Q3 2023 Similarweb Ltd Earnings Call
Participants
Jason E. Schwartz; CFO; Similarweb Ltd.
Or Offer; Co-Founder, CEO & Director; Similarweb Ltd.
Raymond Jones; VP of IR; Similarweb Ltd.
Brett Anthony Knoblauch; Research Analyst; Cantor Fitzgerald & Co., Research Division
Jason Stuart Helfstein; MD & Senior Internet Analyst; Oppenheimer & Co. Inc., Research Division
Patrick D. Walravens; MD, Director of Technology Research & Equity Research Analyst; JMP Securities LLC, Research Division
Rachel Ayotte; Research Analyst; William Blair & Company L.L.C., Research Division
Ryan Patrick MacWilliams; Research Analyst; Barclays Bank PLC, Research Division
Sang-Jin Byun; Equity Analyst; Jefferies LLC, Research Division
Tyler Maverick Radke; VP & Senior Analyst; Citigroup Inc., Research Division
Presentation
Operator
Greetings, and welcome to Similarweb's Third Quarter Fiscal 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, RJ Jones, Vice President, Investor Relations. Thank you, RJ. You may begin.
Raymond Jones
Thank you, operator. Welcome, everyone, to our third quarter 2023 earnings conference call. During this call, we will make forward-looking statements related to our business. These statements may include the expected performance of our business and our future financial results, our strategy, the potential impacts of rising interest rates, rising global inflation and current macroeconomic and geopolitical conditions, including the current war in Israel, challenges in our business and in the markets in which we operate, our anticipated long-term growth and overall future prospects.
These (inaudible) to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those in the projected or implied during the call. Further, reported results should not be considered as an indication of future performance. Please review the forward-looking statements discussion in our shareholder letter, along with our Form 20-F filed with the SEC on March 23, 2023, and in particular, the sections entitled Cautionary Statement regarding Forward-Looking Statements and risk factors therein. For discussion of the factors that could cause our actual results to differ from the forward-looking statements.
Also note that any forward-looking statements made on this call are based on information available as of today's date, November 8, 2023. We undertake no obligation to update any forward-looking statements we make today, except as required by law. As a reminder, certain financial measures we use in presentations of results on our call today are expressed on a non-GAAP basis. In particular, we referenced non-GAAP operating loss, which represents GAAP operating loss, less share-based compensation, adjustments and payments related to business combinations, amortization of intangible assets and certain other nonrecurring items. We use this and other non-GAAP financial measures internally to facilitate analysis of our financial and business trends and for internal planning and forecasting purposes.
We believe these non-GAAP financial measures when taking collectively may be helpful to investors because they provide consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, results of operations or outlook. However, non-GAAP financial measures have limitations as an analytical tool and are presented for supplemental informational purposes only. They should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release, which can be found on our Investor Relations website at ir.similarweb.com.
Today, we will begin with brief prepared remarks from our CEO, Or Offer and CFO, Jason Schwartz. Then we will open up the call to questions from sell-side analysts in attendance. Please note that we publish a detailed discussion of our third quarter 2023 results in a letter to shareholders for investors to reference as well as an updated investor presentation with a strategic overview of the business, both of which are available on our Investor Relations website. With that, I will turn the call over to Or Offer, CEO of SimilarWeb.
Or Offer
Thank you, RJ, and welcome, everyone, joining the call today. In Q3, we reported another quarter of growth and operating improvements. We grew our revenue 10% over Q3 last year to $54.8 million. Our global customer base grew 12% year-over-year to [94,400] customers. And our average customer spends nearly $51,000 with us annually. I'm very proud of the team as we crossed a series of profitability milestones. I'm excited to report that our Q3 non-GAAP operating margin showed a strong improvement of 29 percentage points compared to last year, which led us to achieving our first ever non-GAAP operating profit in the quarter. This is a significant achievement for us, and it is truly a team accomplished, and I'm very proud of the team.
