Greetings. Welcome to Similarweb's Third Quarter Fiscal 2020 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Raymond Jones, Vice President, Investor Relations. Thank you. You may begin.

Thank you, operator. Welcome, everyone, to our third quarter 2022 earnings conference call. During this call, we will make forward-looking statements related to our business. These statements may include the expected performance of our business and our future financial results, our strategy, the potential impacts of the COVID-19 pandemic and its associated global economic uncertainty, our anticipated long-term growth and overall future prospects. These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. Again, actual results and the timing of certain events may differ materially from the projected results or the timing predicted or implied by such forward-looking statements. Further, reported results should not be considered as an indication of future performance. Please review our Form 20-F filed with the SEC on March 25, 2022, in particular, the section entitled Risk Factors therein. For a discussion of the factors that could cause our actual results to differ from the forward-looking statements. Also note that the forward-looking statements made on this call are based on the information available as of today's date, November 16, 2022. 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 referenced non-GAAP operating loss, which represents GAAP operating loss less share-based compensation adjustments and payments related to business accommodations, amortization of intangible assets and certain other nonrecurring items. We use this and other non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes. We believe these non-GAAP financial measures when taken collectively, may be helpful to investors because they provide consistency and comparability of the 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 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.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 third quarter 2022 results in a letter to shareholders for investors to 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 Or Offer, CEO of Similarweb.

Thank you, RJ. And also thank you to everyone joining the call today. We reported a solid result in our third quarter as we navigated the challenging macroeconomic environment. Revenue grew 41% over Q3 last year to $50 million in the third quarter. The expansion of our global customer base consisting of SMB, enterprise and strategic account stayed steady. Our customer base grew 21% year-over-year to 3,900, and our average account spends about $52,000 with us annually, up 15% over last year. Furthermore, over 53% of our annual recurring revenue comes from customers who spend more than $100,000 per year with us. Today 37% of our relationships consists of multiyear contract, a metric that has expanded year-over-year since 2020. When we look back to 2020, digital transformation has become mission-critical for every business and we benefit greatly. At that time, we became a public company, we nearly doubled our revenue and we focus on continuing our rapid growth. Despite the incredible trajectory we have been experiencing since the outset of the pandemic in 2022 and other plans, we are facing the impacts of continued war in Ukraine, raising interest rates, global inflation and customer with leaner budgets. We now believe that the macroeconomic condition will take longer to recover than we assumed and are looking at an entirely different economic climate in 2023. To succeed in this environment, we must adjust our priorities and sharpen our focus and take the right action for our company. This leads me to a truly difficult change I'm sharing with you today. We have decided to reduce the size of our payment by about 10%, saying goodbye to Similarwebers who mean a lot to us. The incredibly talented Similarwebers that we have to say goodbye to, I'm deeply sorry. Over the last couple of…

Thank you, Or. And thank you to everyone joining us on the call today to discuss our third quarter results. I will briefly address our financial performance, and then we will open up the call to questions. Our results in the third quarter continue to demonstrate our disciplined execution. Revenue reached $50 million for the quarter and exceeded our outlook of $49.2 million on the high end of our range. Our overall dollar-based net retention rate, or NRR, increased to 112% as compared to 110% in the third quarter of 2021. And for our $100,000 ARR customer segment, NRR increased to 123% as compared to 122% in Q3 last year. Our remaining performance obligations, or RPOs, increased 39% year-over-year to $158 million, 86% of which will be realized over the next 12 months. As we exceeded our plans on the top line we also exceeded expectations on our bottom line. Our third quarter GAAP operating loss was $20.6 million, while our non-GAAP operating loss was $13.3 million, which was much less than the $20.9 million loss we had anticipated on the lower end of our guidance range. Importantly, our non-GAAP operating margin improved over 1,200 basis points versus the prior year. In addition to increased sales, we deployed broad-based operating efficiency measures across the business. As a reminder, this result includes noncomparable expense impacts from our acquisitions as compared to the prior year. Turning now to Q4 2022, we expect total revenue in the range of $50.5 million to $50.9 million. For the full year, we expect total revenue in the range of $192.4 million to $192.8 million, representing 40% growth year-over-year at the midpoint of the range. Non-GAAP operating loss for the fourth quarter is expected to be in the range of $14.5 million to $15 million. And for the full year, between $67.4 million and $67.9 million. Compared to last year, our outlook includes impacts to cost of goods sold relating to our data.ai partnership and to the acquisition of Embee Mobile. We anticipate non-GAAP gross margin will be approximately 75% to 76% in Q4 2022 and approximately 75% and for the full year 2022 as a result of these impacts. As we finish 2022 and plan for 2023, we are anticipating a different growth trajectory next year than we have experienced to date, influenced by recessionary conditions that will persist for an indeterminable amount of time. As Or mentioned, we are adjusting our strategic priorities as we, along with our customers, prepare to face these increasing challenges globally. Today, especially, is a trying day in our history as we restructure our organization to balance our expectations for moderating growth with accelerating our path to profitability. Our team, our business model and our balance sheet remain resilient as we navigate these challenges. The decisions we are making and the actions that we are taking reflect our focus on becoming free cash flow positive during 2023. With that, Or and I are ready to answer your questions.

