SEMrush (SEMR) Q2 Earnings/Thoughts

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After a short introduction last week (https://discussion.fool.com/introducing-semrush-semr-34900686.as…) I decided to give you all a bit more color about SEMrush($SEMR).

What they do:

SEMrush is a recent MarTech (Marketing Technology)IPO that offers tools to marketers — of all sizes and shapes — to improve their online visibility and get detailed insights about their SEO, SEM, Social Media, Content, and Display advertising.

SEMrush is a leader in their space mostly because of their excellent suite of products at super affordable prices (from 99/month to $375/month with add-ons such as additional seats or additional features that cost $50-200/month). Pretty cheap if you ask me. The competition charges as much as $1000/month for not-as-good tools (as a marketer myself I’ve used several tools/products so far).

How well they do it:

Since inception (2008) they manage to grow their client base to 76k customers as of Q2 earnings (this was a 29% increase YoY and 5.6% sequentially). Not bad at all. It seems that their land and expand approach is working well so far. In the earnings call the management said that $10K+ ARR customers grew 50%. This shows that higher-paying customers are increasing nicely.

Customers are happy with the service so that they didn’t mind the increase in the monthly cost according to the Q2 earnings call (the management noted that the churn was stable so far). This makes sense as marketers will need to pay much much more if they decide to switch to another competitor because of the much higher prices.

How big the opportunity is:

By looking at the numbers (https://investors.semrush.com/events-and-presentations/defau…) we can see that there is a reacceleration across all metrics. Covid was a bad period for them as companies were trying to cut costs. But this has now changed as everyone wants to add such tools to their arsenal. Hence the reacceleration in terms of revenue, gross margins, operating margins, and NRR.

Gross Margins:

2018: 72.2
2019: 75.5
2020: 76.0
2021Q2: 77.3 (improving steadily)

Revenue Growth YoY:

2017: 72%
2018: 65%
2019: 45%
2020: 36%
2021: 48%* estimated (This is mostly because everyone realizes they need such tools especially after covid)

Net Revenue Retention:

2019: 120%
2020: 114%
2021Q1: 116%
2021Q2: 121% (This shows they are getting even better than pre-covid numbers)

Operating Margins:

2020Q1: -3.7%
2020FY: -6%
2021Q1: 5.3%
2021Q2: 1.2% (they are improving in this area too. their long-term target is 20%)

How reasonable they are priced:

The current valuation is around 16x 2021 sales. A company growing around 50% with gross margins of around 80% with zero debt with NRR of 120+% in a $20+ billion TAM is considered very reasonable considering that other slower-growing companies like Hubspot ($HUBS) have an EV/S of 28.

Final Thoughts

From my experience, I can see that most companies seek to add such tools to their arsenal whereas a few years ago they wouldn’t bother. Now it is more of a necessity. This is what I believe will drive top-line growth even higher than expected. I plan to hold my 15% position for as long as the management keeps executing. I don’t expect this to grow triple digits but even if it stays in the 50+% range I’ll be happy to hold as SEMrush adds value to marketers at a very fair price and I expect it to keep doing so for the foreseeable future.

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I am familiar with this company but hadn’t realized that it went public. I took a cursory look and I didn’t see anything obviously negative in their numbers. In fact, they look solid which is why it’s somewhat perplexing as to why this is valued so low at a $2.9B market cap? Are we missing something?

It looks cheap compared to an Asana or Monday that are both bleeding cash to acquire users and even against Hubspot which is much larger. I know they are all in different spaces, but still.

I see two possibilities.

A) It’s a high-quality but under-the-radar company that is attractively priced. There isn’t a lot of hype around it and that’s good.

or

B) It’s a small and interesting niche company that is facing a slow to low growth scenario. But the numbers don’t seem to indicate that.

Did they provide any guidance? Search engine marketing is only going to get more popular with all the challenges related to IDFA on iOS and with Google eliminating cookies from Chrome. This might be a big winner if more budgets get funneled back into SEM and SEO.

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They guided for 6% sequentially (47.7 M on the high end), I am curious how much they beat or stay within this guidance. I think they are an under the radar stock with a great multiple. I think if they beat and raise again with something like 10% growth sequentially, they will skyrocket similar to what we saw with Asana and Monday who were in a sandbox for a few quarters before skyrocketing after demonstrating some consistency.

