Similarweb - Q2 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Similarweb Q2 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.

Raymond Jones (VP of Investor Relations)

Thank you, operator. Welcome everyone, to our Q2 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 23 March 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, 9 August 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 reference 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 non-recurring 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.

We will open up the call to questions from sell-side analysts in attendance. Please note that we publish a detailed discussion of our Q2 2023 results in the letters 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.

Or Offer (CEO)

Thank you, RJ. 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. Our average customers 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 path to profitability. Our non-GAAP gross margin was nearly 80% again, and our Q2 non-GAAP operating margin showed a strong improvement of 35 percent 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. At the same time, we see that enterprises 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 fit their corporate budgets while remaining a Similarweb customer. Despite this, our low 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 visitors will use our free tools this year. This is truly remarkable achievement for our marketing organization. Our product team have been working on new feature in our solution that will provide more value to our customers. We have an exciting list of release coming up in Q3. One of them is called Similarweb 3.0, which is a new way of how we package our offering that include new data, insight, and navigation, and will 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're solving one of the hardest problem every insight and analytics softwares have, that is the ability to find insight in the data quickly and action them. 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 AI capabilities will be like having a conversation with the world's most effective and talented market researcher, analyst, strategy consultant, and data scientist combined in one.

The AI can give answers to critical business question instantly. This will 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.

Jason Schwartz (CFO)

Thank you, Or, and thank you to everyone joining us on the call today to discuss our Q2 results. I will briefly address our financial performance, and then we'll open up the call to questions. Our results in the Q2 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 Q2 of 2022. 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 Q2, we saw 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 continued to exceed expectations on our bottom line. Our Q2 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 to 54.5 million. For the full year, we now expect total revenue in the range of $216 to 218 million, representing approximately 12% growth year-over-year at the midpoint of the range. Non-GAAP operating loss for the Q3 is expected to be in the range of $2.8 to 3.2 million, and for the full year, between $16 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 Q4 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.

Operator (participant)

At this time, we will conduct the question-and-answer session. If you would like to ask a question, please press star, then the number one on your telephone keypad now, and you will be placed in the queue in the order received. Once again, to ask a question, please press star, then the number one on your telephone keypad now. Our first question comes from Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia (Partner and Co-Head Tech Equity Research)

Perfect. Thank you guys so much for taking the questions. I know, you 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, and linger for a bit. Or, or Jason, can you touch on what the common paths are that customers are taking to reduce spend? Are they cutting products outright? Are they reducing volume? What, 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 2024, how are you positioning yourself with those customers so that you can re-expand as budgets start to come back and as macro stabilizes?

Or Offer (CEO)

Hi, Arjun. Good to hear from you. It's Or. Thank you for the questions. I think the, to answer the question, we need to look on the different lines of business that we have. We, we have few different products we sell to, to a few different use cases. 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. There, when you, when you have reduced budget, it's mostly because the company's been through a round of layoffs or reducing force. Then because this product is seed-based, so usually, the spend is, is going down.

So if you look at different example of the products, the Stock Intelligence, when we sell alternative data for investors, some investors decided to invest less in tech or into digital companies and decide to shift their investment strategy into gold and oil, there is where our data is less available, so they're reducing some of their consumption. This is just examples.

Arjun Bhatia (Partner and Co-Head Tech Equity Research)

Okay, got it. What, I know last quarter we had, we had just talked about pricing packaging changes. What have you seen, you know, as you've kind of just bundled, some, some of your products together? Any early kind of feedback that you've seen from the pipeline, the top of funnel, as a result of some of those changes, that you've made, or are you seeing anything yet, or is that still to come, in future periods?

Or Offer (CEO)

Yeah. We launched the change a quarter ago in, into 1 team as a pilot, and it was very successful. I think a month ago, we launched it globally to the entire go-to market. The feedback is good. It's really simplified the mental model of how you price and how you align with the value. I think it's, it's really drive more success in, in, in win rates. Hopefully, maybe shorten the sales cycles. It got longer in the past few quarters.

I think also there's going to be a nice opportunity for migration. It's always a good opportunity to go back to some of the current customers that are up for renewal and presenting them the new pricing and mental model, and then it's like you can migrate them to this new version. It's also a good time or maybe to have some opportunity for upsell. This is what I hope will happen.

Arjun Bhatia (Partner and Co-Head Tech Equity Research)

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

Or Offer (CEO)

Thank you.

