Greetings, and welcome to the Similarweb Fourth Quarter Fiscal Year 2022 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to RJ Jones, Vice President of Investor Relations. Thank you. You may begin..

Thank you, operator. Welcome, everyone, to our fourth quarter 2022 earnings conference call. During this call, we will make forward-looking statements related to our business.

These statements may include the expected performance of our business and our future financial results, our strategy, the potential impacts of the COVID-19 pandemic and its associated global economic uncertainty, our anticipated long-term growth and overall future prospects.

These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. Further, reported results should not be considered as an indication of future performance.

Please review our Form 20-F filed with the SEC on March 25, 2022, in particular, to the section entitled Risk Factors therein for a discussion of the factors that could cause our actual results to differ from the forward-looking statements.

Also note that the forward-looking statements made on this call are based on the information available as of today's date, February 15, 2023. We undertake no obligation to update any forward-looking statements we make today, except as required by law.

As a reminder, certain financial measures we use in presentations of results and on our call today are expressed on a non-GAAP basis.

In particular, we referenced non-GAAP operating loss, which represents GAAP operating loss, less share-based compensation, adjustments and payments related to business combinations, amortization of intangible assets and certain other nonrecurring items.

We use this and other non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes.

We believe these non-GAAP financial measures when taken collectively may be helpful to investors because they provide consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business results of operations or outlook.

However, non-GAAP financial measures have limitations as an analytical tool and are presented for supplemental informational purposes only. They should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at ir.similarweb.com. Today, we will begin with brief prepared remarks from our CEO, Or Offer; and our CFO, Jason Schwartz.

Then we will open up the call to questions from sell-side analysts in attendance.

Please note that we published a detailed discussion of our fourth quarter 2022 results in a letter to shareholders for investors to reference as well as an updated investor presentation with a strategic overview of the business, both of which are available on our Investor Relations website.

With that, I will turn the call over to Or Offer, CEO of Similarweb..

Thank you, RJ, and welcome, everyone, joining the call today. As we completed 2022, we reached a key milestone for our business as we crossed over the $200 million ARR mark. This was a special milestone for me. It took us almost 7 years to grow to $100 million ARR business, and we achieved that in 2020.

And then it took us only 2 years to double that and cross the $200 million of ARR in 2022. While the year was filled with unexpected challenges, we were able to achieve healthy growth and begin accelerating our path to profitability. We reported a solid result in the fourth quarter as we navigated the challenging macroeconomic environment.

Revenue grew 28% over Q4 last year to $51 million in the fourth quarter. The expansion of our global customer base consisting of SMB, enterprise and strategic accounts has been steady. Our customer base grew 16% year-over-year to over 4,000 customers and our average account spend about $52,000 with us annually, up 80% over last year.

Furthermore, 55% of our annual recurring revenue comes from customers who spend more than $100,000 per year with us. Today, 39% of our ARR is generated from customers with multiyear contracts, demonstrating the durability of those customer relationships, this is a metric that has grown year-over-year since 2020.

Looking forward to 2023, we believe current macroeconomic condition will persist for some time. To succeed in this environment, we have adjusted our strategic objectives and sharpened our focus to deploy resource carefully on a core activity that create revenue and improve profitability.

Our first objective is to successfully serve strategic customers. Now more than ever, our strategic customers are increasing and expanding the use of our data. Our second objective is to grow our number of accounts through product-led growth and effective go-to-market strategies.

We have barely penetrated our multibillion-dollar total addressable market that consisting of hundreds of thousands of businesses that all need digital market data to win and to be successful in digital world. We will experience with different approaches to packaging and pricing this year.

The third objective is to accelerate the adoption of new products and add-ons. Today, Similarweb is a multi-solution company with many products and solutions. We can offer it to our customers. We see a big opportunity to continue cross-selling those solutions to our current book of business.

Last but not least, we'll strive to operate efficiently with an excellent and efficiency. We will optimize our execution this year with a focus forward finding new efficiencies across our sales and marketing areas. This will enable us to achieve cash flow positive by the fourth quarter of this year.

We believe that our digital data is simply the best period. Our customers tell us that our solutions are more valuable than ever in today environment. We will continue to double down on our customers' needs to survive and win in this unpredictable economy. Jason, I will turn the call over to you..