I’m worried that Q3 may slow down for them per their remarks but a 6% sequential guide seems pretty strong given their remarks.

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JabbokRiver42 had pointed out potential geopolitical risks previously https://discussion.fool.com/i-hadn39t-heard-of-this-company-befo…

Investing in SEMR really means you are investing in a Russian SaaS company. Maybe that partially explains its current valuation?

From a Forbes article:
Its founders, Oleg Shchegolev and Dmitri Melnikov, have been friends for more than 30 years and are both from Russia. They immigrated to the US and now work from Semrush’s Boston offices.

Goldman Sachs analyst Vyacheslav Degtyarev wrote in a recent research report that “Russian entrepreneurs and individual tech developers are increasingly seeking to enter international markets given materially larger addressable markets, advantaged by an abundant and relatively cheap domestic technology talent pool.”

Translation: Russian techies will do the work. Their founders will move where the money is. Bam. Success.

Glassdoor review from 2020:
I worked here and I can tell from these comments and the recent dates that these are all BS just to get their rankings up. You can tell by the dates and all the same locations…I mean that makes sense though since that is what SEMrush “overseas” truly cares about. There is no such thing as company values, company culture, growth opportunities, career development talks or anything. Don’t even waste your time because if you don’t have a “title” you don’t mean anything. Leadership, which does not include just the chief executives but all of the puppeteers over in the Russia office do not care for anyone in the US office. Which is actually sad to say. They make this very clear as they do not include the US employees in meetings, decision, or anything at that point. If you doing get the privileged to attend something of value, your “colleagues” overseas and the Leadership have a tendency of putting you down or laughing in your face and they will literally talk Russian during meetings, in the hallways, and right in front of your face. Knowing that they are pointing, smirking and talking about you. Multiple times during your work day the employees get a sense of “what am I doing wrong”, “I don’t get it”, “am I going to get fired”…it’s extremely frustrating and then you realize that the offices oversea want you to feel this way. They have the CEO in their pockets and say it is a U.S. based company but the everything is still happening overseas. The turn over is ridiculous and now that I am out, I would not recommend the experience to anyone.

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GolfCaddy4PLynch,

I see two possibilities.

A) It’s a high-quality but under-the-radar company that is attractively priced. There isn’t a lot of hype around it and that’s good.

or

B) It’s a small and interesting niche company that is facing a slow to low growth scenario. But the numbers don’t seem to indicate that.

Did they provide any guidance? Search engine marketing is only going to get more popular with all the challenges related to IDFA on iOS and with Google eliminating cookies from Chrome. This might be a big winner if more budgets get funneled back into SEM and SEO.

a) Indeed there is no hype around this company as of now. There are no options available either that many investors/traders are after. A quick search online will show that only a limited number of followers have this company on their radar. Stocktwits followers: 313 https://stocktwits.com/symbol/SEMR (slowly increasing, it was around 120 when I first took a position 4-5 months ago)Even on Twitter https://twitter.com/search?q=%24semr&src=typed_query there isn’t much talk about it.

b) Someone could argue that they were in a deceleration mode before covid hit. Because they went from 72% YoY in 2017 to 65% in 2018 and to 45% in 2019. However, this has changed since 2021Q1 as they grew their first quarter by 44% and the second quarter by 13% sequentially and 58% YoY. I believe that this is not a turnaround story even if they were slowing down before. They would still grow by a meaningful margin. It is just that now every company realizes that they need such tools when before it was a good-to-have option. And SEMrush has what they need at a reasonable price.

My take is that it will probably gain some traction once more investors are aware of their recent IPO (just like you mentioned you didn’t know they went public). They provided guidance which they beat and raised from $175-177M (40-42% YoY growth) to $182-184M for FY2021 (46-47% YoY). I believe they might beat that once again pushing them into the low 50s% YoY.

RunnerGuy,

I’m worried that Q3 may slow down for them per their remarks but a 6% sequential guide seems pretty strong given their remarks.

