Similarweb Q3 2024 Earnings Call Transcript

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November 13, 2024

There are 10 speakers on the call.

Operator

Greetings, and welcome to the SimilarWeb Third Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rami Meyerson, Vice President, Investor Relations for SimilarWeb.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Welcome everyone to our Q3 2024 earnings conference call. Joining me today are our CEO and Co Founder, Aurel Orphan and our CFO, Jason Schwartz. Yesterday, after market closed, we released our results for the Q3 and published a discussion of our results in a letter to shareholders as well as an investor presentation with a strategic overview of the business on our Investor Relations website at ir. Cylinderweb.com.

Speaker 1

Certain statements made on the call today constitute forward looking statements, which reflect management's best judgment based on the currently available information. These statements involve risks and uncertainties that may cause actual results to differ from our expectations. Please refer to our earnings release and our most recent annual report filed on Form 20 F for more information on the risk factors that could cause actual results to differ from our forward looking statements. Additionally, certain non GAAP financial measures will be discussed on the call today. Reconciliations to the most directly comparable GAAP financial measures are available in the earnings release and the earnings presentation.

Speaker 1

We will begin with Or and Jason's highlights on the quarter, and then we will open up the call to questions from sales side analysts. With that, I'll turn the call over to Or. Or, please go ahead.

Speaker 2

Thank you, Rami, and welcome everyone joining the call today. I'm extremely proud of the Q3 financial results we reported yesterday. Revenue growth accelerated again to 18% year over year growth in Q3, driven by increase in annual customer and improving retention. Our total customer count grew 21% year over year and the net retention or NRR increased by 2 percentage points. This is the 4th quarter in a row that we reported accelerating revenue growth and the 2nd quarter of accelerating customer growth.

Speaker 2

SimilarWeb is one of the only small group of public software companies that have reported accelerating growth over the last year. This growth acceleration and the improvement in our NRR results from a number of initiatives we implemented over the past year. We have improved our marketing capabilities, driving more meeting for our sales team and increasing brand awareness. We built a strong customer success organization that helped turn around our NRR trend over the last 3 quarters and is now back above 100% again. Susan Dunn, our new CRO is driving a series of improvements in our go to market motion and I'm happy with the progress she is making.

Speaker 2

It is great to see the success these initiatives are starting to deliver. SimilarWeb mission is to help companies to be successful in the digital world by providing them with the most accurate, comprehensive and actionable digital data. So every business can win those markets. For more than a decade, we have invested and continue to invest in a series of properties, capabilities that empower us to create our unique digital data. The continued customer growth and improved retention trends are indication of the confidence our customer place in our quality of our data and our ability to generate value from the data and the solution we provide.

Speaker 2

The significant investment we have made over the years to build SimilarWeb unique digital data means that we are in a great position to benefit from the AI revolution. Right now, I see 4 distinct options for us to capitalize and monetize the generative AI opportunity. The first one is the digital data is critical and fundamental component of every AI and LLM tech stack. And that is why many of the largest global tech companies are engaging with us to access our digital data to train their LLM and ensure their models are accurate and relevant. Last quarter, we announced our first 8 digit customer.

Speaker 2

And today, I'm pleased to share that during October, we secured our second 8 digit customer. This is also a big tech customer who has been with us nearly 10 years and also use our web intelligence, sales intelligence, shopper intelligence through the platform and API integration across many division and geographics. It is now also using similar digital data to train its LLM and we continue to engage with several other companies on similar opportunities. The second motion, we see opportunity for us in the JamTev AI is that we believe that the changes that LLMs are already having on the online customer behavior and the evolution of the journey from search to chatbots are more material and present a much more significant opportunity for SimilarWeb. We are engaging with several brands that are keen to understand how the transition from traditional search engine to chatbots for the consumer to find information that leads to transaction will impact their business.

Speaker 2

The evolution of the customer journey and the risk of omission from the output of the LLM is a growing concern for every brand around the world. Similar web digital data can provide a range of insights that can assist brands in understanding the impact and navigating this new version of the way consumer gather information. I believe that this is a great opportunity that we are uniquely positioned to capitalize as the AI revolution evolves. The 3rd way when joining the AI evolution is, of course, integrating AI into our own products and solution, help them increase the uses and speed to insights to our customers. Last year, we introduced similar ask.

Speaker 2

And earlier this year, we introduced Sam, our sales assistant agent in our sales intelligence solution. We're deploying and implementing more AI agents per use case across all of our solutions to drive more high customer engagement, accelerating the adoption and use of our solutions. And the 4th area is, of course, is integrating AI into our own internal process and tools, driving more efficiency and reducing costs. We're already seeing improvement in the development cycle around our engineering and reducing our customer support responses time with those tools and implementation. And there's many more to come to drive more cost saving and improve efficiency all across our organization with AI.