Thank you, Or, and thank you to everyone joining us on the call today to discuss our fourth quarter results. I will briefly address our financial performance and then we will open up the call to questions. Our results in the fourth quarter continued to demonstrate our disciplined execution.

Revenue reached $51.3 million for the quarter and exceeded our outlook of $50.9 million on the high end of our range. Our overall dollar-based net retention rate, or NRR, was 109% as compared to our 113% in the fourth quarter of 2021 and for our over $100,000 ARR customer segment, NRR was 120% as compared to 125% in Q4 last year.

Our remaining performance obligations, or RPO, increased 24% year-over-year to $171 million, 80% of which will be realized over the next 12 months. As we exceeded our plans on the top line, we also exceeded expectations on our bottom line.

Our fourth quarter GAAP operating loss was $14.6 million while our non-GAAP operating loss was $10.9 million, which was less than the $14.5 million loss we had anticipated on the low end of our guidance range. Notably, our non-GAAP operating margin improved 25 percentage points versus the prior year.

This result reflects the impact of our broad-based operating efficiency measures we have implemented across the business. Turning now to Q1 2023. We expect total revenue in the range of $52.5 million to $53 million.

For the full year, we expect total revenue in the range of $221 million to $222 million, representing approximately 15% growth year-over-year at the midpoint of the range.

Non-GAAP operating loss for the first quarter is expected to be in the range of negative $11.5 million to negative $12 million and for the full year between negative $30 million and negative $31 million. We anticipate non-GAAP gross margin will be approximately 77% to 77.5% in Q1 2023 and approximately 78% to 79% in fiscal year 2023.

Importantly, we intend to achieve sustained positive free cash flow by the fourth quarter of 2023. Please note that our free cash flow may fluctuate seasonally as we progress through the year. In particular, we anticipate substantial improvement in the first half of 2023 as compared to the first half of 2022.

Ultimately, we expect our quarterly cadence will be positive when we finish the year. Our projected growth trajectory in 2023 reflects our assessment of the impact of recessionary conditions on our business that will persist for an indeterminable amount of time.

As Or discussed, we have aligned our strategic objectives to balance our expectations for moderating growth with accelerating our path to profitability. Our team, our business model and our balance sheet remain resilient as we navigate the challenging environment. With that, Or and I are ready to answer your questions..

[Operator Instructions]. Our first questions come from the line of Arjun Bhatia with William Blair..

Perfect.

Or maybe, Jason, can you just flush out a little bit of what you saw in the buying environment in Q4? How that differed versus the past few quarters and maybe what you're incorporating into the 2023 outlook that you provided?.

Thank you for the question. It's Or. I would try to -- I think I would summarize Q4 as more stable in the quarter.

If you look on the last year and 2022 as a whole, Q1 was a business as usual and then I think most of our sectors start seeing market dynamic around Q2, Q3 when much of the business dynamic becoming tougher as more and more corporates start to type the budgets. But I think you saw some a little bit more stability.

And hopefully, it's -- looking into this year, I think companies have got to understand what is the new way of doing business. And I think it's kind of [indiscernible] for the reflect on how 2023 will look like..

Okay. Got it. That makes sense. And maybe just one -- another one on the product side, rather. I noticed you mentioned the Data-as-a-Service offering.

Can you maybe just give us a sense for where you are in bringing that product to market, especially with larger customers? It seems like something that would resonate? And how should we think about the monetization of that offering?.

Yes. So we did put a lot of efforts in the past few quarters to kind of enhance and improve our Data-as-a-service offering. It's meaning that more data is available through APIs and data fee. So it's more coverage and more different way to consume the data.

So in the API ecosystem, there is few motion to push the data and to more inquiry, you get the answer, it's called Batch API and et cetera. There's another approach when you have bulk of data like integration that you can get the data through Snowflake, AWS.

So we put a lot of efforts to have everything available, and this unlocked a lot of opportunities to companies to get the data in a way that's more beneficial, and it's really helped our OEM vertical.

So we have a big sector of companies and that use our data to enrich their own products, and we're seeing a big success, though, in the past few quarters. So this investment will yield a good ROI for us..

Our next questions come from the line of Ryan MacWilliams with Barclays..

Or how you feel about the new deal pipeline at this point? Like are you experiencing enough net new inbound customer opportunities? And what is driving some of the enterprise strength that you're seeing?.

