SEMRUSH HOLDINGS, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our planned investments in our research and development, sales and marketing, and general and administrative functions, contains forward-looking statements based upon current plans, beliefs, and expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled "Special Note Regarding Forward-Looking Statements" and Item 1A. Risk Factors included elsewhere in this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , which was filed with theSEC onMarch 18, 2022 . The period-to-period comparison of financial results is not necessarily indicative of future results.
Company Overview
We are a leading online visibility management SaaS platform, enabling companies globally to identify and reach the right audience in the right context and through the right channels. Online visibility represents how effectively companies connect with consumers across a variety of digital channels, including search, social and digital media, digital public relations, and review websites. Our proprietary SaaS platform enables us to aggregate and enrich trillions of data points collected from hundreds of millions of unique domains, social media platforms, online ads, and web traffic. This allows our customers to understand trends, derive unique and actionable insights to improve their websites and social media pages, and distribute highly relevant content to their targeted customers across channels to drive high quality traffic. OnMarch 29, 2021 , we completed our IPO in which we issued and sold 10,000,000 shares of our Class A common stock at a public offering price of$14.00 per share for aggregate gross proceeds of$140.0 million . We received approximately$126.6 million in net proceeds after deducting underwriting discounts, commissions and offering expenses. OnApril 20, 2021 , the underwriters of our IPO partially exercised their option to purchase additional shares of Class A common stock. In connection with the closing of the partial exercise onApril 23, 2021 , the underwriters purchased 719,266 shares of our Class A common stock for net proceeds to us of$9.2 million . In connection with the closing of the IPO, all of the outstanding shares of our preferred stock and common stock automatically converted into 124,902,093 shares of Class B common stock. OnNovember 23, 2021 , we closed our follow-on offering (the "Follow-On Offering") in which we sold 4,000,000 shares of our Class A common stock at a price to the public of$20.50 per share. We received$77.9 million in net proceeds after deducting underwriting discounts, commissions and offering expenses. Selling stockholders sold an aggregate of 1,000,000 shares of Class A common stock in the Follow-On Offering.
Since our founding in 2008, we have achieved a number of significant milestones, including:
•2010: Surpassed 1,000 customers;
•2012: Started expansion into SEO software, launched Position Tracking, and
opened our first
•2014: Continued expansion of SEO capabilities with Site Audit tool;
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--------------------------------------------------------------------------------•2015: Surpassed 10,000 customers and launched Social Media tools;
•2016: Launched Content Marketing and Digital PR tools;
•2017: Completed our first round of financing led by entities affiliated withSiguler Guff & Company and introduced collaboration features, including the ability to add users and share projects and receivedU.S. andUK search awards for the "Best SEO Software Suite"; •2018: Completed another round of financing led by Greycroft and e.ventures, relocated headquarters toBoston, Massachusetts , and opened an office inDallas, Texas , surpassed$70 million in ARR, and launched our first add-on offering, Local Listings;
•2019: Surpassed 50,000 customers and
•2020: Acquired Prowly, received multiple awards, including "Best SEO Software Suite" and "Best Search Software Tool" according to the European Search Awards, and our headcount grew to more than 900 employees globally;
•2021: Completed our IPO and the Follow-On Offering and surpassed
•2022: Acquired Backlinko and Kompyte, continued expansion of our App Center to 37 apps including 17 third-party apps, increased the number of customers that pay more than$10,000 annually by more than 50% year over year. We generate substantially all of our revenue from monthly and annual subscriptions to our online visibility management platform under a SaaS model. Subscription revenue is recognized ratably over the contract term beginning on the date the product is made available to customers.
We have one reportable segment. See Note 16 to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.
