Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semrush Holdings third quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the call over to Bob Gujavarty, Vice President, Investor Relations. Please go ahead.
Good morning. I'm Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings Q3 2021 results conference call. We'll be discussing the results announced on our press release issued after market close on Tuesday. With me on this call is our CEO, Oleg Shchegolev, our CFO, Evgeny Fetisov, and our CSO, Eugene Levin. A summary of our prepared comments are also available on the official Semrush Twitter account, @semrush. Before we begin, I would like to highlight our participation in several virtual investor conferences to be held during the fourth quarter. We'll attend the Stifel Virtual Midwest One-on-One Growth Conference on November 11 th and the RBC Technology Global TMT Conference on November 16th. Today's call will contain forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning our expected future business and financial performance and financial condition, expected growth, adoption and demand for our products and features, expected investments and their anticipated benefits, industry and market trends, our competitive position, market opportunities, and our guidance for the fourth quarter of 2021 and the full year 2021, and can be identified by words such as expect, anticipate, intend, 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 those forward-looking statements.
For a discussion of the risks and important factors that could affect our actual results, please refer to our final IPO prospectus filed with the Securities and Exchange Commission, our quarterly reports on Form 10-Q, as well as our other filings with the SEC. Also, during the course of today's call, we refer to certain non-GAAP financial measures. There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available on our press release issued after market close, which can be found at investors.semrush.com. With that, let me turn the call over to Oleg.
Thank you, and good morning to everyone on the call. I'm pleased with our performance in the third quarter. Revenue of $49.3 million was up 53% year-over-year and up 9% sequentially. Our paid customers grew approximately 23% year-over-year, while the average revenue per customer grew by more than 20% year-over-year. I wanted to once again highlight the breadth of our product offering, as I believe this is key to our growth strategy. As part of our repackaging efforts in January, we raised prices for entry-level plans, but we reduced pricing for incremental user licenses as we look to deepen our relationship with our customers. The strategy appears to have been successful. As of September 30th, 2021, year-to-date, year-over-year user licenses growth was more than 80%.
The user license growth contributed to strong growth in customers who pay in excess of $10,000 annually. These $10,000 customers were up more than 75% year-over-year in the third quarter. I would also highlight the continued strength of Semrush .Trends, our industry-leading competitive intelligence add-on. Semrush .Trends revenue was up more than 70% in the third quarter compared to the same period a year ago. We introduced a look-ahead feature in .Trends this quarter, which updates forward traffic estimates weekly. I believe this capability is unique to Semrush .Trends, and that it could further position us as a leader in the competitive intelligence space. Semrush is fortunate to not have any customer or industry concentration. However, digital marketing agencies represent an important channel for us.
We estimate 20%-25% of our customers are digital marketing agencies, and we introduced our Agency Growth Kit add-on to help these customers grow their business. I am pleased to report that Agency Growth Kit attach rates are approaching 5% for agency customers only 12 months after launch. I'm optimistic that attach rates for Agency Growth Kit will only continue to grow as nearly 25% of our agency customers have expressed interest in the product by registering at our Agency Growth Kit client portal. We continued to fill out our executive team as Andrew Warden joined Semrush as our Chief Marketing Officer. Andrew is very familiar with our platform and the marketing technology industry, having served in a variety of marketing roles previously to joining Semrush, including prior experience as a CMO.
Our growth strategy incorporates increased investment in brand marketing, and I am pleased to have a seasoned professional like Andrew on board to help guide those efforts and ensure they have a positive impact to our growth. Semrush is gradually implementing a return to the office where public health conditions allow, and we look forward to meeting more of our investors face-to-face in 2022. If you would like to arrange a meeting in Boston with our team, please reach out to Bob and he can coordinate. In conclusion, I am pleased with our performance in the third quarter. We extended our product leadership and the strong growth in average check and robust user growth suggests that our products are becoming more essential to our customers. Looking ahead, we must stay focused on execution to end the year on a strong note.
