Good day, ladies and gentlemen, and welcome to the Similarweb Second Quarter Fiscal 2023 Earnings Call. Our host for today's call is Raymond Jones, Vice President of Investor Relations. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

I would like to now turn the call over to your host, Raymond, the floor is yours..

Thank you, operator. Welcome, everyone, to our second quarter 2023 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 impact of rising interest rates, rising global inflation and current macroeconomic conditions, challenges in our business and in the markets in which we operate, 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 23, 2023, and in particular, the sections entitled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors for a discussion of the factors that could cause our actual results to differ from the forward-looking statements.

Also note that any forward-looking statements made on this call are based on information available as of today's date, August 9, 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 CFO, Jason Schwartz.

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

Please note that we publish a detailed discussion of our second quarter 2023 results in the 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. In Q2, we reported another quarter of growth and operating improvements, we grew our revenue 13% over Q2 last year to $53.7 million.

Our global customer base grew 12% year-over-year and over 4,300 customers, and our average customer spend nearly $51,000 with us annually, in line with Q2 last year. I'm very proud of our great progress in this quarter on our pass-through profitability.

Our non-GAAP gross margin was nearly 80% again and our Q2 non-GAAP operating margin showed a strong improvement of 35 percentage points compared to last year. That is extremely significant. Earlier this year, we announced our goal to achieve sustained positive free cash flow by Q4.

Our Q2 results show we continue to make great progress, and we feel very strongly that we will achieve our goal this year. When we originally planned our outlook for this year, we thought we would see market trends start to recover in Q3 and Q4.

In fact, we see that our pipeline remains strong, we are adding new customers and expanding our penetration into the market. But at the same time, we see that enterprise are still continuing to optimize their budgets and spending.

Sales cycles are longer than in the past and some customers needed to reduce their spending with us in order to fix their corporate budgets while remaining a Similarweb customer. And despite this, our logo retention of our $100,000 customers remain at 98%. Our results also show we are investing efficiently in our marketing, R&D and product divisions.

In marketing, Q2 metrics at the top of our funnel stayed positive. We had more than 25 million unique visitors using our free tools at similarweb.com, in Q2. And we are forecasting that more than 100 million unique visitor will use our free tools this year. This is truly a remarkable achievement for our marketing organization.

Our product team has been working on new features and our solution that will provide more value to our customers. We have an exciting list of the list coming up in Q3.

One of them is called Similarweb 3.0 which is a new way of how we package our offering that includes new data insight and navigation, and would lead to a better pricing alignment with our customer that will enhance our go-to-market motion and improve our offering to our enterprise customers.

We had a really exciting recent launch of a feature called SimilarAsk, that is already live in the platform and is being used by our early adopter customers. SimilarAsk is the first digital intelligent AI system designed to answer real question that users type in free text without having to know how to navigate our platform.

We are solving one of the hardest problem, every insight and analytics software have that is the ability to find insights in the data quickly and action them. And by introducing SimilarAsk, we hope to solve this holy grail of data to insight and insight to action.

In the future, we believe that using SimilarAsk and the AI capabilities will be like having a conversation with the world's most effective and talent market researcher, analysts, strategy consultant and data scientists combined in one.

The AI can give answers to critical business question instantly, this would accelerate our time to feature development and drive more efficiency in our product development cycle and product adoption. We believe our upside potential for working with AI is high, and we look forward to bringing SimilarAsk into the market.

In our view, Similarweb digital data is the best of its kind available on the market today. And merging it with the AI capabilities will unlock amazing growth potential for us down the road. With that, 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 second quarter results. I will briefly address our financial performance, and then we'll open up the call to questions. Our results in the second quarter continued to demonstrate our disciplined execution.

Revenue was $53.7 million for the quarter and near the top of our guidance range. Our overall dollar-based net retention rate, or NRR was 101% as compared to 115% in the second quarter of 2022. And for our $100,000 ARR customer segment, NRR was 109% as compared to 127% in Q2 last year, and now represents 55% of our total ARR.

While customer acquisition and logo retention were steady in the second quarter, we sort the challenges to expansion within our existing customer base. Some customers needed to reduce their spending with us in order to fit their corporate budgets while remaining to be a Similarweb customer.

