Marketing at Staysure, one of the top travel insurance companies in the U.K. When COVID hit, their entire business was at risk of failure. Similarweb helped them adapt to the new reality. With Similarweb, they were able to quickly identify which markets recovered the fastest from initial lockdown and focus on those opportunities. They also used Similarweb to identify new market segments, for example, younger travelers looking to insure against COVID-19 risks. They were able to create new products designed for this emerging segment and use Similarweb insights to build a strategy to reach the new audience. According to the company, and I quote: "Similarweb kept us in business." When times are challenging, it's all about understanding what the competition is doing, where we fit in the market, and what's going on in the market overall. It’s notable that in Q2, we completed an upsell deal with Staysure, increasing the ARR value of their contract by over 30%. This example isn't unique. Now more than ever, companies need visibility into what's happening in their digital ecosystem if they want to survive and win. Digital transformation is accelerating, but all that investment cannot be optimized without comprehensive, accurate and timely market data that integrate into the corporate workflows. This makes digital intelligence mission critical. We believe this is a massive opportunity, and we estimate that our total addressable market today is over $34 billion. Delivering this kind of impactful digital intelligence isn't an easy task to do. It is extremely difficult to gather massive quantities of digital signals across the internet, each signal providing only a small perspective of what's going on in the digital world. And it is even harder to use those signals to build the model that are designed to measure and predict how the digital world behave. This is what we do. Just think, every day we need to estimate traffic for tens of millions of websites and apps in over 190 countries in over 200 industries. And we need to do it really well because we know that leading companies and investors around the world will make critical business decisions based on the insights we provide in our platform. We've been working on solving this problem and creating this technology for over 10 years. Over time, we've invested significant resource and funds in our data assets and acquisition, and building a very strong competitive moats around our technology. To achieve that, we've built a unique R&D organization that operates in an innovative, fast-paced culture. Every month, this team deliver hundreds of innovative data and feature enhancements that improve our customer retention and increase average customer spend. We've continued to expand this team, which now includes nearly 250 top-notch developers, PhDs, data scientists, and Big Data engineers, and we're very proud on their work. We also built a very efficient sales and marketing organization to approach and attack this very large market opportunity. This starts by attracting and engaging prospects with our widely used free tools. On our website, and through a popular browser extension, we provide free access to a broad range of basic capabilities as well as opportunity to explore our paid offerings. The cost-effective leads from this freemium inbound motion are efficiently converted to pipeline opportunities for our sales team to pursue. We complement this with an outbound sales motion focused on developing new opportunities with larger target accounts. After successfully landing a new customer, we also have a team of client success analysts who help our customers realize more value from our platform, resulting in a more strategic relationship and expanding revenues. This land-and-expand motion is working very successfully for us. I want to turn now and discuss our Q2 performance. I'd like to mention a couple of highlights and how they illustrate several of our business strategies, specifically, around our land and expand sales motion, creating of new channels of indirect growth and the introduction of new products and data sets. Let's start with our land and expand. Over the last 12 months, we accelerated new logo acquisition, landing over 600 new customers and crossing the 3,000-customer's logo threshold in Q2. We are building on this strong new logo acquisition by refining our motion around customer retention and growth. As an example of this, in Q2 we completed one of the largest deals in Similarweb history with a major e-commerce company. This customer began its journey with us in 2016, starting with 1 use case and around $50,000 in annual ARR. Today, they use Similarweb across 25 teams globally, with around 1,500 users, representing over $3.5 million in ARR. Our Q2 upsell was a 7 figure ARR upsell with a multi-year commitment, included the addition of hundreds of new users as well as an upsell of premium product features and extended data sets. It's also highlighting our land and expand motion in operation, where we started small and overtime were able to expand to additional users, use case, departments and geographies within the customer. This land and expand motion is driving significant growth among our largest and most strategic customer segment. Those companies where we are generating more than $100,000 in ARR. We grew the number of these accounts by 52% year-over-year, and nearly 60% of this growth came from existing customers where our ARR expanded to more than $100,000. Overall, our ability to retain customer and expand ARR is reflected in the highest levels of NRR that we've ever recorded. NRR strongly improved from 101% at the end of 2020 to 106% at the end of Q2. In that critical customer segment of accounts with over $100K in ARR, we improved NRR to 118%, up from 113% at the close of 2020. Beyond our direct sales motion, we continue to develop indirect sources of demand. First, we recently announced the availability of Similarweb digital insights on the AWS Data Exchange. With the AWS Data Exchange, companies ranging from CPGs to hedge funds can enrich their Big Data analysis with digital market intelligence, including website traffic, keywords and retail transactions. While this did not have a material contribution to Q2 results, I believe that this partnership will broaden our customer reach and further help customer integrate Similarweb into their workflow. And in Q2, we also introduced an affiliate marketing program and a partner referral program, launching 2 new indirect channels for lead and opportunity creation. Also in Q2, we launched a new solution, our Shopper Intelligence, which is targeted at the rapidly growing e-commerce segment. Shopper Intelligence analyzes consumer shopping behavior across desktop and mobile and provides a comprehensive solution for understanding the digital customer journey and what consumers are buying online. Our goal is that Shopper Intelligence would analyze and deliver insights about digital consumer behavior across both e-commerce marketplaces and first-party shopping websites. We are off to a strong start with this new solution. We've already closed new businesses in a diverse set of industries, not just in the primary CPG audience, but also retail, pharma, technology and private equity. I'm looking forward to giving you more details on these wins in the future. We believe that Shopper Intelligence is an innovative product with features that are unique in the market, and I'm super excited about it, and I think we have a huge opportunity in front of us with this new offering. In Q2, we also made significant addition to the scope of data and insight available through the Similarweb platform. We completed the acquisition of the assets of SimilarTech, which we believe is one of the best provider of technographic data in the market. The acquisition enables us to more completely integrate SimilarTech's data into our solutions and the opportunity to leverage their data to build some exciting new features as well. Separately, we recently announced significant advancements in the capabilities in our Keyword Generator, which enables sales professional to find and explore keywords relevant to expanding their business. The Keyword Generator now includes support for YouTube, the world's second largest search engine, as well as Amazon, where 60% of all product searches currently originate. Those enhancements expand our coverage by over 800 million keywords, extending our breadth of coverage and keyword volume accuracy. Beyond these efforts, we continued to invest in our organizational growth and development. We continued to scale our organization to support our strong growth. Employee headcount in Q2 grew nearly 60% year over year. We continued our international expansion, opening up a new direct sales presence and office in Germany. Recently, we also announced a new office in Reston, Virginia, where we will focus on hiring sales and marketing roles, and where we expect we will be able to tap into strong local talent in the areas of digital measurement and market research. Finally, I'm very excited to announce that last week we closed on a new headquarter facility in the Tel Aviv area. This new building will accommodate our rapid growth, and we will be able to fully design the space to meet our needs for our growing team. Our new Similarweb headquarter is located in the center of Tel Aviv metropolitan, and I expect that when complete, it will be a significant attraction that will enable us to continue to recruit top talent here in Israel. Finally, as we said during the IPO, we will leverage our momentum and continue to pursue both organic and inorganic growth strategies. We will invest in our sales and marketing efforts to accelerate customer acquisition because of the high ROI we get on those investments and the big market opportunity we see. We will take advantage of our strong financial position to opportunistically target and acquire companies in order to improve and expand our data use case and addressable markets. We are operating in a fragmented market, and we believe we have the opportunity to be a consolidator. Wrapping up, I'm very proud of the company we've built. We've followed up our 2020 performance with strong and accelerating growth in the first half of 2021. We have outstanding leadership, and our team is smart, bold, fast, talented and experienced. We have a strong balance sheet. Our solutions are market-leading and providing timely and comprehensive data and insights that we believe our customers cannot get anywhere else. Every day, thousands of businesses rely on Similarweb's solutions to make mission-critical decisions. We believe we are recognized as the standard measure of the digital world. Our insights are frequently referenced publicly by CEOs, major publications and respected research firms. Our platform has become a required experience for job opportunities and a notable skill that users highlight on LinkedIn. We are confident in our growth strategy, and we have a track record of strong operational execution. It's still early in our journey, and we believe we're in a great position to capitalize on and capture an increasing share of a very large market. And as I like to say, we're just getting started. With that, I would like to turn the call over to Jason Schwartz, our CFO. Jason?

