Good morning my name is Rex. And I will be your conference operator today. At this time I would like to welcome everyone to the Semrush Holdings’ Second Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Thank you. A transcript of the prepared remarks will be available at investors.semrush.com after the call. At this time I would like to introduce Bob Gujavarty, VP of Investor Relations. You may begin your conference.

Good morning I am Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings second quarter 2022 results conference call. We will be discussing the results announced in our press release issued after market close on Wednesday. With me on the call is our CEO, Oleg Shchegolev, our CFO, Evgeny Fetisov, and our President, Eugene Levin. Before we begin, I would like to highlight our participation in The Goldman Sachs Communacopia and Technology Conference in San Francisco the week of September 12. Today's call will contain forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our expected future business and financial performance and financial condition, expected growth, adoption and demand for our products and features, expected investments acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for the third quarter of 2022 and the full year 2022, and our ability to successfully relocate employees outside Russia, including executing our relocation plans on the timeline we expect and at the anticipated cost, can be identified by words such as expect, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, and should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. For a discussion of the risks and important factors that could affect our actual results, please refer to our annual reports on form 10-K, filed with the Securities and Exchange Commission, our quarterly reports on Form 10-Q, as well as our other filings with the SEC. Also during the course of today's call, we refer to certain non-GAAP financial measures. There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued after market close, which can be found at investors.semrush.com. And with that, let me turn the call over to Oleg.

Thank you. And good morning to everyone on the call. I'm very pleased with our execution in the second quarter. We delivered strong growth with revenue up 39% year-over-year and solid new customer additions. As most of you know, our sales cycles are typically very short and our average deal size is relatively small. So despite complicated market conditions in Europe and delayed decision making, it did not affect our second quarter results much Listings was a standout performer in the second quarter, as revenue grew, more than 70% from the previous year. Local listings is our second most popular add-on, but attach rates remain in the mid-single digits. We believe listing management alone is $500 million market. And we have a long run way for growth. I'm pleased to see our customer mix continue to improve in the quarter. The number of customers who pay more than $10,000 annually was up more than 80% from a year ago. We remain focused on the SMB market, but we continue to share rated growth from mid-market and enterprise customers as well. I believe our brand marketing campaigns contributed to the new customer growth year-to-date. And I would like to provide insight on our plans for second half of the year. We saw good success with our campaign in the streaming service haul, and we expect to expand to our streaming platforms in the third quarter. According to Neilson, streaming is poised to become the most popular form of video consumption. And it appears to be a very efficient channel for reaching new customers. SMBs are facing a more challenging macroeconomic environment and we plan to adjust our campaigns to reflect the new reality. In the back half of 2022, we expect to have a more balance spent between brand and product…

Thank you, Oleg. Q2 revenue of $65.6 million was up 39% year-over-year and up more than 9% sequentially. Growth was driven by an increase in the number of paying customers and higher average revenue per customer. Mix was again, a tailwind as the percentage of revenue from customers on the [indiscernible] and business plans hit another record high. As expected, our dollar-based net revenue retention for the second quarter was down slightly at 125% as well after the easy comparisons of the COVID impacted periods. Gross margin of 79.5% was up 230 basis points from a year ago and largely [indiscernible] from the previous quarter. I expect gross margin of 79% plus or minus for the back half of 2022. Non-GAAP operating expenses excluding exit costs were $52.4 million in the quarter up 53% year-over-year and up 11% from the previous quarter. Sales and marketing represented the largest increase year-over-year and sequentially. Sales and marketing was $30 million in the second quarter up 67% year-over-year and up 18% from the previous quarter. The increase is given by higher headcount as well full quarter of spend related to all brand marketing campaigns. We expect those brand campaigns to continue through the remains of the year. Research and development expense was $9 million in the second quarter, up 58% year-over-year and 17% from the previous quarter. The year-over-year and sequential increase reflects higher headcount as well as an increased compensation expense related to rating in high cost geographies. A full quarter of [indiscernible] also contributed modestly to the increase. G&A spending of $13 million was up approximately 26% year-over-year, but down 6% from the previous quarter. The year-over-year increase reflects high public company costs, whilst the sequential decrease was related to a one-time benefit that occurred in the second quarter. I expect…

[Operator Instructions] Your first question comes from the line of Brent Thill from Jefferies. Your line is open.

