Semrush - Q2 2024

Transcript

Operator (participant)

Hello, everyone, and welcome to the Semrush Holdings Q2 2024 results conference call. My name is Chat, and I'll be the coordinator for your call today. During the presentation, you can register to ask a question by pressing star one on your telephone keypad. If you change your mind, please press star two. I'll now like to hand over to Brinlea Johnson, Investor Relations, to begin. Brinlea, please go ahead.

Brinlea C. Johnson (Head of Investor Relations)

Good morning, and welcome to Semrush Holdings Q2 2024 conference call. We'll be discussing the results announced in our press release, issued after market close on Monday, August 5. With me on the call is our CEO, Oleg Shchegolev, our President, Eugene Levin, and our CFO, Brian Mulroy. Today's call will contain forward-looking statements, which we read pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, but are not limited to, statements concerning our expected future business and financial performance and financial condition, expected growth, adoption and existing and future demand for our existing and any new products and features, our expected growth of our customer base and specific customer segments, the continued development of our products, the expansion of our ContentShake tool, industry and market trends, our competitive position, market opportunities, sales and marketing activities, acquisition activity, integration and results of recent acquisitions, future spending and incremental investments, our guidance for the Q3 of 2024 and the full year 2024, and statements about future pricing and operating results, including margin improvements, revenue growth, and profitability, and assumptions regarding foreign exchange rates. Forward-looking statements are statements other than statements of fact, and can be identified by words such as expect, can, anticipate, could, 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 discussion of the risks and important factors that could affect our actual results, please refer to our most recent quarterly report on Form 10-Q and our annual report on Form 10-K, filed with the Securities and Exchange Commission, as well as other filings with the SEC. During the course of today's call, we refer to certain non-GAAP financial measures. There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued yesterday after market close, which can be found at investors.semrush.com.

Now, let me turn the call over to Oleg.

Oleg Shchegolev (CEO)

Thank you, and good morning to everyone on the call. I'm excited about our results. We had a very strong Q2, delivering revenue of $91 million, up 22% quarter-over-quarter, and ARR growth of 25% quarter-over-quarter. We reported income from operations of $3.4 million and non-GAAP income from operations of $12.2 million in the Q2. Non-GAAP operating margin increased to 13.4% compared to non-GAAP operating margin of 3.1% in the prior year period. We exceeded our prior guidance, and I am pleased to say we are raising our full-year 2024 revenue guidance. We are expanding our leadership position in online visibility and are succeeding in combining strong, durable growth with improving profitability and free cash flow generation.

Our strong financials are the result of the solid foundation we have been building since 2008. Semrush started as a small group of SEO and IT specialists united by one mission: to make online competition fair and transparent, with equal opportunity for everyone. Now, we are well positioned for the next leg of growth with the leading software platform that enables marketing professionals to build, manage, and measure campaigns across all major channels to improve their online visibility. Our edge over the competition comes from our strong culture and history of leveraging our differentiated data to elevate the digital marketing activities of our customers. Semrush's unique data sets are born from our own intellectual property and historical customer knowledge, and the data our customers share with us. This data generates invariable predictive insights and opportunities for customers to drive significant ROI.

As we enable new ways to customers to use our data, this use itself generates additional data, and as these data sets get larger, they also grow in power, accuracy, and trust. In the early years, we gained a strong reputation offering a single SEO product to SEO specialists and small to medium-sized businesses. Over the years, we have evolved our product suite into a comprehensive marketing platform focused on search engine optimization, search engine marketing, content marketing, social media, competitive intelligence, local marketing, and digital PR, leveraging AI and advanced analytics. During the course of this evolution, we believe that we have created the most comprehensive digital marketing data set available in the market. And while we started our journey focused on specialists and small business owners-...

