Similarweb Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the SimilarWeb Second Quarter Fiscal 2023 Earnings Call. Our host for today's call is Raymond Jones, Vice President of Investor Relations. At this time, All participants are in a listen only mode. Later, we will conduct a question and answer session. I would like to now turn the call over to your host.

Operator

Raymond, the floor is yours.

Speaker 1

Thank you, operator. Welcome everyone to our Q2 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 impact 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, Further reported results should not be considered as an indication of future performance.

Speaker 1

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, August 9, 2023. 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 combinations, amortization of intangible assets and certain other non recurring items.

Speaker 1

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.

Speaker 1

Similarweb.com. Today, we will begin with Brief prepared remarks from our CEO or offer and CFO, Jason Schwartz. Then we will open up the call to questions from sell side analysts in attendance. Please note that we published a detailed discussion of our Q2 2023 results in a letter to shareholders for investors' 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 Ur Offer, CEO of SimilarWeb.

Speaker 2

Thank you, RJ, and welcome, everyone, joining the call today. In Q2, we reported another quarter of growth and operating improvements. We grew our revenue 13% over Q2 last year to $53,700,000 Our global customer base grew 12% year over year and over 4,300 customers. And our average customers spend nearly $51,000 with us annually, in line with Q2 last year. I'm very proud of our great progress in this quarter on our path to profitability.

Speaker 2

Our non GAAP gross margin was nearly 80% again and our Q2 non GAAP operating margin show a strong improvement of 35% points compared to last year. That is extremely significant. Earlier this year, we announced our goal to achieve sustained positive free cash flow by Q4. Our Q2 results show we continue to make great progress and we feel very strongly that we will achieve our goal this year. When we originally planned our outlook for this year, we thought we would see market trends start to recover in Q3 and Q4.

Speaker 2

In fact, we see that our pipeline remains strong. We are adding new customers and expanding our penetration into the market. But at the same time, we see that enterprise are still continuing to optimize their budgets and spending. Sales cycles are longer than in the past and some customers needed to reduce their spending with us in order to fit their corporate budgets while remaining a similar web customer. And despite this, our local retention of our $100,000 customers remain at 98%.

Speaker 2

Our results also show we are investing efficiently in our marketing, R and D and product divisions. In marketing, Q2 metrics at the top of our funnel stayed positive. We had more than 25,000,000 unique visitor using our free tools@similarweb.com in Q2 and we are forecasting that more than 100,000,000 unique visitor We will use our free tools this year. This is truly remarkable achievement for our marketing organization. Our product team has been working on new feature in our solution that will provide more value to our customers.

Speaker 2

We have an exciting list of release coming up in Q3. One of them is called similarweb3.0, which is a new way of how we package our That includes new data, insight and navigation and will lead to a better pricing alignment with our customer that would enhance our go to market motion and improve our offering to our enterprise customers. We had a really exciting recent launch of a feature called Similaresque that is already live in the platform and is being used by our early adapter customers. Similarex is the 1st digital intelligent AI system designed to answer real question that users type in free text without having to know how to navigate our platform. We are solving one of the hardest problem every insight and analytics software have that is the ability to find insights In the data quickly and action them.

Speaker 2

And by introducing Similar Ask, we hope to solve this Holy Grail of data to insight and insight to action. In the future, we believe that using Singular Ask and AI capabilities will be like having a conversation with the world's most effective and Tenant, market researcher, analyst, strategy consultant and data scientist combined in 1. The AI can give answers to critical business question instantly. This will accelerate our time to feature development and drive more efficiency in our product development cycle We believe our upside potential for working with AI is high and we look forward to bringing similar ask into the market. In our view, SimilarWeb digital data is the best of its kind available on the market today and merging it with AI capabilities

Speaker 3

Thank you, War, and thank you to everyone joining us on the call today to discuss our 2nd quarter results. I will briefly address our financial performance and then we'll open up the call to questions. Our results in the second quarter Our overall dollar based net retention rate or NRR was 101% as compared to 115% in the Q2 of 20 And for our $100,000 ARR customer segment, NRR was 109% as compared to 127% in Q2 last year and now represents 55% of our total ARR. While customer acquisition and logo retention were steady in the second quarter, we saw challenges to expansion within our existing customer base. Some customers needed to reduce their spending with us in order to fit their corporate budgets, while remaining to be a SimilarWeb customer.

