Greetings. Welcome to Similarweb's third quarter fiscal 2022 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Raymond Jones, Vice President, Investor Relations. Thank you. You may begin.
Thank you, operator. Welcome everyone to our third quarter 2022 earnings conference call. During this call, we will make forward-looking statements related to our business. These statements may include the expected performance of our business and our future financial results, our strategy, the potential impacts of the COVID-19 pandemic and its associated global economic uncertainty, our anticipated long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected or implied during the call. Again, actual results and the timing of certain events may differ materially from the projected results or the timing predicted or implied by such forward-looking statements. Further, reported results should not be considered as an indication of future performance.
Please review our Form 20-F filed with the SEC on March 25, 2022, in particular, the section entitled Risk Factors therein, for a discussion of the factors that could cause our actual results to differ from the forward-looking statements. Also, note that the forward-looking statements made on this call are based on the information available as of today's date, November 16, 2022. We undertake no obligation to update any forward-looking statements we make today, except as required by law. As a reminder, certain financial measures we use in presentations of results and on our call today are expressed on a non-GAAP basis. In particular, we reference non-GAAP operating loss, which represents GAAP operating loss, less share-based compensation, adjustments and payments related to business accommodations, amortization of intangible assets and certain other non-recurring items.
We use this and other non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. We believe these non-GAAP financial measures, when taken collectively, may be helpful to investors because they provide consistency and comparability of the past financial performance by excluding certain items that may not be indicative of our business results of operations or outlook. However, non-GAAP financial measures have limitations as an analytical tool and are presented for supplemental informational purposes only. They should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our investor relations website at ir.similarweb.com. Today, we will begin with brief prepared remarks from our CEO, Or Offer, and CFO, Jason Schwartz.
We will open up the call to questions from sell-side analysts in attendance. Please note that we publish a detailed discussion of our third quarter 2022 results in a letter to shareholders for investors to reference, as well as an updated investor presentation with a strategic overview of the business, both of which are available on our investor relations website. With that, I will turn the call over to Or Offer, CEO of Similarweb.
Thank you, RJ, and also thank you to everyone joining the call today. We reported a solid result in our third quarter as we navigated the challenging macroeconomic environment. Revenue grew 41% over Q3 last year to $50 million in the third quarter. The expansion of our global customer base consisting of SMB, enterprise, and strategic accounts stayed steady. Our customer base grew 21% year-over-year to 3,900, and our average account spends about $52,000 with us annually, up 15% over last year. Furthermore, over 53% of our annual recurring revenue comes from customers who spend more than $100,000 per year with us. Today, 37% of our relationships consist of multi-year contracts, a metric that has expanded year-over-year since 2020.
When we look back to 2020, digital transformation became mission-critical for every business, and we benefited greatly. At the time we became a public company, we nearly doubled our revenue, and we focused on continuing our rapid growth. Despite the incredible trajectory we have been experiencing since the outset of the pandemic, 2022 had other plans. We are facing the impacts of continued war in Ukraine, raising interest rates, global inflation, and customers with leaner budgets. We now believe that the macroeconomic condition will take longer to recover than we assumed and are looking at an entirely different economic climate in 2023. To succeed in this environment, we must adjust our priorities and sharpen our focus and take the right action for our company. This leads me to a truly difficult change I'm sharing with you today.
We have decided to reduce the size of our team by about 10%, saying goodbye to Similarwebers who mean a lot to us. To the incredibly talented Similarwebers that we have to say goodbye to, I'm deeply sorry. Over the last couple of months, we made a lot of adjustments trying to adapt to the quickly changing market condition. However, now I know that we were overly optimistic in our estimate of the duration of the recession, and it seems the market will take much longer to recover. With that in mind, we certainly need to make this change. In addition to the changes in our headcount, we will be reducing expenses across the company. Those changes will align to one key decision, accelerating our timeline to become free cash flow positive during 2023.
To achieve this, we will match the pace of our investment with the realities around us, and we will sharpen our focus and deploy resources carefully on the core activities that create revenues. What is great about Similarweb is that our solution is very valuable in time like this. The visibility we give into the digital world are critical to companies to make decision in those times. We will double down on our customer needs to survive and win in this unpredictable economy. As we adapt to the macroeconomic environment with our customer, we greatly appreciate the support of our shareholders who are navigating with us. Jason, I will turn the call over to you.
Thank you, Or. Thank you to everyone joining us on the call today to discuss our third quarter results. I will briefly address our financial performance, and then we will open up the call to questions. Our results in the third quarter continued to demonstrate our disciplined execution. Revenue reached $50 million for the quarter and exceeded our outlook of $49.2 million on the high end of our range. Our overall dollar-based net retention rate, or NRR, increased to 112% as compared to 110% in the third quarter of 2021. For our $100,000 ARR customer segment, NRR increased to 123% as compared to 122% in Q3 last year.
