Similarweb Ltd. (SMWB) Earnings Call Transcript & Summary

All right. Good morning, everybody. My name is Tyler Radke. I co-head the U.S. software sector here at Citi. Welcome to the 2021 Citi Tech Conference. Unfortunately, we're doing this virtually, again, but thanks for everyone for joining us. To kick off the first session of the conference on the software track, we have Similarweb. We're joined by the CFO, Jason Schwartz. So first of all, Jason, thank you for joining us. I know you had an early morning meeting with Australia. So thank you for doing a U.S. meeting, albeit virtually.

Thanks so much, and good morning to you, Tyler, and good morning, everyone.

So Jason, I thought we could just start, Similarweb, recent IPO, kind of high-growth company and the intelligence space. Maybe just for investors who aren't familiar with the business, just give a quick overview and just kind of recap the company's journey so far.

Sure. So it's my pleasure, and good morning, everyone. Similarweb is the measure of the digital world, where the leading platform for digital intelligence that delivers a trusted, comprehensive and detailed view of the digital world. Using Similarweb, people from all -- from a wide range of executive business leaders and investors can make smarter and better operating business decisions with market and competitive intelligence to capture market share and grow revenues. Today, we serve over 3,000 customers around the globe, including many of the largest brands in the world. We're growing at a 49% year-over-year rate. We just reported annualized revenue of about $130 million, nearly 50% of that coming from customers who spend over $100,000 a year with us. We offer 5 different solutions, from research intelligence, market intelligence, shopper intelligence, sales intelligence, and, of course, investor intelligence that meet the needs of a wide range of personas and buyers. I'm happy to talk about that today.

Yes. Yes, absolutely. So maybe we could just start at a high level, as we think about the [indiscernible] opportunity, digital intelligence platforms, it feels like they're kind of moving from being nice-to-have to must-have. Maybe just talk about that dynamic and what you're seeing from customers and how the use cases have evolved.

Yes, sure. I really think that digital intelligence is a must-have. Without it, it's like driving blind. Tyler, you know that we're headquartered in Israel. So we like to think about it like a military campaign. And business is a battle. You would never get into battle without having intelligence, knowing the lay of the land, who's the competition, what are their strengths and weaknesses, know how to discover the opportunities to win, and that's really what Similarweb does. Now market intelligence is not a new category. Companies like Nielsen, GFK, market research firms, consultancies have been around for dozens of years giving insight into what people watch and what people buy offline. The problem is that they do a really poor job in giving that insight and data on the online or digital world, and that's what we do. It's about digital intelligence. And we believe that digital intelligence is as big an opportunity.

I see. I see. Got you. I think it would be hard to have this conversation around digital intelligence without talking about the events of 2020 and the pandemic. I think, clearly, what we've seen from your numbers, to your point, 49% revenue growth, kind of several quarters now of reaccelerating revenue growth, what do you think the pandemic is kind of done in terms of awareness for this category? And just help us understand how you're seeing customers' budgets evolve since we're now in kind of, yes, a different world than we were a couple of years ago.

Yes, absolutely. I've been at the company now for just about 6 years. And when I think back, the original investment thesis of Similarweb was based on two premises. The first is that as more and more transactions and interactions move online into digital channels, business operators, executives, investors would need more and more digital intelligence to make smarter and better business decisions. That's the first thing. And the second thing is that you need market and digital intelligence as much in a bull market as you do in a bear market, right? You always need to know where the competition is and where the opportunity is. And in the end of the day, the way we look at it is that it's all about digital transformation. And that digital transformation continues to be the tailwind that we're seeing in our accelerating revenue growth. We continue to see significant increase in pipeline and demand from all segments, from the SMBs to enterprise and strategic customers as well as from all industries, even those who were hard-hit by COVID. And we don't see any slowdown in this in the near term. But I don't think that it was necessarily linked to the pandemic as it was at the events of the last 18 months just accelerated our -- as consumers and as business folks, our comfort in -- and recognition that doing things online and interacting and transacting online is very convenient and very efficient.