Q3 metrics at the top of our funnel continue to stay strong. We had around 30 million visitors to our free tools at similarweb.com in Q3 and we are in a phase of exceeded more than 120 million visits to our tool this year. As a result, our pipeline remains robust, and we are adding new customers and expanding our penetration into our market. During the quarter, we launched Similarweb 3.0, which is the latest generation of our platform. Similarweb 3.0 is a new way in which we package our offering that includes new data insights and obligation.
We now have a better pricing alignment with our customer that enhance our go-to-market motion and improve our offering to our enterprise customer and our average order value since launch has increased noticeably. We continue to make progress with SimilarAsk our digital intelligent AI system that uses Similarweb digital data to answer real question that the user type in free text without having to know how to navigate our platform. The latest version of the feature is now widely available to our platform and integrate AI-based trends analysis into the research results for websites benchmarking.
Now just getting started with what is possible with Generative AI and we believe that merging similar digital data with AI capabilities creates an amazing growth potential for us. I would like to take a minute to discuss the second [stances] we are facing in Israel. As you know, 1 month ago, Israel suffered a horrific terrorist attack. We stand in solidarity with Israel, we recognizing the human suffering across the region. We are proud to be an Israeli company with office and employees around the world. Since October 7, our people have demonstrated great resilience, keeping business as usual while adopting to the current situation. We continue to deliver our solution and insights to all of our global customers without interruption. To all Similarwebers, we thank you for your continuing commitment to keep business operating running smoothly. To our customers, partners and you in the investment committee, we are grateful for your support. So many of you wrote to me personally to share solidarity, it means so much to me, and thank you so much. With that, Jason, I will turn the call over to you.
Jason E. Schwartz
Thank you, Or, and thank you to everyone joining us on the call today to discuss our third quarter results. I will briefly address our financial performance, and then we'll open up the call to questions. Our results in the third quarter reflect the cumulative effect of our focus on disciplined execution. Revenue was $54.8 million for the quarter and exceeded the high end of our guidance range. For our $100,000 ARR customer segment, NRR was 108% as compared to 123% in Q3 last year and now represents 55% of our total ARR. Despite longer sales cycles than we have seen historically, customer acquisition and logo retention were steady in the third quarter. Consistent with trends earlier this year, we saw challenges to expansion within our existing customer base as enterprises are continuing to optimize their budgets and spending.
Some customers have reduced their spending with us in order to meet budget constraints while remaining a Similarweb customer. We are encouraged that 43% of our ARR is generated from customers with multiyear contracts, demonstrating the strength and longevity of those customer relationships driven by the enduring value that we deliver. While our results on the top line were better than planned, we also exceeded expectations in our operating efficiency and on our bottom line. Our non-GAAP gross margin reached a new record of 83%. Our third quarter GAAP operating loss was $4.9 million while our non-GAAP operating profit was $1.1 million. This result was our first ever profitable quarter on a non-GAAP operating basis and is a momentous achievement. Notably, as Or mentioned, our non-GAAP operating margin improved 29 percentage points versus the prior year.
Turning now to Q4 2023. We expect total revenue in the range of $55.5 million to $56 million. For the full year, we now expect total revenue in the range of $216.8 million to $217.3 million, representing approximately 12% growth year-over-year midpoint to the range. Non-GAAP operating profit for the fourth quarter is expected to be in the range of $0.5 million to $1 million which would amount to our second profitable quarter on a non-GAAP basis. For the full year, we expect our operating loss to be between $8.6 million and $9.1 million. In the fourth quarter, we expect to reach our goal of sustained positive free cash flow quarterly. We continue to focus on balancing growth with profitability as we become sustained free cash flow positive. We believe that our team, our business model and our balance sheet remain resilient as we navigate the current environment. As a global company headquartered in Israel, we remain united, resilient and determined to achieve our goals. We are committed to keeping business as usual, and our focus on disciplined execution will continue.
