Good morning. My name is Rex, and I will be your conference operator today. At this time, I would like to welcome everyone to the Semrush Holdings second quarter 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press Star one. Thank you. A transcript of the prepared remarks will be available at investors.semrush.com after the call. At this time, I'd like to introduce Bob Gujavarty, VP of Investor Relations. You may begin your conference.
Good morning. I'm Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings second quarter 2022 results conference call. We'll be discussing the results announced in our press release issued after market close on Wednesday. With me on the call is our CEO, Oleg Shchegolev, our CFO, Evgeny Fetisov, and our President, Eugene Levin. Before we begin, I would like to highlight our participation in the Goldman Sachs Communacopia and Technology Conference in San Francisco, the week of September twelfth. 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, investments and acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for the third quarter of 2022 and the full-year 2022, and our ability to successfully relocate employees outside Russia, including executing our relocation plans 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 report 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 the course of today's call, we will 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 very pleased with our execution in the second quarter. We delivered strong growth with revenue up 39% year-over-year and solid new customer additions. As most of you know, our sales cycles are typically very short, and our average deal size is relatively small. Despite complicated market conditions in Europe and delayed decision-making, it didn't affect our second quarter results much. Listings was a standout performer in the second quarter as revenue grew more than 70% from the previous year. Local Listings is our second most popular add-on, but attach rates remain in the mid-single digits. We believe Listing Management alone is a $500 million market, and we have a long runway for growth. I am pleased to see our customer mix continue to improve in the quarter.
The number of customers who paid more than $10,000 annually was up more than 80% from a year ago. We remain focused on the SMB market, but we continue to see rapid growth from mid-market and enterprise customers as well. I believe our brand marketing campaigns contributed to the new customer growth year to date, and I would like to provide insight on our plans for second half of the year. We saw good success with our campaign in the streaming service Hulu, and we expect to expand to other streaming platforms in the third quarter. According to Nielsen, streaming is poised to become the most popular form of video consumption, and it appears to be a very efficient channel for reaching new customers. SMBs are facing a more challenging macroeconomic environment, and we plan to adjust our campaigns to reflect the new reality.
In the back half of 2022, we expect to have a more balanced spend between brand and product marketing, with emphasis on value-selling campaigns. Our focus year- to- date has been in paid traffic. However, we have not ignored investment in organic traffic opportunities as well. As many of you will recall, we acquired Backlinko in the first quarter. Backlinko is one of the most visited sites for SEO training, and our rationale for acquiring the site was what we could get better monetization of the traffic by improving our conversion rates. This played out in the second quarter as we doubled the number of conversions from Backlinko as compared to a year ago. Finally, I want to highlight three key changes to the organization. First, we promoted Eugene Levin to the role of president.
Many of you know Eugene and will agree he is intimately involved in operations and strategy at Semrush. His promotion reflects the reality that his contributions go far beyond those of Chief Strategy Officer. In conjunction with that announcement, we also promoted Vitalii Obishchenko to the role of Chief Operating Officer. We are a product-led growth company, and believe there is nothing more important to our future success than introducing compelling new products. Vitalii was previously head of product development and has a track record of bringing great software products to market. In his new role, he will have more authority to make sure we execute on our product roadmap. Second, we have made key changes to our sales organization. We now have multiple teams dedicated to executing on our land and expand strategy. Andrew Warden, our CMO, will focus on new customer acquisition.
Brian Mulroy, our SVP of sales, will focus on upsell of existing customers through new products and additional user licenses. Finally, Steve Murgo, our SVP of retention, will be focused on retention of existing customers. Each of these sales motions requires a different skill set, and therefore, it was logical to create dedicated teams led by experienced executives. Third, we have made remarkable progress in relocations. We opened multiple offices across Europe and relocated nearly all of our full-time employees. As of today, we have no operations in Russia. I'm extremely proud of the Semrush team. The complexity and scale of relocating so many people over a short period of time was immense, but we rose to the challenge, and made it happen. I will now turn the call over to Evgeny for a more detailed recap of our financial performance and our forward guidance.
Thank you, Oleg. Q2 revenue of $65.6 million was up 39% year-over-year and up more than 9% sequentially. Growth was driven by an increase in the number of paying customers and higher average revenue per customer. Mix was again a tailwind as the percentage of revenue from customers on the Guru and Business plans hit another record high. As expected, our dollar-based net revenue retention for the second quarter was down slightly at 125% as we lap the easy comparisons of the COVID-impacted periods. Gross margin of 79.5% was up 230bps from a year ago and largely flat from the previous quarter. I expect gross margin of ±79% for the back half of 2022.
non-GAAP operating expenses excluding exit costs were $52.4 million in the quarter, up 53% year-over-year and up 11% from the previous quarter. Sales and marketing represented the largest increase year-over-year and sequentially. Sales and marketing was $30 million in the second quarter, up 67% year-over-year and up 18% from the previous quarter. The increase is driven by higher headcount as well as a full quarter of spend related to our brand marketing campaigns. We expect those brand campaigns to continue through the remainder of the year. Research and development expense was $9 million in the second quarter, up 58% year-over-year and 17% from the previous quarter. The year-over-year and sequential increase reflects higher headcount as well as an increased compensation expense related to operating in higher cost geographies.