With that, I will hand the call to Evgeny for a recap of our financial performance.
Thank you, Oleg. Q3 revenue of $49.3 million was up 53% year-over-year and came in above our expectations. Growth was once again driven by a steady increase in paying customers and an increase in the average revenue per customer. We experienced average revenue per customer growth of more than 20% in the third quarter as compared to the year ago period. The growth was driven by additional user licenses, a richer mix of core and business accounts, and strong growth of add-ons. Our trailing twelve-month revenue retention was 124% as of September 30th, up from 121% as of June 30th. The increase continues to reflect easy comparisons due to COVID in 2020. I believe we will see some moderation in revenue retention as those easy comparisons abate.
However, in achieving a modest decline, I believe Semrush will continue to produce industry-leading revenue retention for software firms servicing small and medium enterprise market. Gross margin of 76.9% was down slightly from the previous quarter and up from 76% a year ago. Non-GAAP operating expenses of $37.6 million in the quarter were up 47% from a year ago and up approximately 10% from the previous quarter. The growth was driven by additional headcount as well as increased marketing spend.
We plan to make additional investments in brand marketing in the back half of 2021, and these investments drove the majority of the sequential increase. Those investments are expected to extend into the fourth quarter and into 2022. Strong revenue growth was offset by slightly lower gross margin and higher operating expenses and contributed to a non-GAAP net income of $12,000 in the third quarter, up from a net loss of $778,000 a year ago. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $188.5 million, up from $180.8 million at the end of the second quarter. The increase in cash was primarily due to approximately $8.6 million of cash flow from operations.
The third quarter was another strong quarter of cash generation, and I expect cash flow to moderate in the fourth quarter due to increased investment into marketing and sales. Looking ahead to guidance, I expect fourth quarter revenue in the range of $51.8 million-$52.3 million, representing 42%-43% year-over-year growth. For the full year, I expect revenue in the range of $186 million-$186.5 million, which would represent 49% year-over-year growth. Increased investments primarily driven by higher spending in marketing are likely to weigh on profitability, and therefore, I expect a fourth quarter non-GAAP loss of $5.5 million-$5 million and a non-GAAP loss of $3.5 million-$2.6 million for 2021.
We achieved another quarter of strong revenue growth and our third consecutive quarter of non-GAAP net income. Cash flow rebounded strongly, and our financial performance puts us in a position to make the appropriate investments to support our growth in 2022 and beyond. With that, Oleg, Eugene and I are happy to take any of your questions. Operator, please open the line for questions.
At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile our Q&A roster. Your first question comes from the line of Brent Thill with Jefferies. Your line is open.
Great. Hey, guys, this is James on for Brent. Thanks for the questions. Could you talk about bringing on Andrew Warden to run marketing and just what his strategic objectives are on the go-to-market side? Should we expect any changes to your sales structure, or should we assume any, everything just stays relatively intact? That's my first question. My second one is I know you're not providing specific 22 guidance yet, but can you talk about the puts and takes for revenue growth next year? Are there any big drivers that we should be considering? How should we be thinking about the mix of subscriber versus average check? Thank you so much.
Thank you. I will take the first question related to our new CMO, Andrew Warden. My name is Oleg. Look, we don't expect any kind of significant changes in our go-to-market strategy. We should continue the same way. This quarter shows us what we are very good with our marketing and sales strategy. At the same time, we should prepare ourselves for 3-5 years future. We want to start more branding campaigns. We want to give more attention to brand marketing. We started many experiments with video advertising, and we want to continue with video advertising even more. I think Andrew Warden would be a great addition to our team. Next...
Yes. This is Evgeny. I'll take the second question, James. On revenue guidance, I believe it's slightly too early to talk about the next year full year's numbers. We will provide you more clarity on our next call in February. However, I can say that we plan to continue to be high grower. We'll continue to focus on adding more customers plus expanding our average check, basically in line with how we were working this year. I guess that's the level of detail I will be able to provide. Then Eugene, right?