Operator (participant)

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

Steve Roman (Analyst)

Hi, this is Steve Roman on for Jason. Thank you for taking our questions. First, sales cycles and payback periods have been longer than average for the past few quarters. What changes have you tried or, or made to try to shorten these? Have you seen any change quarter to date in that, or same trend as in Q2? Similarly on marketing, do you anticipate leverage in S&M or having to make headcount reductions to reach that Q4 guidance, or is that not necessary? Thank you.

Jason Schwartz (CFO)

Yeah, 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. On the sales cycle, look, we're seeing the sales cycles are still longer. Or mentioned, you know, talked about how businesses are still struggling with the macro environment and managing their budgets through the year. 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.

Steve Roman (Analyst)

Okay. Thank you very much.

Operator (participant)

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

John Byon (Analyst)

Hi. Thank you. This is John Byun on behalf of Brent Thill. Maybe one more question on, on, on the macro. Any differences you're seeing in behavior between, you know, your very large enterprise customers and somewhat small and mid-market? You know, any signs of maybe loosening in the first, you know, 5 weeks of this quarter versus Q2?

Or Offer (CEO)

Yeah, there, there is a bit change in, in behavior in a way. We see more pressure on the small accounts and in the very, very big and, and corporates, we see more pressure, more stress about showing optimization on budgets. It's like in the edges, very small companies and very, very big corporates.

John Byon (Analyst)

On, on SimilarAsk, I mean, that looks very interesting. I'm wondering, you know, how far along you are with the development on that beta? You know, is there, you know, prospect for, for going GA this year, or is it something more like you're looking at next year? Thank you.

Or Offer (CEO)

So the good news, it's already live in the platform, and our people and some of our better customers have already been lucky enough to engage and use this capability of free text and, you know, discover insight like that much faster. It's very exciting when you play and understand all the capabilities around the unlock of opportunities here. And we're gonna be launching probably in the next week or so to the entire paying customers, and it's only the beginning. I think the more we play and integrate, discover, more we use this, more creating values and to give to our customers. It's, I think it's only the beginning of really great relationship.

John Byon (Analyst)

Great. Thank you.

Operator (participant)

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

Tyler Radke (Managing Director and Senior Equity Research Analyst - Software)

Yeah. Hi, good morning. Thanks for taking the question. I wanted to ask you just some of the trends you're seeing across industries. You know, we've heard from some others this software reporting season, you know, the tech vertical remains under pressure. If you could just kind of highlight the differences in demand patterns and where you're seeing the longer sales cycles play out, either by product or by industry. Thank you.

Or Offer (CEO)

Yes, I think it's correlating to, to what I answer before to Arjun Bhatia. For example, tech industry, it's mostly B2B companies that we saw there, and that's buying our solution, and they're usually buying our sales solution. That is, as I said before, there they didn't, they didn't lay off and reducing force. They invest all vertical solution. You know, some of them are adjusting their investment strategy, and so investing, investing, investing tech. Then you see, you see there the dynamics and then, you know, maybe the ACV go a little bit down or close deal go. These I think, so you see mostly in tech sector, as I said, and the investor sector.

The other thing, the retail CPG looks strong also by if, I think another nice, that we see that Europe is, is better, and Europe is doing, is doing well. China, we start seeing a little bit slowness, but overall, all the rest is kind of the same.

Tyler Radke (Managing Director and Senior Equity Research Analyst - Software)

Helpful. Just wanted to, to unpack the expansion headwinds a bit more specifically on, you know, net retention. It looks like that ticked down pretty meaningfully. You know, wanted to see if you had visibility into where, where and when that troughs, and then specifically, are you seeing any pricing pressure, in addition to down sales, you know, in terms of reduced fees or, or capabilities? Thank you.

Jason Schwartz (CFO)

Yeah. Thanks, Tyler. I think what we're really seeing over there is that budget pressure that our customers are feeling. That impacts not only, you know, their current spend with us, but also our ability to expand with them. Those, 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 install 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 gonna continue to provide us that lifetime value of those customers.

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

Operator (participant)

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

Pete Newton (Research Analyst)

Hey, thanks for taking the question. This is Pete Newton on for Ryan MacWilliams. I'm really pleased to see the profitability improvement and the operating leverage in the model. Just on the AI front, how do you foresee generative AI enhancing Similarweb as a unique data asset? Can it help you guys capture and process even more available data on the internet?