We now have over 116,000 paying customers and approximately 1.1 billion free active users, over 150 countries across all industries and all market segments. This shift from a single SEO product tailored to specialists and small business owners to a multi-product platform has been the driving force behind our growth and ability to significantly expand our average ARR per paying customer by over 50% since the beginning of 2021. We expect to continue to expand average ARR over the long term. We believe our brand, competitive moat, data set, product offering, efficiency and profitability, and customer loyalty are stronger than ever, and we continue to make new investments that we expect to further strengthen the business. This year, we continued on our journey and focused on initiatives we expect to drive the next phase of growth for Semrush.

In May, we launched our enterprise SEO product, and we are pleased with the initial traction and demand. Prior to the launch, we already had been successful in acquiring 8,000 enterprise accounts with over 500 employees. In the first few months, we have closed new deals with DigitalOcean, HSBC, Royal Bank of Canada, and many more. We believe the demand for our innovative enterprise SEO product is strong, and we are encouraged by our early traction in the market. In addition to expanding our portfolio, we have a disciplined capital allocation approach around M&A, and we believe we are well positioned to take advantage of new opportunities, giving our cash position. In the Q2, we made a small acquisition by taking a majority stake of Brand24, which we expect to extend our capabilities in social media and brand marketing.

Most recently, in the beginning of Q3, we acquired Ryte, which extends our capabilities with technical SEO, and we believe will significantly increase our average ARR per paying customer potential. With our strong start to 2024, I feel even more confident that we have built the foundation for the future. We plan to leverage our profitability to invest in new products, to extend our reach, impact, and cross-sell, upsell capabilities. These moves in concert are designed to solidify Semrush as the marketing platform of choice across all industries, segments, geographies, and now evolving across all marketing disciplines and leadership levels. We look forward to showcasing this strategy in more detail at our Analyst Day in New York City on October first. I'm excited to see many of you there.

I will now turn the call over to Eugene and Brian to discuss the results of the quarter and our outlook in more detail.

Eugene Levin (President)

Thank you, Oleg. We delivered another solid quarter and continued to scale, innovate, and accelerate growth. Our platform is very powerful and helps marketers all over the world grow their online visibility. We're expanding our product portfolio into a comprehensive marketing platform, leveraging our innovative internal development teams, partnerships, and M&As. In the Q2, we acquired a majority stake in Brand24, an impressive company with a strong team and a leading SaaS platform, with a global reach, providing metrics, measuring brand awareness, sentiment analysis, and collecting customer insights. The acquisition strengthens our portfolio of off-market media monitoring products and enhances our data analytics capabilities and insights into the market trends. In July, we acquired Ryte, which is a SaaS platform that helps businesses optimize their website to improve user experience and organic search performance.

Ryte can scan websites of any size and highlight important technical and performance issues, and these insights are used by both marketing and engineering teams. They have strong traction with large companies, and we believe that virtually any large company that generates customers through their website can benefit. We believe Ryte enables us to expand our enterprise portfolio footprint beyond SEO and content marketing by engaging website developers within our current and prospective customer base. It is our expectation that over time, these additional features will further increase our average ARR per paying customer. We talked previously about our enterprise SEO product, increasing our average ARR for enterprise accounts by 10-15 times, and we estimate Ryte could further extend that increase by 15-20 times. We're gaining traction with both our SEO enterprise products and our enterprise go-to-market strategy.

We're increasing our number of dedicated enterprise reps, have signed new deals with some of the largest companies in the world, and we're building out a strong pipeline that gives us confidence that our platform is resonating in the market. In addition to enterprise product initiatives, we continue to leverage AI in our platform. This quarter, we leveraged AI to give our customers truly personalized recommendations. In keyword research, we use AI to calculate personalized metrics, such as keyword difficulty. Our AI engine takes into account characteristics such as relevance, topical authority, ease of navigation, and other relevant factors to create a truly personalized experience. These new features enable our customers to identify topics that create the best potential for success to enhance their online visibility. In ContentShake AI, we can now generate different content based on the location of the business.

