Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Semrush Holdings Q1 2022 Results Conference Call. All lines have been placed on mute, to prevent any background noise. [Operator Instructions]. A transcript of the prepared remarks will be available at investors.semrush.com after the call. Thank you. Bob Gujavarty, VP of Investor Relations, you may begin.

Good morning. I'm Bob Gujavarty, VP of Investor Relations, and welcome to Semrush Holdings' First Quarter 2022 Results Conference Call. We'll be discussing the results announced in our press release issued after market closed on Tuesday. With me on the call is our CEO, Oleg Shchegolev; our CFO, Evgeny Fetisov; and our CSO, Eugene Levin. Before we begin, I'd like to highlight our participation in several investor conferences in the second quarter. We'll attend the 17th Annual Needham Technology and Media Conference in New York City on May 17, the New York Stock Exchange Healthcare and Tech Investor Day on June 8 and the Stifel 2022 Cross Sector Conference in Boston on June 9. 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 and acquisitions and their anticipated benefits, industry and market trends, our competitive position, our market strategies, market opportunities, our guidance for the second quarter of 2022 and the full year 2022 and our ability to successfully relocate employees outside Russia, including executing our relocation plan on the time line 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 today's call, we will 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 first quarter. We delivered solid financial results with revenue up 43% year-over-year and record new customer additions. Before diving into the results, I would like to speak about our decision to wind down our operations in Russia by the end of September. Bank sanctions were first announced by the United States and other countries. We quickly developed mitigation strategies and hope that the situation would get better and would not last long. However, it has become clear that there is potential for a long conflict and further decline of the business environment in Russia. Looking at our performance in the first quarter, it's clear that Semrush is doing well despite all the uncertainty. However, we need to prepare the possible new sanctions and reduce the potential impact to our operations. I believe ending our operations in Russia will not only help us to reduce these risks but help remove the uncertainty for all our stakeholders. Early indications are that a large majority of eligible employees will relocate outside Russia. With the high level of employee being and our broad experience managing remote workers should help minimize disruption through the relocation process. Our goal is to wind down our operations in Russia by the end of September, but I'm hopeful that we can accelerate that time line. The decision to leave Russia was a difficult one. It's a decision that comes with human and financial costs. But we believe this is the correct decision and best for the long-term success of Semrush. We hope for a rapid and peaceful resolution to the conflict in Ukraine, but our plan still exists to leave us better prepared in case the conflict gets worse. Now to…

Thank you, Oleg. Q1 revenue of $57.1 million was up 43% year-over-year and up more than 6% sequentially. Growth was largely driven by an increase in the number of paying customers, while we continue to see an increase in the average revenue per customer as well. The Kompyte acquisition closed in late March, and therefore, wasn't material in our first quarter results. Our dollar-based net revenue retention was 127% as of March 31, up slightly from 126% as of December 31. I expect revenue retention to moderate in 2022 as the base effect of easy comparison wins. I expect to see a gradual decline in the metric beginning next quarter and extending through the remainder of 2022. Gross margin of 79.8% was up 170 basis points from a year ago and up 140 basis points from the previous quarter. We saw some benefits in COGS primarily due to the lower third-party costs. However, I would expect gross margin closer to 78% for the remainder of the year. Our non-GAAP operating expenses of $47.1 million in the quarter were up 62% year-over-year and up a more modest 5% from the previous quarter. Not surprisingly, the largest increase year-over-year was in G&A, driven primarily by public company costs. Sales and marketing was $25 million in the first quarter, up 56% year-over-year and down slightly from the previous quarter. As Alex mentioned, we launched our brand marketing campaign in March. We delayed the launch by several weeks due to the conflict in Ukraine. And as a result, some of the marketing spend in the first quarter will be incurred in the second quarter. Research and development was $8 million in the first quarter, up 51% year-over-year and 20% from the previous quarter. The sequential increase was driven by a reduction in capitalized product…

[Operator Instructions] Our first question is from Michael Turits with KeyBanc. Your line is open.

Congrats on putting up some good numbers, especially on the ad. So first, on the ads, can you tell us where would it make sense for what really drove those? I'll just throw my follow-up questions, which are really on the relocation. Can you just run through the details on that in terms of just review what is the total number of your headcount, the number of employees in Russia, what the specific costs for moving them are? And what do you expect that schedule to be like, what the risks are there?