[Operator Instructions] Our first question is from Ryan MacWilliams with Barclays. Please proceed.

Thanks for taking the question. Or, given your insight into current market trends and through speaking with your customers, what are some of the things that you're seeing that could indicate these prolonged changes in demand for Similarweb? And are you seeing any more pressure on existing customer growth or new customer acquisition? Thanks.

Hi, Ryan, good to hear from you. Thank you for the question. So what we're seeing, I think, it's similar motion that are in the market for most software companies is that there is a slowdown in making business. What means that the process of approving a deal now, getting much longer, you need to go higher the organization to get approval from the C level, is a CFO, CEO. A lot of clients pushing to the end of the year or pushing into next tier budgets. And what means that the pressure is mostly coming from new business. We're seeing stability on the current book of business, but new business is tougher. The KPI there are totally different than what it used to be.

Appreciate the color. And then, Jason, pleased to see the guidance for Similarweb becoming free cash flow positive move up the year to 2023, along with the new focus on profitability. So how should we think about the benefit to free cash flow from the reduction in workforce? And is there any particular segment or area where the employee headcount changes are primarily impacting? Thanks.

We're unable to hear the speakers. Please check and see if you have your line muted.

Are you able to hear me now?

Yes. Please go ahead. Thank you.

Okay. Sorry. So the reductions are actually all across the business. I think you're seeing efficiencies already in this quarter in Q3 in terms of that 1,200 basis point improvement in the operating expenses. You see the margin come down on R&D, and on sales and marketing, and on G&A. And that was before we implemented the restructuring that we announced today that will come through towards the end of the year. We're looking to just drive the business to be more efficient. And we think that that's the right way for us to be managing going into 2023.

Perfect. Thanks guys.

Our next question is from Arjun Bhatia with William Blair. Please proceed.

Hey thanks guys. Or, I'm curious, just as you look at the business, obviously, you're seeing a slowdown and that's not unique to Similarweb rate. We see that across the space. But when you think about your business, what are the different areas where you think you may be more resilient? And where do you think the impact may be more pronounced from a macro perspective, whether you break that out by industry or customer size between enterprise and SMB? Any color you have there would be helpful.

Hey, Arjun, good to hear from you. And thank you for the question. So when we're analyzing the different segment that is getting tougher, I would say, than other I would say that Europe is more challenging than the rest of the world. I think U.S. is okay. And in APAC, it's also good. So the phase of doing business maybe a little bit tougher, but we see that it's still rolling. From the motion side, like around SMB – and so I think SMB is still doing good. So we see good traction though. And enterprise are more tougher, and I think strategic is maybe getting more complex, we see a lot of budget getting from centralized team to decentralized. We still closing deals still poising maybe a little bit more complexity. I think enterprise maybe is getting hit harder than SMB and strategic.

Okay. Got it. And Jason, maybe one for you. When you think about – obviously, you're not going to guide to 2023 at this point. But when you think about the margin expansion that's available, looking ahead, where do you see the most leverage, I'll say most incremental leverage in the model versus how you're operating the business today?

