SEMrush Holdings, Inc. Q1 FY2024 earnings call

• Oleg Shchegolev noted revenue growth, free cash flow of $12 million with a 14% free cash flow margin, and a customer base of nearly 112,000 customers with over 1,125,000 pre-active users. The enterprise product was soft launched in late 2023 and is now generally available, with early adoption from large-scale business customers.
• Eugene Levin discussed the upmarket migration strategy, adjusting the go-to-market model for enterprise customers, realigning sales investments, and leveraging AI in the platform. AI products like ContentShake are seeing good adoption, with monetization happening through multiple ways including built-in AI features in tools, higher-priced tiers with AI, and separately sold AI subscriptions.
• Brian Mulroy highlighted revenue growth driven by new customer additions and cross-sell/upsell, ARR trends, margin improvement due to gross margin expansion and operational efficiencies, and the plan to continue investing in enterprise and AI while maintaining strong retention metrics.

Semrush reported revenue of $85.8 million in the first quarter, up 21% year-over-year. Annual recurring revenue (ARR) for the quarter grew 21% year-over-year to $354.2 million. ARR per paying user grew 9.8% year-over-year, and dollar-based net revenue retention for the first quarter was 107%. Non-GAAP operating income was $9.7 million, with a non-GAAP operating margin of 11.3%, which is up 2,000 basis points year-over-year. Gross margin improved nearly 80 basis points year-over-year to 82.9%. Revenue contribution is from various segments including their core products and AI-driven offerings, with the enterprise segment showing potential for growth in ARPU.

• For the second quarter of 2024, Semrush expects revenue in the range of $89.1 million to $90.1 million.
• For the full year 2024, revenue is expected to be in the range of $366 million to $369 million, up from the prior range of $364 million to $368 million. Full-year 2024 non-GAAP operating margins are expected to be between 10.5% and 11.5%, up 50 basis points from prior guidance, and full-year free cash flow margins are approximately 8%. The guidance assumes a euro exchange rate of $1.08.

Q: Scott Berg asked about bucking the soft trend in SMB software demand and what's helping Semrush deliver good results. Eugene Levin and Brian Mulroy responded that Semrush has a strong market position, benefits from secular market shifts, has a strong competitive moat, and new AI products monetized in multiple ways are contributing.

Q: Surinder Thind asked about U.S. enterprise customers vs international opportunity. Eugene Levin replied that the U.S. is a top market, but over half of early enterprise customers post-soft launch are international, and the product is built for global use with presence in over 13 countries and ramping teams based on customer base geography.

Q: Jackson Ader asked about the balance of growth and profit. Brian Mulroy said Semrush is investing in enterprise upmarket play, AI product investments, and focusing on incremental returns from investments, with a strong foundation of customers and cash on the balance sheet to support investments.

Q: Adam Hotchkiss asked about enterprise customers' needs and the balance of co-innovation. Eugene Levin explained that enterprise customers have different needs like handling millions of pages with internal linking, which tiered offerings don't address, and enterprise products are incremental, solving unique problems for large companies.

Q: Elizabeth Elliott asked about net adds and seasonal trends. Brian Mulroy noted that net add metrics can fluctuate, and focusing on higher-valued upmarket enterprise accounts may impact net add metrics going forward.

Q: Arti Vula asked about hiring trends. Eugene Levin responded that there's no significant expected change, with investments in enterprise funded by efficiencies in SMB and mid-market, and sales expense and headcount not expected to change materially