Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Semrush Holdings Q1 2022 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 during this time, simply press star then the number one on your telephone keypad. To withdraw your question, please press star one again. A transcript of the prepared remarks will be available at investors.semrush.com after the call. Thank you. Bob Gujavarty, VP of Investor Relations, you may begin.
Good morning. I'm Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings Q1 2022 results Conference Call. We'll be discussing the results announced in our press release issued after market close on Tuesday. With me on the call is our CEO, Oleg Shchegolev, our CFO, Evgeny Fetisov, and our CSO, Eugene Levin. Before we begin, I'd like to highlight our participation in several investor conferences in Q2 . We'll attend the 17th annual Needham Technology and Media Conference in New York City on May 17, the New York Stock Exchange Healthcare and Tech Investor Day on June 8, and the Stifel 2022 Cross Sector Conference in Boston on June 9. 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 acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for Q2 of 2022 and the full- year 2022, and our ability to successfully relocate employees outside Russia, including executing our relocation plan on the timeline we expect and at the anticipated cost. 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 these forward-looking statements. For a discussion of the risks and important factors that could affect our actual results, please refer to our annual reports on Form 10-K, 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 today's call, we'll refer to certain non-GAAP financial measures. There's a reconciliation schedule showing the GAAP versus non-GAAP results currently available in 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 very pleased with our execution in Q1 . We delivered solid financial results with revenue up 43% year-over-year and record new customer additions. Before diving into the results, I would like to speak about our decision to wind down our operations in Russia by the end of September. The sanctions were first announced by the United States and other countries. We quickly developed mitigation strategies and hoped that the situation would get better and would not last long. However, it has become clear that there is potential for a long conflict and further decline of the business environment in Russia. Looking at our performance in Q3 , it's clear that Semrush is doing well despite all the uncertainty.
However, we need to prepare the possible new sanctions and reduce the potential impact to our operations. I believe ending our operations in Russia will not only help us to reduce these risks, but help remove the uncertainty for our stakeholders. Early indications are that a large majority of eligible employees will relocate outside Russia. The high- level of employee buy-in and our broad experience managing remote workforce should help minimize disruption through the relocation process. Our goal is to wind down our operations in Russia by the end of September, but I'm hopeful that we can accelerate that timeline. The decision to leave Russia was a difficult one. It's a decision that comes with human and financial costs. We believe this is the correct decision and best for the long-term success of Semrush.
We hope for a rapid and peaceful resolution to the conflict in Ukraine, but our plans to exit should leave us better prepared in case the conflict gets worse. Now to the results. We had a solid start to the year. Q1 revenue of $57.1 million was up 43% year-over-year and up more than 6% sequentially. Our first brand marketing campaign launched in mid-March. It's too early to make conclusions, but I'm inspired by the initial results. We added more than 5,000 paid customers in the quarter, a new record, and the growth was strong, extending beyond our largest markets. These are very uncertain times in the business environment now. We are gaining new customers and see trial subscriptions growing at a great pace. It gives us confidence in our growth outlook for 2022.
On the product side, I wanted to call out the performance of our App Center. Last quarter, I mentioned that the AdClarity app exceeded $100K of growth bookings. In less than three months, I'm glad to report that App Center added $1 million of gross ARR in Q1 . The majority of growth was driven by a single app, AdClarity. I believe the growth of our App Center is proof that our platform approach will provide us with a competitive advantage- related to point solutions providers. I have asked the team to accelerate the availability of new third-party apps and for our marketing teams to promote them more effectively. Looking at our pipeline today, I believe the number of third-party apps will more than triple by the end of 2022.
We closed the acquisition of Kompyte in Q1 , and I am excited about the potential of adding new sales enablement and intelligent functionality to our industry leader, .Trends product offering. The Kompyte team is growing. We plan to advance their product, but also to offer new products that we can cross-sell to Semrush platform customers. In conclusion, we delivered solid financial results and record customer growth despite all the uncertainty in the market. I will now turn the call over to Evgeny for a more detailed recap of our financial performance.