Speaker 2

I'm very bullish on the opportunity ahead of us. We are staffing up our go to market teams to capture the big opportunity that we are seeing on top of our funnel and continue to grow. In Q3, our marketing team generated a record high of more than 500,000 registration on our website and created a record high number of meetings this year to our go to market teams. On the brand awareness side, I'm super pleased that SimilarWeb has been adopted by leading media outlets and corporate executives as their preferred measure of the digital world. Jeff Bezos and Elon Musk appreciate the critical importance of high quality data and they along with many business leaders reference SimilarWeb when making observation on the digital world.

Speaker 2

Even this week, when Sam Altman, OpenAI CEO want to show how big the chairgpt.com website is, referred similar web data in his tweet. We appreciate the confidence those leaders express in our data. Our goal is to be the number one partner for digital success. I want to thank the whole team for another quarter of excellent results and great execution during a period of macroeconomic uncertainty and geopolitical challenge. We believe that we are still only starting to realize the potential of our data and the addressable market we serve.

Speaker 2

And as I like to say, we are just getting started. Thank you everyone on the call for continued support. With that, I will turn the call over to Jason.

Speaker 3

Thanks, Orr, and everyone joining us on the call today to discuss our Q3 results. I'll provide highlights of our financial performance and then we'll open up the call to questions. We generated $64,700,000 of revenue in Q3. As Oren mentioned, revenue growth continued to accelerate for the 4th consecutive quarter to 18% year over year in Q3, driven by new customer growth and improving retention. Our remaining performance obligations or RPO totaled $212,000,000 at the end of Q3, up 27% year over year.

Speaker 3

We expect to recognize approximately 76% of the total RPO as revenue over the next 12 months. In Q3, we achieved an overall net revenue retention rate of 101% and an NRR of 111% for our over $100,000 ARR customer segment, an improvement relative to the Q2 of 2024 for both metrics. We are encouraged by the change of the trajectory over the last two quarters and expect further improvement in the quarters ahead. The increase in multi year contracts to approximately 45 percent of our ARR demonstrates the importance and critical nature of our data and we expect will contribute to improved retention rates ahead. Our operational performance in the quarter demonstrates our continued commitment to disciplined execution and we delivered a non GAAP operating margin of 7%, a 5th consecutive quarter of non GAAP operating profit.

Speaker 3

We generated $9,000,000 of free cash flow in the quarter, a 4th consecutive quarter of positive free cash flow. Free cash flow in the quarter was positively impacted by the phasing of customer seats that we had expected to collect in the Q4. We expect to continue to generate positive free cash flow over the coming quarter and in future quarters as well. Following the results that we reported yesterday and that exceeded expectations, we are raising our guidance for revenue and narrowing the guidance range for non GAAP operating profit for the full year 2024. In Q4 'twenty four, we expect total revenue in the range of $64,700,000 to $65,700,000 representing approximately 15% growth year over year at the midpoint of the range.

Speaker 3

For the full year 2024, we expect total revenue in the range of $249,000,000 to $250,000,000 an increase of $2,500,000 at the midpoint of the range relative to our previous expectations. Non GAAP operating profit for the Q4 is expected to be in the range of $1,500,000 to $2,500,000 For the full year, we are narrowing the range and expect our operating profit to be between $14,000,000 $15,000,000 Our guidance reflects increased operating expenses primarily related to increased headcount. As Orr mentioned earlier, we've decided to accelerate our hiring to capture the opportunities presented by the growing demand for our data end solutions. After delivering 4 quarters of accelerating revenue growth, non GAAP operating profit and positive free cash flow, we remain focused on delivering profitable growth and making further progress towards the rule of 40 over time as well as achieving our long term profit and free cash flow targets. And with that, Oren and I are ready to answer

Speaker 2

your questions.

Operator

Thank you. Our first question comes from the line of Ryan McWilliams with Barclays. Please proceed with your question.

Speaker 4

Hey, guys. Thanks for taking the question. Gord, great to see new customer growth accelerate. How would you attribute what drove the stronger new customer growth? I'm sure it's a mix, but is it maybe a better macro environment or is it more due to some of the changes

Speaker 3

the mobile has made and its market improvements?