Yes, we need to wait and see how well they execute this and the following quarter. I want to see them beating this quarter’s guidance too and pushing the FY guidance even further.

jonwayne235,

Investing in SEMR really means you are investing in a Russian SaaS company. Maybe that partially explains its current valuation?

…and the Leadership have a tendency of putting you down or laughing in your face and they will literally talk Russian during meetings, in the hallways, and right in front of your face.

Translation: Russian techies will do the work. Their founders will move where the money is. Bam. Success.

From my experience, the reviews have some validity to them. I’ve worked with many Russian colleagues and indeed they prefer talking in their own language. But we need to remember that English is not their first language and some have difficulties in conveying the meaning they want unless they use their native language (I’m not a native speaker myself so I understand this).

This is apparent even in SEMrush’s CEO which indeed I find difficult to understand at times. However, I can tell that they are results-oriented and they will get the job done even if they laugh at your face. I guess this does not worry me since they seem to grow their customer base at a rapid clip. There is a large office just near my house in Cyprus.

Even in TMF introduction, you can see that they were not very happy with their customer support but they wouldn’t change them as they are happy with their service. https://www.fool.com/premium/live/video/4056/coverage/2021/0… This either means the product is very good or that the pricing is very competitive. I’d say the truth lies somewhere between the two.

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Thanks for the responses.

I don’t think the Russian-based operations pose much geopolitical risk. As long as the company is domiciled and listed on a U.S. exchange. That means accounting and legal agreements need to meet U.S. standards and are binding under U.S. law.

I read the post that listed these complaints from Glassdoor. And they just read like common issues at any early-stage international company that has a development office in central Asia would face.

“high turnover and we are never told why- employees are on edge at times” (in 7 reviews)

“Our developers are located in Russia, which can present issues sometimes” (in 5 reviews)

“Duplication of job duties in Russian office causes employees to question whether the US office will remain open” (in 4 reviews)

“Bad Management, low pay, poor work environment” (in 3 reviews)

“US Management serves only as mouthpiece for Russian office” (in 3 reviews)

It may not be a great place to work in the Boston office, that seems to come out on Glassdoor. But if the stock takes off even that could change. It would offer them an incentive to attract and retain high-quality U.S. employees.

Putting this on my watch list and may buy a few shares if there is a correction soon.

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Folks, I do have experience investing in Russia-linked companies. I’m pretty sure that such company will be trading at discount to purely US companies without such “toxic” links. U can recall valuations of Chinese companies even before recent crackdown. There are always significant political risks with such companies which have sizeable exposure to non-democratic countries without rule of law. And recent Chinese crackdown only proves this.

Golfcaddy and everyone are free to have differing opinion on the subject, I hope to be proven wrong for those on the board who have long position in this specific company.

Best,
V

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Hi LearningInvest0r,

Can you give examples of Russian-linked companies you invested in that you regretted?

For me, I have a policy not to invest in Chinese companies, even if they list on an American exchange. But what I consider a Chinese company is one that has the majority of their business in China and is headquartered there. I lost money in LuckinCoffee. And that was a mistake for a host of reasons. But it was a good learning experience. This is why I love Sea, they are in Singapore, are English-Centric, and follow a Western approach to business, one that I can understand.

Semrush has mostly clients in the U.S. or the West and is headquartered in Boston. They are not in a sensitive area like telecom equipment that is subject to legal scrutiny like Huawei is.

Thanks.

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I think the risks posed by Chinese and Russian investments are different.

We are seeing the nature of the Chinese risks in real time. I don’t see Russia as making the same kinds of crackdowns on corporate operations. In fact, the problem seems to be in some ways the opposite–the failure to crack down on companies and individuals engaged in illegal behavior within its borders–especially in the cyber arena.

For a number of years now, we in the US have been in an escalating cyber-war with Russia. So a SaaS company with (if the info is true) ALL of its developers in Russia, saying to Western countries (especially the US) “Here, install our wonderful, essential software, please” seems risky at best. I don’t doubt it’s a good product. It’s probably amazing. Russian developers prove their cyber credentials every time they take down a part of our infrastructure. I just personally don’t trust it under current conditions.

Durable goods? Sure. E-commerce? Fine. I’m just in a zero-trust environment with them when it comes to anything cyber.