Great. Hey guys, this is James on for Brent. Thanks for taking the question. My first is around the macro, whether you are seeing any impact in Europe and specifically, and just in general, how that may have impacted new customer adds in the quarter. That's my first question. And then my second is just around Backlinko you mentioned that as being more of a driver of growth, is there any way to quantify its impact to revenue or is it still pretty much immaterial today? Thank you.

Hi, this is Eugene. So in terms of macro, we're seeing some signs of softness in Europe, I would say, especially around June. I wouldn't say it's really that much about new additions. Demand is still pretty strong. It's more of overall softness of the market. In the United States we don't see anything like this. So, U.S. seems to be very strong. Even some European, non-Euro markets are quite strong. As for Backlinko yes, we definitely can quantify the growth internally, but it's not something we or probably other companies would report with this level of granularity I would say it’s definitely material compared to the size of the acquisition. So we believe we're getting really good ROI in this transaction, but as you recall, transaction itself was not huge. So, that probably gives you some sense of scale.

Great. Thank you.

Your next question comes from line of Parker Lane with Stifel. Your line is open.

Yes hi guys. Thanks for taking the question. Just curious if you could give us an update on the performance of the Kompyte business and the demand environment you are seeing around competitive intelligence. It seems like it would be particularly relevant with the uncertainty out there in the markets right now. Thank you.

Yes. Great question. And I think you are getting this absolutely right. So competitive intelligence is definitely one of the verticals that is going to be impacted by uncertainties in the macroeconomic environment. We're seeing strong demand, especially with the cross sell. And I think we're seeing good results because business that we acquired is relatively small compared to Semrush. So, we already have a huge user base of people who are good leads for this new product. And compared to this difference in scale, any kind of softness in demand wouldn't be very significant. At the same time, yes, when we talk to customers, we hear some anecdotes about their plans to do budget cuts. Sometimes we start conversation with an account and then in the middle of this conversation, our kind of champion inside that organization disappears and gets – becomes victim of the layoffs. So, that happens. But I wouldn't say that it's a reoccurring thing. I would say it's more of an anecdote that you can use to make judgment about the overall market environment, but in terms of numbers it doesn't really impact us just because Kompyte was so much smaller than the whole scale of Semrush and kind potential cross sell opportunity.

Yes. Makes sense. Appreciate you taking the question and congrats on the quarter.

Thanks Parker.

Your next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.

Great. Thank you so much. It's really impressive to see the higher priced plans had customers up about 25% year-over-year, just coupled with the overall strong new ads. And we've been hearing a lot about inflation and higher interest rates pressuring consumers and small business wallets. So my question is, if you're seeing any sort of shift to Semrush from higher cost platforms providing any sort of tailwind for the business? And if there's a comment kind of overall on market share in there too that'd be great? Thank you.

I would say that it's a little bit earlier got to talk about any kind of results here. We see some conversations related to it, but it's too early to talk about any kind of tailwind related to such things.

And this is Evgeny, I would just add small thing. In terms of market share, definitely something we will be looking for at the same time in enterprise space with bigger accounts; those subscriptions are usually annual, so most of the customers haven't been through the renewal cycle during this economic environment yet. So we don't know to what extent we would be able to pull demand from more expensive platforms, definitely monitoring this and being optimistic.

Got it. And then just a quick one on cost, the net cost guidance could have narrowed and it sounds like there is some lower cost from the relocation. But just curious to see if there's any other areas that you're seeing greater efficiencies in the business? Thank you.

