Greetings and welcome to Similarweb Q4 Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host RJ Jones, Vice President Investor Relations. Please go ahead..

Thank you, operator. Welcome everyone to our fourth quarter and fiscal year 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 impacts of rising interest rates, rising global inflation, and current macroeconomic and geopolitical conditions including the current war in Israel, 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 the forward-looking statements discussion in our shareholder letter along with 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 therein for a discussion of factors that could cause our actual results should differ from the forward-looking statements.

Also note that any forward-looking statements made on this call are based on available information as of today's date, February 14, 2024. 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 profit or loss, which represents GAAP operating profit or 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 publish a detailed discussion of our fourth quarter and fiscal year 2023 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. In Q4, we reported another quarter of growth and operating improvements. We grew our revenue by 11% over Q4 last year to $56.8 million. Our global customer base grew 16% year-over-year to over 4,700 customers and our average customer spends around $50000 with us annually.

The top of our funnel continues to stay strong. We had around 13 million visitors to our three tools at similarweb.com in Q4 and we expect 120 million visits to our tool in 2023. As a result, our pipeline remains robust and we are adding new customers and expanding our penetration into our market.

The changes we made to packaging insight and navigation in the launch of Similarweb 3.0 in Q3 are bringing in new customers. We're creating upside from bigger average order at renewables [ph]. We are excited to see all the new customers at our entry-level price points, especially in our monthly packages which are no touch with low acquisition costs.

Pricing alignment with our customer with 3.0 has greatly enhanced our go-to-market mode and improved our offering to our enterprise customers. It is even better with our strategic customers who are reaching new heights with us.

We closed a record number of seven-figure deals during the fourth quarter because some of the largest companies in the world are recognizing the value of actionable insight they can be extracted from our data at scale.

We are rapidly becoming a go-to source for [indiscernible] to power up competitive advantage for the largest companies, who are investing massive resource into Gen AI. We believe that we are just getting started with what is possible with generative AI and only beginning to see its tremendous growth potential for us.

I'm very proud of our team as we achieved an important milestone that we want to reach this year. We were profitable on a non-GAAP basis in the fourth quarter and our Q4 non-GAAP operating margin show a strong improvement of 30 percentage points compared to last year, which led to us achieving our first positive free cash flow quarter since our IPO.

This is a great achievement for us and reflects a lot of smart work and discipline from our team. We want to continue to build on this performance in the coming year in terms of growth, profitability and free cash flow. To do this, we are focused on execution in four areas. First, we intend to build on the positive momentum with our strategic account.

We want to land and expand in those large global customers. Second, we are focused on increasing the net retention of our enterprise and SMB customers, helping our customer to take advantage of everything in Similarweb 3.0 is a customer success priority for us. Third, we will enhance and innovate in our product line.

One area where we have a great opportunity to drive market penetration is with our mobile data and app intelligence, as well as by unleashing our own Gen AI similar as capabilities with our data. Lastly, we will continue to operate efficiently. We will carefully invest where needed to support growth and create operating leverage.

Thank you everyone for your continued support. We look forward to update everyone on our progress. 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 fourth quarter results. I will briefly address our financial performance and then we will open up the call to questions. Our performance in the fourth quarter reflects our focus on disciplined execution.

Revenue was $56.8 million for the quarter and exceeded the high end of our guidance range. For our $100,000 ARR customer segment, NRR was 107% as compared to 120% in Q4 last year and now represents 57% of our total ARR. Closing out the longer sales cycles, we have seen in 2023, customer acquisition and logo retention were steady in the fourth quarter.

And as Or mentioned, an area of strength for us was in our strategic accounts where we closed 10 seven-digit contracts during the quarter, an outstanding result that is fueling our positive momentum.

As we concluded 2023, 42% of our ARR is contracted under multiyear commitments demonstrating the strength and longevity of our customer relationships and our remaining performance obligations also reached a new record of $195 million, a positive indicator of our performance durability going forward.