Yes. Yes. Absolutely. So I thought we could talk a little bit about the use cases just to kind of put a finer point on some of the trends we're talking about. Maybe what are kind of the 2 or 3 biggest value propositions you see resonating with customers? And how do customers measure ROI with this category, kind of in a newer category of software?

Yes. Great, great question. And as I said at the beginning, we offer 5 different solutions, from research intelligence to marketing intelligence, shopper intelligence, sales intelligence and investor intelligence. And research intelligence, for us, is about giving you the lay of the land, to give you a sense of your market share, your audience, you versus your competition, by geography, by locale. Marketing intelligence is about understanding which of our channels are -- marketing channels are performing best for you or how to optimize or get the most out of your marketing budget dollars by channel, by geography, you versus your competition, you versus the market. Shopper intelligence is a new product for us that we announced it a few weeks ago. And that is all about understanding channel or funnel conversion, understanding it at the product family level or the SKU level, again, what's performing, what's the path to purchase, what's your funnel conversion, you versus your competition, you versus your market. Sales intelligence is about -- for B2B sales and trying to drive better sales motions or to consultative sales using market and competitive intelligence. And of course, investor intelligence is really mostly focused on the public market, although private equity and private investors use it as well, to identify great -- or investment opportunities because more and more, today, every company is really a digital company. And so, as I said, digital transformation is here. And to get that information or to get that edge to win your market, you really need Similarweb. And so the beauty is that in the digital world, competition can come from anywhere. And it doesn't take a lot of capital to start a business and disruption of the incumbents is really the norm. And as a result, having that -- like I said, the best information and insights is a decisive advantage. And from that perspective, we're quickly becoming a must-have and people don't really question that. I mean, who doesn't want or doesn't need to have competitive intelligence. That being said, our solutions have a very clear ROI. So for example, on the marketing intelligence solution, the measure that our customers use is about pipeline growth and user acquisition efficiency. For our sales solution, it's about improving win rates and revenue. For the new shopper intelligence solution, it's about channel optimization and revenue growth. And for investors, like folks on the call, it's really about investment performance.

Got you. Got you. Okay. And I guess, as we think about those use cases, I mean, how broad, in terms of verticals, do you think this opportunity is, right? I think it's pretty clear to see how -- certainly, firms like Citi Group, in an investment research use case, could use Similarweb. We actually use it in our department, so happy customers over here. But what about some traditional industries such as industrials or some industries that aren't kind of considered tech forward? Do you kind of see use cases that are emerging across the board? Just help us understand how to think about the scope of the opportunity by industries.

Yes, absolutely. And it goes back to that question and, Tyler, thank you for being a great customer. And if I take, for a second Citi, Citi, while you, Tyler, use it for investment research, but remember, Citi is a consumer bank. It has many channels over there that are consumer-focused, whether that's the deposit account or credit cards or mortgages, all of which are marketed online. You operate in different markets in different geographies. And we think about we, today, sell to well over 20 different industries. We cluster them up into a number of different industry clusters like transactional businesses. Transactional businesses could include folks like traditional retail CPGs who are selling direct as well. It's consumer finance, it's automotive, it's telecom, it's folks like publishers and consultancies. You go end-to-end, there almost isn't a business that doesn't have a digital presence today. I guess, oil and gas companies aren't there yet. But apart from that -- or nonprofits. You almost find -- I have a hard time trying to find a business that isn't part of that digital transformation.

I see. I see. Okay. Maybe we could shift gears and just talk about partnerships a little bit. Who are you working closely within the software ecosystem? Obviously, you talked a lot about digital transformation and companies can't really go at this alone. So curious who are your most important partners are, and how you see that evolving over time.

Yes. We are, on one hand, not really dependent on any specific relationships in the broader software ecosystem to reach our revenue goals and to capture the TAM. But we see a lot of value in partnering with folks like AWS and other data marketplaces that help us to broaden our customer reach. Just recently, we announced a new partnership with AWS in that regard. We think that integrations that we have with Salesforce and other sales clouds or with Tableau, Domo and other BI systems increase the ubiquity of our insights and help us integrate into our customer workflows and work streams. And that's really the real game changer for us. The more and more that our customers are using Similarweb Insights as part of their day-to-day activities, and it -- whether it's in our platform or it's because we're integrated to another system that is part of their workflow or work stream, that's a great win for us, and we're looking forward to doing more of that over the next couple of quarters.