The opportunities in front of us will continue to inspire us and our hope for piece will not relent. With that, Or and I are ready to answer your questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question is from Ryan MacWilliams with Barclays.
Ryan Patrick MacWilliams
Congrats on the results given the circumstances. It's great to see the improvements and profitability. Now for Jason, how did you see macro change during the quarter? Maybe certain different customer segments? And have you seen any changes from a macro standpoint since the end of the quarter to your customer base?
Jason E. Schwartz
Thanks, Ryan. So we saw -- we're starting to see some improvements in the overall demand environment and deals starting to accelerate. We're seeing that mostly in Europe and in APAC. And still U.S. is similar kind of trends like we can see. But we're starting to see that demand starting (inaudible) a little optimistic going into the future.
Ryan Patrick MacWilliams
Excellent. And then -- in your shareholder letter, you said the average order value has increased since the launch of Similarweb 3.0. That's great to hear. This mean like a higher price point for the platform? Or are customers adopting additional capabilities? Or is just a larger scope within organizations, love more detail there.
Or Offer
Ryan, it's Or. Thank you for the question. So they kind of repackage the different features in different motion and drove very nice growth in AOV. So that you get different features for the (inaudible). Because they really build it from scratch. So it's very different than the old pricing structure we had.
Operator
Our next question is from Jason Helfstein with Oppenheimer.
Jason Stuart Helfstein
I just want to send support and best wishes to everybody in Israel. So first, do you think we're at an inflection point here? I mean, obviously, we saw the improvement in billings on a year-over-year basis. How much of this is you're basically getting customers to move to sign contracts faster versus you're now starting to see customers add some more capabilities, where they were not willing to do that and/or some pricing. So if you kind of like look at the three ways, you can kind of drive billings, maybe break that down? And I guess, do you think we're an inflection point from here?
Or Offer
I will start. It's all and maybe our Jason also can add more information. I do start seeing that dialogue around [downturn]. It's something that I feel that we -- in the end of the area of companies and trying to optimize their budgets. I think this is a good indication that maybe there is a trend shift on that angle. Jason, maybe you have anything to add from your side?
Jason E. Schwartz
Yes. I think that we're starting to see some of that starting to trough. But I think the thing that continues to impress us is the continuous desire of customers to sign on for multiyear commitments. And that's very encouraging in an environment where people were trying to reduce commitments or reduce their spend and the fact that we see, again, year-over-year and sequentially quarter-over-quarter, that number of the percentage of our ARR that's committed under a multiyear agreement is something that we watch closely as a good sign for the durability.
Operator
Our next question is from Rachel Ayotte with William Blair.
Rachel Ayotte
Yes. Thank you. I was wondering if you could talk a little bit more about any impact you guys have seen to either like the sales cycles or pipeline conversions since you've introduced the new pricing impact in plans earlier this quarter?
Or Offer
Yes, sure. And so I think that the new pricing and packaging, we introduced improved a little bit and the sales cycle and the conversion rate. But overall, in the past few quarters, those metrics got hurt because of the macro environment. So we did see longer sales cycle around SMBs that increased dramatically. I think around Straton strategic and enterprise accounts, it was a small increase. And the conversion rate, I think, again, in the past few quarters, you saw that it was harder to convert mostly SMBs and I don't think it's improved the trend, but we still need to do more improvement in order to back to the metrics that they were before the macro environment start changing early this year.
Rachel Ayotte
Awesome. And then maybe just following up on that. Were there any adjustments you needed to make with go-to-market motion or the sales force when you introduce the Similarweb 3.0.
Jason E. Schwartz
No, no.
Operator
Our next question is from Brent Thill with Jefferies.
Sang-Jin Byun
Jason, this is John Byun for Brent Thill. I have two questions on Similarweb 3.0, I mean, it's been, I guess, 2 months since that was announced. I don't know if you could dig in a little bit in terms of details into where you've seen the most impact, it comes out on the major solution category or add-ons? And then second, from the previous comments earlier, it does look like things are starting to maybe stabilize a bit. The net revenue retention numbers seem to be slowing the decent as well. And I don't know if you agree with that. Where or when do you think that might bottom?