Thank you, Oleg. Q1 revenue of $57.1 million was up 43% year-over-year and up more than 6% sequentially. Growth was largely driven by an increase in the number of paying customers, while we continue to see an increase in the average revenue per customer as well. The combined acquisition closed in late March and therefore was immaterial in our Q1 results. Our dollar-based net revenue retention was 127% as of March 31, up slightly from 126% as of December 31. I expect revenue retention to moderate in 2022 as the base effect of easy comparison wanes. I expect to see a gradual decline in the metric beginning next quarter and extending through the remainder of 2022.
Gross margin of 79.8% was up 170 basis points from a year ago and up 140 basis points from the previous quarter. We saw some benefits in COGS, primarily due to the lower third-party costs. However, I would expect gross margin closer to 78% for the remainder of the year. Non-GAAP operating expenses of $47.1 million in the quarter were up 62% year-over-year and up a more modest 5% from the previous quarter. Not surprisingly, the largest increase year-over-year was in G&A, driven primarily by public company costs. Sales and marketing was $25 million in Q1 , up 56% year-over-year and down slightly from the previous quarter. As Oleg mentioned, we launched our brand marketing campaign in March.
We delayed the launch by several weeks due to the conflict in Ukraine, and as a result, some of the marketing spent in Q1 will be incurred in Q2 . Research and development was $8 million in Q1 , up 51% year-over-year and 20% from the previous quarter. The sequential increase was driven by a reduction in capitalized product development costs, while the year-over-year increase was driven by headcount growth as we continue to expand our R&D teams with a focus on Western Europe. G&A spending of $13.7 million was up approximately 80% year-over-year and up 8% from the previous quarter. The sharp year-over-year increase is related to public company expenses as the year-ago period and the company had just completed an initial public offering.
Strong revenue growth and higher growth margins were more than offset by higher operating expenses and contributed to a non-GAAP net loss of $1.6 million compared to a non-GAAP net income of $2.1 million a year ago. This is an improvement from the non-GAAP net loss of $2.9 million in Q4 . Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $260 million, down from $270 million in Q4 . The decrease was largely driven by $40 million paid for Backlinko and combined acquisitions, which was partially offset by $8 million of cash from operations. I'm very pleased with our cash generation this quarter.
Despite an increase in spending and larger operating loss, cash flow from operations was down only slightly from a year ago. Over the last four quarters, the company has generated approximately $23 million of cash from operations even as we have investments in support of the business. Looking ahead to guidance. I expect Q2 revenue in the range of $59.5-$60.5 million, up 33% year-over-year. For the full- year, I expect revenue in the range of $249-$251 million, which would represent growth of more than 33% year-over-year.
Winding down our Russia operations will result in incremental cost in 2022, and as a result, we expect a Q2 non-GAAP loss of $9 million-$8 million and a non-GAAP loss of $46 million-$44 million for the full- year 2022. The high incremental loss is almost entirely due to the relocation of our employees out of Russia, while stepped up investments in Kompyte is a contributing factor as well.
We delivered solid financial results in the Q1 with record revenue and gross margin. More significantly, we added more than 5,000 customers, which gives us confidence in our outlook for the revenue growth well above 30% in 2022. The winding down of our Russia operations comes with costs in the short- term, but we believe it is the best path forward for all of our stakeholders, including employees, customers, and shareholders. With that, Oleg, Evgeny, and I are happy to take any of your questions. Operator, please open the line for questions.
I'll just remind everyone, if you'd like to ask a question, please press star then one on your telephone keypad. Our first question is from Michael Turits with KeyBanc. Your line is open.
Hey, guys. Congrats on putting up some good numbers, especially on the ads. First, on the ads, can you tell us where, you know, if you could give any sense for what really drove those? Then I'll just throw in my follow-up questions, which are really on the relocation. Can you just run through the details on that in terms of just review with us the total number of your head count, the number of employees in Russia, what the specific costs for moving them are, and what you expect that schedule to be like, what the risks are there?
Thank you. This is Oleg. Look, we are happy with such 5,000 new paid customers during Q1 . I think it's connected to many experiments which we finished in the past in Q4 . At the same time, in Q1 , it was very great supporting buzz around our acquisitions. We received very great support from our audience, from our experts. Look, even we started our new brand marketing campaigns in mid-March. At the same time, I believe before it was enough experiments- related to that.
