Similarweb Ltd. (SMWB) Earnings Call Transcript & Summary

Okay. So thanks for joining us here today at the Barclays TMT conference. I'd also like to thank Similarweb for joining us. With me today from Similarweb is Jason Schwartz. He's the CFO.

Jason, how are things on your end? And it's a little late here, so hopefully, you're in the U.S. today.

I am, and it's great seeing you again, Ryan, and it's been a busy day, but things are going great.

Yes. I just go a little loopy after like 7 or 8 firesides. So if things start to tail off towards the end of this, make sure you can push me back on the right track. But for those investors who are maybe able to make it in or if you're watching this on a replay, due to some technical issues, please feel free to e-mail me at [email protected]. I can be sure to get those questions in to Jason and other members of the Similarweb team. So Jason, look, I'm [indiscernible] covering Similarweb over the last couple of months. And I think we have some investors who'd like to learn more about the Similarweb business and the tailwinds behind digital intelligence. So could you just talk to us at a high level about -- just about your product set and then maybe your path to IPO?

Yes, sure. And again, Ryan, thanks so much for giving us the opportunity to speak with you and the investors today. So Similarweb is the measure of the digital world. We're the leading platform for digital intelligence that delivers a trusted, comprehensive and detailed view of the digital world. In essence, I like to think that we measure and predict the Internet every single day. That means like tens of millions of websites and mobile apps across every industry in 190 countries around the globe. I mean, it's that amazing. And what we've done is we package up -- we offer 5 different solutions from research intelligence to marketing intelligence, shopper intelligence, sales intelligence and investor intelligence that meet the needs of a wide range of personas and buyers across the business. And so using Similarweb, executives, business leaders and investors make smarter and better operating business decisions with market and competitive intelligence to essentially capture more market share and grow revenues. And today, we serve over 3,000 customers around the globe, including many of the largest brands in the world. And we could talk about revenue size and that kind of stuff as we go through this. But you asked about the tailwinds behind digital intelligence and what's the real driver. And I -- the investment thesis for Similarweb was always based on 2 premises. The first one is that as more and more transactions and interactions move online to digital channels, business operators, executives, investors need more and more digital intelligence to make smarter and better business decisions. It's as simple as that. And the second piece is that you need market and digital intelligence as much in a bull market as you do in a bear market, right, in order to capture that. And so in the end of the day, when you think about what's the driver, it's all about the digital transformation. And that digital transformation continues to be the tailwind that we're seeing in our accelerating revenue growth. We continue to see big increase in our pipeline and demand for -- from all these segments; customers that are SMBs, enterprises and even the largest companies in the world. And it really doesn't matter whether you're new to this or early in your digital transformation or you are a digital-first company. You need to have that intelligence in order to capture the opportunities, be wary of any disruptors that are coming after you and it ultimately win your market.

Excellent. And I think one thing that stands out is your freemium model, which ultimately then leads to some larger customer sizes that investors might expect. So can you just talk about how -- like your product offering that any investors on the line can go check out with a free trial, ultimately leads to customers that are over $100,000 in ARR?

Yes, absolutely. And so I invite all investors to right now go ahead and open up their browser to similarweb.com. And you'll see a search bar, and you can put in any website, any mobile app, anywhere in the globe. And you'll get a readout like a quick spot report or a flash report, giving you some high-level metrics, as I kind of compare it in the investment world to like a Yahoo! Finance or a Google Finance, where you could type in any single ticker, and you'll get some spot information on the stock. Great to give you an indication of what the company is about, what -- how the stock is trading or for us, understanding where a company is operating, where their digital properties are, where is the traffic coming from, where does it go to, what are their top channels and who their key competitors are. But if you want to do in serious investing, you won't use Yahoo! Finance. You're going to use a Bloomberg terminal in order to get your intelligence, the same thing is with Similarweb. You'll start using our pro products, our pay platform and start using from one use case to a second use case at multiple divisions of multiple geographies across your business.

I appreciate that analogy. And just take it one step further, if you want really good insights, you go to someone like Barclays Research, right? I'm just kidding. But so when it comes to like the different products you have and like where you kind of started that, like how would you say -- what is your customer mix or the product mix of the bulk of your revenue? And then how do customers move from there into other different solutions generally?

