Marketing analytics software Semrush (NYSE:SEMR) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 19.3% year on year to $74.7 million. The company also expects next quarter's revenue to be around $78.5 million, roughly in line with analysts' estimates. SEMrush made a GAAP loss of $279 thousand, improving from its loss of $8.28 million in the same quarter last year.
SEMrush (SEMR) Q2 FY2023 Highlights:
- Revenue: $74.7 million vs analyst estimates of $74.4 million (small beat)
- EPS: $0 vs analyst estimates of -$0.03 ($0.03 beat)
- Revenue Guidance for Q3 2023 is $78.5 million at the midpoint, below analyst estimates of $79.1 million
- The company reconfirmed revenue guidance for the full year of $307.5 million at the midpoint
- Free Cash Flow was -$8.58 million compared to -$4.93 million in the previous quarter
- Net Revenue Retention Rate: 112%, down from 116% in the previous quarter
- Customers: 104,000, up from 100,000 in the previous quarter
- Gross Margin (GAAP): 82.6%, up from 79.9% 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.
As you can see below, SEMrush's revenue growth has been very strong over the last two years, growing from $45 million in Q2 FY2021 to $74.7 million this quarter.
This quarter, SEMrush's quarterly revenue was once again up 19.3% year on year. We can see that SEMrush's revenue increased by $3.82 million quarter on quarter, which is a solid improvement from the $2.09 million increase in Q1 2023. Shareholders should applaud the acceleration of growth.
Next quarter's guidance suggests that SEMrush is expecting revenue to grow 19.3% year on year to $78.5 million, slowing down from the 33.6% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 20.1% over the next 12 months.
SEMrush reported 104,000 customers at the end of the quarter, an increase of 4,000 from the previous quarter. That's a little slower customer growth than last quarter but quite a bit above what we've typically observed over the last 12 months, suggesting that its sales momentum is healthy but softening after a tough comp quarter from last year.
One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.
SEMrush's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 112% in Q2. This means that even if SEMrush didn't win any new customers over the last 12 months, it would've grown its revenue by 12%.
Despite falling over the last year, SEMrush still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 82.6% in Q2.
That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, SEMrush's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. SEMrush burned through $8.58 million of cash in Q2 , reducing its cash burn by 13.1% year on year.
SEMrush has burned through $25.2 million of cash over the last 12 months, resulting in a negative 8.87% free cash flow margin. This low FCF margin stems from SEMrush's poor unit economics or a constant need to reinvest in its business to stay competitive.
Key Takeaways from SEMrush's Q2 Results
With a market capitalization of $1.45 billion, SEMrush is among smaller companies, but its more than $24.1 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.
While revenue beat by a small amount in the quarter, ARR missed and revenue guidance for next quarter was disappointing, coming in below Wall Street analysts' expectations. Additionally, there was a slowdown in customer growth. However, the CEO said “We expect revenue growth to reaccelerate with increasing adoption of our expanding product portfolio, tools, and add-ons." The company therefore raised full year guidance. Overall, this was a mixed quarter for SEMrush and the market will have to wait to see if the reacceleration materializes. The stock is flat after reporting and currently trades at $10.18 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 isn't a bad business. We'd expect growth rates to moderate from here, but its revenue growth has been strong over the last two years. And while its customer acquisition is less efficient than many comparable companies, the good news is its impressive gross margins are indicative of excellent business economics.
SEMrush's price to sales ratio based on the next 12 months is 4.3x, 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 of 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.