Good day and thank you for standing by. Welcome to the Semrush Holdings' Second Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bob Gujavarty. Please go ahead..

[Technical difficulty] -- quarter 2021 results conference call. We'll be discussing the results announced in our press release issued after market closed on Monday. With me on the call is our CEO, Oleg Shchegolev; our CFO, Evgeny Fetisov; and our CSO, Eugene Levin.

Before we begin, I'd like to highlight our participation in several virtual investor conferences to be held during the third quarter. We will attend the KeyBanc Virtual Technology Leadership Conference on August 11 and the Piper Sandler Global Technology Conference on September 14.

Today's call will contain forward-looking statements, which were made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements concerning our expected future business, future financial performance and financial condition, expected growth, adoption and demand for our products and features, expected investments and their anticipated benefits, industry and market trends, our competitive position, market opportunities, and our guidance for the third quarter of 2021 and the full-year 2021.

And can be identified by words such as expect, anticipate, intent, plan, believe, seek, or will. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements.

For a discussion of the risks, and important factors that could affect our actual results, please refer to our final IPO prospectus filed with the Securities and Exchange Commission, our quarterly reports on Form 10-Q, as well as our other filings with the SEC. Also, during the course of today's call, we refer to certain non-GAAP financial measures.

There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available on our press release, issued after market close, which can be found on our Web site at investors.semrush.com. And with that, let me turn the call over to Oleg..

Thank you and good morning to everyone on the call. I am pleased with our performance in the second quarter. Revenue of $45 million was up 58% year-over-year and up 13% sequentially. We saw strength across all our major markets, but particular strength from markets outside the United States and United Kingdom, which grew 65% year-over-year.

Our paid users grew 29% year-over-year, while the average check grew by approximately 19% year-over-year. Looking at some of the product highlights from the quarter, we saw strong traction with [technical difficulty] Media Marketing tools.

As I mentioned in May, we transitioned these tools to a free-to-use model with the goal of driving wider adoption. The initial results look promising as we had over 30,000 active users at the end of June.

According to G2 rankings, we are a leader in social media management, and I believe the stronger adoption of our solutions is further validation of our leadership position. Many investors ask about the primary use case that drives customers to adopt Semrush.

It's an interesting question because our product offering is far broader than the point solutions offered by our competitors. There is a wide variety of use cases, and I would like to highlight a couple of those to help investors better understand what is driving our growth.

Priddy Chimney Sweeps is a contractor in the Washington District area that provides [critical] [Ph] services related to safety, upkeep, and construction of chimneys and fireplaces. Priddy is a new service provider in a market dominated by larger brands with much larger advertising budgets.

Priddy engaged with Ardent Growth, [it is through] [Ph] a marketing agency, to revamp the company's digital marketing strategy. Using Semrush tools, Ardent Growth conducted research to plan an effective site architecture, SEO, and content strategy that could rapidly increase Priddy's [indiscernible] operation. The results speak for themselves.

First page rankings went from approximately [30] [Ph], in September of 2019, to over 300 as of October, 2020. And [organic traffic] [Ph] increased by over 2000%. When a prospect searches for chimney sweep in Washington, D.C., Priddy clean is ranking third behind [indiscernible].

The improved visibility translated directly to an increase in traffic and conversions. And as a result, Priddy Chimney Sweeps' revenue has grown substantially, and amid a global pandemic which saw many SMEs struggle; the company is preparing to expand.

We are focused on solutions for SMEs, but our solutions are widely deployed across enterprise customers as well. Universal Health Services is a leading provider of hospital and healthcare services.

UHS Corporate Marketing is their internal resource supporting marketing and communication strategies, and multi-channel tactics for UHS Corporate and its subsidiaries. In November, 2019, the UHS SEO team purchased a Semrush license and begun analyzing the state of their [final facility script sites] [Ph].

Their SEO team quick realized that facility sites were lacking content that would drive relevant traffic. Using the Semrush [indiscernible] SEO Writing Assistant and [topic research] [Ph], where SEO and content teams began producing content around behavioral health, and saw immediate results.

With Semrush, the team streamlined the process of creating highly effective content, and grew conversions by 49% in five months. With the help of Semrush, UHS grew the number of in-house campaigns by 10X in one year, while also cutting costs by 60% as compared to outsourcing [indiscernible]. I would like to [indiscernible] of our data assets.

A few investors were confused about what data we collect and analyze. I want to make it clear that while building the map of the internet working on producing our insights, Semrush collects billions of discreet data points through a combination of internal and external sources, then take the data and transform into actionable insights for customers.

