Jason E. Schwartz; CFO; Similarweb Ltd.
Or Offer; Co-Founder, CEO & Director; Similarweb Ltd.
Raymond Jones; VP of IR; Similarweb Ltd.
Arjun Rohit Bhatia; Co-Group Head of the Technology, Media, and Communications Sector & Analyst; William Blair & Company L.L.C., Research Division
Brett Anthony Knoblauch; Research Analyst; Cantor Fitzgerald & Co., Research Division
Noah Ross Herman; Research Analyst; JPMorgan Chase & Co, Research Division
Patrick D. Walravens; MD, Director of Technology Research & Equity Research Analyst; JMP Securities LLC, Research Division
Ryan Patrick MacWilliams; Research Analyst; Barclays Bank PLC, Research Division
Sang-Jin Byun; Equity Analyst; Jefferies LLC, Research Division
Steven Hromin; Research Analyst; Oppenheimer & Co. Inc., Research Division
Tyler Maverick Radke; VP & Senior Analyst; Citigroup Inc., Research Division
Greetings, and welcome to the Similarweb First Quarter Fiscal 2023 Earnings 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. You may begin.
Thank you, operator. Welcome, everyone, to our first 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 impact of rising interest rates, rising global inflation and current macroeconomic conditions, challenges in our business and in the markets in which we operate, our anticipated long-term growth and overall future prospects.
These statements are subject to known and unknown risks, uncertainties and assumptions that could cause actual results to differ materially from those projected or implied during the call. Further, reported results should not be considered as an indication of future performance. Please review 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 for a 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 May 10, 2023. We undertake no obligation to update any forward-looking statements that we make today, except as required by law. As a reminder, certain financial measures we use in presentations of results and on our call today are expressed on a non-GAAP basis. In particular, we referenced non-GAAP operating loss, which represents GAAP operating loss plus 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 taken 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 first quarter 2023 results, any letter to shareholders or 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.
Thank you, RJ, and welcome, everyone, joining the call today. We reported a solid result in the fourth quarter. Despite the challenging macroeconomic environment, we grew over revenue by 19% over Q1 last year to $52.8 million. Our global customer base consisting of SMB, enterprise and strategic accounts grew 14% year-over-year to nearly 4,200 customers. And our average customer spends about $51,000 with us annually, up 4% over the last year.
We have much to be proud of this quarter when looking at our path to profitability. First, our gross margin was nearly 80%, a new record. Next, our investment in marketing and R&D are showing strong returns. In marketing, metrics at the top of the funnel are very positive and show increasing trends. Our R&D team made (inaudible) with our data and solution and will provide more value to our existing and prospective customers. Lastly, our operating margin showed an amazing improvement of 31 percentage points compared to last year.
Earlier this year, we announced our goal to achieve sustained positive free cash flow by Q4. Our Q1 results show we are making great progress. We are focused on deploying resources carefully on the core activities that creates revenues and improve profitability. With this in mind, we are reducing our head count by 6% in Q2. We're excited to see all progresses happening in the world of AI. With all the new capabilities AI will bring, we see a lot of opportunities for our company on a few fronts.
The first one is to improve our data analysis at scale using AI to excel in speed, accuracy and quality. Next, it will enhance our product development by using AI capabilities of finding and analyzing insight in our unique data, which is extremely powerful. What will be different for us is when those AI will meet our unique data assets. We are one of the only companies that have this comprehensive data on activity of the digital world covering more than 10 years.
Once AI will be training on all the coverage that Similarweb digital data has, we will be able to develop new capabilities to conduct extensive analysis for companies from simple queries of their specific needs and provide prediction of what will be next. We are uniquely positioned to benefit from the AI change and how it will use our data to help companies to win in the digital world. We believe that Similarweb digital data is best of its kind available anywhere where our customers generate revenues and enhance the monetization in the digital world.
Our customers tell us that they make better decision, navigating this uncertain environment because of Similarweb. We remain determined to help our customers overcome the challenges to win in this unpredictable economy and beyond. 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 first quarter results. I will briefly address our financial performance, and then we will open up the call to questions. Our results in the first quarter demonstrate our continued focus on disciplined execution towards achieving our strategic objectives. Revenue was $52.8 million for the quarter and in line with our guidance range. Our overall dollar-based net retention rate, or NRR, was 105% as compared to 115% in the first quarter of 2022. For our $100,000 ARR customer segment, NRR was 114% as compared to 127% in Q1 last year and now represents 55% of our total ARR.