A full quarter of Kompyte also contributed modestly to the increase. G&A spending of $30 million was up approximately 26% year-over-year, but down 6% from the previous quarter. The year-over-year increase reflects higher public company costs, while the sequential decrease was related to a one-time benefit that occurred in the second quarter. I expect G&A spending to increase in the back half of the year in absolute terms and as a percentage of revenue. Strong revenue growth and higher gross margins were more than offset by higher expenses and contributed to a non-GAAP net loss of $6.1 million compared to a non-GAAP net income of $290,000 a year ago and a non-GAAP net loss of $1.6 million in the first quarter.
I would note that exit costs represented more than half of the non-GAAP net loss in the quarter, and this suggests that once we complete our relocations in 2022, our operating losses should decline reasonably quickly. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $249 million, down from $260 million in the first quarter. Our cash flow from operations was - $4.7 million, and we incurred approximately $2.3 million of capital expenditures. Looking ahead to guidance, we expect the current economic conditions to persist, and therefore, we're guiding for slower growth in the third quarter before rebounding in the fourth quarter. We expect our quarter revenue in a range of $63.8 million-$64.2 million, up 30% year-over-year.
For the full-year, I expect revenue in the range of $251 million-$253 million, which would represent growth of 34%-35% year-over-year. We expect a third quarter non-GAAP loss of $13 million-$12 million and a non-GAAP loss of $32 million-$28 million for the full-year 2022. We continue to execute well despite the more uncertain economic environment, and I believe we have good visibility to re-deliver another year of revenue growth well above 30%. 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 then the number one on your telephone keypad. Your first question comes from the line of Brent Thill from Jefferies. Your line is open.
Great. Hey, guys, this is James on for Brent Thill. Thanks for taking the question. My first is just around the macro, you know, whether you're seeing any impact in Europe and specifically and just in general, how that may have impacted new customer adds in the quarter. That's my first question. My second is just around Backlinko. You mentioned that as being more of a driver of growth. Is there any way to quantify its impact to revenue, or is it still pretty much immaterial today? Thank you.
Hi, this is Eugene. In terms of macro, we're seeing some signs of softness in Europe, I would say especially around June. I wouldn't say it's really that much about new additions. Demand is still pretty strong. It's more of a, you know, overall softness of the market. In the United States, we don't see anything, you know, like this, so U.S. seems to be very strong. Even some European non-euro markets are quite strong. As for Backlinko, yes, we definitely can quantify the growth internally, but it's, you know, not something we, or, you know, probably other companies would report with this level of granularity. I would say it's definitely material compared to the size of the acquisition, so we believe we're getting really good ROI in this transaction.
As you recall, transaction itself was not huge. That's probably gives you some sense of scale.
Great. Thank you.
Your next question comes from the line of J. Parker Lane with Stifel. Your line is open.
Yeah. Hi, guys. Thanks for taking the question. Just curious if you could give us an update on the performance of the Kompyte business and the demand environment you're seeing around competitive intelligence. It seems like it'd be particularly relevant with the uncertainty out there in the markets right now. Thank you.
Yeah, great question. I think you're getting this absolutely right. Competitive intelligence is definitely one of the verticals that is going to be impacted by uncertainties in macroeconomic environment. We're seeing strong demand, especially with the cross-sell. I think, you know, we're seeing good results because business that we acquired is, you know, relatively small compared to Semrush. So we already have a huge user base of people who are good leads for this new product. You know, compared to this difference in scale, any kind of softness in demand wouldn't be very significant. At the same time, you know, when we talk to customers, we hear some anecdotes about their plans to do budget cuts.
You know, sometimes we start conversation with an account, and then in the middle of this conversation, our kind of champion inside that organization disappears and gets, you know, becomes victim of the layoffs. So that happens, but I wouldn't say that it's a recurring thing. I would say it's more of an anecdote that you can use, you know, to make judgments about the overall market environment. But in terms of numbers, it doesn't really impact us just because Kompyte was so much smaller than the whole scale of Semrush and kind of potential cross-sell opportunity.
Yeah. Makes sense. Appreciate you taking the question, and congrats on the quarter.
Thanks, Parker.
Your next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.