However, we only collect publicly available data, which does not include sensitive non-public data like credit scores, financial assets, and payment information. Our practices are designed to [complying the] [Ph] identity for advertisers' regulations in the United States, and with General Data Protection Regulation, GDPR, in Europe.

Looking ahead, I do believe we will see a reduction in micro-targeting, and it may result in less paid ad spending on the part of SMEs. [Indiscernible] could make it extremely difficult to measure returns on paid advertising for sites that generate relatively modest [target] [Ph], which includes many SMEs.

I don't believe the overall marketing budget at SMEs [will shrink] [Ph] as it is more challenging than ever to reach potential customers. Rather, I believe a portion of this ad budget will shift to paid and organic search.

I believe this would be a tailwind for Semrush as we offer a best-in-class solutions focused on improving organic and paid search results. With that, I would like to pass the call to Evgeny for a more detailed discussion on our financials..

Thank you, Oleg. Q2 revenue of $45 million was up 58% year-over-year, and came in above our expectations. Growth was then once again driven by steady increase in paying customers and an increase in the average monthly recurring revenue per paying customer or average check.

We experienced average check growth in the second quarter of approximately 19% from the year-ago period as we continue to see a tailwind from the price adjustments we implemented earlier this year that among other results led to the growth in a number of additional user licenses purchased, and a richer mix of [indiscernible] and business accounts.

Our trailing 12-month revenue retention was 121% as of the end of June, up from 116% at the end of March. These results reflect an improvement in churn as compared to the higher levels experienced during the second quarter of 2020.

Gross margin of 77.3% was [technical difficulty] basis points from a year ago, but down slightly from the previous quarter. The year-over-year improvement was due to higher revenue and sequential [technical difficulty] was largely due to additional spending on third-party data and increasing hosting fees.

Non-GAAP operating expenses, of $34.3 million in the quarter, were up 50% from a year ago, and up 18% from the previous quarter. The growth was driven by additional headcount as well as the high cost associated with operating as a public company. Higher public company expenses contributed to the 35% sequential increase in G&A in the quarter.

I expect operating expenses to continue to grow in the back-half of the year, but the growth will be more weighted to marketing and product development, with G&A spending growth [moderating] [Ph].

Strong revenue growth and higher gross margin were partially offset by high operating expenses, and contributed to non-GAAP net income of $290,000 in second quarter, up from a net loss of $1.9 million a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $188.8 million, up from $171.9 million as of March 31.

The increase in cash was primarily due to approximately $10 million received in April from the partial exercise of the over-allotment option granted to the IPO and the writers. Cash flow from operations in Q2 was marginally positive after an exceptionally strong first quarter.

Looking ahead to guidance, expect second quarter revenue in the range of $47.3 million to [technical difficulty] million, representing $47 million to $48 million year-over-year of growth. For the full-year, I expect revenue in the range of $182 million to $184 million, which would represent 46% to 47% year-over-year growth.

We expect to accelerate our investments in the second-half of year with a focus on marketing. These investments will [indiscernible] and therefore expect [technical difficulty] non-GAAP loss of $4.5 million to $4 million, and non-GAAP loss of $7.9 million to $6.3 million for the full-year 2021.

We achieved 58% revenue growth in the second quarter in our second consecutive quarter of non-GAAP profitability. Our performance in the first-half of the year clearly suggests we have a large opportunity ahead of us, and a proven go-to-market strategy to capture that opportunity.

Our solid financial performance in the first-half of 2021, combined with the [technical difficulty] successful IPO puts us in a position to make incremental investments to support growth, investments that I believe will benefit the business going forward. With that, Oleg, Eugene, and I are happy to take any of our questions.

Operator, please open the line for questions..

[Operator Instructions] Your first question comes from the line of Michael Turits with KeyBanc..

Hey, guys, congratulations on another good quarter post IPO. One very high level question. Obviously, you've accelerated really strongly coming out of COVID with digital transformation being led by digital marketing and other front office spending areas.

How much do you think that's a pull-forward that we've now seen, and much do you think this is a sustainable growth rate that we can see into the next couple of years?.

Thank you. So, good morning. This is Oleg. I think our strong quarter, and you know, our strong performance in first-half of this year, this is clearly a signal for us [indiscernible] regulation, our market is huge. We have robust opportunity. And we are working on numbers for the next year, and so on. And we believe that we [indiscernible]..

Yes. Mike, I think you might have mentioned there is some outlay, there is some pull-forward from, say, this back-half of the year given out strong the first-half was on, say -- on the back of the year opening that we see across the board.