Thank you, Or. I’m going to start with an overview of our financial model and then I will review our financial results for the quarter and wrap up with our guidance for Q3 and full year 2021. Our financial model is built on the delivery of strong and predictable revenue growth, substantially all of which is generated from SaaS subscriptions. We deliver a high net dollar-based retention rate, or NRR, and also maintain high gross margins and unit economics that drive cash efficiency. In Q2, we delivered record revenue of $32.5 million, reflecting 48.5% year-over-year growth. We increased our total number of customers to 3,068, up 24% from 2,479 in Q2 last year. This includes, as Or mentioned, a strong increase in our $100,000 or more ARR customers, which grew by 52% from 145 in Q2 2020 to 220 in Q2 2021. Most of these customers began initially as smaller customers and have expanded through our successful land and expand motion. Today, these customers comprise 49% of our overall recurring revenue base. Our revenue and customer base is highly diversified, and no single customer amounts to more than 5% of revenue. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses and operating results are on a non-GAAP basis and are reconciled to the GAAP results in the earnings press release that was issued just before this call. Our gross profit totaled $25.6 million in the quarter, representing a gross margin of 78.6% versus 76% in Q2 2020. This margin improvement reflects the significant operating leverage we have been able to realize in our fixed SaaS infrastructure and data costs. Operating expenses grew to $36.3 million in Q2, up from $19.1 million in Q2 2020, largely reflecting the investment in personnel across the business, from product and R&D, sales and marketing and our G&A team, to support our business growth. We see a large TAM and opportunity ahead of us and will continue to invest in personnel and initiatives that help us capture more market share. The specific components of our operating expenses were: Research and Development, $8.3 million versus $4.7 million in Q2 2020. This excludes $696,000 of retention payments relating to the acquisition of SimilarTech during the quarter. We anticipate an additional $350,000 in Q3. Sales and marketing, $21.4 million versus $11.8 million in Q2 2020. General and administrative $6.6 million versus $2.6 million in Q2 2020. This excludes $1.2 million of nonrecurring expenses related to our initial public offering. As a result, our non-GAAP operating loss in the quarter totaled $10.8 million, increasing from $2.5 million in Q2 2020. Free cash flow for the quarter was negative $3.3 million compared to $1.5 million in Q2 2020. In May, we successfully completed our initial public offering of our ordinary shares raising net proceeds of $150.7 million after deducting underwriting fees and commissions and related offering costs. During the quarter, we also repaid all outstanding amounts under our credit facility, such that as of the end of the quarter, we have no outstanding debt. As a result, we have a strong cash position that totaled $177 million of unrestricted cash balances as of June 30, 2021. We have additional capacity available to us under our $75 million credit facility with Silicon Valley Bank. As such, we believe that we have sufficient liquidity to successfully execute our business growth plans. As Or mentioned, last week, we signed an office lease agreement for our new Israel headquarters. We anticipate investing $8 million to $10 million in leasehold improvements over the next 4 quarters in advance of our anticipated move-in date in Q2 2022, which will be amortized over the 10-year term of the lease. We are introducing guidance for both Q3 and the full year 2021. For Q3 2021, revenue is expected to be in the range of $32.8 million to $33.2 million. Non-GAAP operating loss is expected to be in the range of $14.5 million to $14.9 million. Full year 2021 revenue is expected to be in the range of $129 million to $130 million. Non-GAAP operating loss for full year 2021 is expected to be in the range of $49 million to $50 million. I'll now hand the call back over to Or for his closing remarks.

