SEMrush (US:SEMR)2023-05-09 16:00Part I. Financial Information Financial Statements The company reported increased revenue but a wider net loss and negative operating cash flow for Q1 2023, with slight asset reduction Unaudited Condensed Consolidated Balance Sheets Total assets slightly decreased as of March 31, 2023, primarily due to reduced cash, while liabilities and deferred revenue increased Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $56,889 | $79,765 | | Short-term investments | $175,416 | $157,774 | | Total current assets | $255,131 | $257,379 | | Total assets | $295,500 | $298,690 | | Liabilities & Equity | | | | Deferred revenue | $56,255 | $49,354 | | Total current liabilities | $92,996 | $88,701 | | Total liabilities | $102,047 | $98,786 | | Total stockholders' equity | $193,453 | $199,904 | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Revenue increased 24% year-over-year, but a significant rise in operating expenses led to a wider operating and net loss for the quarter Statement of Operations Summary (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Revenue | $70,870 | $57,128 | | Gross Profit | $58,231 | $45,541 | | Total Operating Expenses | $68,999 | $48,131 | | Loss from Operations | $(10,768) | $(2,590) | | Net Loss | $(9,860) | $(2,571) | | Net Loss Per Share (Basic & Diluted) | $(0.07) | $(0.02) | Unaudited Condensed Consolidated Statements of Cash Flows The company experienced negative cash flow from operations in Q1 2023, a reversal from the prior year, leading to a significant decrease in cash and equivalents Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3,609) | $8,026 | | Net cash used in investing activities | $(18,889) | $(16,656) | | Net cash used in financing activities | $(451) | $(13) | | Decrease in cash, cash equivalents and restricted cash | $(22,876) | $(9,902) | | Cash, cash equivalents and restricted cash, end of period | $56,889 | $259,939 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail accounting policies, recent acquisition, Russia exit costs, increased stock-based compensation, and the discontinuation of the ESPP - On February 23, 2023, the Company acquired certain assets of Traffic Think Tank for total cash consideration of $1.8 million. The acquisition's primary purpose was to acquire valuable brand and content related to its SEO community and courses89 - During Q1 2023, the company incurred $1.0 million in exit costs related to its efforts to exit operations in Russia and relocate employees, which began in March 2022102103 - The Employee Stock Purchase Plan (ESPP) was discontinued after the last purchase on February 28, 2023130 - Revenue is primarily derived from monthly or annual subscriptions to the company's SaaS platform. For Q1 2023, subscription revenue accounted for nearly all of the company's revenue4041 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by customer acquisition, widening operating loss due to strategic investments, and assesses liquidity as sufficient for the next 12 months Key Factors Affecting Our Performance Performance is driven by customer acquisition and retention, with key metrics showing growth in paying customers and ARR, despite a slight decrease in retention rate Key Performance Indicators | Metric | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Paying Customers | >100,000 | 87,000 | | Annual Recurring Revenue (ARR) | $293.0 million | $238.4 million | | ARR per Paying Customer | $2.9 thousand | $2.7 thousand | - The dollar-based net revenue retention rate was approximately 116% as of March 31, 2023, compared to 118% as of December 31, 2022149 Results of Operations Comparison Q1 2023 revenue increased 24% year-over-year, but significant increases in operating expenses, particularly Sales & Marketing and R&D, led to higher overall costs Revenue by Geography (in thousands) | Region | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | United States | $34,747 | $25,820 | | United Kingdom | $7,007 | $5,870 | | Other | $29,116 | $25,420 | | Total Revenue | $70,870 | $57,120 | Year-over-Year Change in Operating Expenses (in thousands) | Expense Category | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales and marketing | $35,496 | $25,830 | +$9,666 | +37% | | Research and development | $13,880 | $8,138 | +$5,742 | +71% | | General and administrative | $18,640 | $14,163 | +$4,477 | +32% | | Exit costs | $983 | $0 | +$983 | N/A | Liquidity and Capital Resources The company maintains sufficient liquidity with cash and investments, supplemented by an undrawn credit facility, despite negative operating cash flow in Q1 2023 - As of March 31, 2023, the company had cash and cash equivalents of $56.9 million and short-term investments of $175.4 million189 - The company has a $45.0 million senior secured revolving credit facility that matures on January 12, 2024. As of March 31, 2023, no amount had been drawn on this facility192193195 - Net cash used in operating activities was $3.6 million in Q1 2023, compared to net cash provided by operating activities of $8.0 million in Q1 2022197 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency fluctuations, primarily the euro, and interest rate changes on its short-term investment portfolio - The company is exposed to foreign currency risk as it incurs significant expenses in foreign currencies, primarily the euro. A hypothetical 10% increase or decrease in the relative value of the U.S. dollar to the euro would result in a $3.9 million gain or loss210 - Interest rate risk exists for the company's portfolio of cash, cash equivalents, and short-term investments ($232.3 million as of March 31, 2023). However, due to the short-term nature of the portfolio, a 10% change in interest rates is not expected to have a material effect209 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective due to material weaknesses in financial reporting, despite ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of March 31, 2023212 - The ineffectiveness is due to material weaknesses in internal control over financial reporting related to deficiencies in controls over the financial statement close process and the cash disbursement process213 - Remediation efforts are underway, including hiring additional qualified accounting personnel, engaging a professional accounting services firm, and enhancing the ERP system. However, the material weaknesses were not fully remediated as of March 31, 2023215218 Part II. Other Information Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company currently believes that the ultimate costs to resolve any pending ordinary course legal matters will not have a material adverse effect on its business, operating results, financial condition, or cash flows221 Risk Factors The company faces significant risks including customer retention, intense competition, reliance on third-party data, evolving data privacy laws, and internal control weaknesses - Business Risks: The business is harmed if paying customers do not renew or upgrade subscriptions. The market is intensely competitive, and the company has a history of net losses224229233 - Data & Technology Risks: Products depend on access to third-party data sources, which could be lost or become less favorable. Failures in third-party data centers or infrastructure could adversely affect business234248 - Security & Privacy Risks: A security breach of confidential customer information could harm reputation and lead to significant liability. The company must comply with complex and evolving data protection laws like GDPR and CCPA252292 - Financial Control & Ownership Risks: The company has identified material weaknesses in its internal control over financial reporting. The dual-class stock structure concentrates 81% of voting power with pre-IPO stockholders, limiting the influence of new investors325329360 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no material change in IPO proceeds usage during the quarter - There were no unregistered sales of equity securities in the period372 - There has been no material change in the use of proceeds from the company's IPO373 Exhibits This section lists key exhibits filed with the Quarterly Report, including CFO employment agreements and required certifications - The report includes exhibits such as the offer letter for new CFO Brian Mulroy, the separation agreement for former CFO Evgeny Fetisov, and CEO/CFO certifications376