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SEMrush (NYSE:SEMR) Q1: Beats On Revenue, Provides Optimistic Full Year Guidance


Full Report / May 10, 2022
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Marketing analytics software Semrush (NYSE:SEMR) reported Q1 FY2022 results that beat analyst expectations, with revenue up 42.8% year on year to $57.1 million. Guidance for next quarter's revenue was $60 million at the midpoint, which is 1.64% above the analyst consensus. SEMrush made a GAAP loss of $2.57 million, down on its profit of $1.47 million, in the same quarter last year.

SEMrush (SEMR) Q1 FY2022 Highlights:

  • Revenue: $57.1 million vs analyst estimates of $55.9 million (2.04% beat)
  • EPS (GAAP): -$0.02
  • Revenue guidance for Q2 2022 is $60 million at the midpoint, above analyst estimates of $59 million
  • The company lifted revenue guidance for the full year, from $246 million to $250 million at the midpoint, a 1.62% increase
  • Free cash flow of $7.37 million, up 128% from previous quarter
  • Net Revenue Retention Rate: 127%, in line with previous quarter
  • Customers: 87,000, up from 82,000 in previous quarter
  • Gross Margin (GAAP): 79.7%, up from 78% 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 exceptional over the last year, growing from quarterly revenue of $39.9 million, to $57.1 million.

SEMrush Total Revenue

And unsurprisingly, this was another great quarter for SEMrush with revenue up 42.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $3.38 million in Q1, compared to $4.49 million in Q4 2021. 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 33.3% year on year to $60 million, slowing down from the 58.1% 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 27.1% over the next twelve months.

Customer Growth

You can see below that SEMrush reported 87,000 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.

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 127% in Q1. That means even if they didn't win any new customers, SEMrush would have grown its revenue 27% year on year. Trending up over the last year, this is a great retention rate and a clear proof of a great product. We can see that SEMrush's customers are very satisfied with their software and are using it more and more over time.

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 79.7% in Q1.

SEMrush Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good 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 follow 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's free cash flow came in at $7.37 million in Q1, down 15.4% year on year.

SEMrush Free Cash Flow

SEMrush has generated $18.7 million in free cash flow over the last twelve months, a solid 9.15% of revenues. This strong FCF margin is a result of SEMrush asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from SEMrush's Q1 Results

With a market capitalization of $1.29 billion SEMrush is among smaller companies, but its more than $259.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were very impressed by SEMrush’s very strong acceleration in customer growth this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $8.96 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 good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

SEMrush's price to sales ratio based on the next twelve months is 4.8x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about SEMrush and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $18.8 per share right before these results, implying that they saw upside in buying SEMrush even in the short term.

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