We are encouraged that 42% of our ARR is generated from customers with multiyear contracts, which has continued to grow steadily and sequentially, demonstrating the strength and longevity of those customer relationships driven by the enduring value that we deliver to our customers.

While our results on the top line were in line with our plan, we continue to exceed expectations on our bottom line. Our second quarter GAAP operating loss was $9.8 million, while our non-GAAP operating loss was $3.5 million, which was better than the lower end of our guidance range.

Notably, our non-GAAP operating margin improved 35 percentage points versus the prior year. These results reflect the ongoing impact of our broad-based operating efficiency initiatives we have deployed across the business. Turning now to Q3 2023. We expect total revenue in the range of $54.1 million to $54.5 million.

For the full-year, we now expect total revenue in the range of $216 million to $218 million, representing approximately 12% growth year-over-year at the midpoint of the range. Non-GAAP operating loss for the third quarter is expected to be in the range of $2.8 million to $3.2 million, and for the full-year between $16 million and $17 million.

This implies a non-GAAP operating loss margin of 5.4% for the second half of this year at the midpoint, an improvement of over 4.5 percentage points as compared to the first half of this year. Importantly, we are on track to achieve our goal of sustained positive free cash flow by the fourth quarter of 2023.

We continue to focus on balancing growth with accelerating our path to profitability and to align our actions with our intent to become sustained free cash flow positive. We believe that our team, our business model and our balance sheet remain resilient as we navigate the current environment. With that, Or and I are ready to answer your questions..

At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Arjun Bhatia with William Blair. Your line is open..

Thank you guys so much for taking the questions. I know the customers are still optimizing spend. I think you guys aren't alone, we're seeing that across the space come up in Q2 and later for a bit.

Or or Jason, can you touch on what the common paths are that customers are taking to reduce spend? Or are they cutting products outright, are they reducing volume? What do you normally see? And then, when you think about the recovery, right, whenever it happens, if it's later this year or early in '24, how are you positioning yourself with those customers so that you can re-expand as budgets start to come back and as macro stabilizes?.

Hi, Arjun. Good to hear from you. It's Or. Thank you for the question. I think to answer the question and we need to look on the different lines of business that we have. We have a few different products we sell to a few different use case.

So if you look on, for example, our Sales Intelligence Solution, that we're selling to the sales organization for lead generation, lead enrichment, et cetera. And there, when you have reduced budget, it is mostly because the company has been through around over layoff or reducing force.

And then because this product is fee-based, so usually the spend is going down.

And so if you look at different example of the products, the Stock Intelligence, when we sell alternative data for that, so to invest less in tech or into digital companies and decided to shift their investment strategy into gold and oil, there is [indiscernible] they're reducing some of their consumption. So this is just example..

Okay. Got it. And then I know last quarter, we had just talked about price and packaging changes.

What have you seen as you kind of just bundle some of your products together, any early kind of feedback that you've seen from the pipeline, the top of the funnel as a result of some of those changes that you made? Or are you seeing anything yet? Or is that still to come in future periods?.

Yes. So we launched the change a quarter ago into one team as a pilot, and it was very successful. And I think a month ago, we launched it globally to the entire go-to-market. The feedback is good. It's already simplified the mental model of how you price and how you align with the value.

I think it will drive more success in win rates, hopefully, maybe shorten sales cycles that got longer in the past few quarters. And I think also it is going to be a nice opportunity for migration.

It's always a good opportunity to go back to some of the current customers that have renewal and presenting them the new pricing in intermodal and the like -- you can migrate into this new version. It's also a good time or maybe we have some opportunity for upsell. So this is what they hope to happen..

Okay, perfect. Very helpful. Thank you, Or..

Thank you..

Your next question comes from Jason Helfstein with Oppenheimer. Your line is open..

This is Steve Homan [ph] on for Jason. Thank you for taking our questions. So first sales cycles and payback price have been longer than average for the past few quarters.

What changes have you tried or made to try to shorten these? Have you seen any change quarter-to-date in that or same trend as in second quarter? And then similarly, on marketing, do you anticipate leverage in S&M or having to make headcount reductions to reach that fourth quarter FDF guidance? Or is that not necessary? Thank you..

