Similarweb Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 9 speakers on the call.

Operator

Greetings, and 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, R.

Operator

J. Jones, Vice President, Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, operator. Welcome everyone to our Q1 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 are 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.

Speaker 1

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.

Speaker 1

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 And non GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at ir.

Speaker 1

Simlerwebdot Today, we will begin with brief prepared remarks from our CEO or Ofer and CFO, Jason Schwartz. Then we will open up the call to questions from sell side analysts in attendance. Please note that we publish a detailed discussion of our Q1 both of which are available on our Investor Relations website. With that, I will turn the call over to Or Offer, CEO of SimilarWeb.

Speaker 2

Thank you, RJ, and welcome, everyone, joining the call today. We reported a solid result in the 4th quarter. Despite the challenging microeconomic environment, we grew our revenue by 19% over Q1 Last year to $52,800,000 Our global customer base consisting of SMB, enterprise and strategic accounts Grew 14% year over year to nearly 4,200 customers. And 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.

Speaker 2

First, our gross margin was nearly 80%, a new record. Next, our investment in marketing and R and D are showing strong returns. In marketing, metrics at the top of the funnel are very positive and show increasing trends. Our R and D team made with our data and solution and will provide more value to our existing and prospective customers. Lastly, our operating margin show an amazing improvement of 31 percentage points compared to last year.

Speaker 2

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 resource 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.

Speaker 2

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.

Speaker 2

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 We believe that similar web digital data is best of its kind available anywhere, We help our customers generate revenues and enhance their monetization in the digital world. Our customer tell us that they make better decision navigating this Certain environment because of Simulome Web. 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.

Speaker 3

Thank you, War, and thank you to everyone joining us on the call today to discuss our Q1 results. I will briefly address our financial performance, Our results in the Q1 demonstrate our continued focus on disciplined Execution towards achieving our strategic objectives. Revenue was $52,800,000 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 Q1 of 2022, for our $100,000 ARR customer segment, NRR and now represents 55% of our total ARR. While customer retention was good in the Q1, 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 demonstrating the durability of those customer relationships and the value that our data delivers to our customers.

Speaker 3

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 $13,100,000 while our non GAAP operating loss was $7,200,000 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 and as Orr 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 $53,300,000 to $53,800,000 For the full year, we continue to expect total revenue in the range of $221,000,000 to $222,000,000 representing approximately 15% growth year over year at the midpoint of the range.

Speaker 3

Non GAAP Operating loss for the Q2 is expected to be in the range of $6,500,000 to $7,000,000 and for the full year between $21,000,000 $22,000,000 Importantly, We intend to achieve sustained positive free cash flow by the Q4 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.

Speaker 3

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 aligned 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. And with that, Oren and I are ready to answer your questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Arjun Bhatia with William Blair. Please proceed.

Speaker 4

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

Speaker 2

Hey, Arjun. What's up? And thank you for the question. So the guidance stays. So we are still heading on plan.

Speaker 2

I think when We need the reduction. We look over in the company and try to see where we can optimize. So big part was around S and L. And then in other department like operation, when we decided to go to be more slim in those departments. So this is where we 6%.

Speaker 2

And as I said, it's not going to change the guidance. It's still on track.

Speaker 4

Okay. Got it. That's helpful. And then, you're making some good progress on the margin front getting to free cash flow breakeven. One of the things that stuck out this quarter was the gross margins, which were continued to increase for a couple of quarters now.

Speaker 4

But as you think about this 80% range, do we do you think that's sustainable here? Should we expect some more

Speaker 2

Hello. First, we feel it was an excellent progress. We're very proud with the numbers we've achieved in that front. And yes, on the long term, we hope that it will be even above 80, but yes, maybe in the next quarter or 2, it will be up and down a little bit, but Down the road, for sure, AP and above.

Speaker 4

All right, perfect. Thank you, Orest. Appreciate you taking the questions.

Operator

Our next question comes from Ryan McWilliams with Barclays. Please proceed.

Speaker 5

Hey, guys. Thanks for taking the question. Good to see the continued progression on the profitability front and raising your full year Operating income guide, despite all some uncertainty on the macro side, just with those economic headwinds, Jason, maybe Any commentary on how macro impacted you guys, like as you expected or any worse in the quarter? And like did it get incrementally more difficult Following March, Silicon Valley Bank and into April. Thanks.