While customer retention was good in the first quarter, we saw a more challenging environment to drive upsells within our customer base as businesses struggled with budget cuts in the current macroeconomic environment. Despite tight budgets, we are encouraged that 40% of our ARR is generated from customers with multiyear contracts, which has continued to grow steadily and sequentially demonstrating the durability of those customer relationships and the value that our data delivers to our customers. While our results on the top line were in line with our plans, we exceeded expectations on our bottom line.
Our first quarter GAAP operating loss was $13.1 million, while our non-GAAP operating loss was $7.2 million, which was significantly below the low end of our guidance range. Notably, our non-GAAP operating margin improved 31 percentage points versus the prior year. And as Or mentioned, our gross margin improved to nearly 80%.
These results reflect the ongoing impact of our broad-based operating efficiency measures we've implemented across the business. Turning now to Q2 2023. We expect total revenue in the range of $53.3 million to $53.8 million. For the full year, we continue to expect total revenue in the range of $221 million to $222 million, representing approximately 15% growth year-over-year at the midpoint of the range.
Non-GAAP operating loss for the second quarter is expected to be in the range of $6.5 million to $7 million and for the full year between $21 million and $22 million. Importantly, we intend to achieve sustained positive free cash flow by the fourth quarter of 2023. Please note that our free cash flow may fluctuate seasonally as we progress through the year. In particular, we anticipate significant improvement in Q2 2023 as compared to Q2 2022.
With our reorganization we announced today, we anticipate savings to be realized in the back half of this year. Ultimately, we expect our quarterly free cash flow cadence will be positive when we finish 2023. Our updated growth projection for 2023 reflects our assessment of the impact of continuing macroeconomic pressures on our business that will persist for an indeterminable amount of time. We continue to balance our expectations for moderating growth with accelerating our path to profitability.
The decisions we are making and the actions we are taking align with our intent to become free cash flow positive by the end of this year. We believe that our team, our business model and our balance sheet remain resilient as we navigate the challenging environment. And with that, Or and I are ready to answer your questions.
Question and Answer Session
(Operator Instructions) Thank Our first question comes from Arjun Bhatia with William Blair.
Arjun Rohit Bhatia
Can we start with the headcount reductions that you announced. I would love a little bit more detail on where you're cutting heads, where you're reducing some of your expense exposure? And how should we think about what that means for top line growth for the remainder of the year? Is there a potential for that to be disruptive? Or are these non-revenue-generating roles that are being cut here?
Thank you for the question. So the guidance stays. So it's -- we are still heading on plan. I think when we did a reduction, we look over in the company and try to see where we can optimize. So a big part was around SML. And then another department like operation when we decided to go to be more slim in those departments. So this is where we had 6%.
And as I said, it's not going to change the guidance, it's still on track.
Arjun Rohit Bhatia
Okay. Got it. That's helpful. And then you're making some good progress on the margin front getting to free cash flow breakeven. One of the things that stuck out this quarter was the gross margins, which were -- continue to increase for a couple of quarters now. But as you think about this 80% range, do we -- do you think that's sustainable here? Or should we expect some more fluctuation as we progress through this year?
Well, first, we feel it was an excellent progress. We're very proud with the numbers we have achieved in that front. And yes, on the long term, we hope that it will be even above 80%. But yes, maybe in the next quarter or 2, it will be up and down a little bit, but down the road for sure, 80% and above.
Our next question comes from Ryan MacWilliams with Barclays.
Ryan Patrick MacWilliams
I couldn't see the continued progression on the profitability front and raising your full year operating income guide despite also some certainty on the macro side, just with those economic headwinds. Jason, maybe any commentary on how macro impacted you guys like as you expected or any worse in the quarter? And like did it get incrementally more difficult following March like the Silicon Valley Bank and into April.
Jason E. Schwartz
Yes, Ryan, it's good to hear from you. The -- like we shared in the shareholder whether we're seeing, again, the extension of sales cycles they're taking longer and it's impacting up-sells the budgets that -- the slimmer budgets that people have. So we're seeing that happen as well. And we're seeing similar kinds of trends. We're seeing demand -- top of the line demand actually increasing throughout the quarter and going into Q2. So we're seeing that in April. So we're -- that's overall where we're seeing.