While our results on the top line were better than planned, we also exceeded expectations on our bottom line. Our non-GAAP gross margin reached 81% in the fourth quarter. Our fourth quarter GAAP operating loss was $1.1 million, while our non-GAAP operating profit was $4.7 million.

This resulted in a record non-GAAP operating margin of 8%, and represented an improvement of 29 percentage points versus the prior year. Our focus on operating efficiency throughout 2023 drove excellent results culminating in us generating $3.5 million in positive free cash flow in the fourth quarter, a 6% free cash flow margin.

We achieved our stated goal of becoming free cash flow positive, as we enter 2024, which is a momentous result for our team. Turning now to Q1 2024. We expect total revenue in the range of $58.5 million to $59 million.

For the full year of 2024, we now expect total revenue in the range of $242 million to $246 million, representing approximately 12% growth year-over-year at the midpoint of the range. Non-GAAP operating profit for the first quarter is expected to be in the range of $1 million to $1.5 million.

For the full year, we expect our operating profit to be between $6 million and $8 million. In 2024, we are focused on achieving profitable growth and making progress towards the Rule of 40. We anticipate being profitable on a non-GAAP basis and generating positive free cash flow in all four quarters of 2024.

As we navigate the current macro environment, we are building momentum and increasingly optimistic. We believe we are well positioned to take advantage of the math adoption of Generative AI by the world's largest businesses, which is just beginning.

We believe that companies that leverage our data and insights will achieve lasting data-driven competitive advantages ones that will be sustained with our unique and powerful offering in the near and long-term. And with that, Or and I are ready to answer your questions..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question we have is from Arjun Bhatia of William Blair. Please go ahead..

Hey, guys. It's Rachel on for Arjun. Congrats on the quarter. I wanted to ask about linearity in the quarter and then into Q1 so far. It looks like some of the underlying metrics like RPO and then net new customers outpaced revenue growth. So, any color on linearity would be helpful. Thanks..

Hey, Rachel, it's Jason. Thanks for the question. Yes, we did see some more back end of the -- on the linearity, particularly with some of the bigger deals that were closed in the latter half of the quarter. So you do see some difference on the linearity over there. But we're really excited with the results that we had.

And think this is a good indication of what we should see going forward..

Awesome.

And then just one more maybe on some of those bigger deals were those deals that got pushed out from earlier quarters? And then anything specific you would attribute that momentum to with those strategic customers?.

Yeah. So I think that a lot of those deals happened in Q4 and closed in Q4. I think that our strategic motion gets better and better. We did a lot of improvement in the past year around pricing packaging introducing an innovation a lot of solutions. And all of those are start to yield fruits that we are very excited.

Jason, if you have something to add?.

Yeah. And then we've been saying for the last couple of quarters, how the sales cycles were elongated. Some of these deals have been in the pipeline for a while, and just took a long time to close. We're very excited to see that that data ultimately -- that those deals did ultimately convert and are providing us good momentum as we enter 2021..

Yeah. Make sense. Thanks for taking my question, and congrats again..

The next question we have is from Surinder Thind of Jefferies. Please go ahead..

Thank you. I'd like to touch base on NRR and more specifically those customers that are averaging below $100,000 in contract value. Can you talk a little bit about the churn level there? It's continuing to decline at this point. Any color that you can provide there of where we think it should stabilize.

It seems like it's stabilizing but I just want to kind of understand that cadence..

Hey, it's Or. It is stabilized. We see it stabilized and we see even a little bit increase. If you look on the logo retention that I think is the best indication to see that there is shift momentum. So in the longer retention you will see improvement in the retention rate. So, we're seeing this indication positive now..

Thank you.

And then in terms of just -- as you think about the multiyear contracts, how do you anticipate that impacts the cadence of the recovery at this point? Obviously, there will be some clients that are coming up for renewal that maybe haven't renewed at the lower desired levels that they would have just because of being involved in the longer contracts?.