Speaker 3

Yes, Ryan, it's good to hear from you. The like we shared in the show, 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, so we're seeing that happen as well. And We're seeing similar kinds of trends. We're seeing demand top of the top line demand actually increasing Throughout the quarter and going into Q2.

Speaker 3

So we're seeing that in April. So we're That's overall. We are seeing.

Speaker 5

Excellent. And then, Ora, I was thinking about your overall activity around AI and large language models. And I've been thinking like what interesting insights can come from the combination of your data set and things like CATGPT. So I'm sure despite the macro, you're really excited, given all its like technology advancement. Could you help us again 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.

Speaker 5

Thanks.

Speaker 2

Yes. So regarding our uniqueness, 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 digital world. There is Very few companies that have this unique data and then when you take this data from the digital world behavior for the past And years and you can train the AI more than on that. It can come with really amazing stuff.

Speaker 2

We just came out of a week of hackathon K and LNV, when we have been play for 1 week with the Chechi PT AI and our capabilities and they came out with really crazy stuff. And one of the advantage and that the AI really helping you with is the discovery of insight and then translate those insight into I think that most of companies that provide analytics and data and insights, you need to work very hard to find those insights and then And doing a lot of research and the AI really accelerated like so this is really something that I think will give Our sector is a good push. Excellent. Appreciate the color. Thanks guys.

Operator

Next question comes from Jason Helfstein with Oppenheimer. Please proceed.

Speaker 1

Hi, this is Steve Hohman on for Jason. So 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're looking for or you're looking at, I should say, to kind of indicate when that will occur? Thank you.

Speaker 3

Yes. So again, we're seeing we've got the one big benefit that we have in our businesses today, 40 And of our renewals have already signed up or our book of business have signed up on a multi year commitment. So we've got good visibility in there. During the last couple of months, we see some customers who are asking for Semi annual payments and or quarterly payments and that will affect the billing number, but wouldn't affect The overall cash flow numbers, and I think as Lore 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 cash flow positive is more tangible than ever.

Speaker 1

Okay. Thank you very much.

Operator

The next question comes from Brent Thill with Jefferies. Please proceed.

Speaker 6

Hi. Thank you. This is John Bian for Brent Thill. I think in the past you talked about some changes in product bundling, packaging and pricing. And I wanted to see if you could Talk about that in terms of, I think, a lower entry point you alluded to as well as a higher price enterprise tier.

Speaker 6

If you can give an update on the timing and maybe any sort of response at this point?

Speaker 2

Yes. And so it's a good question. And so we start rolling out a new package for the enterprise that contain a lot of enterprise features. And this looks like that our AOV was increased 4% in the 1st quarter, so it's a good indicator. And this is only part 1 of a bigger project we're running up A new motion packaging to have much better land and expand all along the motion.

Speaker 2

So we do think there is a good leverage On that on the second half of the year.

Speaker 6

Great. Thank you. And then maybe Jason, the NNR has declined obviously given all the macro trends, but wondering how you expect it to

Speaker 3

Yes. So we're what we saw during this quarter is actually strong overall retention Evidenced by logo retention, even if you look at our $100,000 accounts, The ones that make up 55% of our revenue, the lower retention is like 98%, very, very high. The challenge that we have Given the market environment is that the upsells that we've seen historically are just We're taking longer. And so you're seeing that impact the near term NLR numbers. But overall, the durability and And the health of the relationships that we have with our customers, I think, are strong.

Speaker 6

Okay. Thanks very much.

Operator

The next question comes from Noah Herman with JPMorgan. Please proceed.

Speaker 1

Hey, guys. Thanks for taking the questions and congrats on the quarter. Just curious coming back to the 6% Headcount reduction. Could you maybe just give us some sense of what the total maybe cost savings would be or what

Speaker 3

Hi, Noah. It's Jason. So thanks for the question. The guidance that we have is And the improvement that you see in the back half of the year of the guidance reflects that. I think We're seeing already a few $1,000,000 of improvement on that front.

Speaker 3

And then going forward, You'll see even more in 2024.

Speaker 1

Okay. Yes, that was all from my side. Thank you.

Operator

The next question comes from Brett

Speaker 7

Chase, maybe the first one for you. I guess, the you guys target kind of reached kind of

Speaker 3

positive for cash flow in the 4th quarter.

Speaker 7

Was that still, I guess, on plan, excluding this headcount reduction? Or is the head What was the headcount reduction needed for you guys to reach that target?

