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All right. Perfect.
So we'll probably have some more people trickling in as the keynote empties, but to stay on schedule here, we are super excited to welcome back Semrush. We have Brian Mulroy, the CFO, and Eugene Levin, President. And I think maybe the best place to start for those newer to the story, could you just give a quick overview of your market position? And then you just had a recent quarter, some updates from that.
Sure. Yeah, I can do this. I'm Brian Mulroy, the CFO over at Semrush, and it's great to be here. Thanks for having us back. So Semrush is a high-margin recurring revenue SaaS digital marketing technology company. Our focus areas are what we call top-of-funnel online visibility digital marketing channels, and there's six of them. So it's search engine optimization. The idea there is no company wants to be on page two where nobody tends to go. They want to be ranked at the highest levels on organic search. We focus on paid advertising and making sure companies are spending their money wisely and getting the best return on their investments across all digital marketing paid channels. We focus on social media, just like individuals. Everyone wants to go viral, get a lot of likes, shares, and positive comments.
We help businesses figure out what content, how to respond to content, and listening to their consumers and other competitors and companies that are important to figuring out their strategy and their performance in the market. We focus on local marketing. That's all about making sure that you're listed in the right places where there's a local component. I went to the doctor a few months ago and showed up at the wrong place because that was the address in Google. I called them. They said, oh, yeah, we moved six months ago. Where'd you get this address from? That's our old address. I said, I just googled it. It's important for companies to make sure they're staying on top of where their business is being represented, whether it's a phone number, address, or information about the company and what they do.
We focus on content marketing and giving companies a means to be able to generate content that generates traffic and ultimately converts that traffic into paying customers. And we focus on brand marketing. So six core areas with data and intelligence at the core to make sure marketers are focused on the highest return channels for their business. You also asked about our performance from a metrics perspective. So we just closed our third quarter in 2024. We surpassed $400 million in annual recurring revenue. That's up 24% year- over- year. We just surpassed 117,000 paying customers. And those customers are all over the world. So we're in 150 countries in just about every industry and in every market segment, whether it's a solopreneur or freelancer and an individual who's focused on their own small business or the Fortune 500 accounts that have very sophisticated and extensive in-house marketing teams.
We have $233 million in cash and equivalents in the balance sheet that we leverage to invest in the business organically and through M&A and other forms of capital allocation, and our non-GAAP operating margin this latest quarter is 12.4%, so that was a quick overview.
Yeah, no, that's perfect. Maybe building both off of the earnings results. Then you also had an Analyst Day a few weeks ago.
We did.
You talked at the events about some new segmentation to help investors kind of better analyze and understand the business. Maybe you could build on some of the details there and what you disclosed and then kind of what you think are the key conclusions to drive from those disclosures.
Yeah, we're really excited about disclosing some new insights about the business, insights that we believe will give investors a much more in-depth understanding about the drivers of growth for a company and the future potential for growth and profitability. There were two key things that we focused on. One was we just talked about that we have 117,000 paying customers that span from those individuals, solopreneurs and freelancers, all the way up to Fortune 500 accounts. We've always said that, but we never gave the specifics of how much ARR or how many customers are in each of those segments. So what we said at Analyst Day was 55% of our business is focused on very large, sophisticated companies that have in-house specialized marketing expertise and need sophisticated tools, data, and intelligence to do their best work.
Those are enterprise companies with more than 500 employees, and we have over 8,000 enterprise-sized customers. We have 17,000 mid-market. Those are companies between 5- 500 employees. Enterprise is 500+ . And then we have 22,000 marketing agencies that trust us for data, intelligence, tools, and workflow to support their own clients and make sure that they're representing their brand and delivering their best work. The other part of the business, the other 45%, are small business owners, freelancers, which are also smaller marketing agencies, and then solopreneurs who are just starting out on their journey.