Our subscription model enables our paying customers to choose among tiered plans for a majority of our products to meet their specific needs. Our multi-price point pricing for our core product ranges between$100 and$400 per month or$1,000 to$4,000 per year for customers who purchased our core product prior toJanuary 4, 2021 and do not let their subscriptions lapse, and between$119.95 and$449.95 per month or$1,199 to$4,499 per year for new customers sinceJanuary 4, 2021 , with each price point providing an incremental level of access to our products and usage limits. Within our subscription tiers, customers have the ability to purchase increased usage limits by adding the ability to create additional projects, keywords to track, and seat licenses without moving to a higher price point plan. We have a demonstrated track record of customers consistently upgrading to higher price point plans to get access to incremental functionality and usage limits. Additionally, we offer add-ons that are not included in our subscription plans and are sold on a one-time or monthly basis depending on the add-on. Since inception, we have managed our rapid growth with discipline and efficiency. We generated revenue of$254.3 million and$188.0 million for the years endedDecember 31, 2022 and 2021, respectively, representing growth of 35% year over year. Our revenue grew at a compound annual growth rate of 46% between the years endedDecember 31, 2017 andDecember 31, 2022 . Our net loss for the years endedDecember 31, 2022 and 2021 was$33.8 million and$3.3 million , respectively. We believe that the growth of our business and our operating results will be dependent upon many factors, including our ability to acquire new and retain existing paying customers, increase revenue from existing paying customers, and sustain and adapt to product and technology innovation. While these areas 58 -------------------------------------------------------------------------------- present significant opportunities for us, they also pose challenges and risks that we must successfully address in order to sustain the growth of our business and improve our operating results. While we have experienced rapid growth and increased demand for our products over the last few years, we expect to continue to incur losses in the short term and may not be able to achieve profitability. Our marketing is focused on building our brand reputation, increasing market awareness of our platform and products, and driving customer demand and a strong sales pipeline. We believe that these efforts will result in an increase in our paying customer base, revenues, and improved operating margins in the long term. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls, and our ability to manage headcount, capital, and processes in an efficient manner. Additionally, we face intense competition in our market, and to succeed, we need to innovate and offer products that are differentiated from point solutions that address aspects of online visibility management. We must also effectively hire, retain, train, and motivate qualified personnel and senior management. If we are unable to successfully address these challenges, our business, operating results, and prospects could be adversely affected.
Key Factors Affecting Our Performance
There are a number of factors that have impacted, and we believe will continue to impact, our results of operations and growth. These factors include:
Acquiring New Paying Customers
We expect increasing demand for third-party online visibility software to accelerate adoption of our platform. Our recurring subscription model provides significant visibility into our future results and we believe ARR is the best indicator of the scale of our platform, while mitigating fluctuations due to seasonality and contract term. We define ARR as of a given date as the monthly recurring revenue that we expect to contractually receive from all paid subscription agreements that are actively generating revenue as of that date multiplied by 12. We include both monthly recurring paid subscriptions, which renew automatically unless cancelled, as well as annual recurring paid subscriptions so long as we do not have any indication that a customer has cancelled or intends to cancel its subscription and we continue to generate revenue from them. As ofDecember 31, 2022 and 2021, we had more than 95,000 paying customers and 82,000 paying customers, respectively, accounting for$275.1 million and$215.7 million in ARR, respectively.
Retaining and Expanding Sales to Our Existing Customers
We serve a diverse customer base across a variety of sizes and industries that
is focused on maximizing their online visibility. We believe there is a
significant opportunity to expand within our existing customer base as customers
often initially purchase our entry-level subscription, which offers lower usage
limits and limited user licenses, as well as fewer features. We have
demonstrated the ability to expand contract values with our existing customers
as they use our products and recognize the critical nature of our platform and
often seek premium offerings through incremental usage, features, add-ons, and
additional user licenses.
Our sales team is largely focused on driving account expansion by encouraging
our customers to fully recognize the potential benefit from our comprehensive
platform. As a result, we have become increasingly efficient at acquiring
customers who increase their spend with us over time. The chart below
illustrates the subscription revenue from each customer cohort based on the year
in which they became customers during the year presented. As indicated in the
chart, our customer cohorts typically experience their lowest dollar-based net
revenue retention rate during their second full year after becoming a customer,
after which the dollar-based net revenue retention rate typically improves and
we are able to drive increased spending across the remaining customers within
the cohort.