Thank you, Jason. I would like to close by thanking my leadership team and our employees around the world for working hard to deliver a very successful first half of the year. Our IPO was a milestone for us as we continue to grow, and I am pleased to welcome our many new investors to the Similarweb family. With that, operator, please open the call up for questions. Thank you.

[Operator Instructions] And our first question is from the line of Sterling Auty with JPMorgan.

So I wanted to start with the question around the AWS Marketplace partnership and deal. Can you help us understand does this just make it easier for customers to access the data and monetize? Does they just change where they're getting the data from? Or does it actually add incremental reach to new customers that perhaps you weren't getting to before?

So it's Or, I will try to answer this question. So I think the quick answer is, yes to all of the above. It will increase as the way to approach to many more customers than before that operate on the AWS platform and buying data on the data marketplace. So we do expect to get more customers. It will give an easy way for them not only to access the data, but another layer of server to server, so they do need to get the API, API key. It's more easy to get and access our data and also charge for and also trying the data because the data is already there and if they have AWS account, it's much more easy for them to buy, use, try it and also charge because they already -- it's connected to the Amazon invoice system. And also, Amazon is putting a lot of incentivize on their -- for their customers and they give them free credit to try many data sets on the data marketplace. So we're also going to leverage of this momentum of Amazon themselves pushing their customer to try and buy data assets there.

Great. And then 1 follow-up. With the improvement in the net dollar retention, you talk about the number of different ways that you can expand more users, more data, more geographies, which one of those really stood out the most in the quarter in terms of driving that net dollar retention?

So I don't have the exact answer, but I tell you what I feel that is driving really great expansion. One is the cross-selling of our offering. I talk a little bit about our Shopper Intelligence. So we saw great success there of people buying 1 all solution for us. So I think buying more solution is a great driver. But I also saw a great deals of people buying more users or other add-ons or integrating APIs. So I think it's all across. But my feeling that what is strong now is this quarter was the most solution we're able to sell and introduce to our customers.

