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SEMrush (NYSE:SEMR) Posts Better-Than-Expected Sales In Q3


Full Report / November 15, 2022
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Marketing analytics software Semrush (NYSE:SEMR) reported Q3 FY2022 results topping analyst expectations, with revenue up 33.5% year on year to $65.7 million. The company expects that next quarter's revenue would be around $67.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. SEMrush made a GAAP loss of $9.09 million, down on its loss of $615 thousand, in the same quarter last year.

SEMrush (SEMR) Q3 FY2022 Highlights:

  • Revenue: $65.7 million vs analyst estimates of $63.9 million (2.84% beat)
  • EPS: -$0.06 vs analyst estimates of -$0.09 (34.4% beat)
  • Revenue guidance for Q4 2022 is $67.5 million at the midpoint, below analyst estimates of $68.1 million
  • Free cash flow was negative $2.29 million, compared to negative free cash flow of $9.86 million in previous quarter
  • Net Revenue Retention Rate: 122%, down from 125% previous quarter
  • Customers: 94,000, up from 91,000 in previous quarter
  • Gross Margin (GAAP): 81.1%, up from 76.9% same quarter last year

Started by Oleg Shchegolev while still in university, Semrush (NYSE:SEMR) is a software as a service platform that helps companies optimize their search engine and content marketing efforts.

With all the social media, blogs posts, and audio and video content non stop screaming for our attention, it is becoming increasingly difficult for small and medium sized businesses to compete for the attention of their customers online. p

Semrush offers a suite of tools that help companies to be found online. Users can simply insert their own or their competitor’s web domain name into the platform and immediately start seeing insights around what keywords they rank for in Google, who are the visitors and where is the traffic coming from. The tool automatically provides suggestions on how to optimize the website both from content and technical SEO perspective.

Semrush is constantly monitoring a large part of the internet and its large data set enables it to algorithmically suggest new content strategies based on popular topics and headlines or provides insights on how to optimize your online ads for better performance. The company has expanded from a pure search engine optimization product to a wide range of over 50 tools, covering everything from market research, social media, content marketing to paid online marketing. And even more impressively, Semrush is the leading tool in most of the categories it competes in.

As the number of places that keep business listings (such as addresses, opening hours and contact details) increases, the task of keeping all listings up-to-date becomes more difficult and that drives demand for centralized solutions that update all touchpoints.

Semrush competes with companies like Hubspot (NYSE:HUBS) and Yext (NYSE:YEXT), although they only offer some of the features.

Sales Growth

As you can see below, SEMrush's revenue growth has been impressive over the last two years, growing from quarterly revenue of $32.1 million in Q3 FY2020, to $65.7 million.

SEMrush Total Revenue

And unsurprisingly, this was another great quarter for SEMrush with revenue up 33.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.18 million in Q3, compared to $5.48 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates SEMrush is expecting revenue to grow 25.5% year on year to $67.5 million, slowing down from the 47.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 24.5% over the next twelve months.

Customer Growth

You can see below that SEMrush reported 94,000 customers at the end of the quarter, an increase of 3,000 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

SEMrush Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

SEMrush Net Revenue Retention Rate

SEMrush's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 122% in Q3. That means even if they didn't win any new customers, SEMrush would have grown its revenue 22% year on year. Despite the recent drop this is still a good retention rate and a proof that SEMrush's customers are satisfied with their software and are getting more value from it over time. That is good to see.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. SEMrush's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 81.1% in Q3.

SEMrush Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.81 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a great gross margin, that allows companies like SEMrush to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. SEMrush burned through $2.29 million in Q3, with cash flow turning negative year on year.

SEMrush Free Cash Flow

SEMrush has burned through $598 thousand in cash over the last twelve months, resulting in a negative 0.24% free cash flow margin. This below average FCF margin is a result of SEMrush's need to invest in the business to continue penetrating its market.

Key Takeaways from SEMrush's Q3 Results

With a market capitalization of $1.62 billion SEMrush is among smaller companies, but its more than $246.5 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

It was good to see SEMrush deliver strong revenue growth this quarter and maintain robust gross margin. On the other hand, there was a slowdown in customer growth and cash burn increased. Overall, it seems to us that this was a mixed quarter for SEMrush. The company is flat on the results and currently trades at $11.49 per share.

Is Now The Time?

When considering SEMrush, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think SEMrush is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And on top of that, its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from SEMrush given its price to sales ratio based on the next twelve months is 5.4x. There are definitely things to like about SEMrush and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $16.3 per share right before these results, implying that they saw upside in buying SEMrush even in the short term.

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