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Our dollar-based net revenue retention rate enables us to evaluate our ability
to retain and expand subscription revenue generated from our existing customers.
Our dollar-based net revenue retention rate as of December 31, 2022 and 2021 was
approximately 118% and 126%, respectively.
We calculate our dollar-based net revenue retention rate as of the end of a period by using (a) the revenue from our customers during the twelve month period ending one year prior to such period as the denominator and (b) the revenue from those same customers during the twelve months ending as of the end of such period as the numerator. This calculation excludes revenue from new customers and any non-recurring revenue.
We have successfully increased ARR per paying customer over time and believe this metric is an indicator of our ability to grow the long-term value of our platform. We expect ARR per paying customer to continue to increase as customers adopt our premium offerings, and we continue to introduce new products and functionality. Our ARR per paying customer as ofDecember 31, 2022 and 2021 was$2,868 and$2,631 , respectively. We define ARR per paying customer as of a given date as ARR from our paying customers as of that date divided by the number of paying customers as of that date. We define the number of paying customers as the number of unique business and individual customers as of a given date. We define a business customer as all accounts that contain a common non-individual business email domain (e.g., all subscriptions with an email domain of @XYZ.com will be considered to be one customer), and an individual customer as an account that uses an individual non-business email domain.
Sustaining Product and Technology Innovation
We have a strong track record of developing new products that have high adoption
rates among our paying customers. Our product development organization plays a
critical role in continuing to enhance the effectiveness and differentiation of
our technology in an evolving landscape and maximizing retention of our existing
customers. We intend to continue investing in product development to improve our
data assets, expand our products, and enhance our technological capabilities.
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Non-GAAP Financial Measures
In addition to our financial results determined in accordance withU.S. generally accepted accounting principles ("GAAP"), we believe that free cash flow and free cash flow margin, each a non-GAAP financial measure, are useful in evaluating the performance of our business.
Free cash flow and free cash flow margin
We define free cash flow, a non-GAAP financial measure, as net cash provided by
operating activities less purchases of property and equipment and capitalized
software development costs. We define free cash flow margin as free cash flow
divided by total revenue. We monitor free cash flow and free cash flow margin as
two measures of our overall business performance, which enables us to analyze
our future performance without the effects of non-cash items and allows us to
better understand the cash needs of our business. While we believe that free
cash flow and free cash flow margin are useful in evaluating our business, free
cash flow and free cash flow margin are each a non-GAAP financial measure that
have limitations as an analytical tool, and free cash flow and free cash flow
margin should not be considered as an alternative to, or substitute for, net
cash used in operating activities in accordance with GAAP. The utility of each
of free cash flow and free cash flow margin as a measure of our liquidity is
further limited as each measure does not represent the total increase or
decrease in our cash balance for any given period. In addition, other companies,
including companies in our industry, may calculate free cash flow and free cash
flow margin differently or not at all, which reduces the usefulness of free cash
flow and free cash flow margin as tool for comparison. A summary of our cash
flows from operating, investing, and financing activities is provided below. We
recommend that you review the reconciliation of free cash flow to net cash used
in operating activities, the most directly comparable GAAP financial measure,
and the reconciliation of free cash flow margin to net cash used in operating
activities (as a percentage of revenue), the most directly comparable GAAP
financial measure, provided below, and that you not rely on free cash flow, free
cash flow margin or any single financial measure to evaluate our business.
