Greetings, welcome to the Similarweb first quarter fiscal 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, RJ Jones, Vice President, Investor Relations. Thank you. You may begin.
Thank you, operator. Welcome everyone to our first quarter 2023 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 rising interest rates, rising global inflation and current macroeconomic conditions, challenges in our business and in the markets in which we operate, 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. 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 23, 2023, and in particular, the sections entitled Cautionary Statement regarding Forward-Looking Statements and Risk Factors for a discussion of the factors that could cause our actual results to differ from the forward-looking statements. Also note that any forward-looking statements made on this call are based on information available as of today's date, May 10, 2023. We undertake no obligation to update any forward-looking statements that 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 combinations, 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 with 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 first quarter 2023 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 welcome everyone joining the call today. We reported a solid result in the first quarter. Despite the challenging macroeconomic environment, we grew our revenue by 19% over Q1 last year to $52.8 million. Our global customer base, consisting of SMB, enterprise and strategic accounts, grew 14% year-over-year to nearly 4,200 customers. Our average customer spends about $51,000 with us annually, up 4% over the last year. We have much to be proud of this quarter when looking at our path to profitability. First, our gross margin was nearly 80%, a new record. Our investment in marketing and R&D are showing strong returns. In marketing, metrics at the top of the funnel are very positive and show increasing trends.
Our R&D team made advances with our data and solution and will provide more value to our existing and prospective customers. Our operating margin show an amazing improvement of 31% points compared to last year. Earlier this year, we announced our goal to achieve sustained positive free cash flow by Q4. Our Q1 results show we are making great progress. We are focused on deploying resources carefully on the core activities that creates revenues and improve profitability. With this in mind, we are reducing our headcount by 6% in Q2. We're excited to see all progresses happening in the world of AI. With all the new capabilities AI will bring, we see a lot of opportunities for our company on a few fronts. The first one is to improve our data analysis at scale using AI to excel in speed, accuracy and quality.
Next, it will enhance our product development by using AI capabilities of finding and analyzing insight in our unique data, which extremely powerful. What will be different for us is when those AI will meet our unique data assets. We are one of the only companies that have this comprehensive data on activity of the digital world covering more than 10 years. Once AI will be training on all the coverage that Similarweb Digital Data has, we will be able to develop new capabilities to conduct extensive analysis for companies from simple queries of their specific needs and provide prediction of what will be next. We are uniquely positioned to benefit from the AI change and how it will use our data to help companies to win in the digital world. We believe that Similarweb Digital Data is best of its kind available anywhere.
We help our customers generate revenues and enhance their monetization in the digital world. Our customers tell us that they make better decisions navigating this uncertain environment because of Similarweb. We remain determined to help our customers overcome the challenges to win in this unpredictable economy and beyond. 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 first quarter results. I will briefly address our financial performance and then we will open up the call to questions. Our results in the first quarter demonstrate our continued focus on disciplined execution towards achieving our strategic objectives. Revenue was $52.8 million for the quarter and in line with our guidance range. Our overall dollar-based net retention rate, or NRR, was 105% as compared to 115% in the first quarter of 2022. For our $100,000 ARR customer segment, NRR was 114% as compared to 127% in Q1 last year, and now represents 55% of our total ARR.
While customer retention was good in the first quarter, we saw a more challenging environment to drive upsells within our customer base as businesses struggled with budget cuts in the current macroeconomic environment. Despite tight budgets, we are encouraged that 40% of our ARR is generated from customers with multi-year contracts, which has continued to grow steadily and sequentially, demonstrating the durability of those customer relationships and the value that our data delivers to our customers. While our results on the top line were in line with our plans, we exceeded expectations on our bottom line. Our first quarter GAAP operating loss was $13.1 million, while our non-GAAP operating loss was $7.2 million, which was significantly below the low end of our guidance range.
Notably, our non-GAAP operating margin improved 31 percentage points versus the prior year. As Or mentioned, our gross margin improved to nearly 80%. These results reflect the ongoing impact of our broad-based operating efficiency measures we've implemented across the business. Turning now to Q2 2023, we expect total revenue in the range of $53.3 million-$53.8 million. For the full- year, we continue to expect total revenue in the range of $221 million-$222 million, representing approximately 15% growth year-over-year at the midpoint of the range. Non-GAAP operating loss for the second quarter is expected to be in the range of $6.5 million-$7 million, and for the full- year between $21 million and $22 million.