Yes, for sure. We love all our children equally, right? But like I said, we have 5 different solutions, each one serving a different use case. We're -- the first 2 that we introduced to the market are productized, where our digital research intelligence and our digital marketing intelligence, those are kind of the most well-known and most penetrated today. That's somewhere between 65%, 70% of our revenue, starts from those 2 products. Sales intelligence is about, as I call it, 9% to 10%, shopper intelligence is new, but showing great momentum. We could talk about that. I think it's an exciting part of the solution set that we have today. And then obviously, the investor vertical or the investor industry is also a significant and nice customer set that we have as well.

Excellent. Yes. And for those investors who are in the line, I mean, I have published using Similarweb free trial the day before. So definitely check out. You can look at landing pages for a lot of software companies we cover, see how website business have tracked over a 12-month basis and you can go from there. You can go a little more premium on the Similarweb platform.

And we're really happy to have you guys as a paying customer for many years. And the number of products that Barclays has productized that is trend trackers and trend spotters and all sorts of reports that you guys issue, not only on digital properties, but on broader sectors that are influenced by those traffic or digital use cases. And all of that stuff, I know, is heavily based on Similarweb insights. So we're really proud to be partnering with you on that.

Yes. You know what, I think that's kind of a good place to go in a tangent with. Who does this usually land with in a larger organization? Because it sounds like it can land in a few different places. And I guess, how do you see this kind of expand from a seek-out basis within an enterprise? I know it varies, but I want to just see if there's any commonalities.

Yes, it's really interesting because it depends on the industry or depends on what the use cases are. So like if you think of a traditional, well, I call a transactional business, and transactional businesses for us are, I would think of it as retail companies or CPG companies or consumer finance or travel, people who are -- the way that they sell to their end customers are transactional basis. So those guys typically will start with the research intelligence product, trying to really just understand the market share. They're as the lay of their land, them versus their competitors, them versus their overall market share, understanding their audience by geography, by region, et cetera. And that's an important piece of the pie. And then based on that, you kind of start setting, well, where do you want to go? Where do you want to be? Or what kind of -- where is your target of what kind of market share do you want to capture over the next 1 to 3 years? And then that begs the question, well, how are you going to do it? And in what regions are you going to do? And the next obvious step that they start thinking about is, what are you -- where are we going to acquire new customers? And how are we going to do that? And particularly for a transactional business, it's understanding the different digital channels. It may be search or maybe display and maybe referral or maybe affiliates and understanding your share versus the market by region, you versus your competitors, which affiliates are sending traffic to your competitors that you didn't even know was a player and suddenly, identifying those opportunities and going and doing that. And then once you've done that and you start deploying that and you start building up and acquiring market share, the next question you ask is, well, how's my path to purchase? Like what is -- how do I improve my funnel? How are people finding and getting to the checkout? What products are they buying? From which product families? By the way, down to the SKU level, what else is being bought in those sessions, me versus my products and me versus my competitors' products, and then suddenly start answering, who should I be partnering with? What kind of additional marketing or product campaign should I be doing in order to capture more of that buying experience or that buyer journey? Understanding when somebody buys on Amazon or buys on Walmart, where did that search start? Where did that acquire journey start? And that goes back to understanding the competitive marketing channel and which is converting all the way through. And so suddenly, you start seeing how one solution begets a second solution to a third solution, and it's not just that. It's broken down by market, by region, by geography, getting down to -- and so we see that kind of journey going on. We've got some customers today that are multimillion-dollar accounts. We talked about that in our most recent earnings calls. And these are customers that have bought 4 of the 5 solutions and are rolling it out into large parts of their global footprint.

I appreciate the insight there. And when it comes to like value that Similarweb can offer, it definitely makes sense as we shift to more digital transactions. And even in this post-COVID world, it doesn't seem like we're going to go back. But as you, like, describe some of the values that -- the value that marketers can achieve on the platform and some competitive information, I think people might walk away thinking, “Oh, well, how is it going to be impacted by IDFA changes? Like is there tracking that Similarweb's going to have difficulties going forward?” Maybe you have talked about this before, but for those investors asking that question, I mean, how would you respond to how do you benefit or deal with changes in the privacy landscape?