Year Ended December 31,
2022 2021
(in thousands)
Net cash (used in) provided by operating activities $ (9,624) $ 23,761
Net cash used in investing activities (179,832) (4,633)
Net cash (used in) provided by financing activities (345) 215,324
Effect of exchange rate changes on cash and cash equivalents (275) (230)
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (190,076) $ 234,222
Year Ended December 31,
2022 2021
(in thousands)
Net cash (used in) provided by operating activities
$ 23,761 Purchases of property and equipment (4,234)
(2,380)
Capitalization of internal-use software costs (1,706) (1,403) Free cash flow$ (15,564) $ 19,978 61
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Year Ended
2022 2021
Net cash (used in) provided by operating activities (as a (3.8) % 12.6 %
percentage of revenue)
Purchases of property and equipment (as a percentage of revenue) (1.7) % (1.3) %
Capitalization of internal-use software costs (as a percentage (0.7) % (0.7) %
of revenue)
Free cash flow margin (6.1) % 10.6 %
Components of our Results of Operations
Revenue
We generate nearly all of our revenue from subscriptions to our online visibility management platform under a SaaS model. Subscription revenue is recognized ratably over the contract term beginning on the date on which we provide the customer access to our platform. Our customers do not have the right to take possession of our software. Our subscriptions are generally non-cancellable during the contractual subscription term, however our subscription contracts contain a right to a refund if requested within seven days of purchase. We offer our paid products to customers via monthly or annual subscription plans, as well as one-time and ongoing add-ons. Our subscription-based model enables customers to select a plan based on their needs and license our platform on a per user per month basis. As ofDecember 31, 2022 and 2021, we served over 95,000 and 82,000 paying customers, respectively, in various industries. Our revenue is not concentrated with any single customer or industry. For the years endedDecember 31, 2022 and 2021 no single customer accounted for more than 1% of our revenue.
Cost of Revenue
Cost of revenue primarily consists of expenses related to hosting our platform,
acquiring data, and providing support to our customers. These expenses are
comprised of personnel and related costs, including salaries, benefits,
incentive compensation, and stock-based compensation expense related to the
management of our data centers, our customer support team, and data acquisition
costs. In addition to these expenses, we incur third-party service provider
costs, such as data center and networking expenses, allocated overhead costs,
depreciation and amortization expense associated with our property and
equipment, and amortization of capitalized software development costs and
intangible assets acquired through business combinations and asset acquisitions.
We allocate overhead costs, such as rent and facility costs, certain information
technology costs, and employee benefit costs to all departments based on
headcount. As such, general overhead expenses are reflected in cost of revenue
and each operating expense category.
We expect our cost of revenue to increase in absolute dollars due to
expenditures related to the purchase of hardware, data, expansion, and support
of our data center operations and customer support teams. We also expect that
cost of revenue as a percentage of revenue will decrease over time as we are
able to achieve economies of scale in our business, although it may fluctuate
from period to period depending on the timing of significant expenditures. To
the extent that our customer base grows, we intend to continue to invest
additional resources in expanding the delivery capability of our products and
other services. The timing of these additional expenses could affect our cost of
revenue, both in terms of absolute dollars and as a percentage of revenue in any
particular quarterly or annual period.
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Research and Development
Research and development expenses primarily consist of personnel and related costs, including salaries, benefits, incentive compensation, stock-based compensation, and allocated overhead costs. Research and development expenses also include depreciation expense and other expenses associated with product development. Other than internal-use software costs that qualify for capitalization, research and development costs are expensed as incurred. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new products, features, and enhancements to our platform. We believe that investing in the development of new products, features, and enhancements improves customer experience, makes our platform more attractive to new paying customers and provides us with opportunities to expand sales to existing paying customers and convert free customers to paying customers.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel and related costs directly associated with our sales and marketing department, including salaries, benefits, incentive compensation, and stock-based compensation, online advertising expenses, and marketing and promotional expenses, as well as allocated overhead costs. We expense all costs as they are incurred, excluding sales commissions identified as incremental costs to obtain a contract, which are capitalized and amortized on a straight-line basis over the average period of benefit, which we estimate to be two years. We expect that our sales and marketing expenses will continue to increase in both absolute dollars and as a percentage of revenue in the year endingDecember 31, 2023 as compared to the year endedDecember 31, 2022 . New sales personnel require training and may take several months or more to achieve productivity; as such, the costs we incur in connection with the hiring of new sales personnel in a given period are not typically offset by increased revenue in that period and may not result in new revenue if these sales personnel fail to become productive. We expect to increase our investment in sales and marketing as we add new services, which will increase these expenses in absolute dollars. Over the long term, we believe that sales and marketing expenses as a percentage of revenue will vary depending upon the mix of revenue from new and existing customers, as well as changes in the productivity of our sales and marketing programs.