For example, if your business is near Boston, you might want to highlight your special offers for Celtics fans. These new features demonstrate how the value of AI can be dramatically increased when it is combined with proprietary Semrush data. And of course, as Google added new AI-powered search engine page result elements, such as AI Overview, we were one of the first companies to support these features. Now, our clients can monitor their presence in AI Overview snippets using Semrush tools, such as Position Tracking and Semrush Sensor. I'm confident in our position in the search market and our extensive portfolio. We're seeing increased adoption of our AI products and continue to innovate and launch new offerings in the market. We're expanding both our revenue and portfolio in the enterprise segment, which helps fuel higher average ARR per customer and strong net retention.

I'm very excited about our ability to service enterprise customers and continue to expand our portfolio of offerings. I will now turn the call over to Brian, who will provide a more detailed discussion of our financial performance and guidance. Go ahead, Brian.

Brian Mulroy (CFO)

Thank you, Eugene. We had a solid quarter across the board. Our revenue was $91 million, growing 22% quarter-over-quarter. Growth was driven primarily by an expansion of our average revenue per customer as we continue to execute on our cross-sell and upsell strategy. Annual recurring revenue for the quarter grew 25% quarter-over-quarter to $377.7 million. The acquisition of Brand24 contributed approximately 2% of our reported ARR. Our calculated ARR per paying customer grew 12% quarter-over-quarter and is now up over 50% since the beginning of 2021, with the cross-sell and upsell benefits that come with our comprehensive marketing platform focused on search engine optimization, search engine marketing, content marketing, social media, competitive intelligence, local marketing, and digital PR. During the Q2, we added approximately 4,100 net new paying customers.

Roughly three-quarters of those came through our acquisition of Brand24. Our dollar-based net revenue retention for the Q2 remains at 107%. We continue to believe our dollar-based net revenue retention will remain strong and increase as our sophisticated accounts increase as a percentage of our mix, since these customers have higher net retention than our company average. Moving down the income statement, during the Q2, we had positive non-GAAP operating income of $12.2 million. We reported another significant improvement in our non-GAAP operating margin of 13.4%, which was up over 1,000 basis points quarter-over-quarter and surpassed our Q2 guidance. Cash flow from operations in the Q2 was $12.1 million.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $231.5 million, down $11.6 million from the previous quarter, as we used approximately $10.7 million of our cash balance to attain a majority share in Brand24 and reserved another $11.7 million as restricted cash to purchase the remaining shares of Brand24 throughout the H2 of 2024. We will report approximately $9 million in cash outflows in the Q3 for the Ryte transaction. Turning now to guidance. For the Q3 of 2024, we expect revenue in a range of $96 million-$97 million, which at the midpoint would represent growth of approximately 23% quarter-over-quarter. We expect our Q3 non-GAAP operating margin to be approximately 11%.

For the full year of 2024, we are raising our guidance and expect revenue in the range of $373 million-$375 million, up from our prior range of $366 million-$369 million, which translates into growth of 21%-22%. We expect the combination of Brand24 and Ryte will contribute approximately 200 basis points of growth, which would mean our organic growth would be in the vicinity of 20% quarter-over-quarter at the midpoint. Moving to our guidance for the full year operating margins. While we are ahead of our full year guidance in the H1, we are maintaining our non-GAAP operating margin guidance for the full year of 10.5%-11.5%, and our free cash flow margin of approximately 8% due to the following reasons.

First, because we are off to a very strong start to the year, we expect to make several focused go-to-market investments to help drive future growth in our enterprise business. Second, although Brand24 and Ryte both have margins that are in line with our corporate average, we plan to accelerate our integration efforts to more rapidly incorporate their products into our portfolio. To do this, we expect to incur some temporary one-time integration expenses that we have built into our updated operating margin guidance. We expect these expenses to abate as we get into the next year, and we also plan to extract some synergies, which should help their operating margin improvement as we progress through 2025. We also had some expenses originally planned in the Q2 that pushed into the H2 of the year.

This is part of what allowed us to overachieve our Q2 guidance. And finally, the increase in our stock price, combined with changes in our affiliate ownership structure, means we will transition to large accelerated filer status under the SEC rules. As a result, we anticipate higher general and administrative expenses as a result of increased compliance costs. I note that holding our operating margin guidance still implies that our operating profit guidance in dollars will increase despite these components. To help you with your modeling, I'd make a few additional comments. We expect that the combined total of Brand24 and Ryte will have a revenue growth rate similar to our corporate average over the near term before our cross-selling efforts kick in.