Yes, Elizabeth. This is Evgeny. So there are a few good components to the improvement of the net income. One is the better performance on Q2, as you may have seen we've updated our expense outlook for the allocations which is better by roughly $5 million. And then the rest is the combination of improvement in the overall headcount outlook for the year, and then favorable Euro FX. So that's – this is what affects based our net income outlook. And one more thing, during my prepared remark, I misspoken the cash flow from operations number its negative 7.4, not 4.7 I'm sorry about that.

Got it. And thanks so much for the clarification.

Your next question comes from line of Mark Murphy with JP Morgan. Your line is open.

Thank you, and I'll add my congrats. Could you say that you have no operations in Russia as of today? Just wasn't sure if I heard that correctly. And if so, could you clarify does that mean no offices or does that mean no people or how exactly are you defining that word operations?

Yes. So this is Evgeny. So we don't have any operations in Russia. So we've sold our local subsidiaries and we don't operate there. So basically no presence. We have some people who have left, it's less than 5% of the total population, which would have most overseas they're in the process of migration and that'll take them couple or maybe about few months, and they stay like there for different reasons, but otherwise we've exited the country.

Okay, understood. The second question was on the macro situation in Europe. If you could just clarify, I think you said demand is pretty strong and then the next thing you said was there is an overall softness, and I'm struggling a little bit to put those two comments together. Can you just clarify what is it that that you might have experienced in Europe because the overall results look pretty solid? And just also did that continue into July and August or was there – has there been any change recently?

Yes. So great question. So what I meant by the word softness is a number of things, for example, [indiscernible] and it takes longer than previously to renew account, or they start negotiating a more favorable for them payment terms. Like maybe they want to have net 60 or then 90 where previously they would not even negotiate. Sometimes you have a deal that is sort of already verbally agreed. And then last minute they say, no, we probably going to buy less. Sometimes you negotiated the deal, but then person who is leading the process departed for sure or have been laid off and you have to deal with someone new. So that's kind of what I meant by softness. Sometimes customers just say, they're under pressure from the management to be more prudent to spend less sometimes there are budget cuts. So like I said, it's not something huge. And those things are more of an anecdote and statistically, none of those reasons would be huge in our metrics, but in aggregate, that's what I call softness, COVID explains.

Yes. And that's extremely helpful. Thank you for that. Much appreciated. And just did that is the situation kind of status quo into July and August or is it stabilizing, degrading further?

So I would say – I would say August started really strong for example, year-over-year. July, I would say – I would say better than for example end of the second quarter, but in general you see the guidance that we provided. So that guidance was based on what we've seen so far in this quarter. But like I said, so far in August, I'm optimistic.

Yes. Okay. Excellent. Thank you and I'll have my congrats.

Thanks Mark.

Next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open.

Hello. Thank you for taking the question. I wanted to touch on the record $5.5 million of sequential growth in revenue. But the ARR in the quarter was actually lower than the year-ago period. I was wondering if that was reflective of this sort of discussion about maybe some softness towards June. Was it really better early quarter performance that drove that? And if there's anything maybe to call out that was an impact that might not have been just linearity through the quarter?

Yes. This is Evgeny. Thank you for the question, Clarke. I think you're absolutely right. So it is a reflection of a beginning of the quarter and then a software ending as Eugene has just mentioned. So June was, I would say like slower versus the overall quarter. So that's – and that's the dynamics, it reflected in our Q3 guide?

All right. Perfect. And then any chance you could comment on what 10-K per annum customers grew in the quarter?

If I – for the quarter, I mean, I think that you disclose the number for the year, which is above 80% growth – above 80% growth year-over-year for the 10-K plus customers.

Okay. Maybe I'll squeeze in one more as a follow up. You lay out these 19 MarTech categories that you're involved with, which of these segments are you most excited about in terms of taking share from pure-play players? With the release of the local listing product, it might move that category higher on the list, but just curious on your thoughts here?