Your mileage may vary.

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Thank you Pavlos21 for introducing this company. As a relatively newbie to this board → thought this would be a good avenue to develop the research/anaytical skills that the veterans on this board have developed. So in addition to the above, I want to add a few learnings from their investor presentation.

I could not find another public competitor to Semrush. I looked at Moz, Afrefs, SEO Powersuite, SE Ranking. One of sites did indicate Yext and Sprout Social as competitors but then Semrush resells Yext, so I don’t think they are really a direct competitor. So the lack of comparable information does limit research on competitors. Does the lack of other public companies also indicate that this is a niche market solution? Semrush and other competitors all have been around for atleast a decade, so they are established companies serving their customers. My assumption is that the changing regulatory enviornment (e.g GDPR) and Apple ad tracking will increase the need for tools such as Semrush. I am planning to do more research to prove out the assumption. If yes, that’s bull case for the company/stock.

The addressable TAM (per Semrush) is 13 billion but they are assuming a 100% adoption from medium size enterprises. So, I have to question the integrity of the TAM. Of course, most companies inflate their TAM but this seems far stretched and makes me question the leadership (similar to the concerns raised by others already on this chain).

95% of their current customers are small to medium business (less than 500 employees) and the annual recurring revenue for these customers are $2000/year. We can surmise that these companies only have 1-2 license for Semrush based on their $99/month fee. If this product is as good as other mention for it t be, I can see why their ARR will continue to rise significantly as businesses add more seats. I would like to see Churn for their existing customers but wasn’t able to find it (yet). This is another bull case for the company.

I do like that their leadership have been with the company for the long term and the newest member of the team (CFO) has been there for 3 years. The concern raised about company culture having a heavy Russian impact needs to be vetted out more. I did own Yandex for a period of time and was handily beating the market before I sold it to adopt a more focused investing philosophy (after finding this board).

Obviously Martech is a crowded field and this is a specific area within Martech. Would Semrush be a target for an acquisition by a more established player in the Martech arena? We do not act or buy a company because of the changes of a possible acquisition so, let’s not discuss it here.

As I was looking at the competitors, I saw that several of their other competitors were also based out of eastern europe. I wonder why? Pavlos or anyone working in the industry can provide more insight into this.

So, I continue to be intrigued but not willing to invest a considerable investment yet into this company especially since I am trying to reduce the number of holdings. To all those who have been on the board, what are other areas you would look at to research a company like this?

More than the success of this company and stock, I am more interested in learning the research and analysis of a company to identify and buy into high growth companies.

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GolfCaddy, I’m not saying that a Russia-linked company would be a next Luckin Coffee or one of typical Chinese companies-frauds from last 10-20 years ago. What I’m saying - valuation of a company with strong Russian links will pretty surely have discount in US/European markets compared to US/European peers. Everyone who invests in such a company should have a clear understanding of this and should not hope or plan in investment thesis that “u know it’s undervalued and the market will catch up”. “Catch-up” could never happen (although some leveling off could of course). If u’d check valuations of “bellwether” Russian companies starting with Gazprom, Rosneft etc. and even their pride Yandex - u’ll notice pretty constant discount compared to US and European peers. Almost all the (listed) companies have direct or indirect government control or stake and pretty surely any company can be shut down any time for reasons hardly understandable to Western investors. I’m not Russian hater, believe me, I love Russia as a country as I’m half Russian, but that’s the reality for us investors. I’m not even mentioning all the cyber security risks and related negative impact to investment thesis.

On the other hand, I’m not saying that an investment in Russia-linked company is a guaranteed failure. It could be very successful depending on the price of entry and many other factors. Theoretically, SEMR could restructure and re-brand itself as a real US company a la Zoom and Eric Yuan did it. Or these founders and managers of the company could brand themself like Sergey Brin who also kind of has roots in the same region. Etc etc

Bottom line of my message is - please be aware of additional risks while investing in a company with strong Russian ties (especially if it’s IT related business). The risks could materialize or not, but there will be impact on valuation pretty surely compared to typical US company without such ties.

For me personally this company falls into “too hard” pile. Why waste our time, energy and capital while taking on additional risk if we can invest into UPST, CRWD, DDOG, NET etc.