Got you. Got you. One of the things that you mentioned earlier, Jason, was just around kind of the various use cases that you've almost built the product and go-to-market motions around intelligence, shopper -- research intelligence, shopper intelligence, investor intelligence. Maybe you could just kind of give us an update on the maturity of those motions, particularly in the context now that you have raised some capital through the IPO. Just how you're -- where we're at in terms of those motions? And how you look to deploy kind of the capital towards accelerating those?

Yes. Yes, and happy to. And we think we're at -- in the really the beginning of this journey. When we talk with investors, we look at this TAM, and we've measured it kind of top-down and then bottom-up as well. We look at it as a huge opportunity to top-down. We've gotten to estimates as high as $100 billion, and bottom-up, looking at over -- we've identified the math like 800,000 companies and you get to like a $34 billion -- it's a big market. And today, like I said, we ended Q2 on a run rate of $130 million. So clearly, we're just at the early innings of this. But we think that there's a huge opportunity ahead of us and the solutions that we have and the market adoption that we're starting to see is just the tailwind that will continue propelling us forward. But we're really executing aggressively on our plan. As we talked about in our most recent earnings call just a few weeks ago, we're hiring approximately 150 people per quarter. That's like 50 additional employees every month across the business, and that's in sales, account management, marketing, R&D, everywhere. Today, we've got 10 offices across 4 continents. We just opened up -- announced the opening of our new office in Reston, Virginia, to tap into the high-quality talent that we see over there. As we talked about, we just announced the release of our new shopper intelligence product, and we're seeing some really good momentum and early wins there. And that's a high value, but also a more costly product versus some of our older or traditional solutions that we have of that. And all of this is part of that strategy that we laid out as part of the IPO. So we think we're really on the right track as we had said and talked about during the road show.

Great. Yes, a lot in there. I wanted to follow-up on the last comment you made just around the shopper intelligence, the new product. Could you just give us maybe a little bit more detail on how this compares to the older version and kind of what the customer traction is? Do you anticipate that existing customers will kind of upgrade to this? What does that price point difference look like?

Yes, happy to. It's a new solution within the broader solution set that we have. If you think about some of the first solutions that we had out there, we called them -- we used to call them the core, right? Where we got started from, we got started from research intelligence, right? The understanding competitive landscape audience, you versus your competition and market share. It's about knowing the lay of the land. You -- and what's your share of the market. Very relevant to a broad range of customers. Everybody needs that kind of basic benchmarking. And then once you understand the benchmarking, the next thing is, "Okay, if this is my market share, how do I grow that market share?" And that's about marketing and by channel. And is it by search? Is it by display? Is it by affiliate marketing? And if it's search, which keywords, which sets -- which keywords are or campaigns are converting? And what are you bidding on that your -- or not bidding on that your competition is? What is sending -- what's working or what message is or what content is your competition or is the market interested in reading that you're not doing? And so the marketing intelligence solution gives you that insight. So the first step is understanding your market share. And the second thing is about, "Okay, how do I penetrate and grow my market share?" But once you've done that, then you get to the next question, which is, "Okay, I'm now growing it, but how efficiently am I doing it? What's my conversion? What's my path to purchase? How does my funnel look?" And get it down not only from a funnel perspective, to get it down to by product, by SKU level. Today, with our shopper intelligence, we're able to give that kind of insight on the Amazon ecosystem. We also have a version on the travel ecosystem, and we have planned to do more and more of this across some more of the top retail ecosystems out there. And I think that, that is insight that was here before not really available for people to get that level of insight and benchmarking of their performance versus their competitors. And so we see this when we first started marketing this we intended that it was going to market to a -- to our existing customers like that normal evolution. What we're seeing with demand since we've launched our product is not only from our initial -- from our existing customers, but we're getting a lot of demand from new customers who are saying that this is something that we've been looking for, for a long time. And as we demo it or show it, you watch the eyes bulge out of the sockets and the aha moment happen. And again, it's something -- it's early days of this, but the initial deals that we've signed are all 6-digit deals, and we're excited about that.