The second part of the segmentation is we talked about how Semrush has evolved from a single-point solution focused on where the buyer and the user is the same person to now a platform that extends across all the digital marketing channels and focuses more on leadership and standardizing a single platform across these more advanced and sophisticated marketing companies. And one proof point of our success in doing that is back in 2018, we had about 200 companies that were paying us more than $10,000 in ARR and zero over 50. Fast forward to today, we have over 4,000 companies paying us more than $10,000 in ARR and now over 300. And we've seen a pretty significant uptick in 2024 and 2023 as we really started to make investments in our up-market enterprise sales motion and invested in specific features that are important to enterprise companies.
Maybe it's just kind of a natural way to build. You also gave some midterm growth targets. One, can you remind us what those were? And I'm sure this goes back to what we were just talking about, but how do you think about the key drivers or catalysts to hitting those numbers?
Sure. Yeah, we did. We updated our guidance for 2024, so now expecting to deliver 22% growth and noted that in the near term, which is 2024 through 2026, that we expect to maintain a 20% compound annual growth rate for revenue. We also talked about free cash flow margins. We've significantly increased it from 2022- 2023 and then 2023- 2024, and we expect continued upward momentum with our free cash flow margin into the near term. The key drivers for both of those, of course, is top-line growth, and there's four growth drivers that we always talk about. One is net new additions. We have 117,000 paying customers today. That's more than tripled since 2018, and we believe there's millions of companies out there that have a need for Semrush.
The key opportunity for us is most companies, especially the large sophisticated customers, have built their own internal proprietary solution and pieced together a lot of fragmentation that we believe we can displace with our digital marketing platform. So we have 8,000 enterprise customers today. There's 90,000 enterprise-sized companies out there that have a need for our platform. We have 117,000 overall, but there's millions of small business owners, agencies, and mid-market companies that have a need for our platform. So a fundamental driver is to continue to drive forward and get more net new additions. Average ARR is key too. We're not just a single product company. We have products across those six digital marketing channels, and we've been successful in being able to cross-sell and upsell those products and drive our average ARR up, which has doubled since 2018.
And we believe we have the products in market with our sales organization enabled to sell it where we believe we can accelerate that ARR expansion. We've also recently embarked on an investment journey back in 2021 and 2022 where we're specifically investing in enterprise-grade features, and that allows us to evolve our target buyer from the user, who's the specialized marketer, to now CMOs, digital marketing leaders who have an interest in standardizing across all their digital marketing teams. That enterprise investment, we believe, will serve as an inflection point to our average ARR, so three fundamental drivers: net new adds, average ARR, and then this enterprise up-market motion.
Yeah, and maybe thinking about some of those enterprise investments and leveraging that install base of 8,000. You've seen a lot of traction with your enterprise SEO product. Can you just tell us a little more about it? What it does, what you're excited about? And then I always kind of like to add, what is the pain point or need in the market that's driving customers towards it?
Yeah, I think Semrush has always been a leader on SMB side of SEO, and for a while, I think we have overlooked the needs of enterprise customers, and as a result, there was no real platform that helps them to solve their problems, so they would use Semrush. Brian has told about 8,000 enterprise accounts that we already have, but at the same time, they would have to pull a lot of data from our core product through APIs and then use it in a variety of ways and supplement it with other data sources such as Google Search Console or Google Analytics, and they would create this sort of patchwork of different solutions, so some data would be in their data warehouse or some kind of database, and some data is going to be in Excel spreadsheets.
Then they would use some Python code or other scripts to kind of pull information together to calculate certain metrics. They have multiple BI systems. Maybe they first started with Tableau, and then they switched to Looker. Some dashboards are going to be in Tableau and some in Looker. You have this sort of system that is very hard to maintain because there's a lot of manual work. It is error-prone. A good example that I provide people, recently we got an Excel spreadsheet from a customer during an onboarding process. They said, this is how we report. Can you please replicate this in your dashboards when you do a setup? The spreadsheet that they gave us had 100 tabs. Each tab had thousands and thousands of lines.
Every month, they would have to populate it manually, downloading CSV files from our system, then copy-paste it into the CSV file. Of course, that leads to a lot of errors. Sometimes, if you present wrong data to your board or to your CMO, sometimes people get fired. There's definitely a big need for kind of a more unified platform where everything is connected, everything is automated, it's error-proof, and you get exactly the results that you want. It's also not just reporting. We also provide a lot of workflows that would not be possible without the level of automation and AI that we provide. I'll give you just one example. We have what we call internal linking workflow. Internal linking is a problem of connecting different pages on your website based on how they're related to each other.