I think I'm looking on the pipeline, we feel strong confidence on the pipeline. And now we need to see how the role will go. I think even a lot of our organization right now that's been full a lot of cost saving and they're building a new process about how purchase needs to be done and the approval, and so I think overall pipeline looks strong..

Excellent. And then one for Jason. Jason, just on the full year guide, can you break down some of the assumptions that led you there? And I feel this is conservative and if there's anything baked into the guide for macro..

Sure. Our guide looks at and does take into effect of some of the things that we're hearing in the industry and broadly in the economy in terms of, we got a word, inflationary environment and where folks budgets are.

And at the same time, a lot of the feedback that we're getting -- that we're hearing from our customers that they use Similarweb as a very strategic part of building out their strategy and have a -- and not just a tactical tool.

And so we look at that, we look at the pipeline and fortunate is, again, that we have a significant amount of our ARR that is tied up in or contracted on multiyear deals. So we have today over 39% of our ARR is contracted on multiyear deals. So we have a very good visibility into the recurring revenue base..

Our next questions come from the line of Jason Helfstein with Oppenheimer..

I just want to ask about the e-commerce product, which is something I know you've been excited about.

Just given that, obviously, e-commerce has kind of gone through kind of COVID hangover, do you feel like that has impacted your ability to get clients to kind of upgrade to that more expensive package? And then kind of as we kind of burn off the COVID hangover, which looks like it's starting, but it's still kind of month-to-month then that's something that you could see a more meaningful update..

Jason, thank you for the question and. So the Shopper product is mostly focused for CPGs. So they are the main target audience, and we see strong demand. I think Q4 and logo-wise, was one of the strongest for that product, it will give a lot of net new logos. So I think we are happy overall from the progress now..

Jason, you may be muted, did you have a follow-up?.

No, I'm off that..

Okay. Our next questions come from the line of Brent Thill with Jefferies..

This is John Byun on behalf of Brent Thill. I had 2 questions. One, another question on the macro. But I'm wondering what you're seeing so far in the environment, 6 weeks or month, 1.5 quarter into the new year, especially in Europe. I mean, Europe seems to have stabilized at least a little bit in terms of energy costs and so on.

So I just want to see what you're seeing so far in the first 6 weeks.

And then second, in terms of your major product lines and add-ons, where -- which one of those is being most resilient in terms of demand and expansion?.

I go -- the first question is around Europe. And so happy to say that Europe was more stable in Q4, and we had good success, especially in the U.K. and much better than what we've seen in Q2, Q3. And so I'm more optimistic about Europe stability right now.

And regarding the different add-ons that we have, we just start introducing the new product for the investor, we call it stock intelligence. For the current book of business last quarter, it was going very well. I'm very happy about that.

And I think from stability-wise, one interesting dynamics, we have one product called sales intelligence or sales organization. And with the layoff around that happened, we saw that there was a good decrease in users. But we didn't see a big impact on revenue as well.

But this specific product is more correlated with user growth, and with the dynamic in the market, we saw that there probably is going to be less upsell going forward. This is the only thing I can think about from the different lines of products we have..

Our next questions come from the line of Brett Knoblauch with Cantor Fitzgerald..

So, Or, I guess in your prepared remarks, you talked a bit about experimenting with packaging and pricing.

Could you elaborate a bit more on that, I guess, with which products are you thinking of maybe repackaging or what type of price changes are you thinking about?.

Yes. We have 2 big initiatives that I'm extremely excited about, but I think we will have a significant impact.

And I did the first one, we are introducing what we call enterprise package as we have more and more big customer that we work with, we realized that we need to treat our pricing and packaging differently back to carve out something that will be more easy to the enterprise to buy that give them the ability to have multiple entities and multiple regions.

And then it's easy for us to close deals in MSA with them. And another thing put there in this enterprise package, a lot of the enterprise needs like SSO, what kind of user admin restrictions and big API manage and kind of restriction is mostly big enterprises.

So this is the first thing is to introduce this enterprise package, and we hope this would increase our ACV with those big accounts at land and will also make the signing agreement then in real as well.

The second motion we're going to introduce later on in Q2 is the new pricing and packaging that will enable us to a cross-sell and upsell better, the core offering we have, that is the research solution and the marketing solution.