For the next year, we think that in terms of comps, first half of the year is going to be a little bit easier when it comes to growth of average check, and then second half is going to be a little bit easier when it comes to growth of users. That's directionally how you can use this information in your models. But we'll provide more details later.
Great. Thank you.
Your next question comes from the line of Michael Turits with KeyBanc. Your line is open.
Hey, guys. Congrats on the quarter. Just a couple of questions on how things progressed through the third quarter. On the one hand, you did point out that on NRR that you're starting to see tougher comps there, and or you will into the future as we come past some of the COVID bounce, if you will. I was wondering how that played out in the third quarter, combined with what may have been, if there was any seasonality from activity levels as we hit the summer and back to the office and just general levels of project. I would say that as we looked at, say, you know, some of the bigger MarTech companies, we saw just that fall off from that accelerated growth to slight deceleration.
Yeah. Michael, this is Evgeny. I'll try to pick up this question. What we saw in the first half of the year were clearly a, I would say, accelerated growth and which will not be typical, and we didn't see the typical seasonality. What we saw in the second half of the year, or we continue to see in this third quarter in particular, is actually a return to the more normal patterns, which the numbers we're seeing are fairly much in line with what we expected them to be at the beginning of the year. That's probably corresponds to what you were seeing across the board. I mean, elevated first half of the year and more normal second half of the year.
Good. Thanks. Evgeny, I was wondering if you could, you know, you guys talked a little bit about pricing and those two different factors of the price increase, but also the price reduction in incremental seats. Can you talk a little bit if you can quantify the impact of each of those?
We could quantify the earlier in the call. We see an accelerated adoption of additional user licenses or seats by our customers. Net-net with lower prices, we're seeing a higher touch rate and higher revenue from this particular, I would say, feature. And then overall, we see a supportive. I mean, part of the growth in the average check, just part is driven by higher, like new customers coming at the new price. Plus, there is a fraction of the increase, which is driven by our existing customers migrating to the new price plans when they upgrade. There is a positive-
Just-
I'm sorry, go ahead.
Yeah. Just to be clear, it seems like you're getting demand elasticity, if you will, out of the reduction in incremental seat price, where it is driving more revenue even at a lower incremental price.
Absolutely. That's correct.
Thank you.
Your next question comes from the line of Mark Murphy with JP Morgan. Your line is open.
Great. Hey, this is Pinjalim. I'm sitting in for Mark. Congrats on the quarter. I wanted to ask at a high level, what are you hearing from your customers in terms of how they're evolving their marketing budgets, given all the uncertainties around IDFA and cookies? Are you seeing them lean more towards organic marketing, which could maybe act as a tailwind for your content marketing solutions?
Yeah. Thank you for the question. This is Eugene. It's a big part of the conversation that we are seeing in the marketing community, and people are trying to figure out what is the right path forward. In general, what we have done so far, we did a small scale survey and asked our customers about how they're planning to address changes in the marketplace and how they're planning to reallocate the budget. Now, within our customer base, we've seen that most of people saying that they will sort of double down on their investments in organic search, paid search, and content marketing.
Those have been sort of top three gainers in their budget. Surprisingly, number four was Facebook ads. People still have more faith in Facebook ads than in things like programmatic advertising or retargeting. Those are our conclusions so far. Now, I have to comment that it's really a small scale study, and it's only our customer base, which is a fraction of, you know, total market. That's what we are seeing within our user base. That's how they address changes in the market.
Understood. Just to follow up on Evgeny maybe on the net new ARR side seems like it was a little bit muted. Is that mainly a function of pull forward of business into the first half from the second half? Or are you seeing any potential impact on marketing budgets from the supply chain uncertainties or any other macro uncertainties when you're talking to customers?