If you have a very small website, let's say five pages, you can just do this manually. You can figure out how to connect those five pages. Now, if you have a website with hundreds of thousands or maybe millions of pages, you cannot figure it out manually, right? There's no notebook that is big enough to fit all those connections. So you need automation. And Semrush, we crawl the whole internet so we know external links, so who links to each page on your website. And then we know how to spread the sort of authoritative scores between pages inside your website based on what are your targets. So if you give us a list of pages that you want to rank higher, we'll say, okay, for this page, get a link from this page.
For that page, get a link from this page. And on average, we see that our customers get 15%-20% boost once they implement recommendations. And then they can also implement it into their CMS systems. So when, let's say, external linking changes, because the internet always changes, they can also adjust in real time and change their internal linking structure automatically.
Yeah, that's incredible. It feels like we're talking about vulnerability management. It's a very similar set of problems. So we kind of went through the product. Can we talk a little bit about the economics of market and just what makes that so attractive for you guys to go after?
Yeah, the key thing, just building on what Eugene mentioned, is companies are spending a lot of money on this and trying to solve a very complex, and we would call an ever-evolving problem, as there's more digital marketing channels, as the search engines continue to change their algorithms, and as AI starts to disrupt the market, where there's now other alternatives to Google to find information, to search and get at what a consumer might be searching for. So there's a lot of complexity, and that's built up over the years. And there's even more channels. It used to be about, look, you just had a website. Now there's YouTube videos, a lot of different social media options, many search options. So the digital marketing landscape has evolved.
Most companies have opted to sort of piece together a lot of fragmentation over the years to keep up with that demand. We've now built from the bottom up an enterprise-grade digital marketing platform that covers the six key channels that are important to companies and to marketers to do their best work and believe we can displace that. At our Analyst Day, we talked about the SaaS subscriptions that companies focus on in the enterprise, adds up to about $300,000. When you supplement that with the IT resources, data engineers, and even marketing analysts that spend their days researching and analyzing data to figure out what they need to do to rank and generate traffic and convert it to revenue, it can go up into $1 million. Right now, we've always been part of the solution.
We have data and intelligence and tools and resources, but we focus more on the specialists, the search engine specialists, the social media specialists, and it hasn't been connected. With this new enterprise product that we've launched, it brings together all of the disciplines, provides a much more robust and sophisticated set of capabilities, leveraging AI that allows them to translate what used to take weeks into hours so they can respond to changes much more quickly and stay competitive out there in a very complex and fast-paced environment, so we believe we can displace that $300,000, even a good portion of the million when you include labor, and that will be a very significant inflection point for our average ARR. Today, our enterprise accounts, those 8,000 we talked about, they spend about $7,500 with us annually.
We believe we can increase that to 50,000 to start and potentially as high as 100,000 as they adopt the broader portfolio. As a proof point, just this morning, we closed our 100th enterprise SEO subscriber. We just launched the product in May. When you look at that cohort and what they were paying us before, it's about $11,000 of ARR just from the 100 that we upgraded to this new product. And on average, we've now upgraded them to $60,000. Our biggest one, one of the biggest hotel chains in the world, is just upgraded and is paying $350,000 a year. So we have a significant inflection point in ARPU, and we're really starting to get momentum and traction in that.
Yeah, no, that's fantastic. And obviously, you have to start with product, which it sounds like you have. As you're moving up market, can you just talk about how you're changing your go-to-market motion or maybe what's the same, what's different between the two markets to leverage your leadership? And then on the second side, what kind of incremental investments, what inning do you think we are in kind of optimizing for this motion?