Speaker 3

We are encouraged that 42% of our ARR is generated from We continue to exceed expectations on our bottom line. Our 2nd quarter GAAP operating loss was $9,800,000 while our non GAAP operating loss was $3,500,000 which was better than the lower end of our guidance range. Notably, our non GAAP operating margin improved 35 percentage points versus the prior year. These results reflect the ongoing impact of our broad based operating efficiency initiatives we have deployed across the business. Turning now to Q3 2023, we expect total revenue in the range of $54,100,000 to $54,500,000 For the full year, we now expect total revenue in the range of $216,000,000 to $218,000,000 representing approximately 12% growth year over year at the midpoint of the range.

Speaker 3

Non GAAP operating loss for the 3rd quarter is expected to be in the range of $2,800,000 to $3,200,000 and for the full year between $16,000,000 $17,000,000 This implies a non GAAP operating loss margin of 5.4% for the 2nd half of this year at the midpoint, an improvement of over 4.5 percentage points as compared to the first half of this year. Importantly, we are on track to achieve our goal of sustained positive free cash flow by the Q4 of We continue to focus on balancing growth with accelerating our path to profitability and to align our actions with our intent to become sustained free cash flow positive. We believe That our team, our business model and our balance sheet remain resilient as we navigate the current environment. With that, Oren and I are ready to answer your questions.

Operator

At this time, we will conduct the question and answer session. Our first question comes from Arjun Badriah with William Blair. Your line is open.

Speaker 4

Thank you guys so much for taking the questions. I know the customers are still optimizing spend. I think You guys aren't alone. We're seeing that across the space come up in Q2 and linger for a bit. Or Jason, can you touch on what the common paths are that customers are taking to reduce spend or they're cutting Products outright are reducing volume.

Speaker 4

What do you normally see? And then when you think about the recovery, right, whenever it happens, if it's Later this year or early in 2024, how are you positioning yourself with those customers so that you can re expand as budgets start

Speaker 2

lines of business that we have. We have few different product we sell to few different use case. So if you look on, for example, our sales intelligence solution that we're selling to the sales organization for lead generation, lead enrichment, etcetera. And there, when you have reduced budget, it's mostly because the company has been around over layoff And then because this product is seed based, usually the spend is going down. So if you look at different example of the products, the stock intelligence, when we sell the alternative data for Sign Versus Code decided to invest less in tech or into digital companies And besides shift their investment strategy into gold and oil, there is well now that they're delivering some of their consumption.

Speaker 2

So So this is just examples.

Speaker 4

Okay. Got it. And then I know last quarter we had just talked about pricing and packaging changes. What have you seen as you kind of just bundle some of your products together? Any early kind of feedback that you've seen from The pipeline, the top of the funnel as a result of some of those changes that you've made or are you seeing anything yet or is that still to come in future periods?

Speaker 2

Yes. So we launched the change a quarter ago into 1 team of the pilots, And it was very successful. And I think a month ago, we launched a trend globally to the entire go to market. The feedback is good. It's really simplified the mental model of how you price and how you align with the value.

Speaker 2

I think it will drive more success in win rates, hopefully, maybe Shortened sales cycle, it got longer in the past few quarters. And I think also there's going to be Nice opportunity for migration. So it was a good opportunity to go back to some of the current customers that are to renewal and Presenting them the new pricing and then for mobile and then it's like you can migrate them to this new version and it's also a good time Or maybe to add some opportunity for upsells. So this is what I hope to look at.

Speaker 4

Okay, perfect. Very helpful. Thank you, Orest.

Speaker 2

Thank you.

Operator

Your next question comes from is in Helfstein with Oppenheimer. Your line is open.

Speaker 5

Hi, this is Steve Homan on for Jason. Thank you for taking our questions. So first, sales cycles and payback periods have been longer than average for the past few quarters. What changes have you tried Or may try to shorten these. Have you seen any change quarter to date in that or same trend as in the second quarter?

Speaker 5

And then similarly on marketing, do you anticipate leverage in S and M or having to make headcount reductions to reach the 4th quarter

Speaker 3

We don't anticipate needing to take any and don't plan on taking any headcount reductions. We think That's the plan that we have now and we feel confident in the guidance that we've given. And on the sales cycle, Look, we're seeing the sales cycles are still longer or mentioned you had talked about how Businesses are still struggling with the macro environment and managing their budgets through the year, and we see that The pipeline is actually strong. We actually have good visibility into deals and deals are still progressing, but the timing of getting those things done Are still longer cycles than it has been in the past.