Sure, Arjun. We actually see it across the lines. When you look at gross margin, gross margin, if you recall at the last year, was already at the 78%, 79%. We took – we got – we took a hit on that earlier this year because of the acquisition of Embee Mobile and the deal that we do with data.ai as that stuff gets blended in, we're already starting to see the leverage of that coming through as the gross margin continues to increase already up at $76 million. And we think that that's one thing that you'll see going into next year. And we think that you'll see efficiencies all across. I mean, look at the improvement that we were able to do on the sales and marketing side taking that to 55% of revenue consistently. We've been consistently about 65%, 66% when you look over the last seven quarters. So I think that you're going to see more and more efficiency coming through, while we continue to maintain our unit economics. Our unit economics are still very, very positive inherently drive a profitable business over a two-year lifespan of a customer. We don't have to wait for three, four years in order to get recovery and profitability on the customer. We feel very good about that.

Okay. Got it. Perfect. Thank you very much guys.

Our next question is from Jason Helfstein with Oppenheimer & Co. Please proceed.

Thanks. And maybe I have two questions. So first, can you talk about the e-commerce product adoption in the quarter versus perhaps like what you saw a year ago? And are you still as bullish on this opportunity as you were in the past? And then second question, when business – just from the cost reduction perspective, I'm assuming you're – for example, in sales and marketing, just reducing headcount to kind of right-size the current opportunity. How do you think that impacts sales though coming out of this? So obviously, things will rebound presumably late in 2023. How do you think about that? Do you then have to rehire on the other side of that? And then consequently, with R&D, are you pushing out new product development that then you rehire on the other side. So how much of this you just think about is driving permanent productivity gains versus you're rightsizing for the current environment and then we'll just need to rehire when the opportunity is right? Thanks.

Thanks, Jason. And so the first question around the Shopper Intelligence product, we still see strong momentum. We have a really good quarter from lower acquisition and I think overall growth. So we still have good momentum. We're focusing now on the U.S. market. And disregarding the Shopper product, e-commerce one. And regarding the reducing force, I think that when we look at the reducing force, we were mostly adopting – so we're trying – the strategy there was not to protect the revenue-generating scheme in marketing sales and honoring innovation and product and – so basically, G&A, it get hit hard, some things in R&D that have more internal and development. So I think we also – because we're very bullish on our product and product market fit and our needs to our solution in those times because we know that customers will need a market that more than ever now to adopt their plan for next year. We're still closing businesses. We just aware that it's just taking longer and tougher to grow new deals, but we're still bullish on continued execution. So we are – as I said, we didn't cut in a way that we think that we need to be higher next year.

Thank you.

Our next question is from Tyler Radke with Citigroup. Please proceed.

Yes. Thanks for taking the question. Maybe I just wanted to better understand exactly how you – the timing of how you saw this play out because I think it's obviously a pretty big tone change from the investment posture that you indicated at the beginning of the year. So was this something that you saw kind of play out in terms of slowdown in new customer acquisition in the quarter? And are you expecting it to get worse? Or you just kind of proactively adjusting for the macro environment that you may anticipate over the next year, just given the headlines out there?

Thanks, Tyler. And I would say that when I look historically in the quarter, I think Q1 was looking good for us. We were optimistic. We were still hitting our internal targets. And Q2, we already start seeing the slowdown. We didn't know exactly to understand what this means. I think just the beginning of the slowdown and specifically to our sector. So we did some adjustment already in the end of Q2 in order to improve efficiency and marketing budgets ones. I understand it looked like it's going to be a slowdown. We didn't know exactly how tough it will be, and I think Q3 was stronger indicator that there is a slowdown and I think, again, I think probably it will be like that by the end of the year, this company ends up to next year. I think there is going to be maybe a more recovery in our sector. And so then we decided that basically, we need to go and do this adaptation and stand the strategy according, first of all, about market condition and also market motion and sentiment. We feel it much better to push the company to possibility and that ourselves to a market that's going to be in the next few quarters more challenging to drive business, and we thought it was the right decision to change its strategy according to the challenging environment.

That's helpful. And maybe a question for Jason; just as we think about cash flow breakeven next year, I think that's a much bigger change than at least the consensus numbers are indicating. Maybe just help us frame how we get there. I mean should we think about revenue growth and teams of 20% and OpEx flat? Or just help us understand kind of the underlying assumptions to get us there? And then secondly, if you could just kind of indicate your view on when you would expect things to get better. Obviously, this is a difficult decision to reduce the headcount. But presumably, you're not expecting things to improve anytime soon. Just any thoughts on when you would look to see higher should you see things improve? Thank you.