Speaker 3

It was On plan irrespective of this and I think that the optimization that we have 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 things that are weaker contribution to take the time to optimize that. And if it means, slim it down a little bit in order to pick it up again, we're making those choices.

Speaker 7

Perfect. Understood. And then on the 2nd quarter revenue guidance, kind of guided for an additional $800,000 or so. Can you just Talk about what's going into that. I think in your prepared remarks, you guys said that top of funnel metrics and demand Kind of outlook was improving, but 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.

Speaker 7

So I guess just help us understand this, I don't know. Yes.

Speaker 3

Two things on that front. One is, again, sales cycles like we've shared for a couple of quarters now, we see them lengthening. You see that already in our CAC payback periods that that's something. So it's just Something that we want to accommodate for. And the second is the linearity during the quarter.

Speaker 3

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 will be a full quarter contribution. So there are two factors that go into that. Perfect.

Speaker 7

And maybe this is an NRR question asked 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?

Speaker 3

So we see that again, What we're seeing right now is long sales cycles on the upsell. And we're seeing customers optimizing All the way through, like I said, we're seeing strong logo retention and that's something that we continue to 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, and those have very strong retention numbers. On the low end of the side on the low end of the spectrum, you see a little more churn.

Speaker 3

So there's a blend that happens In one quarter or another, but overall, that's what we'd see. And the nice thing about our business, when you look At the nearly 4,200 customers that we have, 75% of them are buying multiple products, I think 2 products or more. And the fact that we have that installed base that continues to buy and have multiple uses of Simulab Creates a greater stickiness than I think that others have.

Speaker 7

Perfect. Thanks for answering the question, Jason. I really appreciate it.

Operator

The next question comes from Patrick Walravens with JMP Securities. Please proceed.

Speaker 8

Great. Thank you. I have three questions, but they're all related to similar web digital data. So I think you'll like them, and I'll just tell

Speaker 4

you what they are.

Speaker 8

So number 1, how much are you generating today From people using your data sets to train AI models. Number 2, Is there really a market there? I mean, it seems like a lot of the data sets that people use like Hugging Face and Wikipedia and Kaggle are all public and free. And then number 3, if there really is a market, what do you guys have to do to drive the monetization there?

Speaker 2

Hey, Patrick. It's a very interesting question. And I think by the way, I think that We would want to train the AI model and we will not try to leverage that to give other AI to the end. So I don't think there don't think there is a market there yet, but the field for us to delivering the insights and answering critical questions to Customers know what to do next, how to win in digital world, opportunity discovery, this will be extremely powerful. So I hope that this answer your questions.

Speaker 8

And Or is there anything you need to do to drive More of that today than you're already doing?

Speaker 2

No, we just need to start implementing many different level of our offering.

Speaker 7

All right.

Operator

Thank you. Our next question comes from Tyler Regg with Citi. Please proceed.

Speaker 7

Yes. Thank you. So 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.

Speaker 7

Are you seeing any increased kind of down sales and or pricing pressure, either from tighter budgets And competition who may be in a worse spot than yourself?

Speaker 2

So, solutions we take into the market, 5 products, and so out of them Basically, the growth order is not really correlate with SITs. So if you think about our research solution, our marketing solution, And I'll start in Teligent Solutions. It's not on growth, Dyla. So even if companies are doing layoff, If we don't move the champion, basically, it's okay. We have one product that is the sales intelligence And it is the smallest one that there is a seed base.

Speaker 2

There is layoffs here you can see that it's correlated with the growth The account or downside, but this is only one out of frame.

Speaker 7

Okay. And then with the guide, it looks like you're holding the full year Unchanged and I guess implicitly you're expecting revenue to step up a bit In Q3, Q4, could you just talk about your confidence level in second half pipeline, the renewal base And given everything going on, just the puts and takes on being able to maintain the guide here? Thank you.

Speaker 2

Yes. And so I think we have a strong feeling about maintaining the guidance. We do see and I didn't talk about it a little bit in the A little bit before, I was about seeing the top of the funnel increase and we're seeing demand going on, the people visiting our Web Right. People registered to check our products and the amount of meetings we're able to arrange to our go to market. So we do see strong movement there.

Speaker 2

And I think that as long as the market starts maybe bounce back in the second half of the year, it's also the strongest movement. But we do feel confident about the

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