I believe we have impact from it. Second question, Eugene, please.
Hi, Michael. On relocation costs, or starting with the overall number of employees, we had about 800 people in Russia, and about 85% of these people will relocate. The relocation costs will consist of travel, accommodation, and relocation bonuses. That's basically will be the core components affecting those one-off expenses.
Okay. Just to review just where you were totals of in terms of total head count.
Our total headcount is 1,200-1,300 people.
Then just one. If I can squeeze one more in. You know, again, you raised by about $23 million your operating loss for the year, $15 million in costs from the relocation. You also raised I think by about $4 million on revenue. Slightly higher in terms of the net expense increase. What are the— what's the increase in expenses above and beyond the Russia relocation costs, which frankly come out after you raised expenses last quarter for the brand campaign?
Yeah. Michael, the difference is explained by our expectations that people who would move to the higher, I would say more expensive locations will be getting higher salaries. That's our preliminary expectations of the higher run rate for different costs which we'll incur of people staying in Western Europe.
That's separate from the actual relocation cost. That's just like, okay, now you're in a more expensive cost of living environment. It's gonna.
Yeah.
Be a cost there.
That is correct.
Okay. All right. Thanks. I'll yield. Thanks.
The next question is from J. Parker Lane with Stifel. Your line is open.
It's actually Parker Lane at Stifel. Thanks for taking the questions. Guys, wanted to get a little more visibility on what's going into the brand marketing campaign that started in March. You know, you obviously had very strong net adds, and you're expecting that strength to continue this year. What does that brand marketing campaign look like? What are some of the key components that we should be aware of?
New marketing campaign is more focused on value. I think in the past in our marketing campaigns we were more focused on our product offerings and product features and so on. Right now we want to address a much larger market. Because of that we want to talk more about value of what our customers can get from it without talking about features. Most focus on value, not on features, not on product.
Got it. Understood. Just so we're clear, as far as those employees that are relocating, can you give us a sense of, you know, what roles they were serving in, inside of the organization, and are those going to remain, the same upon relocation?
Yeah. Sure, Parker. The majority of those will be developers. They'll be marketing people, finance, and admin, so I mean, and some salespeople. It's a different mix of the functions which we had in the Russian location.
Got it. Appreciate it. Congrats again on the quarter.
Thank you.
The next question is from Scott Berg with Needham. Your line is open.
Hi, everyone. Congrats on the nice sales quarter, and thanks for taking my questions here. I guess a couple of them. We've been doing some recent work in the space, and one of the things or items that came up was your ability to sell upmarket and scale where other competitors have not scaled well in terms of functionality. If you look at your 5,000 customers that you signed in the quarter, how should we think about the distribution of those customers kind of across different customer sizes? Just trying to understand if you're having a similar traction upmarket as you are downmarket.
Thank you. Evgeny, please tell the execution.
Hi, Scott. What we saw in this quarter, the largest adds were with, say, higher tier customers, which would be above $2,500. Just to give you a sense of the numbers, the customers with more than $10,000 per annum grew about 17% quarter-over-quarter. Then I would say similar growth rate with the, like, medium price tiers. It's a good traction with landing lower price customers and then upgrading them as their relationship matures.
Okay. Fair enough. On the Kompyte acquisition, I know some of the costs are embedded there. Is there any revenue contribution from the acquisition for the year that we should be aware of?
So far, it's minimal, right? There will be some revenue, of course, but it's irrelevant to the overall numbers at this point of time.
Great. That's all I have. Thanks for taking my questions.
The next question is from Mark Murphy with JP Morgan. Your line is open.
Yes, thank you. At a high- level, to what do you attribute being able to show this improvement in the net customer adds, also in the net new ARR, and also the retention happening simultaneously against this backdrop that you mentioned, as you know, being more volatile, you know, with the macro and then also the war in Europe? I think, like, that's the element of this that is surprising just given the circumstances.
Thank you. Look, Mark, I would avoid commenting macro things. I'm not very big expert in these topics. Business is very strong. We have very strong business model. With such subscription business, with such focus on retention, with such focus on delivering value for customers and focus on educating customers, I think it helps. My understanding it's about business model. We have so strong business model and so great market.