Speaker 4

Okay. Thank you very much.

Operator

Your next question comes from John Bune with Jefferies. Your line is open.

Speaker 6

Hi, thank you. This is John Bien on behalf of Brent Thill. Maybe one more question on the macro. Any differences you're seeing in behavior between your very large enterprise customers and somewhat smaller mid market? And any signs of maybe loosening in the 1st 5 weeks of this quarter versus Q2?

Speaker 2

There is a little bit change in behavior in a way. We We get more pressure on the small accounts and in the very, very big and corporates, We see more pressure, more stress about showing optimization on budget. And so it's like in the edges, very small companies and very, very big corporates.

Speaker 6

And then on similar ask, I mean, that looks very interesting. I'm wondering how far along you are with the On that beta, is there prospect for going GA this year? Is it something more like you're looking at next year?

Speaker 2

Thank you. So the good news, it's already live in the platform and our people and some of our better customers already been lucky enough to Engage and use this capability of free tax and discovering site like that much faster. Very exciting when you play and understand all the capabilities around the unlock of opportunities here. And is that going to be launching probably in the next week or so to the entire paid customer? I mean, it's only the beginning.

Speaker 2

I think the more we play and integrate Discover, more we use this more creating value and So I think it's only the beginning of really great relationship.

Speaker 3

Okay. Thank you.

Operator

Your next question comes from Tyler Radke with Citi. Your line is open.

Speaker 3

Yes. Hi, good morning. Thanks for taking the question. I wanted to ask you just some of the trends you're seeing Across industries, we've heard from some others that software reporting season, the tech vertical remains under pressure. If you can just kind of highlight the differences in demand patterns and where you're seeing the Longer sales cycles play out either by product or by industry.

Speaker 3

Thank you.

Speaker 2

Yes. I think it's correlating to what I answered before at all, Alwyn. And for example, tech industry is mostly B2B companies that we sell though and that's buying our solution and they're usually buying our And that is, as I said before, there they didn't lay off Some of them are adjusting their investment strategy and so investing back. So then you see there the dynamics and then maybe ACV goes a little bit down or we close bill. So this I think so you see most in tax sector as I said and the investor sector.

Speaker 2

And the other thing, the retail CPG looks strong. And also by I think another nice way to that we see that Europe is better and Europe is doing well. And China, we start seeing a little bit slowness, but overall, all the rest is kind of the same.

Speaker 3

Helpful. And just wanted to unpack the Expansion headwinds a bit more specifically on net retention, it looks like that ticked down pretty meaningfully. Wanted to see if you had visibility into where and when that troughs? And then specifically, are you seeing any pricing pressure in addition to Down sells in terms of reduced seats or capability. Thank you.

Speaker 3

Yes. Thanks, Tyler. I think what we're really seeing over there is that budget Pressure that our customers are feeling, and that impacts not only their current spend with us, but also our ability to expand with them. That whether it's new dollars from a new customer or new dollars from an existing customer, Those sales cycles are just taking longer. On the one of the things that we've done really Real focus on is recognizing that the installed base that we have, those customers are the long term value that we have And the length of those relationships and the depth of those relationships that we have are the ones that are going to continue to provide Lifetime value of those customers.

Speaker 3

And so we're really encouraged seeing that on those on our large customers, we're at 98 And logo retention, which Oren mentioned, and the fact that 42% of our customers are ARR is Contracted on multiyear commitment reminds us how much that customers See Similorab as being a significant part of the growth of their business.

Operator

Your next question comes from Ryan McWilliams with Barclays. Your line is open.

Speaker 7

Thanks for taking the question. This is Pete Newton on for Ryan McWilliams. I'm really pleased to see the profitability improvement in the operating leverage in the model. Now just on the AI front, How do you foresee generative AI enhancing Similem as a unique data asset? And can it help you guys capture and process even more available data on the Internet?

