Semrush Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Good day. Thank you for standing by and welcome to the Semrush Holdings First Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. . Please note that today's call is being recorded. I will now hand the conference over to Mr. Bob Gujavarty, Vice President of Investor Relations.

[Bob Gujavarty:]

Good afternoon. I'm Bob Gujavarty, VP of Investor Relations and welcome to the Semrush Holdings First Quarter 2021 Results Conference Call. We'll be discussing the results announced in our press release issued after market closed today. With me on the call is our CEO, Oleg Shchegolev; our CFO, Evgeny Fetisov; and our CSO, Eugene Levin.

[Oleg Shchegolev:]

Thank you. And good afternoon to everyone on the call. I believe many of us joining us on the call today maybe new to Semrush story. So I would like to take a few minutes to cover our story and our product offerings. Later, I will offer some comments on first quarter and our outlook for the full year. Semrush is a leading platform for online visibility management, which we believe is a new software category. The category with a total addressable market is nearly $13 billion and potentially greater. I believe we are well positioned to be chair. And since 2016, we have grown revenue at a compound annual growth rate of over 15%. While growing our beta customers count over 38%.

[Evgeny Fetisov:]

Thank you, Oleg. Q1 revenue of $40 million was up 44% year-over-year and came in above our expectations. Growth was driven by steady increase internet users and uptick in the average monthly recurring revenue paying customer or average check. I attribute the higher-than-expected check growth to the number of parties. Price interaction with too can generate continuous change in the subscription mix, with more users moving to Guru in that business, our higher price plans, sales of additional user licenses and project limits and lastly, growing share of competitive intelligence add-on in the company's revenue. As a reminder, the new pricing plan apply only to new paid users and therefore impact only a small portion of our total 73,000 paid users. So pricing could prove to be a tailwind for the balance of 2021 as well as for 2022. I would also like to note that our trailing 12 months revenue retention improved from 114% at the end of December to 116% at the end of March. I believe the decline in this metric from 2019 to 2020, was primarily the result of COVID-19 lockdowns in the first half of 2020, and trends in 2021, so far support this year.

[Operator:]

And our first question comes from Michael Turits with KeyBanc.

[Michael Turits:]

Hey, guys, congratulations on a great first quarter at the gate. I have two questions. One is on branding and the other on pricing. On branding, in terms of customers really talk to we always heard fantastic views of you guys and your name and your brand. But I'm not sure that investors have appreciated that or that that's completely widespread. Is there something that you can be doing to promote that brand even more so your differentiation stands out? And then I was wondering if you could quantify that the pricing uplift this quarter and to revenue where that might go over the next year?

[Oleg Shchegolev:]

Thank you. Yes, you're right. We have received a great opportunity in front of us to spend more on branding. We see a great opportunity to educate market around us and eventually when we think about futures point of our marketing, we have such opportunities spending more on brands.

[Eugene Levin:]

And this is Eugene; I'll jump in on another front. So we'll be spending more time visiting conferences and meeting investors. So I think that will be our contribution in promoting the company amongst the investor community. So we're going to be very active in the coming quarters as well.

[Michael Turits:]

And then on pricing, any qualification at all. How much spin uplift you've seen so far or a contribution for the year?

[Eugene Levin:]

So we clearly - this is Eugene again. So we clearly see a positive effect from the repackaging. So the average chips comes higher, basically close to what we've like change the notional pricing blends for I would say, like 15% to 20%. So the results actually better than we anticipated in terms of the overall customer reception.

[Operator:]

And our next question comes from Brent Bracelin with Piper Sandler.

[Hannah Rudolph:]

Hi, guys, this is actually Hannah Rudolph on for Brent today. Thanks for taking my question. First one for me, just wondering if you could talk about what you feel really drilled those strong customer ads in the quarter.

[Oleg Shchegolev:]

Thank you. First of all, I want to mention what such higher demand we started to feel few quarters ago, I would say its third quarter, when we feel such high demand from our customers. I expect that such tailwind will continue. But at the same time, it's hard to say how long, I think we should be careful if our expectations and it could be some moderation in growth in next quarters.

[Hannah Rudolph:]

Okay, great. And yes, go ahead. Do you want to say something?

[Oleg Shchegolev:]

No, sorry. Please go ahead.