Okay. Evgeny, all else equal, when we think about your operating losses, would you expect them to improve by the $15 million in 2023, which is that one-time relocation cost? Or are there additional, margin improvements that we could, you know, consider factoring in as well for next year?
Mark, I mean, I would of course say this is too early to go into much detail about 2023 'cause there are many, many moving parts. We will need to see how this relocation settles down, where people land, and to what the run rate expenses would be for those different locations. Clearly, I mean, the R&D expenses will probably be at the higher run rate as we go forward into 2023, I mean, more close to the industry standard given that our developers will now be in more, I would say, expensive locations. $15 million one-off will not be there, and we will also be looking at inefficiencies on G&A side as we, like, finish with the relocation.
Again, unfortunately, I won't be able to give a precise number at this point of time, but probably we'll have better visibility during the next quarter call.
Okay. One last one. The two acquisitions, we understand they're very small, but I'm wondering just how much net new ARR that those might have contributed to the number here in Q1?
Yeah. Thank you for the question. In Q1, we're really not attributing any meaningful revenue to those transactions. I also wanna highlight that, Kompyte deal was technically closed, to like, very late into Q1. Even if we, you know, wanted, there is nothing really to recognize just based on the timeline. Then the first acquisition that we've done in Q1, Backlinko, was not really, for revenue, right? We made an acquisition for audience. While we're definitely seeing a lot of demand coming from this website, and we are changing content on the website to generate even more demand, it's not really, you know, directly attributable to revenue. It's more of a, you know, number of leads that we see, number of registration, audience reach.
Those are the metrics that we are focusing on when we think about value of this transaction.
Yeah. I appreciate the color, Evgeny. I'm not asking about the in-period revenue in Q1. I understand that one of those closed late in the quarter. I mean the actual, like, book of ARR, right? The run rate of ARR that they would have carried over that would have contributed into your Q1. I mean, I understand it's small. I don't think I understand, is it, you know-
Yeah.
Is it $1 million? Is it a few million? Is it $200,000? I just don't have much sense of that.
Yeah. As I said, like, at the beginning of Q2, we were still in the process of transferring contracts because we did an asset sale, so it's a little bit more complicated question. You know, if you think about the overall scale of the operation, right? It's a business that had roughly 20 people, and if you just apply like industry standard, you know, like ARR per employee, benchmark for those businesses, you'll get close. We're not disclosing, you know, actual ARR for this particular line of business. As I said, you know, if you look at number of employees and just apply some standard multipliers, you'll get very close.
Okay. Something like $200K per head, run that through and we'll be in the ballpark.
It's going to be in the ballpark. As I said, I would be happy to disclose it later, you know, if Gainy allows me maybe in, you know, closer to Q4, but right now we're not really providing a lot of color on that one. But yeah, I think in the ballpark, you're right. You know.
Understood. Thank you.
The next question is from Brent Thill with Jefferies. Your line is open.
Hey guys, it's James on for Brent Thill. Thanks for the questions. Can you talk about just the disruption that you'd expect to see from the employee relocation? It just looks like you're still expecting pretty robust top line growth for 2022. I'm curious if you're maybe expecting any potential disruptions to overall top line as a result of the relocation. Just a quick one on customer growth. Just are there any particular markets that did particularly well or others that were a bit weaker? Any color there would be great. Thanks.
This is Oleg. I don't expect any significant impact on our operations because of such relocations. Look, COVID helped us a lot and we have great culture and such remote approach that we trained during COVID period. All of us trained with this remote approach, all companies around. With our culture and with our focus on self-organizations and autonomy teams, I don't think we should expect any kind of disruption here.
Just around the customer growth, any particular markets that did well or others that were a bit softer?
It's aligned with our expectations. No, there are no surprises here. It's very, very stable. Even with some macro conversations around us, we don't see anything related to our current cohort numbers. It's stable.
Great. Thank you, guys.
The next question is from Clarke Jeffries with Piper Sandler. Your line is open.
Hello. Thank you for taking the question. You know, net retention ticked up again this quarter. Wondering if there was any kind of particular products or upgrade paths, whether that was users or otherwise, that are emerging, that it's really helping drive that metric upward.