So it's like hard to ask parents about who's their favorite child, right? So that's kind of how I'm seeing this. Of course, yes some children haven't been behaving as well as other children, but we like them all. I would say in terms of where we are spending more time, where we are spending more resources is probably not necessarily areas where we already feel very strong but areas where we want to be much stronger, even though we have great previews, right. There is – there are other things to care about like market share and revenue. So I would say I'm extremely proud of what we are doing in competitive intelligence space, especially after acquisition of Kompyte. So now we have really good self-service product for kind of SMB in mid-market, and we have this more enterprise focused product for kind of larger companies and not just marketing teams, but also sales teams and leadership teams. Local listings, I think have been one of the products that have been around for a long time. I was actually one of the people involved in launching this, so it was sort of member of the first team. I think we've been development – it's kind of somewhat slower than we could primarily because we didn't launch a lot of global markets. We fixed this now, so now I'm way more optimistic, but also we have a lot of great features in a roadmap. For example, we're always thinking how to go beyond list and management. One of the next things we probably go into try is review management. We already have some features in this direction and we probably going to keep developing them and double down. And then of course – of course digital PR, I think it's a huge category that I would say – it is not that competitive from product point of view, as many other categories where we operate. So we think we can be really innovative player there and disrupt the market. This year we have launched our media monitoring product, still very early but so far we have great feedback from some customers as well as early signs of positive revenue trends. So I would highlight those kind of categories that areas where we focus the most right now. But we're always trying to surprise people and there are probably a couple things we're working on that I cannot match, right.

Appreciate it. Thank you very much.

Your next question comes from the line of Michael Turits with Keybanc Capital Markets. Your line is open.

Hi, this is Michael Vidovic on for Michael Turits, and thanks for taking my question. In your second half guidance are you factoring in lower customer editions? Or is it more just lower expansion in near-term?

I think, Michael, I think it's a balanced combination. So as you can see, we've guided for at least slower Q3 and then acceleration in Q4; and then we are looking at both I would say in the same direction.

Okay. And then on the $5 million reduction in relocation costs, are you saying heightened churn and in employees relocating or what feeds into that change? Thanks

Given this was a, I would say unprecedented move that we had to take. It was very difficult for us to be very accurate in prediction and how much we'll spend and where people will go, which countries they'll go to et cetera. So all of this we've been able to, I would say like clarify and narrow it down in terms of our future expected expenses, so that's where the savings coming from.

[Operator Instructions] Our next question comes from Scott Berg with Needham. Your line is open.

Hi, everyone. Congrats on the good results and thanks for taking my questions. I wanted to start with the guidance. Obviously we can all back into the fourth quarter guidance with your third quarter and full year. The numbers are relatively good and I know the commentary was that you're expecting in the macro to rebound a little bit in the fourth quarter. Can you help us understand maybe where that optimism comes in after expecting some slowness here in Q3? Thank you.

This is Oleg. Look, we have some – we have some very good results with marketing we mentioned our experiment with [indiscernible] and I believe such shift, what we see right now obviously with [indiscernible] companies could give us some positive results.

Got it. Helpful. And then I wanted to ask about kind of partner impact and partner traction in the quarter with a chance to speak with some partners that have some very good feedback on your product and platform. But as you look at the macro slowness, how much of that's coming from maybe your own digital sales versus what you end up getting a reference to you and/or booked through your partner channel? Thanks.

Yes. This is Eugene. I just wanted to clarify maybe was not very clear. We're not really seeing pressure on the demand side from like new acquisition point of view. That's where we employ kind of most of our partner tactics. So we haven't seen me any kind of meaningful slow down there, demand is strong. So – and I would say if we speak about affiliate marketing channel, which was also one of the partner instruments in our arsenal we definitely haven't seen slow down there. And pretty much all our key channels grew this year quite well.

And maybe to add, this is Evgeny, to add the question on the say Q3 versus Q4 dynamics. I mean, Q3 now it feels like a typical summer for us. Like it's very, very seasonal in terms of what we see and that's what we're building our expectations on. At the same time as Eugene has alluded to, we seen August as showing positive signs and traction. So again, if we exit the quarter with like right ARR that is based for the good Q4 and this is how we think about this year, I mean, and the structure of the rest of the year.

Great. That's all I have. Thanks for taking my questions.

Thank you.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.