2023-05-15 11:45:49 ET
Summary
- Similarweb published its Q1 2023 financial results on May 10, 2023.
- The firm provides Web analytics software and services to companies worldwide.
- SMWB has made progress reducing operating losses but its revenue growth picture is becoming cloudy as customers pull back on new spending.
- I'm Neutral [Hold] on SMWB stock for the near term.
A Quick Take On Similarweb
Similarweb ( SMWB ) reported its Q1 2023 financial results on May 9, 2023, missing revenue but beating EPS consensus estimates.
The firm operates an online Web analytics platform for businesses via a SaaS revenue model.
While management is starting to make progress in reducing high operating losses, the company’s revenue growth outlook is becoming more difficult to achieve as customers cut back on spending.
For the near term, I’m Neutral [Hold] on SMWB.
Similarweb Overview
Tel Aviv-Yafo, Israel-based Similarweb was founded to assist companies of all sizes in analyzing their website traffic to improve their online marketing results.
Management is headed by co-founder, and CEO Or Offer, who was previously a founding partner at AfterDownload which was later acquired by IronSource.
The company’s primary offerings include:
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Digital Research - understand trends
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Digital Marketing - increase user acquisition
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Shopper Intelligence - improve conversion rates
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Sales Intelligence - increase sales pipeline
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Investor Intelligence - monitor investment opportunities
The firm offers a free version and paid levels based on feature set, geographic coverage and number of users to a variety of business sizes.
The company tracks digital activity for hundreds of industries in more than 190 countries and obtains a large percentage of its annual recurring revenue [ARR] from customers who spend $100,000 per year or more.
Market & Competition
According to a 2021 market research report by Mordor Intelligence, the global market for web analytics was an estimated $3 billion in 2020 and is forecast to exceed $7 billion by 2026.
This represents a forecasted very strong CAGR of 15.2% from 2021 to 2026.
The main drivers for this expected growth are a continued rise in the automation of online marketing and growth in online shopping by consumers and businesses.
Also, the COVID-19 pandemic will likely provide a significant boost to web analytics providers as businesses demand more information about their online properties to cater to more customers performing buying activities online.
North America is forecast to continue to provide the highest demand of any region worldwide, although the Asia Pacific is expected to grow demand at the fastest rate through 2025 as the chart shows below:
Major competitive or other industry participants include:
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SEMrush
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AppAnnie
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Google
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Facebook
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Microsoft
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Adobe Systems
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SAS
Similarweb’s Recent Financial Trends
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Total revenue by quarter has risen per the following trajectory:
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Gross profit margin by quarter has grown materially in the just-finished quarter:
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Selling, G&A expenses as a percentage of total revenue by quarter have trended lower, a positive signal that indicates the firm is generating revenue growth more efficiently:
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Operating losses by quarter have been reduced in recent quarters:
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Operating leverage by quarter has improved significantly in the last three quarters:
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Earnings per share (Diluted) have also improved, although they are still a long way from breakeven:
(All data in the above charts is GAAP)
In the past 12 months, SMWB’s stock price has fallen 40.9% vs. that of Semrush’s ( SEMR ) drop of 12.38%, as the chart indicates below:
For the balance sheet, the firm ended the quarter with $75.3 million in cash and equivalents and $25.0 million in short-term borrowings.
Over the trailing twelve months, free cash used was $71.3 million, of which capital expenditures accounted for $24.6 million. The company paid $17.6 million in stock-based compensation in the last four quarters, the highest figure for the last eleven quarters.
Valuation And Other Metrics For Similarweb
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.0 |
Enterprise Value / EBITDA | NM |
Price / Sales | 2.1 |
Revenue Growth Rate | 32.2% |
Net Income Margin | -34.7% |
EBITDA % | -32.4% |
Market Capitalization | $416,280,000 |
Enterprise Value | $412,170,000 |
Operating Cash Flow | -$46,650,000 |
Earnings Per Share (Fully Diluted) | -$0.92 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be Semrush; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | Semrush | Similarweb | Variance |
Enterprise Value / Sales | 3.7 | 2.0 | -44.4% |
Enterprise Value / EBITDA | NM | NM | --% |
Revenue Growth Rate | 30.7% | 32.2% | 5.1% |
Net Income Margin | -15.4% | -34.7% | --% |
Operating Cash Flow | -$21,260,000 | -$46,650,000 | --% |
(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.
SMWB’s most recent Rule of 40 calculation was negative (0.2%) as of Q1 2023’s results, so the firm has performed poorly in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 32.2% |
EBITDA % | -32.4% |
Total | -0.2% |
(Source - Seeking Alpha)
Commentary On Similarweb
In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted the 14% year-over-year growth in its SMB and enterprise customer base.
Notably, 40% of the company's ARR (Annual Recurring Revenue) is from customers with multi-year contracts, which can serve to spread out drops in customer spending over a longer time period, enabling management to adjust the business’ cost structures in line with revenue.
The firm will be reducing headcount by 6% in Q2 2023, to further lower its cash outlay while seeking to take advantage of AI technologies to improve its offerings and increase operational efficiencies, like virtually every other company now.
The company’s dollar-based net retention rate was 105% versus 2022’s first quarter result of 115%, indicating a drop in sales & marketing efficiency as management said it saw a more difficult environment for upsells as businesses clamped down on new expenditures.
Total revenue for Q1 2023 rose 19.2% year-over-year and gross profit margin increased by an impressive 5.1 percentage points.
SG&A as a percentage of revenue dropped by nearly twenty percentage points and operating losses were reduced by almost 47% year-over-year.
Looking ahead, for the full year of 2023, management guided total revenue growth at around 15% and to achieve ‘sustained positive free cash flow by the fourth quarter of 2023.’
The company's financial position is currently in need of significant improvement, as the firm has only about one year of runway based on its existing cash and trailing twelve-month cash burn, so reaching its goal of free cash flow breakeven by the end of 2023 will be an important milestone.
Regarding valuation, the market is valuing SMWB at an EV/Sales multiple of around 2.0x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
So, by comparison, SMWB is currently valued by the market at a substantial discount to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.
The primary risk to the company’s outlook is a macroeconomic slowdown that appears to be already underway, reducing customer propensity to spend and negatively impacting its revenue growth trajectory.
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 cited ‘Uncertain’ once, ‘Challeng[es][ing]’ five times, and ‘Macro’ seven times in various contexts.
The negative terms refer to the difficult environment the firm and its customers are experiencing and represent a higher-than-average negative sentiment based on my recent comparisons to other subscription software companies.
In the past twelve months, the firm's EV/Sales valuation multiple has dropped about 50%, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include a pause in the rise of the cost of capital, reducing downward pressure on its valuation multiples like the EV/Sales multiple compression shown above.
Management is making the correct moves by lowering headcount, reducing operating losses and aiming for free cash flow breakeven by the end of 2023.
However, given a more difficult customer conversion and upsell environment, which will weigh on revenue growth as the economy continues to slow, I’m in a ‘wait-and-see’ mode.
As such, my opinion on SMWB is Neutral [Hold] in the near term.
For further details see:
Similarweb Makes Operating Progress But Revenue Growth Faces Challenges