Speaker 2

I will answer the AI one and I will let Justin to answer the financial one. And so I think your question is very interesting because we did try to play with AI To answer the lot of, let's say, see a lot of insights and on in the data and trying to understand what caused, for example, those spikes you see. And this is where we use AI to go to the open web and try to explain why certain websites have a spike In traffic, why it's so jumping? So we can go and understand what happened in the same day by looking on the data that's available online. So there is a lot of use case when you can see that the AI is like and closing the bridge Between the data we show the insight and what happened in the open web.

Speaker 2

So there's a lot of great sophistication around that. And Jason, you want to answer the first question here?

Speaker 3

I think he was just commenting on the improved The leverage and efficiency in the business. Thanks so much.

Speaker 7

And then just Just two more for me. First, on the AI adoption, how are you thinking about the timing of that? Do you think it's more of a next year phenomenon as customers reset budgets or Any expectations for that this year?

Speaker 2

I think that there will need few, I would say, month or Quarters of integration with the feature we build using with the AI. So there's a lot of innovation and I'm very curious to see what will get adapt In the end, even now with this free text box that we released and we start seeing what people are searching And it's going to be very interesting to see if it will adapt, if people will really use that as a search engine and will change the way they behave and how they Analyze data other than going over tables and graphs, they will just search in the search books. It's going to be interesting to see and then you need to iterate. So I think you need a Few quarters of integration, we launched the first version now to see how these are using it. Now, if you get adoption, I'm not going to give you reiteration.

Speaker 2

But I think that by the end of the year, Companies will able to discover what are the best use case to leverage AI into their capabilities And only next period to really get into the starting really the value and the acceleration of Value extraction from using that.

Speaker 7

Okay. That's helpful. Thank you. And then just one for Jason. Should macro improve, do you think you can maintain these improved levels of profitability while still investing to capture better growth opportunities in the future?

Speaker 3

Yes, for sure. I think that a lot of the unit economics that you're seeing Our existing book of business, we're able to drive 50% to 55% contribution margin On that, I think that that is the flywheel that continues to fund the business. And with the Proved macro environment, we should see the CAC or the cost of acquisition going back to the historical trends, 15 to 16 month payback as opposed to what we're seeing now, which is more like 19 to 20 month payback.

Speaker 7

Very helpful. Thanks guys.

Operator

On your telephone keypad. Our next question comes from Noah Herman with JPMorgan. Your line is open.

Speaker 8

Hey, guys. Thanks for taking the questions. So you mentioned how you have about, I think, 25,000,000 unique visitors using some of your free tools and you expect that to sort of jump to $100,000,000 by the end of this year. I'm just curious, how should we think about maybe that acting as a potential lever to convert more customer additions throughout the year? And Also too, I mean, do these customers also have access to the new similar apps tool that you've launched?

Speaker 8

And Could that also act as a potential pricing lever with those customers longer term? Thanks.

Speaker 2

Thank you, Noah. Just to explain the announcement, we are now Having more than 25,000,000 unique visitor per quarter and we're forecasting that during the next few quarters, we're going to be growing a little bit that You're going to have in 2023 overall for the year 100,000,000 people using our free tools. It's a very big exposure to Similar way the brand capabilities understand of the technology we provide also the digital intelligence. So this is what make us excited and we understand this is a very strong engine to build pipeline on top of that, especially as you grow that you have such a strong brand. And for big, I think that we have big audience out of those 25,000,000 people that register to try The paid version that you get the free trial.

Speaker 2

So right now, the similar ask is only open to At better customers, next week, we'll be open to our paid customers. So what it means that from the people who choose to register to try Our paid solution, they have a 7 day free trial. They will be exposed down the road to similar risk and we'll be able to see and try it And then

Speaker 8

just a quick follow-up. It's great to see the improvement on the bottom line and obviously, still some challenges with expansions. But I guess Putting the macro headwinds aside, I mean, how should we sort of think about at this point the normalized top line growth for the business that hopefully starts to seed going into next year? Thank you.

Speaker 3

Yes, I think we're going to be able to give guidance for next year when we get to Q4. I think we'll be All be a lot smarter as to how the macro starts shaking out in over the course of the next 3 months. And we still think that the need and the uniqueness and value that we bring with the With SimilarWeb Digital Data is what is going to drive that growth. Ultimately, what we're committed to is that efficient growth that we have the conviction that we will

Operator

At this time, there are no further questions. This does conclude today's SimilarWeb 2nd quarter fiscal 2023 earnings call. Thank you everyone for attending and have a wonderful rest of your day.

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