Our remaining performance obligations, or RPOs, increased 39% year-over-year to $158 million, 86% of which will be realized over the next 12 months. As we exceeded our plans on the top line, we also exceeded expectations on our bottom line. Our third quarter GAAP operating loss was $20.6 million, while our non-GAAP operating loss was $13.3 million, which was much less than the $20.9 million loss we had anticipated on the lower end of our guidance range. Importantly, our non-GAAP operating margin improved over 1,200 basis points versus the prior year. In addition to increased sales, we deployed broad-based operating efficiency measures across the business. As a reminder, this result includes non-comparable expense impacts from our acquisitions as compared to the prior year.
Turning now to Q4 2022, we expect total revenue in the range of $50.5 million-$50.9 million. For the full year, we expect total revenue in the range of $192.4 million-$192.8 million, representing 40% growth year-over-year at the midpoint of the range. non-GAAP operating loss for the fourth quarter is expected to be in the range of $14.5 million-$15 million, and for the full year between $67.4 million and $67.9 million. Compared to last year, our outlook includes impacts to cost of goods sold relating to our Data.ai partnership and to the acquisition of Embee Mobile.
We anticipate non-GAAP gross margin will be approximately 75%-76% in Q4 2022 and approximately 75% for the full year 2022 as a result of these impacts. As we finish 2022 and plan for 2023, we are anticipating a different growth trajectory next year than we have experienced to date, influenced by recessionary conditions that will persist for an indeterminable amount of time. As Or mentioned, we are adjusting our strategic priorities as we, along with our customers, prepare to face these increasing challenges globally. Today especially is a trying day in our history as we restructure our organization to balance our expectations for moderating growth with accelerating our path to profitability. Our team, our business model, and our balance sheet remain resilient as we navigate these challenges.
The decisions we are making and actions that we are taking reflect our focus on becoming free cash flow positive during 2023. With that, Or and I are ready to answer your questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Ryan McWilliams with Barclays. Please proceed.
Thanks for taking the question. Or, given your insight into current market trends and through speaking with your customers, what are some of the things that you're seeing that could indicate these prolonged changes in demand for Similarweb? Are you seeing any more pressure on existing customer growth or new customer acquisition? Thanks.
Hey, Ryan, good to hear from you. Thank you for the question. So what we're seeing, I think it's similar motion that is in the market for most software companies, is that there is a slowdown in making business. What that means is that the process of approving a deal is now getting much longer. You need to go higher in the organization to get approval from C-level, if it's a CFO, CEO. A lot of clients pushing to the end of the year or and pushing into next year budgets. What that means is that the pressure is mostly coming from new business. We're seeing stability on the current book of business, but new business is tougher. The KPIs, they're totally different than what they used to be.
Appreciate the color. Jason, pleased to see the guidance for Similarweb becoming free cash flow positive move up a year to 2023. Along with the renewed focus on profitability. How should we think about the benefit to free cash flow from the reduction in workforce? Is there any particular segment or area where the employee headcount changes are primarily impacting? Thanks.
Hi, we're unable to hear the speakers. Please check and see if you have your line muted.
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Yes, please go ahead. Thank you.
The reductions are actually all across the business. I think you're seeing efficiencies already in this quarter in Q3, in terms of that 1,200 basis point improvement in the operating expenses. You see the margin come down on R&D and on sales and marketing and on G&A, and that was before we implemented the restructuring that we announced today. That'll come through towards the end of the year. We're looking to just drive the business to be more efficient and we think that that's the right way for us to be managing going into 2023.
Perfect. Thanks, guys.
Our next question is from Arjun Bhatia with William Blair. Please proceed.
Hey, thanks, guys. Or, I'm curious, just as you look at the business, obviously you're seeing slowdown and that's not unique to Similarweb, right? We see that across the space. When you think about your business, what are the different areas where you think you may be more resilient? Where do you think the impact may be more pronounced from a macro perspective, whether you break that out by industry or customer size between enterprise and SMB? Any color you have there would be helpful.
Hey, Arjun, good to hear from you and thank you for the question. When we analyzing the different segment that is getting tougher, I would say, than others, I would say that Europe is more challenging than the rest of the world. I think U.S. is okay, and in APAC it's also good. The ease of doing business is maybe a little bit tougher, but we see that is still growing. From the monetization side, SMB is still doing good. We see good traction there. Enterprise are more tougher and I think strategic is maybe getting more complex.
We see a lot of budget getting from centralized team to decentralized, but we still closing deals and still polishing, right? Maybe a little bit more complexity. I think enterprise maybe is getting hit harder than SMB and strategic.