Got you. Got you. Okay. That's super interesting. I wanted to go back to one of the things you mentioned. You identified 800,000 potential companies, and you can get to some very, very large TAM numbers, right? Just kind of doing the theoretical math. I guess, as you're out there talking to customers kind of evangelizing this new category, like what are you seeing that is giving you the confidence that the market could be multiples of where it is today? Is it kind of what you're seeing in terms of customers' expansion, just lack of awareness? Just help put a little bit more context around why this market could be a lot bigger than maybe people think.

Yes. Sure. That's really a great question. And if you -- if I can, for a second, take a step back. When Oren Benjamin, our CEO and our Chief Product Officer, started the business a number of years ago, they initially thought that Similarweb would be a tool used primarily by marketeers. And it was first launched as a no-touch product that for about $200 a month, it was like an all-you-can-eat buffet. Fortunately, that's not the way we price today. But as customers started using the platform, we saw them adopting and integrating the data into business processes and areas that we never envisioned. And that was the evolution of the 5 different solutions that we've talked about that each one of them meets the needs of a different persona and a different use case within the business. Today, we serve over 3,000 customers. We're growing at 49% year-over-year. Nearly 50% of our revenue is from customers who spend more than $100,000 with us. And the interesting thing is most of those customers who do started way below that. I'm talking about at $10,000, $15,000, $20,000. We see customers like the large e-commerce player that we talked about in our most recent earnings call, who started as a $48,000 customer 5 years ago, grew to $2.2 million by the end of 2020. And now, 6 months later, expanded further to a $3.5 million ARR relationship. And at the same time, we look at the big companies like the Fortune 500, only 22% of them are customers today, and less than 1% are paying us over $1 million a year. And we believe, we fundamentally believe that as that digital transformation continues, more and more of them need us and will become 7-digit customers. But it's not only about that Fortune 500. Like I don't want to over -- migrate over to the super enterprise. Like I said, we mapped, right? We've got the list of 800,000 companies that are in our target industries and in the markets that we sell in today. And they only need digital intelligence to survive and grow. And even if you just take our average ACV today, which is approximately $44,000, you're talking about a $34 billion market opportunity, and we get pretty excited about that.

Right, right. Got you. I think one of the questions that we frequently get and certainly around the IPO process was just on competition in this market. On one hand, it is a new category. I think you're really helping pioneer and evangelize it. So I think in terms of competition, investors often ask about kind of the traditional competition in this market. I think you touched on that a little bit. The Nielsen's kind of traditional intelligence to the world. And you also have some newer vendors like SEMrush that are in the space, also a recent IPO. Could you just kind of talk about the lay of the land competitively? And where do you think your biggest source of differentiation is?