Importantly, we intend to achieve sustained positive free cash flow by the fourth quarter of 2023. Please note that our free cash flow may fluctuate seasonally as we progress through the year. In particular, we anticipate significant improvement in Q2, 2023 as compared to Q2, 2022. With our reorganization we announced today, we anticipate savings to be realized in the back half of this year. Ultimately, we expect our quarterly free cash flow cadence will be positive when we finish 2023. Our updated growth projection for 2023 reflects our assessment of the impact of continuing macroeconomic pressures on our business that will persist for an indeterminable amount of time. We continue to balance our expectations for moderating growth with accelerating our path to profitability.
The decisions we are making and the actions we are taking align with our intent to become free cash flow positive by the end of this year. We believe that our team, our business model, and our balance sheet remain resilient as we navigate the challenging environment. With that, Or and I are ready to answer your questions.
Thank you. We will now conduct a question- and- answer session. 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. Once again, that's star one at this time. One moment while we pull for our first question. Our first question comes from Arjun Bhatia with William Blair. Please proceed.
Hey, guys. Thanks for taking the questions. Can we start with the headcount reductions that you announced? Would love a little bit more detail on where you're cutting heads, where you're reducing some of your expense exposure, and how should we think about, you know, what that means for top line growth for the remainder of the year? Is there potential for that to be disruptive or are these non-revenue generating roles that are being cut here?
Hey, Arjun, what's up? Thank you for the question. You know, the guidance stays. It's, we are still heading on plan. I think when we, when we need a reduction, you know, we look over in the company and try to see where we can optimize. Big part was around S&M and then in other department like operation when we decided to go to be more slim in those departments. This is where we had, 6%. As I said, it's not gonna change. The guidance is still on track.
Okay. Got it. That's helpful. You're making some good progress on the margin front, getting to a free cash flow breakeven. One of the things that stuck out this quarter was the gross margins, which continued to increase for a couple of quarters now. As you think about this 80% range, do you think that's sustainable here, or should we expect some more fluctuation as we progress through this year?
First, it, we feel it was an excellent progress. We're very proud with the numbers we're able to achieve on that front. On the long- term, we hope that it will be even above 80%. Yeah, maybe in the next quarter or two, it will be up and down a little bit, but down the road, for sure, 80% and above.
All right. Perfect. Thank you, Or. Appreciate you taking the questions.
Our next question comes from Ryan MacWilliams with Barclays. Please proceed.
Hey, guys. Thanks for the question. Good to see the continued progression on the profitability front and raising your full- year operating income guide, you know, despite all uncertainty on the macro side. You know, just with those economic headwinds, Jason, maybe any commentary on, you know, how macro impacted you guys, like as you expected or any worse in the quarter? Like, did it get incrementally more difficult, you know, following March, like the Silicon Valley Bank, and into April? Thanks.
Yeah, Ryan, it's good to hear from you. You know, like we shared in the shareholder letter, we're seeing, again, the extension of sales cycles. They're taking longer, and it's impacting upsells. The budgets that the slimmer budgets that people have, we're seeing that happen as well. We're seeing similar kinds of trends. We're seeing demand, top line demand actually increasing, throughout the quarter and going you know, into Q2. We're seeing that in April. That's overall where we're seeing.
Excellent. Then, Or, I was thinking about your whole activity around AI and large language models. You know, I've been thinking like, you know, what interesting insights can come from the combination of, you know, your data set and things like ChatGPT. I'm sure despite the macro, you're really excited given all this like technology investment. You know, could you help us again just remind investors why your data set is unique and what, like, insights or near- term use cases do you think Similarweb can help customers with large language models in the near- term? Thanks.
Regarding our uniqueness as we, or probably know a little bit about our competition in the market, I think we are very unique in our data quality and also the ability to give full visibility to the digital world. There is very few companies that have this unique data. When you take this data of how the digital world behaved for the past 10 years, and you can, you know, train the AI model on that, it can come with really amazing stuff. We just came out of a week of hackathon here in the R&D when we have been play for one week with ChatGPT AI and our capabilities, and they came out with really crazy stuff.