Yeah, so we've gone through many evolutions in the 16 years that we've been in business. We talked about one already. It's about our products being focused on the individual user, focused on search. We've broadened that now to this multidisciplined digital marketing channel. Our buyer has evolved from the individual user to now leaders and business owners who have a broader mandate to figure out how to optimize spend, not a specific ask to figure out how to optimize search social. It's about a broader budget and an overall digital marketing strategy. And we've also evolved our go-to-market. So in the early days, and still today, we rely on this very heavily for certain segments of the market. We have what we call a product-led growth motion, fully automated.
We have educational assets all over the web that attract and inspire and educate marketers and business owners about what our platform can do. We allow them to trial our product for free, and then they convert and register and convert to a paying customer without any human interaction at all. We automate the support tickets, and we've been able to get to over 100,000 paying customers with that automated channel. About three or four years ago, seeing that there was this opportunity in enterprise, we started investing in a more sophisticated selling organization and building out what we call a sales-led growth motion, which is a more traditional demand generation start where you have to navigate through a sales cycle, negotiate custom terms and conditions and pricing, work with procurements.
We've had to invest in a deal desk, more sophisticated enterprise sellers who understand those B2B transactions, who can evolve from a transactional type of situation to now a trusted advisor or partnership status with these companies. Over the last three years, almost four years, we've invested in data systems and process teams and resources to establish that motion and make sure that we're ready to capitalize on this enterprise opportunity. There's no question it requires investment, but the good news is we've been able to leverage automation and AI to streamline that product-led growth motion. When you look at our financials, you don't see a huge uptick in spending from an expense revenue ratio. We've been able to gain efficiencies and then reinvest that into the enterprise motion to make sure we're prepared to support that growth.
Yeah, and I heard AI towards the tail end. And over the last 12 years of me coming to this conference, there's always one topic that's going to be in every single meeting. And I think Gen AI will be the one this year. So I mean, if you guys could talk about the investments you're making in content creation, marketing capabilities, but maybe more broadly, how do you think Gen AI impacts Semrush and then also the market at large that you operate in?
I think in terms of marketing as a discipline, AI is what we call a great equalizer. If previously marketing as a discipline was somewhat unattainable for a lot of people, now they can actually participate in this area. The example I usually give people, we always had tools that tell people what topics they need to cover, what content they need to write. Often, because we sell to a lot of small business owners, they would tell us, Eugene, this is great. I understand what I need to do, but I'm not a writer. I cannot go and write 3,000 words of blog post. Now they actually can do that. Now they can use generative AI. Of course, they need to provide certain inputs, leverage their subject matter expertise. AI does the rest.
Of course, AI relies on unique insights and data provided by Semrush, where we know what AI needs to do for content to rank, so you combine this unique insights, you combine large language models, and you combine subject matter experts who knows what to write about and nuances of the field, and then you get content that ranks really well, and again, previously, a lot of people were discouraged to participate. And now we see a lot of them ranking really well and gaining a lot of traffic and generating leads for their business. That's just one example. Another example is we have a reply-to-review feature in our local product. So if previously, let's say you're a small business owner, you're very busy, you get, let's say, online reviews, you don't always have time to read them and reply to them, at least not instantly.
Sometimes if there is a negative review and you didn't reply right away, then the damage is done and stays there. All your future potential customers will see it and they'll make their decisions based on that. Now, what we've done is that we offer people several options based on AI recommendations that they can post as a reply. Also, if they like it, they can just put it on autopilot and AI will just reply automatically. What we've noticed is that maybe AI cannot resolve the core problem, like maybe customer is not satisfied and there needs to be some remedy. The fact that AI replies very quickly. It tells customer that we understand the problem, we'll get back with a solution. A lot of customers who had negative experience after that, much more willing to engage.
If you resolve the problem, they will change their review score. So instead of having one-star rating, you can have four- or five-star rating. And we've seen this driving both engagement and improving star ratings for our customers. Again, just a couple of examples. I think another part of your question is how does it impact the market broadly? I think it also creates room for a new generation of consumer products. So ChatGPT is a good example. I think it's still kind of somewhat in beta from my point of view. It's not a final product. It's not what it is going to be eventually. But it's so powerful that a lot of people find it very useful already. And I think as technologies like that get more and more mature, you will see more and more intelligent agents gain traction.