Yes. It's a great question. And maybe, if it's okay, I'll try and weave the two things -- those together. Maybe talk a little bit about maybe the unique elements of Similarweb and then kind of contrast that or compare that to some of the traditional players out there. If you think about what Similarweb is, we're the only company out there that literally predicts the Internet every single day. When you think about that, that's really insane to be able to do that. It's -- I'd like to think about it as big data on steroids is what we do. And the first thing that we do, a unique thing that we have, is a data advantage. We've got -- in order to do that, you need to have very unique data ingredients. And we've got those kind of very unique ingredients, many of which are proprietary to us. We designed our platform for scale and durability. And as a result of that, we're not reliant on any single data source to deliver our solutions. And we've been doing this for many years. So we uniquely are able to provide that year-over-year or period-over-period trend or seasonality analysis that's really important when making a business decision. And we have invested $100 million since our founding to create this kind of data model. So that's the first thing. The second thing is the breadth of the solutions, and we've talked about that a couple of times that the 5 different solutions that we offer, that meet the needs of that wide range of personas and buyers, nobody else in the market has that breadth of product offering. And so we have a number of niche players, you mentioned, SEMrush, great company, but really focuses on search. And that's, as the name applies, it's about search engine marketing. So we see them often when we're talking to customers about marketing intelligence. And they're a player over there in marketing intelligence, but they don't play in shopper intelligence, don't play in sales intelligence, don't play in investor intelligence and really in competitive intelligence, like the research or audience that -- like the research intelligence solution provides, they're not a player. We're global. We have got the data on nearly every website in every mobile app in over 190 countries around the globe and in more than 20 different industries. And there, it's not only being global because there are players out there that will focus on a single market or a single region, but be able to do that on a global scale is massive and very unique. But the second piece of that is understanding all platforms. It's got to be about web, mobile, and within mobile, both mobile web and mobile app, and so you have players out there that might be focused exclusively on the app ecosystem, which is great, but is missing the entire ecosystem of the web. And even within mobile, they're not -- they're covering mobile app, but not covering mobile web. And so to be that end-to-end solution of all platforms, all countries, all solutions, all use cases. And finally, from a GTM, or go-to-market perspective, we serve companies of both sizes from SMBs, to enterprises, to the largest companies and the biggest brands in the world. We, by the way, in doing so, don't have any revenue concentrations. And the uniqueness and the challenge of contracting and servicing a SMB business versus a Fortune 500 business is very, very different. And companies, in general, have a DNA of one versus the other. We've built something very unique here, being able to do both the small and the large across the globe.

I see. I see. Okay. I guess, in terms of the mix of deals, like how many of your deals are competitive kind of have a bake-off? I know, at the low-end, if a customer is just signing up for one seat, it might be a small enough purchase price where they're not competitively evaluating. But just give us a sense for that mix of how many of your deals are competitive.

So many of -- it depends on the solution because in certain solutions, we're really a recognized leader already today. And in most cases, it's really a greenfield opportunity. In many cases, in most of the cases, we're not replacing an incumbent. It's a business or a business department who realizes, "Hey, we can get access to this or we've used this before in a different company and now we want to bring this capability over to our new employer." So that's something that we see. We, I would say, see in the marketing solution, we do see competition. That's where we see folks like SEMrush and Ahrefs and some -- a lot of the niche players show their -- show up for -- depending on the size of that opportunity to the extent that they're looking for a broader solution, that's when we really differentiate over there.

Got you. Got you. Okay. In terms of your revenue and the reacceleration that you've seen, I think you made some commentary earlier on good pipeline growth. But maybe just to put a finer point on that, how is it kind of shaping up so far in Q3? And maybe as you think about second half of this year versus last year being kind of just compare and contrast some of the things you're seeing?

Yes, absolutely. Like I said, we're continuing to see that strong demand in pipeline. Digital transformation isn't slowing down and the need-to-have real meaningful market and competitive insights to win your market and to grow revenue isn't going away. So when we looked at -- at the end of Q2, we actually increased our Q3 and full year 2020 revenue guidance in our last earnings call as compared to consensus. We're seeing good momentum on that front. We're seeing -- last year, the first part of the year was the initial part of COVID, and you saw deals slowing down and then starting to pick up again on the back half of the year. We saw -- we thought that we were going to see a little slowdown, traditional slowdown in July, August seasonally just because of the people who are going to get started back to travel. We actually haven't seen that slowdown in our business. And so we're feeling pretty excited about what the Q3 and the latter half of Q4 look like.

Okay. Okay. Got you. I guess, turning to margin, which is a topic we haven't really discussed much. But I think certainly, the company has made considerable progress on gross margins over the last few years, which, I think, is pretty impressive, close to 79% gross margin overall this past quarter. How do you think about long-term profitability with this business? I think one interesting thing is, if you look at some traditional data businesses, Nielsen and even like Dunn & Bradstreet, they can be pretty high-margin businesses longer term. So how do you just think about long-term profitability with Similarweb maybe relative to software companies that you see putting out long-term target?