I don’t want to convince anyone or encourage or discourage to invest or not to invest in this specific company. Just expressing my view and trying to bring some added value to the board as I have experience with the region.

Best,
V

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Neverstoplearn,

As I was looking at the competitors, I saw that several of their other competitors were also based out of eastern europe. I wonder why? Pavlos or anyone working in the industry can provide more insight into this.

Most companies I worked for have offices in eastern Europe because of the lower cost. For example, the company I work for at the moment has all the SEO-related activities based in Bulgaria even if the headquarters are based elsewhere. The salary difference is pretty huge. Companies save at least 50%-75% per employee. I imagine someone working in the Boston office would require a lot more.
https://www.glassdoor.com/Job/jobs.htm?sc.keyword=seo%20spec…

From here you can see that the average SEO specialist in Boston makes about $50K. Well, companies pay that much for 4-5 employees in Eastern Europe. I expect this to grow even more now that most companies go digital. They can much easier hire people wherever it makes sense to them. Also, this has another benefit depending on the clients you serve. For example, SEMrush’s clients are mostly located in Europe, UK and rest of the world (54% combined) whereas only 46% are in the US. Having offices around the world helps with customer support, understanding your client’s needs, and so forth.

LearningInvest0r,

What I’m saying - valuation of a company with strong Russian links will pretty surely have discount in US/European markets compared to US/European peers. Everyone who invests in such a company should have a clear understanding of this and should not hope or plan in investment thesis that “u know it’s undervalued and the market will catch up

I agree, however, the only reason I mention their valuation is simply because most people do care about it. And to be honest, I’d much rather deal with SEMR or any other company being “overvalued” than being “undervalued” so that we wouldn’t be having this conversation :slight_smile:

JabbokRiver42,

For a number of years now, we in the US have been in an escalating cyber-war with Russia. So a SaaS company with (if the info is true) ALL of its developers in Russia, saying to Western countries (especially the US) “Here, install our wonderful, essential software, please” seems risky at best. I don’t doubt it’s a good product. It’s probably amazing. Russian developers prove their cyber credentials every time they take down a part of our infrastructure. I just personally don’t trust it under current conditions. Durable goods? Sure. E-commerce? Fine. I’m just in a zero-trust environment with them when it comes to anything cyber

SEMrush uses only publicly available data. https://www.semrush.com/kb/998-where-does-semrush-data-come-… And they are GDPR compliant in the EU and authorized by CCPA in California. https://www.semrush.com/webinars/gdpr-ccpa-eprivacy-which-da… And have several data centers around the globe. https://www.semrush.com/company/security/

Also, if several medium-to-large-sized companies trust them with their data like eBay, Facebook, Quora, Skyscanner, Vaynermedia, Mailchimp, Hubspot, Salesforce, Seeking Alpha, Disney, and even The Motley Fool, then I guess (and the numbers show that) they must be doing something right.

Pavlos

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Thanks, everyone for the thoughtful posts.

If u’d check valuations of “bellwether” Russian companies starting with Gazprom, Rosneft etc. and even their pride Yandex - u’ll notice pretty constant discount compared to US and European peers. Almost all the (listed) companies have direct or indirect government control or stake and pretty surely any company can be shut down any time for reasons hardly understandable to Western investors.

All of the companies listed above are different from a Saas marketing platform with most of their customers in the West like Semrush. Yandex is similar to the Chinese companies I avoid. They serve the Russian market, are key Russian technology assets like Google. I would never buy shares in them because of the geopolitical risks mentioned.

However, that is not the case with Semrush. They are using a dev team in Eastern Europe to build a Western-focused product. From what I can tell Semrush has VC investors that are all based in the U.S. and there is no Russian government ownership. At least that we know of.

Perhaps I am beating a dead horse here, but I think these items are important to point out. You’re correct about Yandex, Gazprom, and Rosneft. But Semrush in my opinion should not be lumped together with them for the reasons above. They may end up in the ‘too hard’ pile still. I haven’t decided yet.

FYI: I still don’t own any shares in Semrush.

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https://m.youtube.com/watch?v=aqq5u3g_hi4&feature=youtu…

It seems that it started gaining some traction.

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