The difference between our non-GAAP operating margin and our free cash flow margin is the result of interest income offset by capital expenditures, cash taxes, and acquisition-related expenses for the Brand24 and Ryte transaction. As a reminder, we enacted a core price increase during Q3 of last year, which we don't expect to repeat this year. This could put some pressure on the quarter-over-quarter growth rates we've been experiencing in our ARR per paying customer. Finally, our guidance assumes a Euro exchange rate of 1.08. Approximately 30% of our expenses are denominated in euros. In closing, we are very pleased with the performance of our business in the H1. We have executed well to overachieve on top-line growth and profitability, advanced forward our strategic priorities, and placed Semrush in a strong position for our next phase of growth.

We continue to remain confident in our ability to grow and scale our business. We're pleased with the traction of our most recent investments and remain committed to efficient and profitable growth that drives long-term value to our shareholders. With that, we are happy to take any of your questions. Operator, please open the line for questions.

Operator (participant)

Thank you, Brian. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. The first question comes from Scott Berg from Needham. Please go ahead.

Scott Berg (Managing Director and Senior Research Analyst)

Hi, everyone. Really nice results here this quarter. I just wanted to touch on the demand environment and maybe what you're seeing with the enterprise solution, you know, early in its stage. I think you talked about still being able to get pricing in the 10-15x kind of multiple of the core Semrush product, and that's excluding, you know, what you've recently acquired here. But were you able to see pricing kind of in that expected range here, you know, early on with this in the market?

Eugene Levin (President)

Hi, thank you for the question. Yeah, absolutely. We actually increased prices a little bit after initial launch in May. We had some feedback from customers, you know, who were saying that sometimes we're, you know, a little bit underpriced, and we could charge more. So we used this opportunity and now, you know, it's still in the same range, $10-$15, but, you know, it's kind of a little bit closer to the higher end of that.

Scott Berg (Managing Director and Senior Research Analyst)

Got it. Very helpful. And then, you know, Brian, one of your last comments there, talking about modeling here going into the next year, can you remind us what the benefit to growth rates, the pricing increase has been over the last year? And, you know, just the way titrate our models effectively to what that headwind could be over the next twelve months. Thank you.

Brian Mulroy (CFO)

Yeah. Thanks, Scott. So in the Q3, last year, 2023, we did a price increase across all of our core offerings, for all new customers, and then we had a small cohort of existing customers, that we rolled out that pricing increase to as well. If you remember from our earnings calls, we mentioned that it was about $4 million of ARR, that we ended up getting the benefit of, in the H2 of last year and then continued for our new customers to get, it was roughly 5%-8% increase, on our price for new customers.

All in, I'd say it was about $2.5 million-$3 million of impact last year and an incremental $2.5 million-$3 million impact in the H1 of this year.

Scott Berg (Managing Director and Senior Research Analyst)

Excellent. Thanks again. Thanks for taking my questions.

Operator (participant)

Thank you. The next question is from Jackson Ader from KeyBanc Capital Markets. Please go ahead.

Jackson Ader (Managing Director and Equity Research Analyst)

Great. Thanks for taking our questions, guys. The first one is on the enterprise launch in May. Can you just give us maybe a little bit of an early update on what some of the features that you rolled out in that new SKU, people are most attracted to in the early going?

Eugene Levin (President)

Yeah, absolutely. So, the three key pillars of enterprise product are, number one, deep customization. So our SMB product is kinda like one-size-fits-all interface, and of course, enterprises, they know really well what they need, and they want, you know, dashboards to be exactly what they're looking for, and they also sometimes want to combine metrics in certain ways that, you know, requires customization. So this is number one, thing that they're really excited about. The second big one is our automated and AI workflows.... So for example, there are a lot of tasks you can do manually if you have a very small website, but if you have a big website, you need all this automation and AI.