So, as you may see from our guidance, our outlook for the -- say, for Q3 and for the back-half of the year, I would say is slightly more moderate as we would need to see how the situation unfolds across the globe in different markets..

Okay.

And then, Evgeny, as a follow-up, perhaps if you could -- that the growth in average check or revenue per customer at 19%, a fantastic acceleration, perhaps you could parse that for us, that you called out some impact from pricing, but can you maybe [stack rank] [Ph] the other impacts, whether it's in terms of incremental products or incremental units, what's really driving that strong growth in the [AR per customer] [Ph]?.

Yes, there are a number of factors which drive the average growth. One is the continuous change in the product mix, so we see a higher share of higher-priced packages. And again, following the changes in pricing, we see our new customers lending and average -- the new [blending and average] [Ph] check, which is about 20% higher than we had last year.

I think that will be the second contributing factor. And the third one, as you mentioned, is the accelerated growth in add-ons and additional [indiscernible]. So, all those contribute to this higher average check growth. So there is -- we see that we provide more value, which our customers take, and this is reflected in the growth of the check..

Great, very helpful.

And again, congrats on a great second quarter out?.

Thank you..

Your next question is from Mark Murphy with JPMorgan..

Yes, thank you very much. I'll add my congrats on a solid Q2.

I wanted to ask you if you can just comment on how ambitious are your plans in the social media marketing realm? And as social media channels are starting to be viewed as a more important marketing channel than the Web site itself for more companies out there, what is it that customers are asking you to build for them to optimize their visibility in social media?.

Thank you. I would start with the [indiscernible] social media management tools for us. And here, it's very important for us to give functions and insights, and tools for some marketers who are not so experienced with the online marketing. It's very important to bring them to such marketing industry and create the right insight, right behavior.

And I think, in general, we want to give more and more [barrier] [Ph] to such [unexperienced projects] [Ph].

But if you're talking about long-term terms, Eugene, please?.

Hi, this is Eugene. So, in terms of overall pipeline, we definitely have a lot of features and plans. Right now, the focus is mostly to get a bigger presence to become a key player in the social medial management ecosystem.

Answering your question about Web sites versus social media presence, I think for an average business, definitely Web site is going to be more important for a foreseeable future. But we are seeing a lot of new generation of marketing people who start with social media, and then later evolve into broader web presence with Web sites.

So, I think that kind of just reiterates Oleg's point about building products for entry-level marketers. And then, moving forward, and answering your question about other things that people ask us to build.

So, existing customers definitely ask us to build products for other buyer personas, so for example, people from customer success departments who also monitor mentions, and want to reply to them, especially when there are some complaints about quality of products or things that can impact reputation. So, hope it answers the question.

In a short-term, focused only on market share, right, on user growth. In the long-run, we'll probably start going into different buyer personas within same organizations..

Okay, understood. Thank you for that, Oleg and Eugene. Evgeny, I had just a couple of quick ones for you, one is a housekeeping item. I don't know if you happen to have or if you're disclosing where headcounts ended for Q2? And then the other part of this, financially, the -- I'm trying to think back historically.

Do you have a feel for how our ARR, if you look at the sequential build in the ARR numbers, which looks very strong in Q2. Has that historically been stronger in Q2 or in Q3, and if you have any high-level commentary on just maybe how we could think about that into Q3 of this year? Thank you..

Right. I will start with headcount -- the headcount target. And we are not disclosing it, but I think we could highlight what as many other companies, they face such new reality of [indiscernible]. And I think big operators are very well for this remote approach.

I think with all approach, with all our structure, how we have built out on those teams, how we have managed teams with growth, and so on -- [really] [Ph] well. And with our focus on best talent, with our focus on best employees, I think [indiscernible] process.

We don't see any significant difficulties regarding such remote work approach because [indiscernible]..

Yes, [indiscernible], I wouldn't be reading into it right now too much, because we see, I would say, a fair amount of distortions, which had based on, let's say, started the COVID and post-COVID reopening, which affected seasonality, but if we look at the typical year, I would say, there would be a slowdown at the end of the year as we end December and probably the midyear as we go into the summer, I mean that there you would have some like seasonal slowdown, but again this particular year may be different..

Just to clarify, Evgeny, there's a slowdown, a midyear slowdown, do you mean -- you mean just the typical July and August because people are on vacation or do you mean --are you saying….

Yes, I would say that the typically -- yes, when we look at say end of the Q2 that will be end of June, where the vacation period starts. So, that's why there would be typical slowdown versus the end of Q1.

Or when we look at the end of Q4, that will be end of December, where everybody is still in the Christmas holiday mode, that's why this period will be slower versus the end of Q3, which will be very busy. That's what I meant..