Yes. Thanks, Steve. I -- we don't anticipate needing to take any -- and don't plan on taking any headcount reductions. We think that the plan that we have now, and we feel confident in the guidance that we've given.

And on the sales cycle, look, we're seeing -- the sales cycles are still longer or [indiscernible] talked about how businesses are still struggling with the macro environment and managing their budgets through the year, and we see that the pipeline is actually strong.

We actually have good visibility into deals and deals are still progressing, but the timing of getting those things done are still longer cycles than it has been in the past..

Okay. Thank you very much..

Your next question comes from John Byun with Jefferies. Your line is open..

This is John Byun on behalf of Brent Thill. Maybe one more question on the macro. Any differences you're seeing in behavior between your very large enterprise customers and somewhat smaller and mid-market.

And any signs of maybe loosening in the first five weeks of this quarter versus Q2?.

There is a change in behavior in a way. We see more pressure on the small accounts. And in the very, very big corporates, we see more pressure, more stress about showing optimization on budget. And so it's like in the edges, very smaller companies and very, very big corporates..

And then on SimilarAsk, I mean, that looks very interesting. I'm wondering how far along you are with the development on the data? Is there prospects for going GA this year? Is it something more like you're looking at next year? Thank you..

So the good news is it's already live in the platform and our people and some of our better customers have already been lucky enough to engage and yields this capability of free tax and discovering site like that much faster. A very exciting what you play and understand all the capabilities around the unlock of opportunities here.

And they'll be launching probably in the next week or so to the entire paying customer. It is only the beginning. I think, the more we play and integrate discover more use cases, more creating value and to give to our customers. So I think it's only the beginning of really great relationships..

Great. Thank you..

Your next question comes from Tyler Radke with Citi. Your line is open..

Yes, hi. Good morning. Thanks for taking the question. Wanted to ask you, just some of the trends you're seeing across industries. We've heard from some others that software reporting season, the tech vertical remains under pressure.

If you could just kind of highlight the differences in the demand pattern and where you're seeing the longer sales cycles play out either by product or by industry? Thank you..

Yes. I think it's correlating to what I answered before, to Arjun. For example, tech industry, it's mostly B2B companies that we sold though, and that's buying our solution and they usually buying our sales solution. And that is, as I said before, there -- they did some layoffs and reducing force.

The investor -- vertically binary stocking trading solution, some of them, an adjustment their investment strategy and so investing in tech. So then you see the dynamics and then maybe [indiscernible] go a little bit down or close it. So this, I think -- so you see most [indiscernible] as I said is in the investor sector.

And the other thing, we are seeing the retail strategy yields look strong. And also by I think another nice way to -- that we see that Europe is better. Europe is doing well. And China, we start seeing a little bit slowness. But overall, all the rest is kind of the same..

Helpful. And just wanted to unpack the expansion headwinds a bit more specifically on net retention. It looks like that tick down pretty meaningfully. Wanted to see if you had visibility into where and when that drops. And specifically, are you seeing any pricing pressure in addition to down cells in terms of reduced fees capability? Thank you..

Yes. Thanks, Tyler. I think what we're really seeing over there is that budget pressure that our customers are feeling. And that impacts not only their current spend with us, but also our ability to expand with them knows that.

Whether it's new dollars from a new customer or new dollars from an existing customer, those sales cycles are just taking longer.

On the -- one of the things that we've done really real focus on is recognizing that the installed base that we have, those customers are the long-term value that we have and the length of those relationships and the depth of those relationships that we have are the ones that are going to continue to provide us that lifetime value of those customers.

And so we're really encouraged seeing that on those -- on our large customers, we're at 98% logo retention, which or mentioned and the fact that 42% of our customers, our ARR is contracted on multi-year commitment, reminds us how much that customers see Similarweb as being a significant part of the growth of their business..

Your next question comes from Ryan MacWilliams with Barclays. Your line is open..

Hi, thanks for taking the question. This is Pete Newton on for Ryan MacWilliams. I'm really pleased to see the profitability improvement in operating leverage in the model.

Now just on the AI front, how do you foresee generative AI enhancing Similarweb as a unique data asset? And can it help you guys capture and process even more available data on the internet?.

I will answer the AI one, and I'll let Jason to answer the financial one. So I think your question is very interesting because we did try to play and with AI to answer a lot of -- let's say, you see a lot of insights in the data. And I'm trying to understand what caused, for example, those spikes you see.

