SEMR - Semrush Sees Lower Growth Potential In 2023

2023-06-22 15:19:03 ET

Summary

• Semrush reported its Q1 2023 financial results on May 8, 2023.
• The firm operates a SaaS platform to assist online marketers worldwide.
• Management has guided to slower 2023 growth as it appears to be managing more to profitability than 'growth at all costs'.
• With a slowing macro environment and downward 2023 revenue growth guidance, I'm Neutral [Hold] on SEMR in the near term.

A Quick Take On Semrush Holdings

Semrush Holdings ( SEMR ) reported its Q1 2023 financial results on May 8, 2023, beating revenue estimates but missing EPS estimates.

The firm operates a SaaS platform that enables businesses to execute and manage their online marketing efforts.

With downward macroeconomic pressures and management appearing to prioritize reduced operating spending and guiding to lower topline revenue growth, I’m Neutral [Hold] on Semrush for the near term.

Semrush Overview

Boston, Massachusetts-based Semrush was founded to create an integrated SaaS system 'providing companies comprehensive and actionable insights to drive traffic online.'

Management is headed by co-founder and CEO Oleg Shchegolev, who previously received a Master's of Science in Computer Science from St. Petersburg State Polytechnic University.

The company’s primary offerings include:

• SEO

• Advertising

• Content Marketing

• Social Media

• Market Research

The company pursues customers primarily through online advertising, including paid advertising, social media, digital public relations, search engine optimization and owned media.

The firm tracks over several hundred million domains, billions of keywords, and trillions of backlinks and URLs.

Semrush’s Market & Competition

According to a 2020 market research report by Grand View Research, the global digital marketing analytics software market was an estimated $2.7 billion in 2019 and is expected to reach $8.1 billion by 2027.

This represents a very strong forecast CAGR of 14.8% from 2020 to 2027.

The main drivers for this expected growth are adoption by companies across virtually all industry verticals to more effectively understand buyer behaviors and to improve their online marketing campaigns.

Also, below is a historical and projected future growth trajectory for digital marketing analytics software in the United States:

The firm sees competition in the following industry categories:

• SEO

• SEM

• Digital PR

• Content Marketing

• Social Media Management

• Competitive Intelligence

SEMR’s Recent Financial Trends

• Total revenue by quarter has risen; Operating losses have lessened in the most recent quarter:

• Gross profit margin by quarter has continued to rise YoY; Selling, G&A expenses as a percentage of total revenue by quarter have also trended higher in recent quarters, although Q1 2023’s figure represented a sequential drop:

• Earnings per share (Diluted), while still materially negative, have improved sequentially:

(All data in the above charts is GAAP)

In the past 12 months, SEMR’s stock price has fallen 34.68% while the iShares Expanded Technology-Software ETF ( IGV ) jumped 21.73%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $232.3 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash used was $25.4 million, during which capital expenditures were $4.1 million. The company paid $9.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month result in the past eleven quarters.

Valuation And Other Metrics For SEMR

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

SEMR’s most recent Rule of 40 calculation was 20.9% as of Q1 2023’s results, so the firm’s results in this regard have worsened since its Q4 2022 report (27.8%), per the table below:

(Source - Seeking Alpha)

Commentary On SEMR

In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted record net new customer additions and achieving the milestone of 100,000 paying customers in 150 countries for the first time.

Leadership also noted that over 20% of the firm’s customers purchase more than one product from the company. This indicates SEMR has more potential upside by focusing further on its cross-selling efforts.

Notably, management said that ‘as a percentage of revenue, we plan to spend less on sales and marketing compared to the prior year.’ It will be interesting to see how negatively this affects revenue growth vs. reducing operating losses.

Management is working to incorporate the latest AI technologies into its systems. The firm has several years of experience with some of its higher-end products but is expanding AI integration with a wider set of functions and is seeing growing usage as a result.

The company’s net dollar retention rate was 116%, indicating solid product/market fit and reasonably good sales & marketing efficiency.

Total revenue for Q1 2023 rose 24.2% YoY while gross profit margin increased by 2.4 percentage points.

SG&A expenses as a percentage of revenue increased by 6.3 percentage points, a negative signal indicating lower efficiency in generating incremental revenue and operating loss increased sharply year-over-year.

Looking ahead, for full-year 2023, management reiterated its previous guidance indicating 21% revenue growth over 2022 at the midpoint of the range.

If the firm achieves this growth rate, it will be notably less than 2022’s growth of 35% over 2021, indicating meaningfully slowing topline revenue growth ahead.

The company's financial position is strong, with ample liquidity and no debt, but material cash burn that management will want to reduce in the future.

SEMR’s Rule of 40 performance has been worsening sequentially, dropping to 20.9% in the most recent quarter.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Macro’ three times.

In this case, ‘Macro’ referred to macro trends within the industry and not negative macroeconomic environment mentions. The company sees ‘elevated and sustained demand, particularly registration trials’, so it does not appear to be experiencing top-of-the-funnel slackening.

Analysts questioned company leadership about trends in the industry, including vendor consolidation, which management confirmed is a ‘big trend’.

With downward macroeconomic pressures along with management appearing to prioritize reduced operating spending and guiding to lower topline revenue growth, I’m Neutral [Hold] on Semrush for the near term.

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