One of the advantage, you know, and that the AI is really helping with is the discovery of insight and then translate those insight into action. I think that most of companies that provide analytics and data and insights, you know, you need to work very hard to find those insights and then doing a lot of research and the AI really accelerate it. Like, this is really something that I think will give our sector a good push.
Excellent. Appreciate the color. Thanks, guys.
Next question comes from Jason Helfstein with Oppenheimer. Please proceed.
Hi, this is Steven Hromin on for Jason. Given that billings continues to slow and customers are growing faster than billings, when do you see kind of an inflection occurring, and what indicators are you looking for, or you looking at, I should say, to kind of indicate, you know, when that will occur? Thank you.
Yeah. Again, we've got the one big benefit that we have in our business is today 40% of our renewals are already signed up. Our book of business are signed up on a multi-year commitment, so we've got good visibility in there. During, you know, the last couple of months, we see some customers who are asking for, you know, semiannual payments and/or quarterly payments, and that'll affect the billing number, but wouldn't affect the overall cash flow numbers. I think as Or mentioned, and you've seen the numbers say the drive that we've been able to do to get to that profitability or close to that, you know, cash flow positive, is more tangible than ever.
Okay. Thank you very much.
The next question comes from Brent Thill with Jefferies. Please proceed.
Hi. Thank you. This is John Byun on for Brent Thill. I think in the past you talked about some changes in product bundling, packaging and pricing. I want to see if you could talk about that in terms of a, I think a lower entry point you alluded to as well as a higher price, enterprise tier, if you can give an update on the timing and maybe any sort of response, at this point?
Yeah. It's a good question. We start rolling out a new package for the enterprise that contain a lot of enterprise features. This looks that our AOV was increased 4% in the first quarter. It's a good indicator. This is only part one of a bigger project. We're rolling out a new motion packaging to have much better land and expand all along the motion. We do think there is a good leverage on that on the second half of the year.
Great. Thank you. Then maybe, for Jason, you know, the NRR has declined obviously given all the macro trends. Wondering how you expect it to trend for the rest of the year. You know, is there a time that you think when they could bottom and grow from there? Thank you.
Yeah. So what we saw during this quarter is actually, you know, strong overall retention evidenced by logo retention. You know, even if you look at our $100,000 accounts, you know, the ones that make up 55% of our revenue, the logo retention is like 98%, you know, very, very high. The challenge that we have, given the market environment, is that the upsells that we've seen historically are just taking longer. You're seeing that impact the near-term NRR numbers. Overall, the durability and the health of the relationships that we have with our customers, I think, are strong.
Okay. Thanks very much.
The next question comes from Noah Herman with JP Morgan. Please proceed.
Hey, hey guys. Thanks for taking the questions and congrats on the quarter. Just curious, coming back to the 6% headcount reduction, could you know, maybe just give us some sense of, you know, what the total maybe cost savings would be? What are you sort of baking into the guidance now for the full year, given the reduction? Thanks.
Hi, Noah, it's Jason. Thanks for the question. The guidance that we have is, you know, and the improvement that you see in the back half of the year, the guidance is reflects that. I think we're seeing already a few million dollars of improvement on that front. Going forward, you'll see even more, you know, in 2024.
Okay. Yep. That was all from my side. Thank you.
The next question comes from Brett Knoblauch with Cantor Fitzgerald. Please proceed.
Hi, guys. Thanks for taking my questions. Jason, maybe the first one's for you. I guess you guys target kind of reached kind of positive for cash over the fourth quarter. Was that still a, I guess, on plan excluding this headcount reduction? Or was the headcount reduction needed for you guys to reach that target?
It was on plan irrespective of this. I think that, the optimization that we've done in the headcount now is again, just the further focus on our disciplined execution, and trying to drive efficiency across the board, prioritizing, the areas that, are contributing the most and the things that are weaker contribution, to take the time to optimize that. If it means slim it down a little bit in order to pick it up again, we're making those choices.
Perfect. Understood. On the, this second quarter revenue guide, you know, kind of guided for, you know, an additional $800,000 or so, can you just talk about what's going into that? You know, I think in your prepared remarks you guys said that top of funnel metrics and demand, you know, kind of outlook was improving. Yet I guess the sequential growth is what you guys are guiding for is looks like to be lower than anything else that you guys have delivered. I guess just help us understand this dynamic.