Great. And welcome to the public markets.

Thank you, Sterling.

The next question is from the line of Drew Foster with Citigroup.

Jason, for the past 6 quarters or so, your top line has been growing sort of directionally in line with your sales and marketing spend. This quarter, it was up another 30 points sequentially relative to Q1. So you're clearly accelerating that. To the extent that sales and marketing is a leading indicator for your top line, like at a high level, how should we think about the pace and magnitude of investments within that envelope over the next 6 quarters? And then if you could just remind us of the breakdown of how much of that incremental spend there is marketing and advertising where you might get a quicker return on those dollars? And how much is related to adding incremental salespeople and sales infrastructure where the return on those investments is a bit more protracted?

Drew, thanks for the question. So what we see right now is a huge TAM and opportunity ahead of us. And as a result of that, we're continuing to invest to capture a larger share of that market that we see. And so we have accelerated hiring. I think you may have seen that in the press release that headcount has grown across the business. But our approach is really to invest in a responsible way, balancing that growth and efficiency. And so that's what we're going to continue to do, and we do think that that's an indication of further growth down the road. As far as the split, we don't break down the split between marketing dollars versus headcount dollars. But what we do say is about 60% of our marketing and sales spend goes to new customer acquisition and about 40% of it is spent on customer retention and expansion.

It's really helpful. And then you had strong gross margin improvement, I think you even called it out at the top of your press release. So could you just maybe unpack what's driving that and where you think you could drive those 2 over time?

Yes. Sure. A lot of our cost of sales is comprised of fixed cost in the infrastructure, the typical kinds of stuff that you have. We have hosting and support. We actually host at AWS as well as all of the investment that we make, both internal costs and external costs in our data assets. And so -- which is really a fixed cost for us because it's the same amount of data that we need, whether we're running or providing service to 50, 500 or 5,000 customers. And so there's a natural leverage that we get on those fixed costs, and that's the improvement that you've seen not only in this quarter but over the trend over time over the last 2, 3 years. We think that we're comfortable with the guidance that we've given. We're saying in the same levels for the near term. And then potentially going forward, we'll -- as we think about the guidance going forward, we'll, of course, update you.

The next question is from the line of Bhavan Suri with William Blair.

Congrats, and going through and welcome to being a public company. Nice job. I guess I just wanted to touch quickly first on the new customer strength. I would love to sort of understand what's driving the momentum there? You've obviously increased sales and marketing, you've got partners, but I guess as you look at that, are these customers sort of replacing other vendor? Or is this web intelligence programs for the first time?

It's a good question. I think that the majority of the deals that we are at, it's -- basically, it's only us. We are not replacing. It's mostly a greenfield opportunity.

Got you. Got you. Got you. And then you relaunched the platform in '19 with sort of these 5 key use cases. Have you seen any change in how customers are adopting solutions? Are they changing where they start? And are they building different sort of data strategies once they've implemented a couple of solutions? How should we think about that progress of the customer and sort of their strategy from when they adopt to when they change?

It's a good question. I do see that the more we develop our offering and bringing new solution into the market, we kind of unlocked new strategies for our customers. Once we kind of introduce our solution better, and I saw it also in our CPG customers, now that we introduce shorter solution to them and they're getting this all new data and then they understand, they can drive your strategy in. And 1 example also on our investor vertical when we come with a more sharp offering and then it's kind of giving them a whole new perspective about how to think and develop strategy around data and insights like market data and insights going forward. So I do see that. I do see that it will come. And a lot of the things we present are new and innovative even to the customers and they understand the power that digital intelligence have and how they can use it to drive more strategic decision across the business.

Your next question comes from the line of Brent Thill with Jefferies.

This is [indiscernible] for Brent Thill. I had 2 questions. One, of the 5 major solutions you have, any particular strength to highlight among the 5? And maybe you could shed some light also on the relative contribution? And then second, just probably for Jason, I just want to see if any comments on the linearity during the quarter, the trends by month, any particular variations to note, including quarter-to-date?

So I will start answering the solution and then Jason can talk about the trend. So yes, all of the solutions are growing very nicely, and we're very happy with the overall growth. We saw a great success with the new tool offering for investors and the shoppers for CPGs are accelerating nicely. But I think still the majority of our business is for our core solution that we start for our research solution and our marketing solution that historically, a lot of our customers to buy together. And all of them are growing very nicely, and we're putting a lot of efforts to develop them and improve their offering. And Jason, you want to answer the trend?