Or Offer (CEO)

I, will answer the AI one, and I'll let Jason answer the financial one. I think your question is very interesting because we did try to and play with AI to answer the lot of, let's say, see a lot of insights in the data, and trying to understand what caused, for example, those spikes you see. 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. We can go and understand what happened in the, in the same day by looking on the data that's available online.

There is a lot of use case when you can see that the AI is, is like a, can, you know, closing the bridge between the data we show the insight and what happened in the open web. There's a lot of great application around that. Jason, you want to answer the, the first question you had?

Jason Schwartz (CFO)

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

Pete Newton (Research Analyst)

Yep, and then just, there's 2 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, an, a next year phenomenon as customers reset budgets, or do you have any expectations for that this year?

Or Offer (CEO)

I think that there will need few, I would say, months or quarters of integration with the feature we build using with the AI. There's a lot of innovation, and very curious to see how what will get adapt in the end. Even now with this free text box that we released, and we start seeing what people are searching. It's gonna be very interesting to see if it will adapt, if people will really use that as a search engine, and will change the way they behave and how they analyze data, other than going over tables and graphs, they will just search in the search box. It's gonna be interesting to see. Then you need to iterate. I think you need a few quarters of iteration.

You launch, the first version out, you see how they are using it, how, if it get adoption or not, there going to be some iteration. But I think that by the end of the year, companies will able to discover what are the best use case to leverage AI into their capabilities, and only next year to really get into the starting really the value and the acceleration of value extraction from using that.

Pete Newton (Research Analyst)

Okay, that's helpful. Thank you. 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?

Jason Schwartz (CFO)

Yes, for sure. I think that a lot of the, the, the unit economics that you're seeing are that the, our existing book of business, we're able to drive 50%-55% contribution margin on that. I think that that is the, the flywheel that, that continues to, to fund the business. With the improved macro environment, y-we should see the, the, CAC or the cost of, of acquisition going back to the historical trends, 15-16 month payback, as opposed to what we're seeing now, which is more like 19-20 month payback.

Pete Newton (Research Analyst)

Very helpful. Thanks, guys.

Operator (participant)

Once again, to ask a question, please press star then the number one on your telephone keypad. Our next question comes from Noah Herman with JP Morgan. Your line is open.

Noah Herman (Research Analyst)

Hey, hey, guys, thanks for taking the, the questions. You know, 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, by the end of this year. I'm, just curious, you know, you know, how should we think about maybe the, you know, that acting as a potential lever to convert more customer additions throughout the year? Also too, I mean, do these customers also have access to the, the new Similar Ask tool that you've launched? Could that also act as a potential pricing lever with, with those customers, longer term? Thanks.

Or Offer (CEO)

Thank you, Noah. Just to explain the announcement, we are now having more than 25 million unique visitors per quarter, we're forecasting that during the next few quarters, we're gonna be growing a little bit. That we're gonna have, in 2023, overall for the year, 100 million people using our free tools. It's a very big exposure to Similarweb, the brand capabilities, understand of the technology we provide, also the digital intelligence. This is what make 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.

For big, I think that we have big audience out of those 25 million people that registered to try the paid version, that you get a free trial. Right now, the SimilarAsk is only open to beta customers, and next week will be open to our paid customers. 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 able to see and try it by themselves.

Noah Herman (Research Analyst)

Got it. Thank you. Then just a quick follow-up on it's great to see the, the improvement on the, on the bottom line, and you know, obviously, still some, some challenges with expansions, but I guess just putting the, you know, the macro headwinds aside, I mean, how, how should we sort of think about, you know, at this point, the, the normalized top line growth for, for the business, that, you know, hopefully starts to, you know, see, you know, going into, going into next year? Thank you.

Jason Schwartz (CFO)

Yeah, I think we're gonna be, we're gonna 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 starts shaking out in over the course of the next, you know, three months. We still think that the need and the uniqueness and value that we bring with Similarweb digital data, is what gonna be, is what is gonna drive that, that growth. Ultimately, what we're committed to is that efficient growth, we are, have the conviction that we will be sustained, free cash flow positive starting in Q4 and going forward.

Operator (participant)

At this time, there are no further questions. This does conclude today's Similarweb Q2 fiscal 2023 earnings call. Thank you, everyone, for attending, and have a wonderful rest of your day.