Speaker 2

Yes. Thanks, Ryan. As I said in the earnings call, our marketing team doing excellent job lately driving more brand awareness, more conversion from our big amount of visitors that we have. And we're seeing increase in registration, customer growth and a very strong top of the funnel. So it's from what I see a lot of improvement internally and doing a great job of the

Speaker 4

team. Appreciate that. And then, Jason, any early insight into how we should think about our models for next year and revenue growth in 2025? I mean, things are certainly accelerating here, but how should we think about the key drivers of next year growth? Thanks.

Speaker 3

Yes. We'll give full guidance on 2025 at the beginning of the year, but I think that the momentum that you see and the exit rates are good indications to the momentum that we intend to see going forward. So as we said, we're going to continue to be focused on that profitable growth, continuing to have both operating and cash flow profit on a quarterly basis going forward as well.

Speaker 2

Appreciate the color. Thanks guys.

Operator

Thank you. Our next question comes from the line of Jason Helfstein with Oppenheimer and Company. Please proceed with your question.

Speaker 5

Hi everybody. Two questions. Or from a product perspective, how has the mix shifted, whether it's like, I don't know, versus a year ago? And maybe where are you seeing the most interest? Obviously, you highlighted AI, but it's still super early.

Speaker 5

But within the kind of other products, like what seems to kind of have the most momentum from a business standpoint? And then second question, Jason, can you unpack the revenue volatility a little bit between the 3Q year over year and the 4Q guide year over year? Does this have to do with the spike in the billings in 2Q, the way it flows through the accounting? And then kind of what was the catalyst for that? Just maybe unpack why we're just kind of seeing a revenue slowdown in the Q4 on just on an accounting basis?

Speaker 2

Hey, Jason, good to hear you. Thank you for the questions. And from the product perspective, we're seeing 2 good I think maybe 3 products are doing well in the past quarter. We have our core product, the web intelligence that is continuing to doing very well. We're seeing more demand on the SEO part.

Speaker 2

We did a lot of progress there in the past year or 2, once we acquired a company called Rank Ranger 2 years ago. So we start implementing more deep SEO capabilities, so our marketing organization drive more growth around the search channel, and we're seeing great success there. Also, we had strong quarter on our sales intelligence tool. We're seeing high demand. We had a lot of good progress there.

Speaker 2

We introduced the sales assistant AI agent that is how customers will get better insights, faster leveraging the AI capabilities. So this one doing very well. And our advisory services organization has a lot of demand, a lot of big brands coming with all sophisticated needs and insights about digital activity. So I think those really had really good momentum right now.

Speaker 3

And then on the guide, I think by now you guys know we'd like to give guidance that we know we can meet. And there's we're an ARR business and so a lot of the visibility that you have between RPO and the deferred revenue just flows through the accounting and that's how we the revenue works. Okay. So this is really like

Speaker 5

it's not representative of any kind of trend as we're thinking about it tonight's year?

Speaker 3

No, I don't think so.

Speaker 5

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Arun Bhatia with William Blair. Please proceed with your question.

Speaker 3

Perfect. Thank you. Congrats guys on the acceleration this quarter, very nice to see. I can start with you that this is the 2nd big deal that you've announced with a big tech company to use your data to train LLMs. Can you just maybe help us understand what's so special and unique about SimilarWeb data that is attracting these companies to license it for LLM training?

Speaker 3

And how does that fit into that specific LOM training use case? And then maybe

Speaker 1

you can just touch on something about

Speaker 3

these contracts whether we should expect these to be referring and the data to be needed to continually be refreshed over the coming years as these models become a little bit more mature?

Speaker 2

Okay. So I tell you just to explain you more. We announced a second customer to be 8 figure customers, and but we do close more than 2 deals around working with companies who want to find the relevant. So this is an initiative that we're seeing growing nicely with the AI evolution. And regarding your question to give visibility about our LLM using our digital data, I'll explain you how I think it's work from that perspective.

Speaker 2

In order to build a really good chatbot, you need to feed them, I assume, with 3 data sets. The first data is probably the Internet data, the web data, all the content that he can learn and be smart and read all this knowledge. The second data set he probably need to feed him is what we will call conversation data, that Ned shared would learn to speak like human did. This is probably when they're giving him Reddit data and all kinds of different conversation data. And the 3rd element that LLM need is to be up to date with what's happening in the world.

Speaker 2

He needs to know that Trump won the election or anything that's happening. In order to be up to date, he needs digital data. That's what's happening right now in the world. What people are searching right now, what they're reading, what they're talking about. And this is where the digital data gets very important and something that you need to feed those elements daily that will be up to track and they have context when they when you talk with the chatbots this morning and talking about the election, he will know what happened.