Thank you. This is Oleg. Look, we are happy with such 5,000 new paid customers during the first quarter. And I think it's connected to too many experiments that we finished in the past -- in fourth quarter. But at the same time, in third quarter, it was very great supporting buzz around our acquisitions. We received very great support from our audience, from our experts. And look, even -- we started our new brand marketing campaigns in mid-March. But at the same time, I believe before it was enough experiments related to that. And I believe we have impact from it. And second question, Evgeny, please.

So on relocation costs or starting with the overall number of employees, we had about 800 -- around 800 people in Russia and about 85% of these people will relocate. The relocation costs will consist of travel, accommodation and relocation bonuses. So that's basically will be the core components affecting those one-off expenses.

Okay. And just to review, I guess, where you are in terms of total headcount?

Our total headcount is 1,200 to 1,300 people.

And then just one -- I was going to squeeze one more in. Again, you raised by about $23 million of operating loss for the year, $15 million in costs from the relocation. And then you also raised, I think, by about $4 million on revenue. So slightly higher in terms of the net expense increase. So what are the -- what's the increase in expenses above and beyond the Russia relocation costs, which do you frankly come at after you raise expenses last quarter for the brand campaign?

Yes. Michael, the difference is explained by our expectations that people who would move to the higher, I would say, more expensive locations, will be getting higher salaries. So that's our preliminary expectations over the higher run rate for different costs, which will incur of people staying in Western Europe.

Okay. So that's separate from the actual relocation costs. That's just like now you're in the more expensive plus the living environment is going to us there.

Yes, that is correct.

The next question is from Tucker Lane with Stifel. Your line is open.

It's actually Parker Lane at Stifel. Thanks for taking the question. Guys, wanted to get a little more visibility on what's going into the brand marketing campaign that started in March. You obviously had very strong net adds and you're expecting that strength to continue this year. But what does that brand marketing campaign look like? What are some of the key components that we should be aware of?

New marketing campaign is more focused on value. I think in the past, in our marketing campaigns, we were more focused on our product offerings and product features and so on. And right now, we want to address much larger market. And because of that, we want to talk more about value of what our customers can get from it without talking about features. Most focus on value, not on futures, not on product.

Got it. Understood. And then just so we're clear, as far as those employees that are relocating, can you give us a sense of what roles they were serving inside of the organization? And are those going to remain the same upon relocation?

Sure, Parker. So the majority of those will be developers. They will be marketing people, finance and admin. So I mean -- and some salespeople. So it's a different mix of the functions which we had in the Russian location.

Got it, appreciate it. Congrats again for the quarter. Thank you.

The next question is from Scott Berg with Needham. Your line is open.

Hi, everyone. Congrats on the nice sales quarter and thanks for taking my questions here. I guess a couple of them. We've been doing some recent work in the space and one of the things or items that came up was your ability to sell up market and scale where other competitors have not scaled well in terms of functionality. If you look at your 5,000 customers that you signed in the quarter, how should we think about the distribution of those customer’s kind of across different customer sizes? Just trying to understand if you're having a similar traction up market as you are down market.

Thank you. Evgeny, please take the question.

So what -- yes, Scott. So what we saw in this quarter, the largest adds were with, say, higher tier customers, which would be above 2,500. And just to give you a sense of the numbers, the customers with more than $10,000 per annum grew about 17% quarter-over-quarter. And now I will say similar growth rate with like medium, medium priced years. So it's a good correction with a Lending lower-priced customers and then upgrading them as their relationship matures.

Okay. Fair enough. And then on the Kompyte acquisition, I know some of the costs are embedded there. Is there any revenue contribution from the acquisition for the year that we should be aware of?

It's so far, it's minimal, right? So it's -- there will be some revenue, of course, but it's irrelevant to the overall numbers at this point of time.

The next question is from Mark Murphy with JPMorgan. Your line is open.

Yes, thank you. At a high level, to what do you attribute being able to show this improvement in the net customer adds, also in the net new ARR and also the retention happening simultaneously against this backdrop that you mentioned as being more volatile with the macro and then also the war in Europe? I think that's the element of this that is surprising just given the circumstances.