[Hannah Rudolph:]

Oh, okay. And then second question is how was logo churn in the quarter? And then kind of a third question on to that. You talked about what you were seeing in terms of your premium motion and the conversion of free to paid customers in the quarter?

[Eugene Levin:]

Thank you for your question. Hannah, this is Eugene again. So on the logo churn; we saw that it was slightly better than we had in previous quarters. And you can see this in our trailing 12 months revenue retention, which nudged up to 116%. As we have mentioned in our remarks. So far, we see some improvement in how we retain our customers. And then the second question was on conversion rates.

[Eugene Levin:]

Yes, I can take this one. So in terms of conversion, from premium model, we are very happy with how this model performs. We didn't see any changes in Q1. So still, our premium product contributes significantly to user acquisition and demand overall demand generation efforts. I would say no material changes in Q1 comparing to previous year.

[Operator:]

And our next question comes from Chris Merwin with Goldman Sachs.

[Chris Merwin:]

Thanks so much for taking my question. I wanted to ask about some of those drivers of the increase in check size. I think you mentioned a number of them, there was of course, the pricing change, there was kind of like there were some customers migrating to higher price tiers. As much as you can, can you break out the magnitude of those drivers for us? And how should we thinking about the sustainability of those drivers, as we progress through the year here? Thank you.

[Evgeny Fetisov:]

Chris. Thank you for question. This is the Eugene again. So there were a number of drivers as you mentioned. So one is, I mean, the price increase will probably be a little bit less pronounced in Q1 because it was just, we just introduced it in and was clearly applicable to the new customers only. So what we see drives the average check apart from the price repackaging, is migration from a lower price points to the higher price points or shift in the share of higher price points and overall, like subscription portfolio, sales of additional usage limits, such as keywords or projects, plus successful sales of add-ons. So our add-ons are growing faster. I mean, revenue from add-ons is growing faster than the total company's revenue. So that all of that contributes, I would say, more or less equally important to the growth of the average check. And Eugene, you may want to add something.

[Eugene Levin:]

Yes. So one thing that I think we could also hear is that we are also looking at number of customers on more expensive subscriptions that go beyond our three core plans. So for example, we look at number of customers who paid us more than $10,000 in the last 12 months. And this number, for example, in Q1 grew more than 50% year-over-year. So that's also one of the kind of quantitative things that you can take. And hope it provides more color behind the growth of the average revenue per user.

[Chris Merwin:]

Okay, great. Thank you. Maybe just one quick follow-up. I think you called out the number of backlinks in the in the quarter announcement, the trillions and sounds like it's growing almost 50% year-on-year, can you talk a bit about, I guess, first of all how you're able to why those are growing as fast as they are? I mean, it's well in excess of your customer growth and how we think about a metric like that impacting your ability in a positive way to acquire even more customers to grow with your customers, just if you can add some more contexts around that number, if you could? Thank you.

[Eugene Levin:]

Yes, so I this is Eugene, I'll take this one. So when we think about the importance of number of backlinks and why we are sharing this metric, I think it goes back to our product, and how product is very relevant part of our overall customer acquisition strategy. So in general, when you have a big database, what it means for end customer that they will have more insights, they will have more ideas about how to build links, and especially if they're really small business, sometimes in checkers with less backlinks, they will not even find anything about their business. But in checkers like Semrush with a lot of links, they will be able to find something. So what it means is that, people have will have more complete picture, which just improves the overall quality of the product. And then at the same time, it opens products like backlinks analytics for a broader set of small businesses, and hopefully helps us to acquire more customers. But yet again, primary goal is just to improve overall quality of product and have more complete sort of map of the internet.

[Operator:]

And our next question comes from Tom Roderick with Stifel.

[Tom Roderick:]

Hey, everybody thanks for taking my questions. Congratulations on the IPO. I wanted to ask you question, just thinking about the Semrush product portfolio and you have kind of the holistic vision of short-term strategies, digital marketing strategies, long-term strategies. And if I think about how your potential clients and existing clients out there are reacting to short-term and long-term whether it's paid advertising on the short-term payback side or search engine optimization and long-term side. How are they shifting the demand for either end of that, as the economy recovers? Is there more of an emphasis on one or the other? Are you seeing more demand for newer solutions would just love to understand how the improving economy is sort of impacting which end of the demand curve in digital marketing? Thanks.