And the latter with time we set that is abundant today and I think with this new pricing and packaging, we will be able to bring better solutions to their specific customers. So this will be an enterprise one that they talk we would introduce this quarter. And the big price and packaging for the core products, [indiscernible] leveling into the Q2.

So those 2 things that are going to happen that I think we would have a very good impact..

No. That's helpful. And then you guys kind of briefly talked about, I guess, improving the efficiency of your go-to-market strategy, whether that's kind of shortening deal cycles, making it easier for people or I guess, customers to buy.

I guess what are you doing on your end? I think we've done research where we found customers to trial your -- especially your Shopper intelligence product, the trial to purchase rate of these customers to actually trial is extremely high.

So I guess how do you get that product in front of more customers and how do you guys do that while keeping an eye on the bottom line as well?.

Just to understand the question is how we're going to accelerate the sale of the Shopper solution product?.

I guess all products, I guess, your entire GTM, in general.

I guess, how should we think about you guys driving profitable growth or kind of making that go-to-market more efficient?.

Yes. So we need a lot of good decision how to optimize this process like, for example, specific for Shopper, we basically dedicated them. Our go-to-market organization in the big region, like in the U.S. market, is split by sector, by industry. So what we did basically, we have a very successful pod in the U.S. market that sells for CPGs.

So we basically now went to disposal, a group of people and tell them we're selling. You're now also in charge of accelerating the Shopper product other than also selling the other products.

And by aligning them with one of the different business line, we're kind of hoping to accelerate the growth of the Shopper product outside of the current book of businesses we currently have as well.

So those kinds of things we change will still make us be very efficient and also drive the growth of the cross-sell of different solutions that we have..

Got it. And then maybe a question for Jason just on the kind of the long-term kind of growth model, guiding to, call it, 15% growth for '23, obviously, macro is a big concern. Hopefully, that doesn't last forever.

Assuming, say, macro improved in 2024, will you guys begin to increase investments to reaccelerate growth? Would you guys sacrifice profitability to do so? Or would you kind of say that you guys kind of crossed the rubicon for profitability and expect to generate kind of positive free cash flow from here on out? And you'll expect to be able to do that while accelerating kind of growth in a better macro environment?.

Yes. Brett, that's the plan. In other words, once we turn sustained cash flow positive, our intention is to continue to maintain that going forward. We have always trained ourselves and managed the business on very profitable unit economics.

And so as we've talked through before, the -- once you hit a certain growth rate at instant recurring base, that business, that recurring business is slowing well 45% to 50% contribution margins on an annual basis. We think that will be a great way to continue to invest while driving our continuous free cash flow..

And sorry, if I could just ask one more. Gross margins were really strong this quarter. The guide for this year is also really strong, at least better than what I was expecting.

I guess can you just break into what drove the kind of sequential margin improvement? Is that maybe more of an uptick in your app to any product and you're getting leverage with that?.

Yes, it's the way that we've always run the business. I think I've been talking about this for a couple of quarters, go back a little over a year ago, we were at the 78%, 79% gross margin.

We -- there were short-term hits that we had to take as we consumed new data elements that we were integrating, including the Embee acquisition and the Data AI partnership. But as soon as that gets at least start generating revenue from those profits -- from those products, you start seeing the leverage that we have on the fixed cost.

And a reminder that our data costs are really a fit for us. I mean none of the deals that we have, have a variable component in there, which is what drives such efficient gross margin economics..

Our next questions come from the line of Noah Herman with JPMorgan..

I noticed in the shareholder letter, you called out a few verticals where you saw really strong growth during the quarter. Were there any verticals in particular that stood out just positively, but also negatively during the quarter? And then I just have a quick follow-up..

No, nothing for a particular industry. I mean, I think it's tracking similar to what we're seeing overall in the economy. E-commerce being a little weaker and some of the other things overall showing continued growth, but we've seen growth all across the board.

And also good net retention numbers and more importantly, gross retention numbers across our customer base.

And I think that's one strong takeaway that we're hearing from our customers as customers went through their cost optimization, exercise it, whether that was headcount or software tools and the like, our customers are telling us that Similarweb is not that product that they're evaluating whether they need it or don't need it because we have the best data and they can't get that kind of information anywhere else, and so they're relying on us.