Or Offer:.

.:.

Got it. And then I guess the final question here. As you think about – works the rollout the initial uptake.

How do you anticipate it impacts the payback period?.

Yes, great question and thanks, Surinder. We actually start seeing the -- what will start happening on the payback period is more and more trying to close the deal. In other words the speed at which we're able to get that and those deals starting to close faster will drive -- that yield will drive the better ROI or recovery on the cash side.

So we see that starting to impact and we should see some more of that towards the middle or latter part of 2024..

Got it. And then the final related question just there would be as you think about the initial uptake, obviously, clients coming in at smaller package size. What is the path for the upgrade there to get them to more normalized or what you would -- what I would call target account levels.

Is that -- how much of that is near-term macro driven? How much of it does it provide with you as an engagement point? Just any initial color there at this point of how those conversations are going?.

Yes, we're very encouraged by what we're seeing with the 3.0 pricing. When we look at the 360-some-odd customers that are over $100,000 the overwhelming majority of those customers historically started well below $100,000.

And what we've done over the years is take customers through that journey starting with one solution good going to better, going to best and then going from one solution to a second solution to third solution. And that's how you take somebody from being a $10,000 customer to getting tens of thousands to hundreds of thousands and even multimillion.

I think what 3.0 was really institutionalize that into best practices with scalable meter measures that make it easy and more seamless for customers to start at an entry-level price which is easy for them to transact and grow over time and we're starting to see that play out.

We feel very encouraged that this is the right way to engage with our customers and think that it will impact not only that we're able to onboard customers like the 16% logo increase that we saw in this year, but also the improvement of NRR over time. .

Thank you. That’s it for my questions..

Thank you..

The next question we have is from Ryan MacWilliams of Barclays. Please go ahead..

Hey, guys. This is Damon Calvin [ph] on for Ryan. Thanks for taking question and congrats on the results. [indiscernible] momentum customers, we noticed the comment in the shareholder letter that 4Q's performance from both logo retention and upsells should affect NRR positively in the future periods.

Should we take that as 4Q being the potential trough and with some stability in 4Q in 2024?.

Yes. We're – we think that we have hit the trough and we're looking forward to seeing that metric continue to expand and grow over the year. It's – as we also mentioned later it's a focus area for us to drive that improvement as well..

Excellent. And also great to see momentum and improvement in overall net new customers. Do you view this as maybe a budget flush at year-end or just potentially a sign for positive trends in customer buying behavior..

I don't think that was a budget flush. I think that it was more about buying patterns. I think again the – some of the simplicity that we've introduced with 3.0 and the packaging that we have makes it easier for people to get started. And you see that's impacting the number of logos that we're able to onboard and we're very excited about that..

Perfect. Thanks, guys..

The next question we have is from Jason Helfstein of Oppenheimer. Please go ahead..

Hi. This is Steve on for Jason. So I have two questions. Number one is you added 341 accounts quarter-over-quarter. That's the highest in your time as a public company.

Was the strength solely driven by customers signing up for and utilizing Similarweb 3.0 at lower pricing? Or was there something else at play? And then secondly where do you see the most upside within your products e-commerce, app store or competitive benchmarking. Thanks..

Yes, Steve, I think the strong momentum that is a very good execution from our team. Also we have the self serve offering that a lot of customers choose to buy yearly, it is also nice boost. And going into this year, I did see a good momentum.

First on the core of the competitive intelligence use case is very strong, a lot of improvement to I think the shopper that is the e-commerce, what we call buy online solution, it's also doing very well so. I think all of them have great momentum right now as we're going into 2024..

The next question we have is from Tyler Radke of Citi. Please go ahead..

Yes, thanks for taking the question. Good morning. So I wanted to go back to the large seven-figure deals that you saw in the quarter sounded pretty encouraging on that front.