And for us, what it means is that marketers would need to optimize their visibility not just in search, but also across all those intelligence agents. And I think it's going to be very interesting to kind of go on that journey and help them. For us, as always, there are two sides. So every technology, we can use it to help our own customers. And I think I've provided a couple of examples. So our content creation tools, our local tools, and so on. But I think also as landscape gets more and more complex, we usually benefit from it because we can create this map of the internet that tells our clients what they need to do to achieve their results.
Maybe building on the content creation side, one question we get a lot from investors is it seems like every walled garden publisher is starting to make its own content creation tools. Is that something that you see in the environment when you look at like a Pinterest, Amazon, Google, so on? And is that a new competitor, or how do you think about where they sit in the market and your differentiation?
Well, we focus on a very specific type of content, which is a relatively long form of web content. And from this point, I don't think there is any competition because the main value is not our ability to call LLM APIs. The main value is that because we monitor billions of different keywords and who ranks for them, we can run very sophisticated analysis and say, okay, to rank well for this keyword, you need to do this and this and this and this. And to rank well for that keyword, you need to do this and this and this and this. And it's really not just topical coverage and what search engines believe is relevant. There's also a lot of personalization. For example, if you are providing landscaping services in Florida, you will probably focus on seeds and different aeration techniques and irrigation systems.
But for example, if you are up north in New England, then you want to write content about winterization for your irrigation systems, so the topics you cover can also be different based on geography or local habits and so on, so we provide this unique information, and without that, large language models would only create basic and generic content that would not rank that well. There is, of course, social media content creation, for example, where companies like Pinterest or Adobe, they can maybe do a little bit more where it is a little bit closer to what we do, but again, what we do with our social media creation is less about the visual side of content and more about what's trending, what's hot, what are the coolest memes you can use.
And this information is something that we get by pulling data from all social networks and monitoring real-time what is resonating with a particular audience. And then when customers give us their audience, we can tell, okay, for your audience, you need to focus on this and this and this. Again, not something that companies like Adobe are likely to do because they have more focus usually on building horizontal software. And we're building software specifically for marketers.
We're running tight on time, so I'm going to try to combine three questions. So you're going to have to bear with me as I get this out. So customers spending greater than $10,000 grew 44% last quarter. And so thinking about the typical customer journey, but then thinking about how your platform's expanded, which we see in the TAM expansion and kind of what the potential of your customers are. And throw a third question in, wrapping that in with NRR as well.
Okay. I'll show you if I got that.
That makes some sense, right? Yeah, we got it.
Definitely. So we have to look at our business by segment because the average ARR, the growth potential in that when we first land and then adding in our expand potential and then the net revenue retention, they're all different by segment. So a solopreneur and freelancer in the lower end of the SMB market, as you'd imagine, they wear many hats. They focus on a lot of different things. They tend to be more project-based, more focused on a specific discipline, and then seasonal in nature where a freelancer might have a client focused on building a website one day and then optimizing that website the next, focusing on social media. So they subscribe to the tools and resources they need in the moment. So there's a sort of a seasonal dynamic where net revenue retention and expansion aren't really a factor.
It's more about how quickly can we get them to adopt and sustain that over time. For our more sophisticated business and agency accounts, that's all we focus on is making sure we're in the high 90s for gross retention. We're above 120% for net revenue retention. And we have a significant opportunity to land at different levels depending on their appetite and where they are in their journey and then expand that over time. In some cases, we are able to get companies to adopt. And that first check and first contract with us does pretty much, it's a situation where they adopt a broad portfolio.
In other cases, they'll come in, they'll say, look, we want to focus on search engine optimization for now. And then over the years, they continue to grow and expand the number of users, the amount of data they need, and the amount of technology and sort of round out the marketing disciplines and subscribe to other areas. So that's the driving force behind why our average ARR continues to go up and why the number of customers paying greater than $10,000 and $50,000 keeps going up and significantly so in 2024.
The time went fast, but I think that's a wonderful place to leave it. Semrush, thank you guys so much for coming again.
Thanks for having us.