Okay, got it. And Jason, maybe one for you. When you think about, you know, obviously you're not gonna guide to 2023 at this point, but when you think about the margin expansion that's available looking ahead, where do you see the most leverage, I'll say most incremental leverage in the model versus how you're operating the business today?
Sure, Arjun. We actually see it across the lines. When you look at gross margin, if you recall what the last year was already at the 78%-79%. We took a hit on that earlier this year because of the acquisition of Embee Mobile and the deal that we did with Data.ai. As that stuff gets blended in, we're already starting to see the leverage of that coming through, as the gross margin continues to increase up, already up at 76%.
We think that that's one thing that you'll see going into next year. We think that you'll see efficiencies all across. I mean, look at the improvement that we were able to do on the sales and marketing side, taking that to, you know, 55% of revenue consistently. We've been consistently about 60, 65, 66% when you look over the last 7 quarters. I think that you're gonna see more and more efficiency coming through while we continue to maintain our unit economics. Our unit economics are still very, very positive, inherently drive a profitable business over a 2-year lifespan of a customer. We don't have to wait for 3, 4 years in order to get recovery and profitability on the customer. We feel very good about that.
Okay. Got it. Perfect. Thank you very much, guys.
Our next question is from Jason Helfstein with Oppenheimer & Co. Inc. Please proceed.
Thanks. Hey, guys, two questions. First, can you talk about the e-commerce product adoption in the quarter versus perhaps like what you saw a year ago? Are you still as bullish on this opportunity as you were in the past? Then second question, you know, from the cost reduction perspective, I'm assuming you're, you know, for example, in sales and marketing, just reducing headcount to kinda right-size the current opportunity. How do you think that impacts sales, though, coming out of this? You know, obviously, you know, things will rebound presumably late in 2023. You know, just how do you think about that? Do you then have to rehire on the other side of that?
Consequently, you know, with R&D, you know, are you pushing out product development that then you rehire on the other side? So how much of this do you just think about is driving permanent productivity gains versus you're right-sizing for the current environment, and then we'll just need to rehire when the opportunity is right? Thanks.
Thanks, Jason. The first question around the Shopper Intelligence product, we still see strong momentum. We have a really good quarter from logo acquisition and I think overall growth. We still have a good momentum. We're focusing now on the U.S. market. This regarding the Shopper product, the e-commerce one. Regarding the force reduction, I think that when we look at the force reduction, we were mostly adapting. We tried the strategy there was mostly to protect the revenue generating teams in marketing itself and R&D, the one with driving innovation and product. Basically, you know, G&A, it got hit hard. Some teams in R&D that are more internal in development.
I think we have also because we're very bullish on our product and our product market fit and our needs to our solution in those times, because we know that customer will need the market data more than ever now, to adapt their plan for next year. We're still closing businesses. We're just aware that it's just taking longer and tougher to close new deals, but we're still bullish on continued execution. We are as I said, we didn't cut in a way that we think that we need to rehire next year.
Thank you.
Our next question is from Tyler Radke with Citigroup. Please proceed.
Yeah, thanks for taking the question. Maybe I just wanted to better understand, you know, exactly how you saw the timing of how you saw this play out, because I think it's obviously a pretty big tone change from the investment posture that you indicated at the beginning of the year. Was this something that you saw kinda play out in terms of slowdown in new customer acquisition in the quarter? And are you expecting it to get worse? Or are you just kind of proactively adjusting for the macro environment that you may anticipate over the next year, just given the headlines out there? Thank you.
Thanks, Tyler. I would say that when I look historically on the quarter, I think Q1 was looking good for us. We were optimistic. We were still hitting our internal targets. Q2, we already start seeing the slowdown. We didn't know exactly to understand what this mean. I think it is just the beginning of the slowdown in specifically to our sector. We did some, you know, adjustment already in the end of Q2 in order to improve efficiency and marketing budgets to understand it looked like it's going to be a slowdown. We didn't know exactly how tough it will be. I think Q3 was stronger indicator that there is a slowdown.
I think probably it will be like that by the end of the year. As companies adapt to next year, I think there is gonna be maybe a more recovery in our sector. We decided that basically we need to do this adaptation and change the strategy according first of all about market condition and also market motion and sentiment. We feel it is much better to push the company to profitability and adapt ourselves to a market that's gonna be in the next few quarters more challenging to drive business. We thought this was the right decision to change strategy according to the challenging environment.
That's helpful. Maybe a question for Jason. Just as we think about cash flow break even next year, I think that's a much bigger change than at least the consensus numbers are indicating. Maybe just help us frame how we get there. I mean, should we think about revenue growth and, you know, of teens or 20% and OpEx flat? Or just help us understand kind of the underlying assumptions to get us there. And then secondly, if you could just kinda indicate your view on when you would expect things to get better. You know, obviously this is a difficult decision to reduce the headcount, but presumably you're not expecting things to improve anytime soon.