General and Administrative
General and administrative expenses primarily consist of personnel and related expenses, including salaries, benefits, incentive compensation, and stock-based compensation, associated with our finance, legal, human resources, and other administrative employees. Our general and administrative expenses also include professional fees for external legal, accounting, and other consulting services, insurance, depreciation and amortization expense, as well as allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business. We expect to continue to incur expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on aU.S. securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of theSEC , increases in insurance premiums, investor relations, and professional services. We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of revenue over time. Exit Costs The costs associated with the winding down of our operations inRussia are included in the consolidated statements of operations in our (loss) income from continuing operations under the line item, Exit Costs. Exit costs in connection with the winding down of our operations inRussia include employee severance and fringe benefit costs, the loss on the sales of our Russian subsidiaries, and other 63
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associated relocation costs. We do not expect the remaining exit costs
associated with the winding down of our operations in
Other Income (Expense), Net Included in other income (expense), net are foreign currency transaction gains and losses. In accordance with ASC 830, Foreign Currency Matters, we redetermined our functional currencies of our international locations as ofJanuary 1, 2022 , when it was determined the local currencies for these regions were most appropriate, with the exception ofRussia where theU.S. dollar was the functional currency. Accordingly, for the year endedDecember 31, 2022 , the functional currencies of our international locations were the local currencies for these regions, except forRussia . As ofAugust 10, 2022 , we no longer have operating subsidiaries inRussia . For the years endedDecember 31, 2021 and 2020, the functional currency of our international operations was theU.S. dollar except for Prowly, which is the Polish Zloty. Any differences resulting from the re-measurement of assets and liabilities denominated in a currency other than the functional currency are recorded within other income (expense), net. We expect our foreign currency exchange gains and losses to continue to fluctuate in the future as foreign currency exchange rates change. Interest expense is related to our outstanding revolving credit facility, as well as interest associated with outstanding finance leases. Other income (expense), net also includes amounts for interest income and expense, other miscellaneous income and expense, and gains and losses unrelated to our core operations. We have elected the fair value option in respect to the accounting for our convertible note investments, allowing for increases and decreases in the fair value of such investments to be recorded to other income (expense), net for each reporting period.
Income Tax Provision
We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. We account for income taxes in accordance with the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. To date, we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets. We expect this trend to continue for the foreseeable future. Our tax expense for the years endedDecember 31, 2022 and 2021 primarily relates to income earned in certain foreign jurisdictions. 64
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Results of Operations for the Years Ended
The following tables set forth information comparing our results of operations
in dollars and as a percentage of total revenue for the periods presented. The
period-to-period comparison of results is not necessarily indicative of results
for future periods.