And this is where we use AI to go to the open web and try to explain why a certain website has a spike in traffic why it was jumping. So we can go and understand what happened in the same day by looking on the data that's available online.

So there is a lot of use cases when you can say that the AI is akin and closing the bridge between the data we showed, the insight and what happened in the open web. So there's a lot of great application around that.

And Jason, do you want to answer the first question we have?.

I think he was just commenting on the improved leverage and efficiency in the business. Thanks so much..

And then just two more for me.

First, on the AI adoption, how are you thinking about the timing of that? Do you think it's more of a next year phenomenon as customers reset budgets? Or do you have any expectations for that this year?.

I think that they will need a few, I would say, month or quarters of iteration with the future we build using the AI. So there's a lot of innovation and very curious to see what will get adopted in the end.

Even now with these three textbooks that we released and we starting on what people are searching and going to be very interesting to see if it will adapt, if people will really use that as a search engine and will change greatly behave and how they analyze data other than going over tables and drafts, they were just the sales book.

It's going to be interesting to see, and then will need to iterate. So I think you need a few quarters of integration. You launched the first version now to see how these are using it now, which is get adoption, not to iteration.

But I see that by the end of the year, companies would be able to discover what are the best use case to leverage AI into their capabilities and only next period to really get into the -- starting really the value, and the acceleration of value structure from using that..

Okay. That's helpful. Thank you. And then just one for Jason.

Should macro improve, do you think you can maintain these improved levels of profitability, while still investing to capture better growth opportunities in the future?.

Yes, for sure. I think that a lot of the unit economics that you're seeing is that the -- our existing book of business we're able to drive 50% to 55% contribution margin on that. And I think that that is the flywheel that continues to fund the business.

And with the improved macro environment, we should see the CAC or the cost of acquisition going back to the historical trends a 15 to 16 month payback as opposed to what we're seeing now, which is more like 19 to 20 month payback..

Very helpful. Thanks guys..

[Operator Instructions] Our next question comes from Noah Herman with JPMorgan. Your line is open..

Hey guys. Thanks for taking the questions. So you mentioned how you have about, I think, 25 million unique visitors using some of your free tools, and you expect that to sort of jump to 100 million by the end of this year.

I'm just curious, how should we think about maybe that acting as a potential lever to convert more customer additions throughout the year? And also too -- I mean, do these customers also have access to the new SimilarAsk tool that you've launched? And could that also act as a potential pricing lever with those customers longer-term? Thanks..

Thank you, Noah. Just to explain the announcement, we are now having more than 25 million unique visitor per quarter.

And we're forecasting that during the next few quarters is going to be growing a little bit, that we're going to have in 2023 overall for the year, 100 million people using our free tools with a very big exposure to Similarweb brand capabilities and the spend of the technology we provide, also the digital intelligence.

So this is what makes us excited and we understand this is a very strong engine to build pipeline on top of that, especially as you grow that -- you have such a strong brand. And for big -- I think, that we have big audience out of those 25 million people that register to try them paid version that you get a free trial.

So right now, the SimilarAsk is only open to data customers and next it will be open to our paid customers. So what it means that from the people who choose to register to try our paid solution, they have a 7-day free trial, they will be exposed down the road to SimilarAsk, and will be able to see and try it by themselves..

Got it. Thank you. And then just as a quick follow-up. It's great to see the improvement on the bottom line.

And obviously, still some challenges with expansions, but I guess just putting the macro headwinds aside, I mean, how should we sort of think about at this point, the normalized top-line growth for the business that hopefully starts to see going into next year?.

Yes, I think we're going to be able to give guidance for next year when we get to Q4. I think, we'll be all be a lot smarter as to how the macro start shaking out in over the course of the next three months. And we still think that the need and the uniqueness and value that we bring with Similarweb digital data is what is going to drive that growth.

Ultimately, what we're committed to is that efficient growth that we are -- have the conviction that we will be sustained free cash flow positive starting in Q4 and going forward..

At this time, there are no further questions. This does conclude today's Similarweb second quarter fiscal 2023 earnings call. Thank you everyone for attending, and have a wonderful rest of your day..