Just any thoughts on when you would look to rehire should you see things improve? Thank you.
Yeah. Tyler, thanks for the call. I think, you know, our philosophy over here, and it's always been that case, is balancing growth and profitability. You know, even before we went public, we had run the business efficiently and getting to cash flow, you know, profitability, break even and slightly positive right before we went public. When we went public, the whole investment thesis was that we were going to accelerate that growth and know that we can return that investment over the next, you know, 24 months after deploying that capital. We did a really good job at that. I think we were showing that growth.
What we've seen now, as Or just mentioned, is we've seen that slow down happening. We as a leadership team always wanna execute with that disciplined execution, that operating efficiency. You've heard us talk about the our unit economics over and over again over the last number of quarters, and it's not just empty words with us. We take action. I think that's why you're seeing the improvement already having in Q3. Many of you asked us before, "Are you able to adapt if you see the market changes?" We said, "Yes." Here it is. We were able to do it. Today's decision on reducing you know, taking a reduction in force is a tough decision, but it's the right decision for the business as we see, you know, going in today's macroeconomic climate.
We see still the demand is there. People are still buying. As you saw, people are even still locking in multi-year deals. So that our customers are telling us that not only we need Similarweb, we can't afford to lose Similarweb from their budgets, and therefore they're locking that contract in for a longer period of time. What we're doing from a, you know, planning perspective is to make sure that we have the operational flexibility and the baseline from an expense side to, you know, to be able to be sustained cash flow positive sometime in 2023, accelerating that from 2024, because again, we think that's the right thing to do.
Thank you.
As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Brett Knoblauch with Cantor Fitzgerald. Please proceed.
Hi, Or and Jason. Thanks for taking the question. I guess given the growth reset, it kinda seems like we're walking back to that $450 million ARR target that you previously guided to by the end of 2024. I guess, should we expect the growth rate that you guys are guiding to in the fourth quarter, call it, kinda high 20% range, be the more normal over the next two years? Should we expect additional deceleration over the coming quarters or coming years? I guess just any help kind of framing the pace of growth over the coming quarters.
No, I think we can expect to as long as the market condition what we're seeing today, we probably think that looking in next year, we hope to look maybe two tough quarter, like maybe Q1, Q2, and then we hope that Q3, Q4 there is some comeback. We're still optimistic about the execution. About what it means for growth for next year, we would probably provide this guidance in the next earnings call, once we gonna have the full year results.
That makes sense. I guess majority of the growth over the medium term to kind of come from you guys pushing on your existing customers? I guess to that extent, could you maybe talk about the adoption of your, you know, App Annie premium add-on and what you're seeing with that and how receptive customers are to that product?
We think the right strategy going forward in this environment, of course, is to double down on our own customers. We're lucky to have very broad product portfolios that we can introduce to them. The App Intelligence model that you talk about is one of them. We see good traction, though. We already have hundreds of customers upselling this model, and we have strong pipeline. This is one of the offering. We still have good innovation internally and the Shopper products for the economy are doing well.
We just launched a new investor platform for alternative data that look very good, and we already on board a lot of investor customers on it. There's still a lot of opportunities, as I said, in our portfolio, then we're very bullish around it.
For the Stock Intelligence product, is that still in beta? I believe you guys kind of said in the press release that it was expected to kind of go live by the end of the year. I guess, is that live now or is this something that will go live over the coming weeks?
Yeah, it's already live. We're already starting. First, I think we had tens of customers already starting like the trial. We give them trial to take a look. It's really new concept, how you look at all alternative data. Also historically, we have tens of paying customers who were buying the data through Excel, and now they have the more sophisticated UI with more insight and information, and we are kind of shifting them to use the platform. We're seeing good traction.
Okay. Maybe just one last question on my end. I guess, have you guys been more accommodative on the pricing, I guess pricing levels for your range of products, or is those held firm? Would you be kind of more accommodative on a pricing standpoint going forward?
It's a good question, and it's also internal discussion that we have internally. If now is the time maybe to do some price increase because the Forex exchange stuff and we're seeing that a lot of companies took this approach of doing price increase. Right now we didn't get to the final decision. We are much more flexible about payment terms. I think we understand our customers want to do some cost saving and et cetera. I think we're still doing yearly contracts, but sometimes we're giving them maybe quarterly payments or monthly payment to make them feel more comfortable. This is something that we did roll now in few regions.
Perfect. Perfect. Thanks, Or. Really appreciate it. Thanks, guys.
We have no further questions. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Thank you, everyone.
Thank you.