Or Offer
Yes. I will try to answer that two questions I heard. I think the nice thing we're seeing with the solution (inaudible).It's like a new approach when we kind of -- when a customer now buying that package, he gets exposed to most of the features we have, even the premium one, but with the lower capacity. So it's giving us also much better land and expand. So if you like, one of the features, it play once or twice. If you want to repeat usage then you go to like a meter approach. And we do see that those features that we introduced and also one of them was then tracking capabilities. It's capability we got from acquisition we did last year from a company called Ranger.
So those kinds of operational capabilities are increasing the user engagement and retention in the platforms. So they're coming more often, they use the platform more. So it was a good success. And now with the solution free all. All the customers getting exposed to those features. This is around that? And the second question, what I remember was around the trend around NRR. So we do see stability around the logo retenant that is stable. And in the past few quarters, it was tougher to do upsell. But I do feel and seeing this is going to change, hopefully, especially as the macro environment get more stable.
Operator
Our next question is from Brett Knoblauch with Cantor Fitzgerald.
Brett Anthony Knoblauch
Just want to send my support as well. Maybe on the product front. Could you maybe walk us through what the top two or three things are you're doing that you think will kind of increase the mission criticality of your platform maybe it's something to do with Gen AI, but just curious what you're doing on that front and what remains kind of like a difficult demand backdrop.
Or Offer
Yes. Yes, for sure. And -- so I will answer in two parts. First, a lot of our teams, we shift them to improve stickiness and success of onboarding in the past few quarters. So we're putting a lot of antsy about improving setup, onboarding. I think the AR platform is very deep and have a lot of capabilities and we still feel that most of the customers are not aware of all of the capabilities we have. We can have an amazing insight and we know that if we push them and discover all those other capabilities. It is increasing retention and upsell and all the other metrics. So we're putting a lot of emphasis around that.
And regarding AI, we have a dedicated team that is all job is to implement AI all across the platform. So we just released what we call the first version of SimilarAsk that help you guys to navigate inside our platform like in free text, (inaudible), whatever data they want to get, and he will work them in the platform to the right place to find that. And I think the second part is able to integrate AI in any other part to help you do the analysis. Basically be your copilot as you use the platform. So there's a lot of exciting stuff that are working in progress. And we will introduce them slowly every quarter in different parts of the platform.
Brett Anthony Knoblauch
Awesome. And then maybe one for Jason on to sales cycles. I think you guys first mentioned the possibility of them elongating in the second quarter of last year. And I think every quarter since we kind of have talked about sales cycles elongating. I'm just curious if they still have been lengthening, call it, quarter-over-quarter or if they've kind of remained steady. And at what point if they are remaining steady, will it become maybe less of a headwind.
Jason E. Schwartz
(inaudible). You're right. We started seeing the impact of that about Q2 of last year. We saw that the cycle starting elongating. I think the last couple of quarters, we've seen them stabilizing kind of at the rate, and we don't see any length any longer, but we do see them not getting -- we didn't see them getting shorter. We're starting to see some of that free up and starting to turn, but it's too early to say that that's a trend just yet. I think the number that we report in the investor deck, we shared the CAC payback period, which is now between 19 to 20 months on a gross profit basis. Historically, that's been in the 15 to 16 month payback period. And we think that as (inaudible) starts shifting back to normal cycles, that we'll start seeing those payback periods starting to return back to those historical levels.
Operator
Our next question is from Patrick Walravens with JMP.
Patrick D. Walravens
Great. And we're keeping you and your families in our prayers. First of all, congratulations on the profitability, I mean, it's kind of a big deal, right? So Jason, where can that go? What's the plan?