Yeah. Thank you. Thank you for pointing this out. Definitely one of the metrics we're really proud of. One of the big factors is, of course, expansion of seats that, you know, we started seeing early last year, and it continues, you know, to date. More and more people buy subscriptions with multiple seats or expanding usage of existing multi-seat subscriptions. I would say this is definitely contributing factor. Obviously, other things like strong sales numbers for our add-on products and App Center that Oleg already mentioned contributes as well. I would say if I had to pick one, definitely expansion of seats.
Yeah. I was gonna ask a follow-up question that, you know, impressive to see $1 million gross ARR in App Center. Could you remind us of what the revenue model or economic model is for that? Is that a rev share-based marketplace for some of the partner products, you know, expecting to triple?
That's correct. We use revenue share. Now, specific percentages could be different, you know, for different partners, but I would say in the ballpark, we always aim for something around 40%, take rate, which I think is more or less standard for this kind of relationship.
Understood. If I could squeeze one more in. You know, you had mentioned improved search volumes in some of your largest markets. More to roll out during this year, you know, with the recent acquisition to add some more volume to, you know, SEO capability. You know, how do you view that competitively? Do you feel like you're really outpacing the competition in terms of scale and accuracy of search estimates?
Yeah. This definitely have been a big focus of our R&D team. I personally was involved in development of algorithm and tests. It was definitely a high- priority because, you know, marketers, to make right decisions, they need to understand what people are searching for, and they need accurate data. As part of the rollout, we tested, for example, our search volume estimates against source of truth data that we were able to collect from Google Search Console.
Results were, I would say, better than anything else that we were able to find in the market, and we really, you know, tried to harden and didn't leave any stone unturned, you know, untouched. To the best of my knowledge, what we have today is the most accurate metric for search volume for keywords. Right now it works in the United States and Australia. Of course, there are plans to roll out into other locations.
Appreciate the color. Thank you.
The next question is from David North with Due North Capital. Your line is open.
Hi, congrats on a good quarter. What countries will the relocated employees be moving to, and will they be moving to locations with company offices, or will they have the ability to work remotely? I'd like to know how much the cost of these employees will increase and whether your key advantage of having lower cost software engineers is still intact. Thanks.
Thank you. This is Oleg. Last year, we decided to open offices in Barcelona, Spain, Amsterdam, Netherlands, and Berlin, Germany. Our product teams are mostly relocating to these locations. Because of conflict, because of things with what's going around, we decided to open office in Armenia and in Serbia. Some marketing groups, some revenue groups, customer success groups are moving to such locations, Armenia and Serbia. It's more relevant to their salaries and costs.
Also relocating our employees to our offices in Cyprus and Prague, Czech Republic. We opened these offices about seven years ago, and right now it's really attractive location for our employees.
This is Evgeny. On the cost side, we definitely expect that our R&D, as I mentioned, our R&D expense will go up because of the cost of living in those countries. As Oleg Shchegolev mentioned, we're more like Western Europe-focused for the developers. For the G&A, or for the support staff, we're targeting locations which are closer in terms of the cost of living, such as Armenia or Serbia, which will be like maybe slightly higher post relocation for those functions. Overall, like I mentioned, the run rate impact will probably be there this year, and then we'll have to work it through in 2023.
Okay. Thank you.
Again, that's star one to ask a question. The next question is from Michael Turits with KeyBanc. Your line is open.
Thanks. Allow me to follow up. Just a quick one. You know, I think we're expecting here to be about free cash flow breakeven previously. Any sense for where that falls out now and how we might think about into next year?
Michael, at this point where we are, like, doing our estimates, we're clearly just simply implying an increase in net loss to our free cash flow projections, right? We don't have, like, a very, like, accurate assumptions, given that there are many moving parts, but I would probably expect us to be cash flow negative, like, for the full- year given the increased estimate for the loss.
Okay. Do you think it's realistic just to think about that improving or maybe breakeven next year?
Can you say it again, please?
Do you think it's realistic to think about that free cash flow improving and possibly being breakeven next year in 2023?
Yes.
Yes?
Yes.
Okay, great. Thanks.
Thank you.
We have no further questions at this time, and this will conclude today's Conference Call. Thank you for participating. You may now disconnect.