Ryan Patrick MacWilliams
Excellent. And then, Or, I was thinking about total activity around AI and large language models. And I've been thinking like what interesting insight can come from the combination of your data set and things like ChatGPT. So I'm sure, despite the macro you're really excited given all like technology investment. Could you help us again, just remind investors why your data set is unique? And what like insights or near-term use cases do you think some of that can help customers with large language models in the near term?
Yes. So regarding our uniqueness probably a little bit about -- on competition in the market, I think we are very unique in our data quality and also the ability to give full visibility to the digital world, there is very few companies that have this unit data and then when you take this down to (inaudible) loophole behave for the past 10 years, then you can train the AI model on that. It can come with really amazing start.
So just came out of a week of hackathon (inaudible) would have been play for 1 week with ChatGPT AI and our capabilities, and they came out with really crazy stuff. And one of the advantage and that the AI really helping you with a discovery of insight and then translate those insights into action. So I think that most of the companies that provide analytics and data and insights, you need to work very hard to find those insights and then doing a lot of research and the AI really accelerate it, like, so this is really something that I think will give our sector, a good push.
Next question comes from Jason Helfstein with Oppenheimer.
This is Steve Homan on for Jason. So given that billings continues to slow and customers are growing faster than billings, when do you see kind of an inflection occurring? And what indicators are you looking for or you looking at, I should say, to kind of indicate when that will occur.
Jason E. Schwartz
Yes. So again, we're seeing -- we've got the one big benefit that we have in our business is today, 40% of our renewals have already signed up or our book of business are signed up on a multiyear commitment. So we've got good visibility in there. During the last couple of months, we see some customers who are asking for semiannual payments or quarterly payments, and that will affect the billing number but wouldn't affect the overall cash flow numbers. And I think as Or mentioned and you've seen the numbers say the drive that we've been able to do to get to that profitability or close to that cash flow positive is more tangible than ever.
The next question comes from Brent Thill with Jefferies.
This is John Byun for Brent Thill. I think in the past, you talked about some changes in product bundling, packaging and pricing. And I wanted to see if you could talk about that in terms of -- I think a lower entry point, you alluded to as well as a higher price enterprise tier. If you can give us an update on the timing and maybe any sort of response at this point?
Yes. And so it's a good question. And so we start rolling out a new package for the enterprise that contain a lot of enterprise features. And this -- that our AOV was increased 4% in the first quarter. So it's a good indicator. And this is only power plant of a bigger project we're running up, a new motion packaging to have much better land and expand all along the motion. So we do think there is a good leverage on that on the second half of the year.
Great. And then maybe for Jason, the NNR has declined, obviously, given all the macro trends, but wondering how you expect it to trend for the rest of the year? And is there a time that you think when they could bottom and grow from there?
Jason E. Schwartz
Yes. So we're -- what we saw during this quarter is actually strong overall retention evidenced by logo retention. Even if you look at our $100,000 accounts, the ones that make up 55% of our revenue, the lower retention is like 98%, very, very high. The challenge that we have, given the market environment is that the upsells that we've seen historically are just taking longer. And so you're seeing that impact the near-term NRR numbers, but overall, the durability and the health of the relationships that we have with our customers, I think are strong.
The next question comes from Noah Herman with JPMorgan.
Noah Ross Herman
Congrats on the quarter. Just curious, coming back to the 6% headcount reduction. Could you maybe just give us some sense of what the total maybe cost savings would be? Or what are you sort of baking into the guidance now for the full year given the reduction.
Jason E. Schwartz
Noah, it's Jason. So thanks for the question. We're -- the guidance that we have is -- and the improvement that you see in the back half of the year of the guidance reflects that. I think we're seeing already a few million dollars of improvement on that front. And then going forward, you'll see even more in 2024.
The next question comes from Brett Knoblauch with Cantor Fitzgerald.
Brett Anthony Knoblauch
Jason, maybe the first one for you. I guess, the -- you guys target kind of reached kind of positive for cash flow in the fourth quarter. Is -- was that still a, I guess, on plan, excluding this headcount reduction? Or is the headcount -- or was the headcount reduction needed for you guys to reach that target?
Jason E. Schwartz
It was on plan, irrespective of this. And I think that the optimization that we have done in the headcount now is, again, just the further focus on our disciplined execution and trying to drive efficiency across the board, prioritizing the areas that are contributing the most. And the things that are weaker contribution to take the time to optimize that. And if it means (inaudible) a little bit in order to pick it up again, we're making those choices.