Yes. It's a great question and one that we often get from investors. When I think of these kinds of privacy changes, privacy rule changes like IDFA or the cookie deprecation and like, those rule changes are really targeted at the companies who do ad retargeting. I call them the bad actors, right? The people who are trying to find out who you are. You never asked to get that kind of bombarding of ads. And they go ahead and target you over and over again across every property that you're visiting. And we're just not in that business. We're not an ad tech company. Similarweb doesn't do add retargeting. And quite frankly, you can't use Similarweb to do ad retargeting because we don't use cookies, and we don't collect personally identifiable information, PII, in order to power our solutions. So when you think about those kind of rule changes, we don't think they have any negative impact on our solutions or our value proposition. I think one of the things, Ryan, that you and I have been talking about a lot is, if you think a little further as -- because there are so many companies who do rely on cookies in order to track and measure, once IDFA and cookie deprecation actually go into effect and are actually rolled out, those kind of companies are going to need to find alternative solutions to provide them with the intelligence and insight that they need to compete and to run their businesses. And then the solution that they're going to need to turn to is to market intelligence players like us who don't rely on those things. And we think that could be an additional tailwind for our growth over the near term.

Yes, absolutely. So I want to pull on that for a little more. And generally, investors so far have been thinking about IDFA impacts on stocks in a negative sense. But there should be some beneficiaries coming out of this as well, especially on the marketing tech side or like you said, digital intelligence side. So it's one thing for me to think about it. But have you heard of companies in your conversations or from your sales teams saying like, “hey, this is what they're asking for, they're trying to deal with this company's privacy regulations going forward?”

Early days. Again, one of the things that happened that cookie deprecation should have been in effect already and Google announced that they were going to push it out for 2 years. So again, I think that there were a number of companies in the ecosystem who sighed a big sigh of relief when that happened. And so people are being more thoughtful about it and taking their time to really understand. But we are starting to hear those discussions as we talk to prospects and we talk to customers who have to start thinking very differently about where they get their data and their intelligence.

Excellent. So what were some of the reasons that drove you guys to go public? Why you think it was the right time? And then kind of with that, have you seen ARR growth and execution since IPO?

Yes. So it was an amazing event for us, getting to ring the bell on the floor of the New York Stock Exchange. For us, this was something that we always knew was the right path for us. We realized that we were primed to be a traditional IPO and not going any of the other ways. And ultimately it's because we think that market intelligence is a big story, and it's -- we didn't create it. Guys like Nielsen, the market research firms have been around for dozens and up to 100 years. But digital intelligence is very new. They failed miserably at meeting the needs and being able to provide that near real-time information that's so critical in today's fast-paced digital world. And so we look at the TAM opportunity that they've created and the size of the revenues that they've created and the millions or hundreds of millions of dollars that are spent by major brands and major companies, CPGs and the like, on market intelligence and understand that, that's going to be replicated, and it's actually shifting budgets or creating new budgets for digital intelligence for the digital channels. And so we recognize that. And I think that the prestige and the awareness that being a publicly-traded company has given and helped us advance some of the discussions with these large enterprise customers has been very exciting over the last couple of months. When we look at what that's done for revenues, we announced just at Q3 that we crossed $150 million in ARR, a quarter ahead of what our forecast was. So we're seeing the acceleration of the business. Where we've announced that we'll have 45% revenue growth is what we see for the year. That's an increase from 32% just last year. We're seeing a quick acceleration in customer growth, so 27% year-over-year in net new logos. We're seeing strong NRR, net dollar retention. I mean we're pretty pumped and excited about the results over the last couple of quarters since going public.

Yes. And just to like add a couple more figures to that, right? You have software-type gross margins, right around 8%. And I thought it was important on your call that you reached the new baseline for net retention, right, like, kind of around the 110% area and even better like from your larger customers. So what's kind of driving some of these further upsells within your existing customer base?

Yes. So I'd like to say that we're an internet company with a software business model. And so you do see we are -- we sell ARR. We sell annual recurring revenue subscriptions, and it's real ARR, meaning that our subscription length -- the minimum subscription length is a year. We're starting to see even more and more customers as they get used to and see the value from Similarweb. Today, over 30% of our customers -- of our ARR is generated from customers who are signing on for multiyear kind of contracts and showing that stickiness or reliance that they place on it. But like you said, that net retention is at 110% overall across all of our 3,200 customers. And when you look at that cohort of customers who are spending over $100,000 a year with us, which today is over 50% of our revenue, you're at 122%. And the reason for that is because we have those 5 solutions. And you start getting from one solution, one use case, it has a clear ROI. Our products have -- it's very tangible. When you start seeing market share gains, you start seeing revenue gains and understanding competitive wins. And suddenly, you realize that how valuable this is to be used all across your business and you go from one solution to a second solution to a third solution, and we're really proud of the execution that the teams are -- both on the product side as well as on the sales and account management side have been delivering.