For the Year Ended December 31,
2022 2021
(in thousands)
Revenue $ 254,316 $ 188,001
Cost of revenue (1) 48,553 41,934
Gross profit 205,763 146,067
Operating expenses
Sales and marketing (1) 126,889 81,122
Research and development (1) 41,204 24,322
General and administrative (1) 62,779 43,116
Exit costs 11,264 -
Total operating expenses 242,136 148,560
Loss from operations (36,373) (2,493)
Other income (expense), net 3,456 (522)
Loss before income taxes (32,917) (3,015)
Provision for income taxes 931 270
Net loss $ (33,848) $ (3,285) (1)Includes stock-based compensation expense as follows:
For the Year Ended December 31,
2022 2021
(in thousands)
Cost of revenue $ 74 $ 37
Sales and marketing 2,235 405
Research and development 1,123 348
General and administrative 3,961 1,952
Total stock-based compensation $ 7,393 $ 2,742 65
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The following table sets forth our consolidated statements of operations data
expressed as a percentage of revenue for the periods indicated (amounts may not
sum due to rounding):
For the Year Ended December 31,
2022 2021
(in thousands)
Revenue 100 % 100 %
Cost of revenue 19 % 22 %
Gross profit 81 % 78 %
Operating expenses
Sales and marketing 50 % 43 %
Research and development 16 % 13 %
General and administrative 25 % 23 %
Exit costs 4 % - %
Total operating expenses 95 % 79 %
Loss from operations (14) % (1) %
Other income (expense), net 1 % - %
Loss before income taxes (13) % (2) %
Provision for income taxes - % - %
Net loss (13) % (2) %
Comparison of the Years Ended
Revenue
Our revenue during the years endedDecember 31, 2022 and 2021 was as follows: For the Year Ended December 31, Change 2022 2021 Amount % (dollars in thousands) Revenue $ 254,316 188,001$ 66,315 35 % Revenue increased by$66.3 million year over year. The majority of this increase was driven by an increase in the number of paying customers to more than 95,000 as ofDecember 31, 2022 from more than 82,000 as ofDecember 31, 2021 . The increase in revenue for the year endedDecember 31, 2022 was also driven by growth in user licenses per customer, add-ons, and attach rates. We define attach rates as the ratio of the number of paying customers who purchase specific add-ons to the number of total paying customers. 66 --------------------------------------------------------------------------------
Revenue based upon the locations of our paying customers during the years ended
For the Year Ended December 31,
2022 2021
(in thousands)
Revenue:
United States $ 119,775 $ 85,642
United Kingdom 25,669 19,625
Other 108,872 82,734
Total revenue $ 254,316 $ 188,001 Cost of Revenue, Gross Profit and Gross Margin
For the Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Cost of revenue $ 48,553 $ 41,934 $ 6,619 16 %
Gross profit $ 205,763 $ 146,067 $ 59,696 41 %
Gross margin 81 % 78 %
The increase in cost of revenue for the year ended December 31, 2022 compared to
the year ended December 31, 2021 was primarily due to the following changes:
Change
2022-2021
(in thousands)
Personnel costs $ 2,327
Hosting fees (933)
Integration and data costs 2,384
Merchant fees 2,033
Depreciation and amortization 530
Other 278
Cost of revenue $ 6,619
For the year ended December 31, 2022 , cost of revenue increased by $6.6 million .
Integration and data costs increased primarily as a result of increasing costs
incurred related to new products and customer growth. Merchant fees increased
commensurate with revenue growth. Personnel costs increased primarily as a
result of a 32% increase in headcount as we continue to grow our customer
support team to support our customer growth. Additionally, depreciation and
amortization expense increased as a result of an increase in amortization of
purchased intangibles associated with the Kompyte acquisition during 2022. These
increases were partially offset by a decrease in hosting fees as a result of the
relocation of data centers during the year ended December 31, 2022 .
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Operating Expenses
Sales and Marketing
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Sales and marketing $ 126,889 $ 81,122 $ 45,767 56 %
Percentage of total revenue 50 % 43 %
The increase in sales and marketing expense for the year ended
Change
(in thousands)
Marketing and advertising expense $ 23,642
Personnel costs 20,064
Other 2,061
Sales and marketing $ 45,767
For the year ended December 31, 2022 , sales and marketing expense increased by
$45.8 million . Marketing and advertising expense increased by $23.6 million as
we continue to focus on acquiring new paying customers. Personnel costs
increased by $20.1 million , primarily as a result of a 38% increase in headcount
as we continue to expand our sales teams to grow our customer base as well as
the costs associated with operating in higher cost locations. Personnel costs
include the amortization of capitalized commission costs, which increased year
over year, partially due to the amortization of commissions paid in prior
periods, as well as expense associated with the amortization of commissions paid
and capitalized during 2022, which increased due to the overall growth in sales.