And I think that's what you're seeing in more and more of that ARR being contracted for multiyear commitments. ..

Got it. That's great to hear. And then maybe just quickly on the guidance for the year on the margin side. Based on the first quarter guidance and the fiscal year, it sort of implies a pretty rapid expansion, I think, towards the back half of the year.

Can you maybe just unpack what are some of the key levers driving that for the business?.

Yes. I think that you're going to see -- a lot of our costs are fixed costs. And so as the revenue grows, the margin expands, and that's the beauty of being a real data business. It takes a lot of -- it takes a lot to start building this stuff out.

But if you look at a lot of other data businesses, what happens is as they start hitting critical scale, you get widely profitable operating margins.

And I think that's what you're seeing over the last couple of quarters as we've taken the right decisions on the -- to drive operational efficiency and you're seeing this quarter, you got a 25 percentage points improvement on the bottom line.

And it is our intention to continue to drive that kind of profitability, and I think the first indication that you guys will continue to see is our drive to hitting sustained positive cash flow, and we look forward like we mentioned in the letter to see meaningful improvement in the cash flow already in the first half of the year compared to what it was last year for the first half of the year..

Our next questions come from the line of Pat Walravens with JMP Securities..

This is Owen on for Pat. So I was looking at the kind of the long-term gross margins.

And my question is, I guess, so have the efficiency gains from the rif back in November have been fully realized and have representative in this quarter's results? Or can we expect to kind of see margin improvement continue to accelerate going forward?.

Thanks, Owen, it's Jason. Yes, I think that you'll see that happening in -- starting more in Q1. Q1 always has some onetime kind of expenses like company kickoffs and the like that hit the first quarter, but we've taken that into our modeling and our guidance.

And I think like you're seeing based on the guide that you're going to see further operational efficiencies and margin improvement over the course of the year, and that's the guide..

Our next questions come from the line of Tyler Radke with Citigroup..

I'm curious how you're thinking about the generative AI opportunity, specifically with some of the announcements around ChatGPT from a search perspective, how are you thinking about integrating this into your product? And what are the future opportunities for monetization?.

I'll run this question. So this is a big thing for us, and we already have multiple teams here internally working, integrating this really amazing technology in many areas of our business. I can talk about 2 areas when we're really enjoying the benefits of this technology. The first one is categorization, especially in the e-commerce world.

So AI and Open AI are really great capabilities to help you categorize elements of different products, different brands. So in the machine learning, this is kind of tough problem, and they do very well, very easy, very efficient.

And the second thing, I think that is more important, and the nice thing about the Open AI technology is that you can fill them with data, and then you can summarize, give you answers, full insights. And then it's only about if you have a unique data set that nobody else has. This is a big, big advantage.

And this is how we leverage because we have a unique data that nobody else has. Our digital data of how the Internet is working, we're doing it better than anyone else's, and it's our proprietary data. So we're feeding it to the AI, and then we can ask in question on top of our data.

So we can tell them on "please tell us what is the digital strategy of CMM and company." And then we look on our data and then we pull out an amazing summary that expand you -- it's very easy, very simple, what they do, what is the insight and so on and so.

So we're kind of trying to leverage to put it on top of our platform to pull automatically for you all the insight and summarize a lot of the information that is there. So a lot of exciting stuff is going to release using these capabilities down the road..

And Jason, just in terms of ARR, I think you added about $35 million or $36 million of net new ARR in 2022, how are you thinking about the net new ARR and just overall ARR growth for 2023? And how have you kind of derisk the assumption there, given what you're seeing in the macro?.

So obviously, we're looking at our pipeline numbers that we see and the discussions that we're having with our customers. We've been looking at that and looking at the upsell opportunities that we have. The greatest part when you talk about net ARR growth starts with knowing that we have a strong retention base.

And that's where, again, the confidence that we have with the -- coming into Q1, we had a significant amount of the ARR that was up for an also already being contracted either through multiyear commitments or also people who ran it in Q4, said it's time to renew, and renewed early in order to do to make sure that they have the budget, they were going to be able to do.

So we had, I think, a good base to start with, and we have confidence in the recurring base that we have and then use our assumptions on pipeline in order to build out AOL and, ultimately, the revenue guidance that we've given today..

Thank you. There are no further questions at this time. And with that, this does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day..