Very clear. Thank you. I appreciate that. Take care..

Thank you, Mark..

Your next question is from Brent Bracelin with Piper Sandler..

Thank you, and good morning here. I want to start with the international, the international momentum has plenty of upside levers this quarter here that drove another quarter of recurring growth.

What's driving the success internationally? Is this just an underserved region? Is the success coming from maybe underserved market segments around small businesses, big sized businesses? And any color on the opportunity international would be super helpful given the momentum you're seeing here this quarter?.

Hi, this is Eugene. So, in general, I think, it's largely related to how different markets going out of COVID and how different restrictions are getting less strict. So, ultimately a lot of people are going back to business, a lot of even can -- start consuming more.

So, that means a lot of businesses have to do more investments in marketing to attract this new demand. I think in general just curb in the United States was not the same as curb in many other places. For example, in the United States, vaccination started earlier than in many even European countries.

So that meant that, for example, in U.S., we would start seeing this a couple of months earlier than in the rest of the world. So that probably explains at least part of the discrepancy between growth rates in the United States and the rest of the world..

Got it. So, it's not like a pace of recovery internationally, just different -- driving different momentum. They're super helpful. I guess and as a follow-up for me, I'm just looking at the SEMrush App Center, I know it's new, but it looks like there is about nine add-on products ranging from $15 a month to $200 a month add-ons.

I know you specifically called out the success in local listing add-ons this quarter, but how should we think about increasing attach rates of these add-on products that provide an incremental lift to growth once we anniversary the price increase, just trying to understand that potential of that App Center as a way to drive additional add-on product revenue,.

Just a little, we are [indiscernible] with what we have seen with all the ups and down. We have launched it at the end of first quarter, and right now we see a very positive feedback from our customers, and we have also feedback from vendors and from partners. And we have good pipeline for future applications.

In general the issue is very, very positive. But when we talk about our tax rates, Evgeny, please….

Yes, right now this is in the early stages of the launch. So, it's more -- we look more at what our customers pay us rather than the numbers. I think it will be too early to dig in this numbers and do any good forecast, if you ask me, Brent..

Yes, seems a good interest, but a little too early to have a kind of financial impact, which leads into my last question, Evgeny, average price per check grows 19%, just specifically, how much of that increase was tied to the price increase versus kind of increase of add-on products?.

So, I'd say the largest impact comes from two parts. One is the change in the mix of the lower price points versus higher price points. And the second largest will be coming from the -- I would say, higher every check from new bank customers.

I mean, the usage of add-ons also contribute this will be the third -- I would say third and most important one..

Okay, very helpful color. That's all I had. Thank you..

Thank you..

Your next question is from Tom Roderick with Stifel..

Yes, hi, everybody. Good morning. Thank you for taking my questions. So I guess I'd love to start on kind of the value of the entire value prop here. I mean there's been all sorts of noise about IDFA out there, and the cost of various mobile advertising strategies have gone way up.

So we've seen to create a little bit more of a lever relative to the demand for some of your products, many of which have a little bit of a longer life in terms of generating marketing leads. Can you talk about just a broader impact that some of those could see a marketing changes have add-on on the demand stream.

And then again, and you were kind of talking about spending on third-party data has gone up. I'd love to understand how the cost of that third-party data, perhaps has had -- perhaps has been a ripple effect, relative to some of the downstream effects from IDFA? Thanks..

So, this is Eugene. I'll start with the first one about broader trends that we see in advertising and how they impact our future. So I think one development that we've seen in our previous quarter is that Google technically changed the timeline for cookie depreciation in Chrome browser.

So that was kind of positively received by the advertising industry. But at the same time, when we do surveys for our customers, and we ask them on what parts they're going to increase marketing spend and what part they're going to decrease marketing spend moving forward. Retargeting is still one of the areas where they're planning to decrease spend.

And then when we go into more kind of qualitative feedback collection, then they highlight that they're going to expand their spend on content, specifically and especially long-term marketing of DVDs. So for example, evergreen content that ranks for a long time and can be used years forward.

And this increase is going to come to some degree from reallocation of the budgets from retargeting to content marketing. So that's going to kind of feedback that we are collecting from our customers.

At the end of the day, I think Google extended this kind of time that brands have to adjust a new reality, but it doesn't mean that retargeting is here to stay for a long time and other intrusive forms of advertising. My expectation is that we're going to see reallocation of resources from those things to more sustainable organic marketing.

And Tom on your question of the data costs. Basically, this is a -- as we alluded to this earlier, we continue to invest into diversification of the data sources.