It was also driven by a $1.8 million increase in stock-based compensation
compared to the year ended December 31, 2021 applicable to these teams.
Research and Development
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Research and development $ 41,204 $ 24,322 $ 16,882 69 %
Percentage of total revenue 16 % 13 %
For the year ended December 31, 2022 , research and development costs increased
by $16.9 million , primarily as a result of a 40% increase in headcount and
higher personnel costs due to the competitive labor market, as compared to the
year ended December 31, 2021 , as we continued to expand our product development
teams as well as the costs associated with operating in higher costs locations.
It was also driven by a $0.8 million increase in stock-based compensation
compared to the year ended December 31, 2021 applicable to these teams.
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General and administrative
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
General and administrative $ 62,779 $ 43,116 $ 19,663 46 %
Percentage of total revenue 25 % 23 %
The increase in general and administrative expense for the year ended
December 31, 2022 compared to the year ended December 31, 2021 was primarily due
to the following:
Change
(in thousands)
Personnel costs $ 6,236
Dues and subscriptions 1,480
Professional services 7,395
Business Insurance 590
Rent and office expenses 2,134
Other 1,828
General and administrative
For the year endedDecember 31, 2022 , general and administrative expense increased by$19.7 million . Professional services increased by$7.4 million , which was primarily driven by a$6.0 million increase in consulting fees and, to a lesser degree, increases in accounting, audit and legal fees. Personnel costs increased by$6.2 million , which was primarily driven by a 41% increase in headcount as compared to the year endedDecember 31, 2021 as we continued to expand our accounting and reporting, legal and compliance, and internal support teams. It was also driven by a$2.0 million increase in stock-based compensation compared to the year endedDecember 31, 2021 applicable to these teams. Rent and office expenses increased by$2.1 million , which was primarily driven by increases in office rent of$1.0 million , other office expenses of$0.4 million and office equipment expenses of$0.4 million . Other Income (Expense), Net Year Ended December 31, Change 2022 2021 Amount % (dollars in thousands) Other income (expense), net$ 3,456 $ (522) $ 3,978 (762) % Percentage of total revenue 1 % - % The change in other income (expense), net for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to an increase in interest income of$3.2 million , as well as an increase in other income of$2.1 million , partially offset by an increase in foreign exchange losses of$1.3 million . 69
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Provision for Income Taxes
Year Ended December 31, Change
2022 2021 Amount %
(dollars in thousands)
Provision for income taxes $ 931 $ 270 $ 661 245 %
Percentage of total revenue 0.4 % 0.1 %
The provision for income taxes is primarily attributable to earnings in our foreign jurisdictions.
Liquidity and Capital Resources
Our principal sources of liquidity have been the net proceeds of our IPO and the Follow-On Offering, which totaled$213.8 million , after deducting underwriting discounts and offering expenses paid or payable by us, and the net proceeds we received through private sales of equity securities, as well as sales of premium subscriptions to our platform.
As of
Our principal uses of cash in recent periods have been to fund operations, invest in capital expenditures and short-term investments, and strategically acquire new businesses. This cash is held in cash deposits and money market funds.
We believe our existing cash and cash equivalents, along with our available financial resources from our credit facility, will be sufficient to meet our operating and capital needs for at least the next 12 months. Our future capital requirements will depend on many factors, including those set forth under Item 1A. Risk Factors. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations, and financial condition could be adversely affected. Our Credit Facility Pursuant to the Credit Agreement among us andSemrush, Inc. , each as a borrower, the lenders party thereto from time to time andJPMorgan Chase Bank, N.A ., as the administrative agent, as amended from time to time, we have a senior secured credit facility that consists of a$45.0 million revolving credit facility and a letter of credit sub-facility with an aggregate limit equal to the lesser of$5.0 million and the aggregate unused amount of the revolving commitments then in effect. The availability of the credit facility is subject to the borrowing base based on an advance rate of 400% multiplied by annualized retention applied to monthly recurring revenue. The credit facility has a maturity of three years and will mature onJanuary 12, 2024 . 70 --------------------------------------------------------------------------------
As of
All of our obligations under our credit facility will be guaranteed by our future domestic subsidiaries and, subject to certain exceptions, secured by a security interest in substantially all of our tangible and intangible assets.