Jason E. Schwartz
And we believe that on a long-term basis, you're going to be seeing 85% gross margins and 25% non-GAAP operating margins. And we -- that's our long-term margin and our long-term model and that we think it's somewhere in the neighborhood of $400 million to $500 million and has been consistent that way. And we're really excited to see that the numbers start pulling into -- going into place seeing gross margin getting 82%, 83%. Seeing sales and marketing down to 41%. And G&A already at 16% and coming down. I think there's a lot of efficiency that we talked about throughout this year that we were going to deliver. And we are really focused on that disciplined execution that we've talked about over the last couple of quarters.
Patrick D. Walravens
Okay. And then so once you hit free cash flow positive, Will you feel like you can start operating a little differently?
Jason E. Schwartz
What do you mean?
Patrick D. Walravens
What will we be able to do that you're not doing now?
Jason E. Schwartz
No. I think the model that we've built, we've been a -- the model is designed to be profitable from the get go, the beauty of the unit economics here that we have a good retention rate. And more importantly, we have great ongoing margins in the second and third year. We lose money on the customer in year 1, that's a '15 to '16 payback period. But in year 2, we're widely profitable on the customer. And so that retention that we have and the durability that you see in those multiyear deals gives us a lot of confidence that we're going to be continuing to produce that. We'll continue to invest in the things that drive further growth, but we're very committed to operating as a profitable growth company. And I think that's what we said in the beginning of the year. And we're happy to see some of this stuff start to come to fruition with the achievement of operating profitability already this quarter.
Patrick D. Walravens
Okay. Last one for me. So as a customer and a user, an example of something I'd love to see you invest in would be an iPhone mobile app and especially if you're going to use Gen AI, so I can just talk to my phone and tell them what I want to see in terms of the data from Similar or when am I going to get one of those?
Or Offer
Maybe when we start producing cash, I will start in the right how to monetize -- now when we will be profitable, I can go back to those adventure of trying new things, but so yes, here's what we're going to do with the free cash flow? You got your answer.
Operator
Our next question is from Tyler Radke with Citi.
Tyler Maverick Radke
Yes. And I'll echo my best wishes and good to see the resiliency here. I wanted to just start off on the gross retention side, it's encouraging to hear kind of the pickup in what seems to be new bookings and expansion bookings. But -- do you feel like you're starting to see the gross retention rates in that turn the corner? If you could just kind of comment on the time line of seeing that bottom.
Jason E. Schwartz
Yes, we're starting to see I think Or mentioned earlier, Tyler, that we're starting to see a slowdown in the down sales or the constriction of budgets that customers are having. I think people have done the optimizations that they needed. And we're starting to see those things not only renew but also renewing for longer periods of time as you -- that's that metric that we keep on watching the multiyear commitment. So -- that gives us some degree of confidence. But again, we're starting to see it turn and we're going to keep on monitoring it over the next couple of quarters and see that turn is happening on a sustained basis.
Tyler Maverick Radke
Okay. Okay. Great. And Jason, I know you're not providing official 2024 guidance. Obviously, Q4 is a big quarter to get through. But if we just think about where you're guiding I believe, in the high single-digit revenue growth range. Is that a good baseline for next year? Or maybe given what you're seeing on the new business side, we could see growth rates pickup from that 9%? And then secondly, on profitability, do you feel like certainly, there's been a lot of margin expansion this year, but how should we just think about the puts and takes on the margin expansion side of the equation, too.
Jason E. Schwartz
Yes. So -- so we're going to obviously wait on giving guidance for 2024 until the end of the year. I think you're right that Q4 is an important part as we start thinking about that. But the optimizations and that we've done during the year, I think, have proven that we can operate more efficiently, and we've done that. The beauty of the model is that there's a lot of leverage, right, the same fixed cost that we have, whether that's in the gross margin line or in G&A, R&D and the like, are highly leveraged as the revenue grows. So that's -- there should be further margin expansion as that continues to grow. But we'll give more guidance on all the margins for 2024 at the beginning of the year.
Operator
Thank you. There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Or Offer
Thank you.
Jason E. Schwartz
Thank you.