Yes. Thank you for that. We're proud that -- we think we are a pretty efficient and scalable business. And like you said, I think that's the nature of data businesses in general. When you look at our performance over the last 3 years, like you said, we increased gross margin from 54% in 2018 to 71% in 2019 and 77% in 2020 and nearly 79% in the first half of 2021. And at the same time, we cut the cash burn from $25 million to $26 million in 2018 to $11.5 million in 2019 to less than $5 million of cash burn in 2020 and cash positive already in Q1 of '21. And like we shared in our Q2 earnings call, our recurring revenue base is generating 13% operating profits today. In other words, if you look at our recurring revenue base because we are substantially -- like 99% plus of our business is ARR, is annual recurring revenue commitments. And that business, that recurring revenue base today is throwing off 13% operating profits. And the investment that we make in customer acquisition, we're covering that investment in 14 to 16 months on a gross profit basis. So today, we're effectively a profitable business. We've already shown that not only path to profitability, but actual -- that we were able to achieve profitability over that 3-year investment. And we see this huge TAM ahead of us that we talked about. So like we've shared with the market and investors as part of the road show and since the IPO, we're leaning in on those investments today to accelerate our growth and to capture that TAM. But long term, we think that Similarweb will operate at 85% plus gross margins and see mid-20 operating margins and even cash flow margins higher because we typically invoice for the full year subscription in advance.

Right. And how do you think about the revenue, like either timing of reaching those long-term margins or revenue scale or growth rate, but -- like how would you kind of measure those characterized long term?

Yes, I think that's like 3 to 5 years. I don't think that this is like a 10-year kind of pie in the sky dream. This is stuff that we've mapped out. I'd like to tell the story that when we were raising our last -- our prior private round as a private company back in 2017, and our gross margins were 52%, 54%, and we told investors, said, when we hit $100 million of ARR, we'll have 80% gross margins. And people looked at it with a 54% margin and they said, I don't see how you do that. I had to apologize when we hit the $100 million, we were only at 79% gross margin and less than 80%. But I think the -- we are a very measured business. We are data-driven. We know how to model this. And this is, again, no different than any other data business. There's a tremendous amount of scale and leverage that goes into the business model. And we believe that this is something that is very attainable in the near term.

Got you. Got you. Maybe on that point, I mean, I think, obviously, we've seen pretty good discipline in terms of spending. And I'm sure you have -- you scrutinize things that are not demonstrating the ROI. But sales and marketing expenses, I think, increased over 80% in the second quarter. I imagine that's not necessarily a huge return to travel in there, just given the state of the world. So maybe just help us understand what you're seeing in the business that gives you the confidence to really kind of lean in and hire, you talked about hiring 150 people a quarter.

So I think it's a couple of things. One, it's the accelerated growth. If you look over the last couple of quarters, you saw revenue growth go from 32% to 38% to 43% and then 49% year-over-year. You see gross margins, like we talked about increasing from a quarter year-over-year, quarter-over-quarter. We look at the net retention and the customer growth -- You see the ACV growing from 3 years ago from being $23,000 or $24,000 a couple of years ago to being $44,000 now. You see the customer growth growing from 2,000 customers or 2,100 customers 3 years ago to being nearly 3,100 today. You see the net retention, like I said, growing from like just over 100% for the overall business or motions to over 106% in Q2. And for that cohort of customers that are over $100,000. And like I said, that's about 50% of the revenue going from 114% to 118% year-over-year. We're seeing that acceleration and stickiness within our customers. and that gives us a lot of confidence. And then on the flip side, like I said, you mentioned, Tyler, that the sales and marketing growth was up. But remember, we're an ARR business. And so we look at that payback over the 12-month subscription that it goes into it. And if you look at our sales and marketing spend today, 60% of that sales and marketing is a new customer acquisition, but 40% of it is investment in that customer retention and expansion, which yields that 13% net operating profit today on the recurring base and a recovery of that CAC in 14 months on a gross margin basis. We think that those are really outstanding and industry-leading kind of metrics and things that we seek to maintain and replicate over the quarters going forward.

Yes, absolutely. Well, I think we are out of time. I really appreciate the discussion and you kicking us off here for the day 1 of the tech conference. So Jason, thank you so much for joining us. And thanks, everyone, for tuning in. We will be starting the next session in about 10 minutes.

Thank you, Tyler. Have a great day, everyone.