Can you just talk about what industries you saw those in? Was this kind of more within the investor intelligence space or more B2C, B2B? And then I'm just curious like if you compare and contrast over the last 90 days and you look at your segments across SMB, mid-market and enterprise, if you could just provide some color on which ones are getting better or worse or staying the same just so we can kind of think about the moving pieces on the demand side.

Thank you..

Hi Tyler, and I think the momentum we've seen in our strat account is a lot of cross the sector they serve. The sectors we serve in the stock account are mostly CPGs, the big CPGs of the world, telco and financial services and big tech, so all of them were doing well.

We did a lot of great change with the way we operate our strat motion, focus them working closely with the big accounts. So all across the board we're seeing good momentum there.

And what was the second question?.

Yeah. If you just looked across your three key segments, your enterprise and strat mid-market and SMB, which ones from a demand perspective got better or worse relative to the third quarter? Did you see further stabilization across everything? Or maybe SMB was still challenged but enterprise got stronger.

Just curious how the demand patterns compared across those relative to 90 days ago?.

Yeah. I think we saw in Q4 a little bit of acceleration in the strat as we were seeing, strat was doing really great and also in the low part of the market in SMB, we saw a strong momentum. So those two really reflect acceleration..

Great. And then maybe a question for you Jason, on the expense side obviously pretty impressive margin expansion this year, and I think operating expenses were down 14%, which is pretty significant.

How are you thinking about just given that you are starting to -- you are profitable on a non-GAAP basis, you're starting to see some positive momentum in the business.

How are you thinking about the spending forecast for next year? What are the areas you're comfortable deploying incremental investments in? And where are you still being cautious? Thank you..

Yes. Thanks for the question. We are -- what we're really using is the Rule of 40 as a guide. We think and as we've said before, and I want to reiterate that now that we've got profitability we intend to stay there. But we still think that there's -- that we're just at the beginning of the penetrating TAM that we see in front of use.

So we will continue to be a profitable business both on the cash flow and on an operating basis. But if we see the opportunities to continue to invest back in the business that will drive more top line growth we will continue to do that both on the sales and marketing side and on the R&D side..

Thank you..

[Operator Instructions] The next question is from Pat Walravens of Citizens JMP. Please go ahead..

Great. Thank you, and Happy Valentines Day guys. I have two questions. The first one is I was talking to partner at a big venture fund who said a year ago it was all about cutting costs. And now we're starting to think about growth again.

Is that part of what's going on with you guys?.

Yeah, yeah. I think we've been into a process of cutting costs turn the company to profitable. And now when we're done with that, we all be back all hands on driving growth but profitable growth, as Jason said, the accelerating growth again with maintaining the possibility.

As we said in the earnings call, we expect to have a free cash flow every -- producing free cash flow every quarter during 2024..

But I'm wondering are your customers starting to shift from cutting costs to thinking about growing and investing again?.

I wouldn't say that you're probably right. I will say that a lot of the market, it's probably going through the same conditions we've been through. So most of the corporate they're finishing with the cost optimization and now all eyes on growth like how we can grow but in a responsible way..

Yes. Yes.

And then Or, can you just give us an example on the Gen AI side and how your data fits in?.

I think that AI is -- every LLM, they need the unique data that you need to train them on. So first of all, some companies use, are underlying that to train their LLMs to be smarter to understand the intellect better. So this is one big angle. The second angle, you know that consumer behavior change.

So because of Gen AI come and people behave differently, they search differently. They use a lot of companies implement copilots and AI. So there's a lot of demand from the big corporate around consumer behavior change.

So in my consumers behave different than before and then they need market visibility and this is where similar where is best in the world to give you visibility on how our behavior change. So those two angles that they are driving, is really give us a nice tailwind..

Awesome. Thanks again..

We have reached the end of the question-and-answer session. And this concludes today's conference. Thank you for joining us. You may now disconnect your lines..