Right. I think you're right. This is Evgeny. It's more of a, I would say, pull forward or I would say higher, like higher base of the first half of the year. It's a little bit tough comparison. Again, as I mentioned, that was a abnormal seasonality where we wouldn't, we would not be expecting it to be as high a year ago, but, now we're again coming back to normal. I think it's like the former.
Got it. Thank you.
Yeah.
Your next question comes from the line of Mauro Molina with Piper Sandler. Your line is open.
Hi. Good morning. Just hopping on for Brent Bracelin here. Thanks for taking our questions. Certainly one thing that stands out here is that 20%+ growth in revenue per customer. We were just hoping to get some color on, you know, what strategies you're using, that are proving to be most effective in driving those license upsells and those add-on upsells, in terms of driving that revenue per customer number. Then I'll have one follow-up.
Thank you. This is Oleg. First of all, such focus on revenue per customer, it was on our side all the time. We thought about initiatives, about additional products, about what we should do on marketing and sales side to improve it. In the third quarter, we gave additional focus to experiments on sales side. We added product-oriented goals for our sales, and it was very successful. Also, even in our marketing, we started some experiments related to such expansion and I feel very optimistic about such experiments in future.
Got it. Thank you.
And, uh-
Oh, sorry.
No, yeah. I just wanted to add that, one more thing that we are doing is, we are investing a lot of effort into personalization technology, so we can understand what particular products will be good fit for a particular customer and, highlight this up front for our sales team. So that sort of increases efficiency when they reach out to customer to pitch particular product, they already know, that this customer could be interested and they know why this customer could be interested. So those are just, couple extra, highlights of what we are doing, to boost our revenue per user.
Got it. That's really helpful. Would it be possible to get a, you know, an update on the social media marketing tools? Anything you can call out there in terms of user adoption and maybe some color on how you've seen active users trend for that solution? Thank you.
This is Eugene. In this quarter, we had very high growth in number of free active users. That was driven primarily by two products. One of them is Backlink Analytics that we made for free with some limitations for large portion of customers. That attracted a lot of customers at the top of the funnel. Then we continued offering free Social Media Toolkit with also some limitations, but largely free. That also have been driving this number of free active users up. In general, we had more than 500,000 free active users, which was an increase of 28% quarter-over-quarter. We're definitely investing a lot of effort into generating top of the funnel for the future growth.
Got it. Thank you.
If you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from the line of Parker Lane with Stifel. Your line is open.
Hi, it's Max Osnowitz. It's on from Parker Lane. Staying on that topic right there, just thinking about the new customer acquisition, maybe free and paid users, is there any specific feature that's driving that outside of search engine optimization? I know you kind of alluded to it there, but maybe paid instead of free.
Yeah. As I pointed, Social Media Toolkit are having great traction with sort of new free customers. We continue expanding functionality and adding new features there. Those products become even more attractive. As you can see, this traction happens across many different products, not just search engine optimization or search engine marketing. We will continue adding new verticals to our portfolio of free products. I think it's very important to focus on this kind of newer generation of future marketers that are very early in their journey, and maybe they're not ready to buy premium paid products, but they need something to guide them in today's environment, and we are happy to be the company that provides them those free products.
When they become more experienced and ready to make a next step, we want to be the company that sells them their first paid product.
Got it. Just thinking different ways of expanding. I know you guys are now have local listing tools in Canada, and its availability is in six countries. How should we think about the coverage of that tool from a population and addressable market standpoint? Are there any additional countries that we should expect it to roll out to over the next year?
Thank you for the question. Adding Canada was a big milestone just because a lot of our customers in the United States, they also have branches in Canada, so that was pretty essential. In general, today, we cover our most critical English-speaking markets with this product. We will definitely keep expanding into new geographies as those geographies get more mature. Right now, I would say in the developing world, there is maybe not that much need in those products, so that's why they're not the highest priority. As those markets mature, we will be adding them to Listing Management products as well.
This is Bob. I just add the incremental color. We've seen a very strong response from Canada. It's early days, but good response from that expansion.
Got it. Thanks, guys.
There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.