And a couple of good examples would be our forecasting workflow that a lot of teams use to justify investments in organic search and show ROI calculations to their finance teams. We also have really strong traction with our content marketing workflows that can scan a huge website and make very specific suggestions about what people need to improve in content or in internal linking to drive better visibility. And then the third one is our enterprise product includes services. Of course, Semrush is a software company. We don't provide services ourselves, but we connect our enterprise clients with leading experts in certain areas, and they can collaborate, you know, through our platform, and that's the third feature that have been, you know, very well received.

Jackson Ader (Managing Director and Equity Research Analyst)

Okay. All right, great. And then, a follow-up on the financials for you, Brian. I think when you mentioned a little bit of extra color on the acquisitions, that on Brand24 and Ryte would grow roughly in line with the company, you know, the, the core Semrush growth rate until the cross-sell motion gets underway. So is the expectation that you would hope that they would be able to accelerate their revenue growth as you kind of build out the, the, go-to-market motion once they're in the product family?

Brian Mulroy (CFO)

Yeah. Hey, Jackson, that's absolutely right. You know, Semrush has been really successful in building out a strong brand and a loyal group of paying customers. We have 116,000 paying customers today. What's been driving and fueling our success recently is our ability to cross-sell and upsell and expand the average ARR per paying customer. We do that by taking our core customers and continuing to diversify the channels and marketing disciplines that are important to them and provide technology and data that helps them to enhance their online visibility. With both Brand24 and Ryte, that extends our capabilities into close adjacencies that we believe will continue Semrush on that trajectory.

Jackson Ader (Managing Director and Equity Research Analyst)

Okay, great. All right. Thank you.

Operator (participant)

Thank you. The next question is from Elizabeth Porter, from Morgan Stanley. Please go ahead.

Elizabeth Porter (Equity Research Analyst)

Great. Thank you so much. I have another question on Brand24 and Ryte. What is the opportunity to sell into the customer base? Is this applicable to all customers, or should we be focusing more on just the larger customers to upsell? And then it sounds like there's a big opportunity again to increase ARPU per customer. So what are the signs that give you confidence that customers are willing to increase their spend kind of to this degree now that we're talking about kind of again another 10%-15% type levels on ARPU? Thank you.

Eugene Levin (President)

Thank you. Great question. So, I'll start with Brand24. So Brand24, they have two different products in their portfolio. One is focused on SMB, it's called Brand24. It's already available for Semrush customers in App Center. We're just expanding capabilities. And now, because this company is sort of in the Semrush family, we will, of course, double down on bundling opportunities. We're having very strong traction with our own social media tools, and Brand24, as a social media monitoring tool, is a really great addition to that portfolio and social media bundle.

They also have Insights24 product that is less known, but actually very, very good media monitoring product for large companies, and they have customers, like, you know, one of the biggest automotive companies, you know, who is managed by a very charismatic leader and so on. And then, Ryte is a little bit different story. So this is a product that is designed specifically for companies with very big websites. So, you know, there's definitely big bundling opportunity between Ryte and our own enterprise SEO product. There will be, you know, we'll need a little bit more time here to fully integrate it into our enterprise SEO product. But, overall, in terms of buyer persona, this is exactly the same buyer persona, and we're very positive about bundling here.

And then in terms of average revenue per user, our estimates right now are based on their current average revenue in this segment. That said, their revenue is a little bit focused on Europe, which is usually a little bit lower check than what you can get in the United States. Does it answer the question?

Elizabeth Porter (Equity Research Analyst)

Great. And then... Yes, it does. Thank you very much. And then just as a follow-up, I wanted to ask on monetizing AI, and you guys have a few different ways that you're monetizing, including one for AI being added to more of just the higher price tiers. So first question is, are you seeing customers start to upgrade to higher tiers for those AI capabilities today? And then second, how do we think about kind of a broader opportunity around an upgrade cycle in order for customers to get access to AI? You know, is there any way to kind of segment the base of who might those more likely candidates be?