Thank you. Look, I would avoid commenting macro things. I'm not a very big expert in this topic. But business is very strong. We have a very, very strong business model and very good subscription business, such focus on retention research, focus on delivering value for customers and focus on education customers. I think it helps. And my understanding what -- it's about business model. We have so strong business model and so great markets.

Okay. And Evgeny, any all else equal, when we think about your operating losses, would you expect them to improve by the $15 million in 2023, which is that onetime relocation cost? Or are there additional margin improvements that we could consider factoring in as well for next year?

Mark, I mean, I would, of course, say this is too early to go into much detail about 2023 because there are many moving parts. We will need to see how this relocation settles down where people land and what the run rate expenses would be for those different locations. Clearly, I mean, the R&D expenses will probably be at a higher run rate as we go forward into 2023. I mean, more close to the industry standard, given that our developers will now be more, I would say, expense applications. $50 million one-off will not be there, and we will also be looking at efficiencies on the G&A side as we like finish with relocation. So again, unfortunately, I won't be able to give a precise number at this point of time. But probably we'll have better visibility during the next quarter call.

Okay. One last one. The two acquisitions, we understand they're very small, but I'm wondering just how much net new ARR that those might have contributed to the number here in Q1?

Thank you for the question. So in Q1, we're really not attributing any meaningful revenue to those transactions. I also want to highlight that Kompyte deal was technically closed to like, yes, very, very late into Q1. So even if we wanted, there is nothing really to recognize just based on the time line. And then the first acquisition that we've done in Q1, Backlinko, was not really for revenue. We made an acquisition for audience. So while we're definitely seeing a lot of demand coming from this website and we are changing content on the website to generate even more demand, it's not really directly attributable to revenue. It's more of a number of leads that we see number of registration, audience reach. So those are the metrics that we are focusing on when we think about value of this transaction.

Yes. I appreciate the color, Eugene. I'm not -- the only thing is I'm not asking about the in-period revenue in Q1. I understand that one of those closed late in the quarter. I mean the actual like book of ARR, right, the run rate of ARR that they would have carried over that would have contributed into your Q1, I mean, I understand it's small. I don't think I understand, is it $1 million? Is it a few million? Is it a couple of hundred thousand? I just don't have much sense of that.

Yes. So as I said, at the beginning of Q2, we were still in the process of transferring contracts because we did an asset sale. So it's a little bit more complicated question. But if you think about the overall scale of the operation, right, it's a business that had roughly 20 people. And if you just apply like industry standard like ARR per employee, benchmark for those businesses, you'll get close. So we're not disclosing actual ARR for this particular line of business. But as said, if you look at number of employees and just apply some standard multipliers, you'll get very close.

Okay. So something like $200,000 per head, run that through and will be in the ballpark.

It's going to be in the -- like I said, I would be happy to disclose it later. If Evgeny allows me, maybe closer to Q4. But right now, we're not really providing a lot of color on that one. But I think in the ballpark, you're right.

Understood. Thank you.

The next question is from Brent Thill with Jefferies. Your line is open.

Hey guys, it's James on for Brent. Thanks for the question. Can you talk about just the disruption that you'd expect to see from the employee relocation? It just looks like you're still expecting pretty robust top line growth for '22. Curious if you're maybe expecting any potential disruptions to overall top line as a result of the relocation. And just a quick one on customer growth. Just are there any particular markets that did particularly well or others that were a bit weaker? Any color there would be great. Thanks.

I don't expect -- This is Oleg. I don't expect any significant impact on our operations because of such relocations. Look, COVID helped us a lot. And we have a great culture and such remote approach, what we trained during COVID period, all of us trained this remote approach, all companies around. With our culture, with our focus on self-organizations and autonomic teams, I don't think we should expect any kind of disruptions here.

And then just around the customer growth, any particular markets that did well or others that were a little bit softer?

It's aligned with our expectations. I don't -- there are no surprises here. It's very, very stable. And even with some macro conversations around us, we don't see anything related to our current cohort numbers. It's stable.

Great. Thank you guys.