Yes. So Tyler, thanks for the call. I think the – our philosophy over here, and it's always been that case is balancing growth and profitability. And even being – before we went public, we had run the business efficiently and getting to cash flow profitability breakeven and slightly positive right before when we went public. And going – when we went public, the whole investment thesis was that we were going to accelerate that growth and know that we could return that investment over the next 24 months after deploying that capital. And we did a really good job at that. I think we were showing that growth. And what we've seen now, as Or just mentioned, is we've seen that slowdown happening. And we, as a leadership team, always want to execute with that disciplined execution, that operating efficiency. We've – you've heard us talk about our unit economics over and over again over the last number of quarters. And it's not just empty words with us. We take action. I think that's why you're seeing the improvement already having in Q3. Many of you have asked us before, are you able to adapt if you see the market changes? And we said, yes. And here it is, we were able to do it. Today's decision on reducing the – taking a reduction in force is a tough decision, but it's the right decision for the business as we see going in today's macroeconomic climate. We see still the demand is there. People are still buying. People – as you saw, people are even still locking in multiyear deals. So that – our customers are telling us that not only we need Similarweb, we can't afford to lose Similarweb from their budgets, and therefore, they're locking that contract in for a longer period of time. What we're doing from a planning perspective is to make sure that we have the operational flexibility and the baseline from an expense side to be able to be sustained cash flow positive sometime in 2023, accelerating that from 2024 because, again, we think that's the right thing to do.

Thank you.

[Operator Instructions] Our next question is from Brett Knoblauch with Cantor Fitzgerald. Please proceed.

Hi Or and Jason. Thanks for taking the question. I guess given the growth reset, it kind of seems like we're walking back that $450 million ARR target that you previously guided to by the end of 2024. I guess should we expect the growth rate that you guys are guiding to in the fourth quarter, call it kind of high 20% range be the more normal over the next two years? Or should we expect additional deceleration over the coming quarters or coming years? I guess just any help kind of framing the pace of growth over the coming quarters?

No. I think we would expect to – as long as the market condition, what we've seen today, we probably think that looking in next year, we're going to – we hope to look maybe too tough quarter like maybe Q1, Q2 and then we hope that Q3, Q4, there is some comeback. So we're still optimist about the execution, about what it means from growth for next year, we would probably provide this guidance in the next earnings call and once we can have the full year results.

Got it. That make sense. And I guess, should we expect, I guess, majority of the growth over the medium term to kind of come from you guys pushing on your existing customers? And I guess to that extent, could you maybe talk about the adoption of your – at any premium add-on and what you're seeing with that and how receptive customers are to that product?

Yes. So we think the right strategy going forward in this environment, of course, is to double down our own customers. We're lucky to have a very broad product portfolio that we can introduce to them. And after model, the upstream model that you talk about is one of them. And we do see good traction there. So we do already have hundreds of customer’s upselling this model and we have a strong pipeline. So this is one of the offering. But again, we still have good innovation internally and the Shopper products for the e-commerce doing well, we just launched a new investor platform alternative data that look very good and we already on board a lot of investor customers on that. And so there's still a lot of – a lot of opportunities, as I said, in our portfolio, then we're very bullish around that.

And for the Shopper Intelligence product is that still in beta? I believe you had kind of said in the press release that was expected to kind of go live by the end of the year. I guess, is that live now? Or is this something that will go live over the coming weeks?

Yes. It's already live. We're already starting first. We think we had tens of customers already starting like the trial. So we give them a trial to take a look at really new concepts, how you look in automative data. And also historically, we have in terms of paying customers who were buying the data for Excel. And now they have a more sophisticated UI with more insight and information, and we are kind of shifting them to use the platform, and we're seeing good traction.

Perfect. And maybe just one last question on my end. I guess, have you guys been more accommodative on the pricing, I guess pricing levels for your range of products? Or the held firm? And would you be kind of more accommodative on a pricing standpoint going forward?

Yes. So it's a good question, and it's also internal discussion that we have internally. If now it's the time maybe to do some price increase because the ForEx exchange stuff and we're saying that the other companies took this approach of doing price increase. And – but right now, we didn't get to the final decision, but we do – we are much more flexible about payment terms. I think we understand our customers want to do some cost savings, et cetera. So I think we're still doing a yearly contract, but sometimes we're giving them maybe quarterly payments or monthly payment and to make them feel more comfortable. So this is something that we did to now in a few regions.

Perfect. Thanks Or. Very appreciate there. Thanks guys.

We have no further questions. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.