Speaker 2

So this is where our data set is feeding the brain and I hope it's answered the question.

Speaker 3

Yes. That's very helpful. Thanks, Orest. And then, Jason, if I can just come back to the prior question on the Q4 revenue guidance. I think even compared to past guides, it's more conservative from like a sequential perspective when we're comparing Q3 to Q4.

Speaker 3

And it sounds like some of these new L and M contracts should start to go live in the coming quarters. So is there some extra conservatism in there in the Q4 number or anything else that we should be aware of that might be just starting off timing of rev rec next quarter and beyond? Again, I think it's just when these deals come in or go live and how the rev rec flows through in general for us. Once people get activated or start using the data, depending on that, we just recognize the revenue of a subscription term. So there's just a the reality of that and as well as the Q4 bookings that we hope will come through, the timing of when those come in within the quarter depends on how much of that is going to be recognized in the quarter.

Speaker 3

So we use the same methodology consistently and we like to give guidance we know we can meet. Okay, perfect. Thank you both.

Operator

Thank you. Our next question comes from the line of Scott Berg with Needham and Company. Please proceed with your question.

Speaker 6

Hi, everyone. Really nice quarter. Thanks for taking my questions. I have 2. Or in your pre scripted remarks, the second option that you're trying to capitalize on in the Gen A theme caught my eye, believing that LMs are changing online customer behavior consumer data today.

Speaker 6

I guess how much of that are you seeing in your business today from customers and companies trying to capture and better understand that data? Or is that a trend that you think really impacts the business more going forward versus what you've already seen today?

Speaker 2

Hi. Thank you for the questions. So this is early things we start seeing more and more brands start to realize that the consumer change the way they consume information. For example, if I want to plan a trip and vacation to Miami or Hawaii or whatever, most of the changes that I will start within the chatbots today and ask them, show me the top hotel, top restaurants, and I start consuming my information from the chatbots other than just used to be search. So this consumer behavior change is something that the brands have thought to really understand now and want to get more visibility about how much time they are being presented as one of the options to the consumer, how it's drive consumer behavior to drive action and transaction.

Speaker 2

So we see right now that more and more brands start realizing it. And they now seek for market data, digital data to see how it's how they've been perceived, if they are being recommended by the chat box and how and what is the market share and so to line. And we are kind of the best data and the best company in the world to give these data and help them drive for the right action.

Speaker 6

Got it. Very helpful. And then, Jason, you talked about the recovery in net revenue retention, kind of nice increase in the quarter here. You also made the comment that you expected to go higher here, I believe, in the short term. Not that you're predicting, you're going to tell us what you think it's going to necessarily be in Q4 into early next year.

Speaker 6

But how do we think about that trajectory? Can it return to the levels that you saw in maybe 2020, 2021 or 2022? Or do you think you'll ultimately settle in somewhere in between those levels in where you are today? Thanks.

Speaker 1

Thanks so much, Scott. We

Speaker 3

like the momentum that we're seeing both in

Speaker 2

the

Speaker 3

retention and as well as the upsells and cross sells that we're having with customers. I think what you're hearing are 2 fold and there are 2 things that give us a little bit of confidence up there. One is the fact that 45% of our revenue is already locked in on multiyear commitments. And that gives us a lot of confidence and commitment to the retention of the book of business that we have. And then the second thing is you're seeing over and over and it's this large deal that Orr talked about earlier is again another indication or another example of how we land, retain and expand those customers, taking them from 1,000 of dollars to tens of 1,000 of dollars to 100 of 1,000 to 1,000,000 and now multimillion accounts.

Speaker 3

That is the motion. We are very encouraged by that and the team that we put in place on the customer success and account management side.

Speaker 6

Excellent. Thanks again for taking my questions. Next quarter.

Operator

Thank you. Our next question comes from the line of Surinder Singh with Jefferies. Please proceed with your

Speaker 7

question. Thank you. In terms of just the 2 large 8 figure deals that you have at this point, are you able to walk us through a little bit of the journey of how they got there, not necessarily over like the past 10 years, but more in the near term? Is this something where maybe the jump went from an $8,000,000 ARR to $10,000,000 ARR or how should we think about that with the latest upsells?

Speaker 2

So I think the nice story about those 2 8 figures deals, it show you the amazing long term relationships with those companies. Those 2 companies that now have 8 figures engagement with us, They all started very little almost 10 years ago when they started engaging us around our web intelligence offering, getting more digital visibility. And over the years, each one of them start to buy more of our solution, if it's sales intelligence, shopper intelligence and more they gain trust with our data and capabilities, we start to go into more events and engagements with them, giving them more market data and basically become to us as adviser for digital market data. And this is how we build over many years, those relationship and engagement drive those big deals. And I think this will give you the confidence that we get more and more like those to come down the road.