Brett Anthony Knoblauch
Perfect. Understood. And then on the second quarter revenue guide, kind of guided for an additional $800,000 or so. Can you just talk about what's going into that? I think in your prepared remarks, you guys said that top of funnel metrics and demand kind of outlook was improving. But yet, I guess, the sequential growth is what you guys are guiding for is it looks like to be lower than anything else that you guys have delivered. So I guess just helps us understand this right now.
Jason E. Schwartz
Yes, 2 things on that front. One is, again, sales cycles like -- for a couple of quarters. We see them lengthening. You see that already in our payback periods that's something. So it's just something that we want to accommodate for. And the second is the linearity during the quarter. As deals come in, more customers take the time and it comes towards the end of the quarter, the contribution for the current quarter is lower, whereas going forward, that will be a full quarter contribution. So there are 2 factors that go into that.
Brett Anthony Knoblauch
Perfect. And maybe just an NRR question asked differently. What do you think the -- that can bottom at like you think it there's more room for that to decline below 105%. We see that trend closer to 100%. Any insight on where that could potentially bottom.
Jason E. Schwartz
So we see that -- again, the -- what we're seeing right now is long sales cycles on the upsell. And we're seeing customers optimizing all the way through. Like I said, we're seeing strong logo retention, and that's something that we continue to focus on. Overall, we're seeing, again, 55% of our revenue comes from those very, very large accounts. When you look at the math on that, those customers are spending only $600,000 a year on average with us. And those have a very strong retention on this.
On the low end of the side -- on the low end of the spectrum, you see a little more churn. So there's a blend that happens in one quarter or another. But overall, that's what we see. And the nice thing about our business, when you look at the nearly 4,200 customers that we have, 75% of them are buying multiple products, the 2 products or more. And the fact that we have that installed base that continues to buy and have multiple uses of Similarweb creates greater stickiness than I think that others have.
The next question comes from Patrick Walravens with JMP Securities.
Patrick D. Walravens
Great. I have 3 questions, but they're all related to Similarweb, digital data. So I think you'll like them. And I'll just tell you what they are. So number one, how much are you generating today from people using your data sets to train AI models? Number two, is there really a market there? I mean it seems like a lot of the data sets that people use like Hugging Face and Wikipedia and (inaudible) are all public and free. And then number three, if there really is a market, what do you guys have to do to drive the monetization there?
Patrick, it's a very interesting question. You -- and I think -- by the way, I think that to code the uniqueness of our data, we would want to train the AI model we will not try to leverage that to give other to -- I don't think there is a market there yet. But assumes for us to delivering the insight and answering critical questions to our customers without what to do next, how to win in digital world opportunities discovery, this will be extremely powerful. So I hope that this answers your question.
Patrick D. Walravens
And/or is there anything you need to do to drive more of that today than you're already doing?
No, we just need to start to implement that in many different level of our offering.
(Operator Instructions) Our next question comes from Tyler Radke with Citi.
Tyler Maverick Radke
So Jason, you talked about strong logo retention. I'm just wondering within those logos, how overall seats is tracking. Obviously, there's been layoffs among your customer base and a lot of pressure on seat-based model. So -- are you seeing any increased kind of down sales and -- or pricing pressure either from tighter budgets and competition who may be in a worse spot than yourself?
So solutions we're taking to the market, 5 products. 4 out of them are -- basically, the growth model is not really correlate with seats. So if you think about our research solution, our marketing solution, our stocking intelligence solution, seats are growth driver. So even if companies are doing layoffs, if we don't lose the champion, basically it's okay.
We have one product that is the service intelligence and is the smallest one that barely is a seat-base. There is no off, you can see that it's correlated with the growth of the account or downside. But this is only one out of 10.
Tyler Maverick Radke
Okay. And then with the guide, it looks like you're holding the full year unchanged. And I guess, implicitly, you're expecting revenue to step up a bit in Q3, Q4. Could you just talk about your confidence level in second half pipeline, the renewal base and given everything going on, just the puts and takes on being able to maintain the guide here?
Yes. And so I think we have a strong feeling about maintaining the guides. We do see -- and we didn't talk about it a little bit in the -- a little bit before about seeing the top of the funnel increase and we're seeing demand going on the people visiting our website, people registered to check our products and the amount of meetings we're able to range to our go-to-market. So we do see strong movement there. And I think that as long as the market starts maybe bounce back in the second half of the year, it will also see strongest movement, but we do feel confident about the guidance right now.
(Operator Instructions) There are no further questions in queue at this time. So this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.