Yes. And it's not like you have any shortage of opportunities given that freemium model on that huge inbound funnel or people doing free trials. One thing you touched on your prepared remarks that I kind of like to pull the thread a little more on is shopper intelligence, right? You released it in June. You've already seen a $1 million ARR win. I mean, pretty good out of the gate. And you also had a 6-figure win, so it wasn't just like one off, Jason's buddy bought something.

You got to have friends like that too.

You got to have friends like that. Yes, absolutely. But even so, I mean, look, it sounds like it's something that's a natural fit for a lot of your transactional customers. But can you just kind of give more light on why you guys are excited about this product and why it's a big market opportunity?

Yes. It's something that I think the adoption and the market reaction is even surprising us. When we start -- when we realized that we'd be able to start reporting on product level dynamics and what really people are buying online and to give that kind of comparison and visibility from not only a market perspective, but also a competitive intelligence, it was something that we knew people were asking for, and we heard it over and over again from our customers. But what we've been able to do is not only give you kind of product category level or product family level, but we've been able now to deliver it down to the SKU level. And so if you're talking about, I don't know, Colgate toothpaste and understanding whether it's the family size or the travel size, each one of those has a different SKU and understanding which packaging is important and which ones are selling, what is being sold together with it when people are buying it. And so you think about product bundling and how you should think about campaigns, both as the retailer who's selling it and where you would put it and how you promote it on your site, but even more so on the product owner, right, on the CPG, who's creating the product and giving you that visibility to see what the throughput is in your end channel, right? This is giving you real consumer and data where you don't have a direct-to-consumer sales process. And what we've since done and when we were at -- when we announced in the earnings call, those first big wins, that was all on the -- giving that insight in the Amazon Marketplaces. What we've since announced is that we've expanded the platforms that we're able to give this intelligence on and includes now Walmart and Best Buy and Chewy’s and other. And suddenly, you're able to see the differentiation between Amazon and Walmart for your product set and understand how your product versus your competitor product, down to the SKU level, is performing on one platform versus another platform in one geography versus another geography. That kind of visibility and granularity has never been really accessible before. And we're hearing feedback not only from product managers, but from executives who, as we start reaching out to C-level executives, we're starting to see this stuff. They're just jumping out of their chair, saying that this is the kind of insight that they need to see.

Yes. And look, even if you hired a data team of 30 people, if you're a large enterprise, and started scraping a whole lot of this study yourself, from my understanding, they still won't match the depth and historical data sets that you have. So would you mind kind of just educating some of our investors on how your data is different than the sets that are out there as your competitors?

Yes. I think that there are a couple of key differentiators. One, we don't rely on a single data source. We have the breadth of data sources, and I'll talk about that. And the second thing is, some of it is very proprietary. So we talk about 4 primary categories of sources of our data. The first one, I'll just talk about 2 that are generally available that aren't proprietary to us. We call -- it's great, as other people do, if we want to know what's the rank of an app in the app store, which is important -- when you're looking at and doing general market intelligence, it's a good important indicator, but that's on proprietary test. We can go ahead and call the app stores and see that kind of information and end load that in and tell that it's directly from the app store. We also partner and source data from a number of different sources that have digital signals from around the world. And so we talk about ISPs, DSPs, CDNs, people who have aggregated data that gives us information or signals to where traffic or where people are interacting across the internet. And that, again, is sourced. It's not proprietary or exclusive to us. These are large deals sometimes. So it's unique, not everybody could go ahead and buy that. But then we get into the -- I think, the real proprietary stuff, including our own contributory network. So those are sources that -- or our signals that we're collecting through our own meetings or our own products that are out there. And that is something that's proprietary. We own -- it's like we own the entire supply chain over there, very unique and very proprietary. And the last piece is because we are who we are. We are, that measure of the digital world and so many customers want to see, in using Similarweb, want to see their real data side-by-side with Similarweb's market estimates or market or competitive landscape estimates of what the rest of the world looks like. We get access to millions of actual website owners and app operators who share with us their first-party data. We use that for tweaking our algorithms, the algorithms that will be used to predict or measure the 100% of that -- of the Internet of the digital world. But when you put all of that stuff together, a wide diverse range of sources, not reliant on every one, some of which is highly proprietary and layer on that with strong AI, right, strong machine learning, that has a ground-based truth that's proprietary because people aren't sharing their actual data with just any Joe on the street. And using that as being to train the algorithms to have the highest accuracy, highest predictability is some of the real unique assets that we have to give us that data edge that we have.

