SEMrush (NYSE:SEMR) Reports Q1 In Line With Expectations But Quarterly Guidance Underwhelms

Marketing analytics software Semrush (NYSE:SEMR) reported results in line with analyst expectations in Q1 FY2023 quarter, with revenue up 24.1% year on year to $70.9 million. The company expects that next quarter's revenue would be around $74.3 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. SEMrush made a GAAP loss of $9.86 million, down on its loss of $2.57 million, in the 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 very strong over the last two years, growing from quarterly revenue of $40 million in Q1 FY2021, to $70.9 million.

This quarter, SEMrush's quarterly revenue was once again up a very solid 24.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.09 million in Q1, compared to $2.99 million in Q4 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 18.7% year on year to $74.3 million, slowing down from the 39.1% 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 20.3% over the next twelve months.

Customer Growth

You can see below that SEMrush reported 100,000 customers at the end of the quarter, an increase of 5,000 on last quarter. That is a fair bit better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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'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 116% in Q1. That means even if they didn't win any new customers, SEMrush would have grown its revenue 16% 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.

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 82.2% in Q1.

That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year 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 $4.93 million in Q1, with cash flow turning negative year on year.

SEMrush has burned through $26.4 million in cash over the last twelve months, a negative 9.87% free cash flow margin. This low FCF margin is a result of SEMrush's need to still heavily invest in the business.

Key Takeaways from SEMrush's Q1 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 $1.36 billion and more than $232.3 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by SEMrush’s acceleration in customer growth this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that both revenue and non-GAAP operating profit guidance for the next quarter missed analysts' expectations. Full year guidance was maintained despite that. Zooming out, we think this was a mixed quarter. The company is down 2.33% on the results and currently trades at $9.64 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. Although SEMrush is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been impressive, though we don't expect it to maintain historical growth rates. But while its impressive gross margins are indicative of excellent business economics, the downside is that its customer acquisition is less efficient than many comparable companies and its cash burn raises the question if it can sustainably maintain its growth.

SEMrush's price to sales ratio based on the next twelve months is 4.3x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that SEMrush doesn't trade at a completely unreasonable price point.

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