Great. Thank you so much. It's really impressive to see the higher-priced plans had customers up about 25% year-over-year, just coupled with the overall strong net adds. We've been hearing a lot about inflation and higher interest rates pressuring consumers and small business wallets. My question is if you're seeing any sort of shift to Semrush from higher cost platforms providing any sort of tailwind for the business? If there's a comment kind of overall on market share in there too, that'd be great. Thank you.
This is Oleg. I would say that it's a little bit early to talk about any kind of results here. We see some conversations related to it, but it's too early to talk about any kind of tailwinds related to such things. This is Eugene. I would just add a small thing. In terms of market share, definitely something we will be looking for. At the same time, in the enterprise space with bigger accounts, those subscriptions are usually annual, so most of the customers haven't been through the renewal cycle during this economic environment yet. We don't know to what extent we would be able to pull demand from more expensive platforms.
Definitely monitoring this and being optimistic.
Gotcha. Just a quick one on costs. The net cost guidance kind of narrowed and sounds like there is some lower cost from the relocation, but just curious to see if there's any other areas that you're seeing greater efficiencies in the business. Thank you.
Yes, Elizabeth. Elizabeth, this is Evgeny. So there are a few good components to the improvement of the net income. One is the better performance in Q2. As you may have seen, we've updated our expense outlook for the allocations, which is better by roughly $5 million. Then the rest is the combination of improvement in the overall headcount outlook for the year and then favorable euro FX. So this is what affects our net income outlook. One more thing. I during my prepared remark, I misspoke on the cash flow from operations number. It's -7.4, not 4.7. I'm sorry about that.
Got it. Thanks so much for the clarification.
Your next question comes from the line of Mark Murphy with JP Morgan. Your line is open.
Thank you, and I'll add my congrats. Could you say that you have no operations in Russia as of today? I just wasn't sure if I heard that correctly. If so, can you clarify, does that mean no offices, or does that mean no people, or how exactly are you defining that word operations?
Yeah. This is Evgeny. We don't have any operations in Russia, so we've sold our local subsidiaries, and we don't operate there. Basically no presence. We have some people who have left. It's less than 5% of the total population, which would have moved overseas. They're in the process of migration, and that'll take them a couple or maybe a few months, and they stay there for different reasons. Otherwise, we've exited the country.
Okay. Understood. The second question was on the macro situation in Europe. If you could just clarify. I think you said demand is pretty strong, and then the next thing you said was there is an overall softness. I'm struggling a little bit to put those two comments together. Can you just clarify what is it that you might have experienced in Europe? Because the overall-
Yeah
Results look pretty solid. Just also, did that continue into July and August, you know, or has there been any change recently?
Yeah. Great question. What I meant by the word softness is a number of things. For example, it takes longer than previously to renew account, or they start negotiating a more favorable for them payment terms, like maybe they wanna have net 60 or a net 90, where previously they would not even negotiate. Sometimes you have a deal that is sort of already verbally agreed, and then last minute they say, "No, we probably going to buy less." Sometimes you negotiated the deal, but then person who was, you know, leading the process departed for, you know, or have been laid off, and you have to deal with someone new. That's kinda what I meant by softness.
Sometimes customers just say, you know, they're under pressure from the management, you know, to be more prudent, to spend less. Sometimes there are budget cuts. Like I said, it's not something huge. Those things are more of an anecdotes, and statistically, none of those reasons would be huge in our metrics. In aggregate, that's what I call, you know, softness. Hope it explains.
Yeah. That's extremely helpful. Thank you for that. Much appreciated. Just, is that the situation kind of status quo into July and August, or is it stabilizing, degrading further?
I would say August started pretty strong. For example, year-over-year. July, I would say, you know, better than, for example, end of the second quarter. In general, you know, you see the guidance that we provided, so that guidance was based on what we've seen so far in this quarter. I am
Understood
Like I said, so far in August, I'm optimistic, so.
Yep. Okay. Excellent. Thank you, and I'll add my congrats.
Thanks, Mark.
Next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open.
Hello. Thank you for taking the question. I wanted to touch on the record $5.5 million of sequential growth in revenue. The ARR in the quarter was actually lower than the year ago period. You know, I was wondering if that was reflective of this sort of discussion about, you know, maybe some softness towards June. Was it really a better early quarter performance that drove that? If there's anything maybe to call out that was an impact that might not have been just linearity through the quarter.
Yeah. This is Evgeny. Thank you for the question, Clarke. I think you're absolutely right. It is a reflection of a stronger beginning of the quarter and then a softer ending, as Eugene has just mentioned. June was, I would say like slower versus the overall quarter. That's it. That's this dynamic is reflected in our Q3 guide.
All right, perfect. Any chance you could comment on how 10K per annum customers grew in the quarter?
For the quarter, I mean, I think we disclosed the number for the year, which is above 80% growth year-over-year for the 10K-plus customers.