Yes. I like that idea that your customers want to verify the web traffic that they have, right? So being like Similarweb-certified and then them sharing their data in order to do that. I mean, that's definitely unique to you versus some of your competitors, just given your experience in the space. So yes, contributory network is definitely interesting and your freemium funnel that gives you a lot of new logos every quarter that your go-to-market team can capitalize on is pretty interesting along with new products like shopper intelligence. So if I'm a new investor and I'm digging into your story, beyond a lot of things we talked about today, and maybe just from your point of view, I guess, what are you excited about into next year for Similarweb and kind of some of the market tailwinds you highlighted?

Yes. So one of the things that we've talked about with investors is that we see this huge TAM ahead of us. We got to the IPO, and we were a breakeven company. We -- if you look back over the 3 years before the IPO, we -- in 2018, 2019 and 2020, gross margin expanded from a 54% gross margin to 71% to 77%. Now in the first half of this year or the year-to-date, we're at 78%, 79% gross margins. On the flip side, you looked at cash burn 2018 with $26 million negative free cash flow. In 2019, that was cut to $11.5 million. In 2020, we burned less than $5 million of cash. Q1 this year, right before the IPO, we were a cash flow positive company. And what we saw is, we see this huge TAM ahead of us. We've measured that from the bottom-up and mapped as part of the -- getting ready for the IPO, mapped 800,000 companies that are in our target industries and our target markets that we sell to today and that are ripe to be Similarweb customers. When we estimated a $34 billion TAM, we took that in our -- what was then our average ARR per customer, which was about $40,000. Today, that's -- we've now grown to already $45,000 because of our land and expand model and the net retention that we talked about. But you take 8x being, you get to $34 billion, it's that simple. But we've got like 3,200 customers today, and we're very proud of that. But it's really just a drop in the bucket in the near-term opportunity that we see. And I think what gets us really excited is we've been -- we told the market that we're going to be leaning into this opportunity, and we are accelerating our hiring across go-to-market, across our product teams and development teams in order to deliver differentiated solutions and higher growth. And we're seeing that impact happen already. So when we see shopper intelligence come out and starting to get multi-hundred thousand dollars and multimillion-dollar deals coming just a couple of a quarter or 2 quarters after launching the product, we know that the investment that we continue to make on the product and the engineering side is valid. When we start seeing customer adds going up, doubling, tripling over where they were a year ago and consistently over the last 2, 3, 4 quarters, that's something that gets us excited. When we see net retention, meaning that we're not only landing the customers, but we're retaining them and expanding them from the tens of thousands to the hundreds of thousands and from the hundreds of thousands to the millions of dollars and showing we can measure that at 122% for over 50% of the business, 110% overall. We know that the investment that we've made on our go-to-market, on our sales, on our account management side is powerful. And when you look at it, we talk about this $100,000 customers -- customer cohort being 50% of our business, I think one of the things that is overlooked is that we have almost 85% of our customer base that's over $25,000 a year. Now when you look at that and compare that to other products that are in the market, to have such a -- it's a statement that we're able to garner that and garner that at such a high net retention. And so when we look at these customers that we already have, that upper-mid -- upper-SMB and those enterprise customers, we see the opportunity to continue to land and to expand within our existing customer base, right? It's all about execution. And we get -- we're really passionate about that and seeing the execution and the return that we're getting on those investments so quickly.

We've certainly seen consistent results so far in your earnings. So we're definitely excited to track the story. And look, I know digital intelligence base is newer for some investors, and so is the marketing tech vertical in general, but we'll do more work here to help educate people. And if anyone has any questions on the line, once again, [email protected]. We can get those over to Jason and the team. Jason, want to say, I knew it would go well, I mean you were talkers, but that was a really good run down, and I think it can help people with your story. So thanks again.

Ryan, thanks so much for having us, and we look forward to speaking to you and the team more often.