Yeah. Two things on that front. One is, again, sales cycles, like we've checked for a couple of quarters now, we see them lengthening. You see that already in our CAC payback periods that something. It's just something that we wanna accommodate for. The second is the linearity during the quarter. As deals come in, more customers take the time, and it comes towards the end of the quarter. The contribution for the current quarter is lower, whereas going forward, that'll be a full quarter contribution. There are two factors that go into that.
Perfect. maybe just to end our question as differently. What do you think that could bottom at? Like, you think there's more room for that to decline below 105? We see that trend closer to 100. Any insight on where that could potentially bottom?
We see that again, what we're seeing right now is long sales cycles on the upsell. We're seeing, you know, customers optimizing all the way through. Like I said, we're seeing strong logo retention, and that's something that we continue to, you know, focus on. Overall, we're seeing, again, 55% of our revenue comes from those very, very large accounts. When you look at the math on that, those customers are spending like $600,000 a year on average with us. Those have a very strong retention numbers. On the low end of the side, on the low end of the spectrum, you see a little more churn. There's a blend that happens in, you know, in one quarter or another. Overall, that's what we see.
The nice thing about our business, when you look at the, you know, nearly 4,200 customers that we have, 75% of them are buying multiple products, at least two products or more. The fact that we have that install base that continues to buy and have multiple uses of Similarweb creates a greater stickiness than I think that others have.
Perfect. Thanks for answering the question, Jason. Really appreciate it.
The next question comes from Patrick Walravens with JMP Securities. Please proceed.
Great. Thank you. I have three questions, but they're all related to Similarweb Digital Data, so I think you'll like them, and I'll just tell you what they are. Number one, how much are you generating today from people using your data, your data sets to train AI models? Number two, is there really a market there? I mean, it seems like a lot of the datasets that people use, like, you know, Hugging Face and Wikipedia and Kaggle are all public and free. Number three, if there really is a market, what do you guys have to do to drive the monetization there?
Hey, Patrick. It's a very interesting question. I think by the way, I think that because the uniqueness of our data, we would want to train the AI model, and we will not try to leverage that to give other AI to learn. I don't think there is a market there yet. I think for us to be delivering the insights and, you know, answering critical questions to our customers about what to do next, how to win in the digital world or opportunity discovery, this will be extremely powerful. I hope that this answer your question.
Is there anything you need to do to drive, more of that today than you're already doing?
No, we just need to start to implement that in many different level of our offerings.
All right. Thank you.
Once again, to ask a question, that's star 1 on your telephone keypad. Our next question comes from Tyler Radke with Citi. Please proceed.
Yes, thank you. Jason, you talked about strong, logo retention. I'm just wondering within those logos how overall seats is tracking. Obviously, there's been layoffs among your customer base and a lot of pressure on seat-based models. You know, are you seeing any increased kind of down sales and or pricing pressure, either from tighter budgets and co-competition who may be in a worse spot than yourself?
We have solutions we take into the market, five products. Four out of them are basically the growth model does not really correlate with seats. If you think about our research solution, our marketing solution, our Stock Intelligence solution, seats are strong growth drivers. Even if companies are doing layoffs, if we don't lose the champion, basically it's okay. We have 1 product that is the Sales Intelligence, and it is one, the smallest one that there is a seat base. There is layoffs. You can see that it correlate with the growth of the account or downsell . This is only 1 out of 5.
Okay. With the guide, it looks like you're holding the full- year unchanged. I guess implicitly you're expecting revenue to step up a bit in Q3, Q4. Could you just talk about your confidence level in, you know, second half pipeline, the renewal base, and given everything going on, you know, just the puts and takes on being able to maintain the guide here. Thank you.
Yeah. I think we have a strong feeling about maintaining the guides. We do see, and I even talked about it a little bit in the little before about seeing the top of the funnel increase, and we're seeing demand going on, the people visiting our website, people registered to check our products and the amount of meetings we're able to arrange to our go-to market. We do see strong movement there. I think that as long as the market starts maybe bounce back in the second half of the year, it will also see strongest movement. Yeah, we do feel confident about the guidance right now.
Okay. Thank you.
Once again, to ask a question at this time, that's Star one on your telephone keypad. There are no further questions in queue at this time. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.