[Eugene Levin:]

Thank you so much. Really good question. And I think I think what we have seen is going to be indicated only to the segment of the market. Not necessarily for the whole market. But what do we see is that; in general, people want to spend more on paid channels? But the problem with the paid channels is that they're saturated. So in general, we keep seeing transition from short-term marketing accuses towards long-term marketing activities across the board. Yet again, if you talk to people who sell ad words, because they don't see other side of the market, they will probably say that they see a huge increase in demand for search ads. But since we see all the sides, we definitely see increasing demand for search ads, but we see even bigger demand towards more organic growth and long-term growth activities in marketing.

[Tom Roderick:]

Yes, that's excellent feedback. And I appreciate the view towards longer term. As you look at some of the newer solutions, whether it's on the conversion or loyalty side, or perhaps even just other core search engine optimization side. Can you point to some of the newer solutions, the upsells, that Semrush has been offering in the market, is that are starting to impact the deal size of customers and starting to have some real traction? Anything on the newer front that you've rolled out in the last couple years on the add-on front? Would love to hear more about that. Thank you.

[Eugene Levin:]

Yes, absolutely. So I think we did really good job during previous couple years in building this product portfolio. And building those add-on some of them that you've mentioned, for example, our Dot trans add-on the previously was called traffic analytics is having great traction right now, local listings, also has really good traction, especially in the United States. We also started cross selling probably new product that we acquired in September, and we are constantly building new things. But for them, it will be too early to have material impact on our revenue. But one of those things, for example, is split signal, new product that is really in early beta. And this product is designed for bigger companies with large websites, and also priced differently at a higher rent. So we are constantly adding new products. But I think if you look at what drives revenue today, those will be things that we already done in the past. And right now we are more of a leveraging all the hard work that our product teams have done previously.

[Operator:]

And our next question comes from Brent Thill with Jefferies.

[Brent Thill:]

First of all, any trends that you're the solder in the quarter in terms of the strength? And I don't know if you had growth rates as it relates to what happened in those geos?

[Evgeny Fetisov:]

Brent unfortunately, what's first part of your question, can you please repeat this one?

[Brent Thill:]

Just overall growth in U.S. versus the rest of the world? What did you see any material changes or differences in each of those regions?

[Evgeny Fetisov:]

This is Evgeny; we actually haven't seen any differences. So we have been growing fairly steadily across the globe in most of the - I would say top markets that we had. So the market share for our top countries remains the same for the quarter and actually was fairly consistent for the last several quarters. So it's a broad, like broad, consistent growth globally.

[Brent Thill:]

And you highlighted that low touch sales model. Is there any changes as it relates to the success you've had with this model? Are you continuing with that go-to market model? Are you contemplating any changes on your go to market in terms of adding inside sales reps or outside sales reps to further penetrate this market?

[Oleg Shchegolev:]

It didn't change our markets in first quarter. And we have the same signup flow. And I think all our conversions, all our things related to go-to market and signup flow very consistent. We didn't face any changes here.

[Operator:]

And our next question comes from Mark Murphy with JP Morgan.

[Matthew Cost:]

Hi, good afternoon. This is Matt Cost, on behalf of Mark Murphy, congrats on the first quarter as a public company out of the gate. Just a question of retention, it's good to see that uptick. But do you think it gets back to the levels you saw in the prior year like close to that 120% range at some point once we're once we've completely lapped the effects of COVID?

[Evgeny Fetisov:]

Matt, thank you for the question. This is Evgeny. We'd love to be able to be very precise in terms of the number, I cannot do this unfortunately. So what do we expect to happen is that for the retention rate, all things being equal to continue to go up as this past quarter move from the numerator into the denominator of the calculation? So I think for the next two or three quarters, we'll continue to see it going up and then leveling out or maybe moving marginally done. So that's the expectation. I hope this is helpful.

[Matthew Cost:]

Yes, that's helpful. And then Oleg, I think you said to Brent's question, you saw the same signup flow. And I just want to make sure so you haven't seen any change to the number of free users that you're bringing onto the platform is that correct?

[Oleg Shchegolev:]

Amount of users growth, yes, you're right, we didn't change our signup all, and even more, we mentioned already our packaging. And we expect that in the beginning of this quarter, we expected some decline in new paying customers because of such repackaging, but we didn't face it, and all our metrics, all our conversion from free customers to paid customers consistent.

[Operator:]

And there are no further questions at this time. And that does conclude today's conference call. Thank you for your participation. You may now disconnect.