Marketing analytics software Semrush (NYSE:SEMR) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 28% year on year to $68.8 million. The company expects that next quarter's revenue would be around $70.5 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. SEMrush made a GAAP loss of $13.9 million, down on its loss of $3.86 million, in the same quarter last year.
SEMrush (SEMR) Q4 FY2022 Highlights:
- Revenue: $68.8 million vs analyst estimates of $67.6 million (1.79% beat)
- EPS: -$0.10 vs analyst expectations of -$0.10 (4.92% miss)
- Revenue guidance for Q1 2023 is $70.5 million at the midpoint, roughly in line with what analysts were expecting
- Management's revenue guidance for upcoming financial year 2023 is $307.5 million at the midpoint, missing analyst estimates by 0.11% and predicting 20.9% growth (vs 35.9% in FY2022)
- Free cash flow was negative $10.3 million, compared to negative free cash flow of $1.8 million in previous quarter
- Net Revenue Retention Rate: 118%, down from 122% previous quarter
- Customers: 95,000, up from 94,000 in previous quarter
- Gross Margin (GAAP): 82.6%, up from 78.5% 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.
As you can see below, SEMrush's revenue growth has been impressive over the last two years, growing from quarterly revenue of $36.4 million in Q4 FY2020, to $68.8 million.
This quarter, SEMrush's quarterly revenue was once again up a very solid 28% year on year. Quarter on quarter the revenue increased by $2.99 million in Q4, which was in line with Q3 2022. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.
Guidance for the next quarter indicates SEMrush is expecting revenue to grow 23.4% year on year to $70.5 million, slowing down from the 42.8% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $307.5 million at the midpoint, growing 20.9% compared to 35.3% increase in FY2022.
You can see below that SEMrush reported 95,000 customers at the end of the quarter, an increase of 1,000 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.
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'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 118% in Q4. That means even if they didn't win any new customers, SEMrush would have grown its revenue 18% year on year. Despite it going down over the last year 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.
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 82.6% in Q4.
That means that for every $1 in revenue the company had $0.83 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 $10.3 million in Q4, with cash flow turning negative year on year.
SEMrush has burned through $14.6 million in cash over the last twelve months, resulting in a negative 5.73% 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 Q4 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on SEMrush’s balance sheet, but we note that with a market capitalization of $1.1 billion and more than $237.5 million in cash, the company has the capacity to continue to prioritise growth over profitability.
SEMrush delivered an overall in line quarter. It was good to see SEMrush deliver strong revenue growth this quarter. And we were also glad to see the improvement in gross margin. On the other hand, the revenue guidance for next year indicates a significant slowdown and there was a slowdown in customer growth. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $7.95 per share.
Is Now The Time?
SEMrush may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that SEMrush is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. And while its customer acquisition costs are higher than we like to see, the good news is its impressive gross margins are indicative of excellent business economics.
SEMrush's price to sales ratio based on the next twelve months is 3.7x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While SEMrush wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.