Okay. Let's squeeze in one more as a follow-up. You know, you lay out these 19 Mar tech categories that you're involved with. You know, which of these segments are you most excited about in terms of taking share from pure play players, you know, with the release of the local listing product? It might move that category higher on the list, but just curious on your thoughts here.
It's like, you know, hard to ask parents about who's their favorite child, right? That's kinda how I'm seeing this. Of course yeah, some children haven't been behaving as well as other children, but we like them all. I would say in terms of where we are spending more time, you know, where we're spending more resources, is probably not necessarily areas where we already feel very strong, but areas where we wanna be much stronger. Even though we have great reviews, right? There are other things to care about, like market share and revenue. I would say I'm extremely proud of what we're doing in competitive intelligence space, especially after acquisition of Kompyte.
Now we have really good self-service product for kinda SMB and mid-market, and we have this more enterprise-focused product for kinda larger companies, and not just marketing teams, but also sales teams and leadership teams. Local listings I think have been one of the products that have been around for a long time. I was actually one of the people involved in launching this, so was sort of member of the first team. I think we've been developing it kinda somewhat slower than we could, primarily because we didn't launch a lot of global markets. We fixed this now I'm way more optimistic. Also, we have a lot of great features in our roadmap. For example, we're always thinking how to go beyond listing management.
One of the next things we're probably going to try is review management. We already have some features in this direction, and we're probably going to keep developing them and double down. Of course, digital PR, I think it's a huge category that, I would say, you know, it is not that competitive from product point of view as many other categories where we operate. We think we can be really innovative player there and disrupt the market. You know, this year we have launched our media monitoring product. Still very early, but so far we have great feedback from some customers as well as early signs of, you know, positive revenue trends. I would highlight those kinda categories as areas where we focus the most right now.
you know, we're always trying to surprise people, and you know, there are probably a couple things we're working on that I cannot mention, right?
Appreciate it. Thank you very much.
Your next question comes from the line of Michael Turits with KeyBanc Capital Markets. Your line is open.
Hi, this is Michael . Thank for taking my question. In your business guide are you expecting low customer addition and or is more low expansion
Michael, I think it's a balanced combination. As you can see, we've guided for a slower Q3 and then acceleration in Q4, and then we are looking at both, I would say, in the same direction,
Okay. On the $5 million reduction in relocation costs, are you saying heightened churn and the employees relocating or what feeds into that change? Thanks.
Given this was a, I would say, unprecedented move that we had to take, it was very difficult to, for us to be very accurate in prediction in how much we'll spend and where people will go, which countries they'll go to, et cetera. All of this we've been able to, I would say, like clarify and, narrow it down in terms of our future expected expenses. That's where the saving is coming from.
Again, if you would like to ask a question, press star and then the number one on your telephone keypad. Our next question comes from Scott Berg with Needham. Your line is open.
Hi, everyone. Congrats on the good results, and thanks for taking my questions. I wanted to start with the guidance. Obviously we can all back into the fourth quarter guidance with what your third quarter and full-year is. The numbers are relatively good, and I know the commentary was that you're expecting in the macro to rebound a little bit in the fourth quarter. Can you help us understand maybe where that optimism comes in after expecting some slowness here in Q3? Thank you.
This is Oleg. Look, we have some very good results with remarketing. I mentioned our experiment with Hulu and I believe what such shift we have right now with the very strict campaigns some positive results.
Got it. Helpful. Then I wanted to ask about kind of partner impact and partner traction in the quarter. We had a chance to speak with some partners that had some very good feedback on your product and platform. As you look at the macro slowness, how much of that's coming from maybe your own digital sales versus, you know, what you end up, you know, getting, referenced to you and or booked through, your partner channel? Thanks.
Yeah. This is Eugene. I just wanted to clarify, maybe it was not very clear. We're not really seeing pressure on the demand side from like new acquisition point of view. That's where we employ kinda more, most of our partner tactics. We haven't seen any kind of meaningful slowdown there. Demand is strong. I would say if we speak about affiliate marketing channel, which was also one of the partner instruments in our arsenal, we definitely haven't seen slowdown there. Pretty much all our key channels grew this year quite well.
Maybe to add, this is Evgeny. Maybe to the question on, say, Q3 versus Q4 dynamics. I mean, Q3 now feels like a typical summer for us. Like it's very, very seasonal in terms of what we're seeing, and that's what we're building our expectations on. At the same time, as Eugene has alluded to, we have seen August as showing positive signs and traction. Again, if we exit the quarter with like right ARR, that is a base for a good Q4, and this is how we think about this year and the structure of the rest of the year.
Great. That's all I have. Thanks for taking my questions.
Thank you.
There are no further questions at this time. This concludes today's conference call. You may now disconnect.