Eugene Levin (President)

Yeah. So we're really working on three different strategies to monetize AI. Number one strategy is to start including it into base product offerings to improve conversion and retention. That's what we're doing with our Copilot features in core SEO products. Seeing really good adoption, you know, over time, we will think how to maybe add even more functionality only on premium tiers, but right now, this part is really more about increasing conversion. Now, the second big driver of monetization when it comes to AI is you know, pushing some features on higher tier plans. For us, a good example is how we monetize our reply to review feature in local products, where you can buy entry-level product for $20 per user, per location, per month.

Then there is a premium product that is $40 per location per month, and premium product includes AI features such as reply to review. And of course, it drives quite a lot of upgrades because it's such a, you know, helpful feature. Then the third way to monetize AI features for us is just to launch standalone products that are, you know, solve in particular large problem. The good example would be our ContentShake AI product that people use to create content and blog posts. This is where we not just use, you know, AI APIs from companies like OpenAI, but we also combine it with our own proprietary data to improve quality of the insights and recommendations, and write content that really performs well in search engines and social media.

That's an example of the third monetization strategy.

Elizabeth Porter (Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. The next question is from Mark Murphy from J.P. Morgan. Please go ahead.

Mark R. Murphy (Managing Director and Senior Equity Research Analyst)

Oh, thank you very much. So I wanted to touch on the net new ARR performance. It's quite strong in Q2. It's a bigger number than Q2 of the last couple of years. How much of that would you ascribe to any upmarket traction versus any sense of stabilization in the macro demand? And then, you know, should we think about that outperformance affecting how we might have modeled Q3 in terms of any deals that might have pulled forward and closed earlier than expected? And I have a quick follow-up.

Brian Mulroy (CFO)

Mark, it's Brian. It's a good question. The... So I'd say a few things. First of all, some of the net new ARR performance, of course, was Brand24, so that's about a third, a little bit more than a third of the number. Independent of that, we did see a pretty significant increase quarter-over-quarter in our net new ARR growth. It is in part driven by enterprise, but we're still in the very early stages of that. So we just launched enterprise in May. We, of course, do have some ARR contribution from that enterprise product. But I'd say the bulk of it is we have a cohort of larger, sophisticated accounts who continue to adopt a larger and larger portion of our portfolio.

We expand beyond SEO into competitive intelligence, local, social media, digital PR, content marketing, and of course, the AI products that Eugene just mentioned. So we have a very extensive portfolio, and we're starting to see really strong traction in our ability to cross-sell and upsell into our install base. What you saw this quarter, we reported in the release that our customers that have more than 10,000 in ARR grew 37%. So that cohort of accounts are becoming an increasingly larger portion of our base and helping to bolster ARR performance. I would say just in the H2 and going into 2025, that we do expect our enterprise product to start to gain some traction and contribute to ARR, but it was smaller in the Q2.

Mark R. Murphy (Managing Director and Senior Equity Research Analyst)

Okay, thank you. And then, as a follow-up, maybe, maybe for Eugene, with, with the latest acquisition, it, it sounded like you're, you're moving further into the area of performance and, issue monitoring, or like, think what we think of as the infrastructure of websites. What, what is triggering that, decision? And, do you, do you sense that that market is growing faster than, your core markets for, for online visibility, or do you think this is just part and parcel of it? Wondering maybe how, how far you think about extending the, the, you know, product, footprint into that area.

Eugene Levin (President)

Yeah, we think this is really a must-have feature for a large company. You know, when you have a small website, you effectively can just, you know, audit the code and test the website yourself. When you have millions and millions of pages, you need a web crawler to go through every page and check if everything is okay. There are definitely ways to expand this opportunity even beyond this category of products. You can start doing audits of GDPR compliance and so on. For us, we're really focusing on the buyer persona, so, you know, technical optimization is a very important part of online visibility, and SEO teams work very, very close with product teams.

And often those products become part of their deployment pipelines and, you know, necessary checks that engineering teams need to perform before they push the code in a production environment. So, that's kinda why we're interested in this category. It, of course, expands the markets. It's a must-have feature, it's something that every large company needs, and it helps us to get a foot in the door and have relationships with engineering organizations inside our existing accounts. So, that's kinda why we're excited about this.