Speaker 2

And as more and more companies depend on the digital world for driving more revenue and success for the business, we want to be the digital market data provider. So, we're very happy with that and hope more to come down the road.

Speaker 7

Thank you. And then in terms of just, as you think about accelerating the hiring of within your sales force, can you talk maybe a little bit about the incremental opportunity and where you're focused on at this point? Is that more there's new clients coming on and you see there's a bigger opportunity there in the near term? Or are we finally kind of seeing this thawing out with existing clients where there's enough demand that we can start to see, I think you've mentioned higher NRR, but just a meaningful improvement in the ability to upsell to those clients?

Speaker 2

Yes, we thank you for the questions. We see 2 great place that we can accelerate our go to market expansion. The first one is to hire more sellers to take over all the meetings and demand we're seeing in top of the funnel, basically the end of the inbound, the increase in the inbound demand we're seeing. The second area is basically doing rental repeats around enterprise clients. We have more than 5,000 customers today.

Speaker 2

We know exactly in which market and industry customers really need our solution. We want to be actively approaching those customers and educated about our offerings and drive more success on the enterprise side. And because our market is massive, We talk about it a lot of time, but we're focusing a very big TAM and we believe that every company that operates online in the digital world and want to be successful, need our solution to drive more market share and growth. Just to get in front of the right people, present them the capabilities and data and insight we can bring to them and bring them on board. So we see good opportunity there.

Speaker 2

So we also, especially now that we are a multi solution company and we can come to a customer and have a web intelligence for the website and app intelligence for the app activity and shopper for the marketplace Amazon strategy. So I can present and come with a lot of great offering. And so we've seen good momentum also on our enterprise play.

Speaker 7

Thank you.

Operator

Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question.

Speaker 8

Great. Thank you. I have one for each of you. But my first one, Orest, how is your new Head of Sales, Susan Dunn doing? What changes has she made and what is she most focused on?

Speaker 2

Wow, Susan is amazing. I cannot tell you how much I'm still lucky that she joined us. A true industry leader, she come from an amazing background. She was the COO of Nielsen IQ. It's a $5,000,000,000 ARR business.

Speaker 2

She was leading thousands of people. She grew there since she's been there more than 20 years, leading and learning. So she has a lot of industry background, how selling data, insights, very deep knowledge around the CPG ecosystem. And she is a tour executive and she is doing really great job now, all the right moves, ramp up the go to market and really set up to success to capture the amazing sun we're approaching. And we're very excited about it.

Speaker 8

Awesome. And then Jason for you, if I look on Page 25 of your slide deck at that long term model where you get to a 25% operating margin, remind us how we think about when or at what level or what size we get to that long term model?

Speaker 3

Sure. It's between $400,000,000 to $450,000,000 and that long term model is 85% gross margin, 25% operating margin and 30% free cash flow, meaning at that level, we'll be talking about $120,000,000 to $135,000,000 of free cash flow. Looking forward to that. Congratulations to you guys and thank you. Thanks so much.

Speaker 3

Thanks so much, Pat.

Operator

Thank you. Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Speaker 9

Hi, good morning. Thanks for taking the question. Just going back to the questions around some of the AI use cases and AI deals, can you just remind us exactly the nature of those in terms of how they're structured? And then for deals that sort of involve an AI consumption or API or data access, what are you seeing just in terms of those average deal sizes? How much bigger are they than kind of the traditional similar web deals?

Speaker 2

Okay. So there is basically, if you're talking about the AI deal, we talk about 2 different products. We sell the first one is training a dilemma, any digital data to train their chatbots to be up to date with what's going on in the world. And then basically when you sell it's different data sets that each one can help the LLMs to be smarter about different things. So it's basically different data stream about people search, what they read, what's happening right now.

Speaker 2

And then it's by different regions and platform. And usually those deals start from 6,000,000,000 and growing. You start small with 1 data set, see it improving the models and then you start adding more and more doors. The second line of business product provided those brands want to understand how they perceive around consumer using chatbots. And there, it's increased by the number of they want to understand what people ask the answers.

Speaker 2

And it's also by region, by platform. So it's also but there it starts with 5 figures and it's going to go up.

Speaker 3

And Tyler, just to add, those are all subscription annual recurring revenue. And as Orest was saying before, we do think these things that these contracts need to be renewed because of the value of the freshness of the data that the LLMs need in order to keep up to date with the data.

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