Whenever we have a data source or whenever we source data for one or another product or feature, where usually we rely on the multiple sources to avoid any users with a loss of one or another vendor. So, that is a continuation of our investments into getting more, I would say more data sources plus increased data quality for a number of products.

This is a step up increase. It is not connected to a growth with the growth of revenue. So I expect that we will see operating leverage as we go forward. However, having said that, we may continue buying more data if we find this like suitable and attractive..

Outstanding, and that's really good color on the reallocation from retargeting the content. So, that's great. I hate to go back to mark Murphy's question, but I think it was kind of a good one with respect to setting expectations on the path of the ARR journey.

As we go through the year and maybe putting a finer point on, I want to make sure I understood what you're talking about.

Just historically, again from Q2 to Q3, were you saying that that is kind of a flattish seasonal trend from Q2 to Q3? So if we just went back and look at last year, there was a jump from Q1 to Q2, and then from Q2 and Q3, would we expect that to be flattish at that $120 million mark, which is what filings have shown for the second quarter of last year or was that up? I'm just trying to get a feel for how we should set expectations for ARR.

I know you don't form a guide to it, but historically, is that up single-digits, flat in Q3.

Just again, sorry to kind of beat that dead horse, but would love to understand the modeling purposes?.

No, no. Yes, that's absolutely worth it. So what I try to say there, and I'm sorry, if I wasn't bit clear, is that last couple of years, mixed everything up. I mean we had a typical seasonality prior to 2019. Now it's very difficult to say what the typical or normal quarter looks like.

What I was saying is that when we're looking at the new demand, we would have a slower growth in the end of December, and as we enter into the summer period. That's what I was trying to say. Otherwise, I mean our recurring revenue will be this like stay in a solid base, which would continue to expand.

So right now we are more cautious into setting expectations for the back-half of the year, as we -- I would say seen a typically strong first quarter or I would say Q1 as well. And then, it's difficult to say what the back half of the year would look like.

I mean, we were seeing a -- I would say softer new demand based on everybody's going to vacation, right? So we want to make sure that Q2 is what we'll get right. But then, so I'm hoping I'm giving you enough. I'm sorry Q3 I'm hopefully giving you enough color there Tom..

Well, you are any part of it is I'm not really asking you to guess exactly how to have a third quarter is going to shake out. But just if you have the number for Q3 for last year, and again, I know it was a weird year because it started Q3 started pretty slow and then ended pretty hard for S&P.

So just as we get to the end of this year the interesting to know if that's going to be a tougher compare, or an easier compare just relative to how last year shook out, so….

I would say -- yes, Tom I think it will be tough to come very close to growth at the end of last year was strong. So that would be my take on it..

Okay, now that's helpful. I appreciate that detail. So, thank you very much. It's great. I'll jump back in the queue..

Thank you..

[Operator Instructions] Your next question comes from Brent Thill with Jefferies..

Great, this is James on for Brent. Thanks for taking the question.

Could you guys talk about the reasons for raising the full-year revenue guidance, but then not taking up the non-GAAP net loss guide understanding that you're investing more in marketing than you originally planned, but just curious if there's any markets that you're looking to lean more heavily into on the marketing side, and just if you could talk about some of those investments that would be really helpful? Thank you..

Sure. Thank you for the question. As we have mentioned in our last quarterly call, we will be investing more into the marketing as we go into the year. And as you [indiscernible] mentioned, that'll be largely -- that'll be the key I'd say investment direction, where we'll be putting money into.

So, as we are growing our revenue, we see more room for investments and we want to support the growth as we go into the end of the year and as we transition to 2022. There is no particular mark which we can say we will be allocating this money on. Our growth is broadly distributed amongst the geographies where it were present.

So it's more, I mean I would say it will be as evenly distributed as it was before..

Got it.

And then, I guess another follow-up on the price increases; you've had a couple quarters now I guess to digest those, curious if you could just comment on how that's impacted churn and then just new customer ads, and so, what you're thinking for the rest of the year?.

It's hard to say [indiscernible] on demand from customer position, because there're so many things here. This is such high level generally around us. And I would say it's hard to say what was feedback on new customers. And the second….

This is Evgeny. And if we look at churn levels, where I would say normal, or I would say slightly better than usual in the first-half of the year. So, if anything, this transition to the new pricing was very successful from what we saw..

That's great. Thanks..

There are no further questions at this time. I will now turn the call back over to the speakers for closing remarks..

Thanks everybody for joining us. We will look forward to seeing you at our Virtual Investor Conference in the third quarter or when we report third quarter results. Thank you..

This concludes today's call..