Mark R. Murphy (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our last question is from Adam Hotchkiss from Goldman Sachs. Please go ahead.

Adam Hotchkiss (VP, Emerging Software Equity Research)

Great. Thanks so much for taking the question. I'd be curious for an update on how you think about generative AI and the impact on search engines more broadly, as it relates to SEO. I'm thinking things like no-click searches that generative AI responses have to search queries and other ways search engines are incorporating generative AI. I'd just be curious how you and customers need to adapt, if at all, from an SEO perspective, as that continues to evolve.

Eugene Levin (President)

Yeah, great question. By now, we already have some time to monitor how new interface, you know, such as AI Overview, impacts user behavior. And it's pretty much in line with the, you know, how we were describing this in the past. The way we think about this is that Google have been involved in their interface for many, many years. They've been always adding new search elements, and often, those new search elements would reduce percentage of customers who click on, you know, on links and, you know, visit another website. At the same time, because of those new search elements, Google became more and more valuable tool for many people, so the total traffic and total amount of time, and total number of use cases would increase.

As a result, total number of outgoing clicks would also increase over time. So that's kinda a little bit of kinda history of of this phenomena of, you know, introduction of new search elements. We think the new AI Overview element fits perfectly. Based on what we are seeing right now, it's really replacing featured snippet in most of cases, and it provides links to original source of content, and a lot of people click on those links. And the rules of... you know, that that are applied to get featured in this AI Overview are very similar to just general recommendations that we usually give people, to, you know, that they need to follow to rank high or to be featured in a featured snippet.

From that point of view, really just one more step, you know, in a very long journey.

Adam Hotchkiss (VP, Emerging Software Equity Research)

Okay. Thanks, Eugene. That was really helpful. And then, Brian, you addressed this a little bit in an earlier question, but just given the recent acquisitions, it'd be great to get a refresher around your broader capital allocation strategy. Just how you think about evaluating potential deals and what you'd say your big gaps in functionality are that you'd look to address.

Brian Mulroy (CFO)

Yes, it sounds like two questions. One is just on capital allocation, and then one in particular, around the products and markets that we're targeting. So I'd just say, in general, we have a very strong balance sheet, $230 million in cash and cash equivalents. As you've seen from our recent announcements, we have been active. We feel that the markets are favorable. There's really good multiples and a lot of good opportunities out there. So we'll continue to put our cash to work in both investing in the business, and whether that means organically through our sophisticated and talented R&D teams, strong partnerships, or M&A, we'll assess each equally and make sure we're focused on the one with the strongest ROI. Eugene can get into just specifics on which technologies and markets we're focused on today.

Eugene Levin (President)

Yeah, I think in general, we're always looking for opportunities to accelerate our R&D roadmap and get faster, you know, from A to B, and sometimes M&A is the best way to get there. We have very robust product roadmap. We effectively talk to our engineering teams, and if we see something that is a heavy lift, and there is an opportunity to get it through acquisition, and the team is great, and there are a lot of synergies and chemistry, and the financial terms are reasonable, or, you know, like in recent examples, attractive, we pull the trigger, and we would like to do partnerships and acquisitions when they make sense.

Adam Hotchkiss (VP, Emerging Software Equity Research)

Really helpful. Thanks, Brian. Thanks, Eugene.

Operator (participant)

This is the end of the Q&A session. I'd now like to hand back to the management team for closing remarks.

Eugene Levin (President)

Thanks, everyone, for joining us today. We delivered a strong Q2, exceeding our guidance and positioning us to raise our full year 2024 guidance. We continue to expand our portfolio of products, and I'm very excited about our ability to move upmarket and the direction of our recently released SEO enterprise products. We continue to expand our leadership position in the online visibility space and are succeeding in combining strong, durable growth with improving profitability and free cash flow generation. We hope to see many of you at our upcoming Analyst Day on October first in New York City. Thanks, everyone.

Operator (participant)

This concludes today's call. Thank you for joining. You may now disconnect your lines.