The next question is from Clarke Jeffries with Piper Sandler. Your line is open.

Hello. Thank you for taking the question. Net retention ticked up again this quarter. Wondering if there was any kind of particular products or upgrade pass, whether that was users or otherwise that are emerging that is really helping drive that metric cohort?

Yes. Thank you for pointing this out. Definitely, one of the metrics we're really proud of. One of the big factors is, of course, expansion of seats that we started seeing early last year, and it continues today. More and more people buy subscriptions with multiple seats or expanding usage of existing multi-seat subscriptions. So I would say this is definitely contributing factor. Obviously, other things like strong sales numbers for our add-on products and App Center that Oleg already mentioned contributes as well. But I would say if I had to pick one, definitely expansion of seats.

Yes. And then I was going to ask a follow-up question that -- in terms of seats, 1 million gross ARR in App Center. Could you remind us of what the revenue model or economic model is for that? Is that a rev share based marketplace for some of the partner products expecting to triple.

That's correct, we use revenue share. Now specific percentages could be different for different partners. But I would say in the ballpark, we always aim for something around 40% take rate, which I think is more or less standard for this kind of relationship.

Understood. And if I can squeeze one more in. You mentioned improved search volumes in some of your largest markets, more to roll out during this year with the recent acquisition to add some more volume to SEO capability. How do you view that competitively? Do you feel like you're really outpacing the competition in terms of scale an accuracy of search estimates?

Yes. So this definitely has been a big focus of our R&D team. I personally was involved in development of algorithm and tests. So it was definitely a high priority because marketers, to make right decisions, they need to understand what people are searching for and they need accurate data. So as part of the rollout, we tested, for example, our search volume estimates against source of truth data that we were able to collect from Google Search console and results were, I would say, better than anything else that we were able to find in the market. And we really tried to harden and didn't leave any stone unturned, untouched. So to the best of my knowledge, what we have today is the most accurate metric for search volume. For keywords, right now, it works in the United States and Australia. Of course, there are plans to roll out it to other locations.

The next question is from David North with Due North Capital. Your line is open.

Hi, and congrats on a good quarter. What countries will the relocated employees be moving to? And will they be moving to locations with company offices? Or will they have the ability to work remotely? I'd like to know how much the cost of these employees will increase and whether your key advantage of having lower cost software engineers is still intact.

Thank you. This is Oleg. Last year, we decided to open offices in Barcelona, Spain, Amsterdam, Netherlands and Berlin, Germany. And our product teams are mostly relocating to these locations. But because of contract, because of things was going around, we decided to open our office in Armenia and in Serbia. And some marketing groups, some revenue groups, customer success groups moving to such locations, Armenia and Serbia. It's more relevant to their service and cost. And also relocating our employees to our offices in Cyprus and Prague, Czech Republic. We opened these offices about 7 years ago. And right now, it's really attractive location for own place.

And this is Evgeny. On the cost side, we definitely expect that our R&D, as I mentioned, R&D expense will go up because of the cost of the living in those countries. As Oleg has mentioned, we're more like Western Europe focused for the developers. For the G&A or for the support stuff, we will be -- we're targeting locations which are closer in terms of the cost of living such as Armenia or Serbia, which will be like maybe slightly higher cost relocation for those functions. But overall, like I mentioned, the run rate impact will probably be there this year, and we'll have to work it through in 2023.

Okay. Thank you.

[Operator Instructions] The next question is from Michael Turits with KeyBanc. Your line is open.

Just a quick one. I think we're expecting to be about free cash flow breakeven previously. Any sense for where that falls out now and how we might think about it into next year?

So Michael, at this point of where we are like doing our estimates, we're clearly just simply implying an increase in net loss to our free cash flow projections. So we don't have a -- like a very like accurate assumptions given the gains that we -- there are many moving parts, but I would probably expect us to be cash flow negative like for the full year, given the increased estimate for the loss.

Okay. And I think it's realistic. Just think about that improving or maybe breakeven next year?

Can you say it again, please?

Do you think it's realistic to think about that free cash flow improving and possibly being breakeven next year in '23?

Yes.

Yes.

We have no further questions at this time, and this will conclude today's conference call. Thank you for participating. You may now disconnect.