Borrowings under our credit facility bear interest at our option at (i) LIBOR,
subject to a 0.50% floor, plus a margin, or (ii) the alternate base rate,
subject to a 3.25% floor (or 1.50% prior to positive consolidated adjusted
earnings before interest, taxes, depreciation, and amortization ("adjusted
EBITDA") for the twelve months most recently ended), plus a margin. For LIBOR
borrowings, the applicable rate margin is 2.75% (or 3.50% prior to positive
consolidated adjusted EBITDA as of the twelve months most recently ended). For
base rate borrowings, the applicable margin is 0.00% (or 2.50% prior to positive
consolidated adjusted EBITDA as of the twelve months most recently ended). We
are also required to pay a 0.25% per annum fee on undrawn amounts under our
revolving credit facility, payable quarterly in arrears.
Operating Activities
Our largest source of operating cash is cash collections from our customers for subscription services. Our primary uses of cash from operating activities are for online advertising, personnel costs across the sales and marketing and product and development departments, and hosting costs. Net cash used in operating activities during the year endedDecember 31, 2022 was$9.6 million , which resulted from a net loss of$33.8 million adjusted for non-cash charges of$28.8 million and a net cash outflow of$4.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$9.0 million for amortization of deferred contract acquisition costs related to capitalized commissions,$7.4 million of stock-based compensation expense,$6.7 million of depreciation and amortization expense, and$4.5 million of non-cash lease expense. The change in operating assets and liabilities was primarily the result of a$9.5 million increase in deferred contract costs, a$3.3 million increase in accounts receivable, a$4.1 million decrease in operating lease liabilities, and a$2.4 million increase in prepaid expenses and other current assets. These outflows were partially offset by a$9.1 million increase in deferred revenue due to the addition of new customers and expansion of the business and a$6.8 million increase in accounts payable. Net cash provided by operating activities during the year endedDecember 31, 2021 was$23.8 million , which resulted from a net loss of$3.3 million adjusted for non-cash charges of$13.0 million and a net cash inflow of$14.0 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of$6.5 million for amortization of deferred contract acquisition costs related to capitalized commissions,$3.5 million of depreciation and amortization expense and$2.7 million of stock-based compensation expense. The changes in operating assets and liabilities was primarily the result of a$13.8 million increase in deferred revenue due to the addition of new customers and expansion of the business, an$11.6 million increase in accrued expenses, and a$1.5 million increase in accounts payable. These inflows were partially offset by a$9.4 million increase in deferred contract costs, a$2.8 million increase in prepaid expenses and other current assets, and a$0.8 million increase in accounts receivable. Investing Activities Net cash used in investing activities for the years endedDecember 31, 2022 , and 2021 was$179.8 million , and$4.6 million , respectively. The increase of$175.2 million between the year endedDecember 31, 2022 and 2021 was primarily due to$157.9 million used to purchase short-term 71 --------------------------------------------------------------------------------
investments, a
Financing Activities
Net cash used in financing activities for the year endedDecember 31, 2022 was$0.3 million and consisted of cash inflows related to the exercises of stock options of approximately$1.0 million as well as shares issued in connection with the Employee Stock Purchase Plan of$0.8 million and cash outflows relating to payments on capital leases of$2.1 million . Net cash provided by financing activities for the year endedDecember 31, 2021 was$215.3 million , which was primarily driven by$215.4 million in net proceeds from our public offerings and, to a lesser extent,$1.3 million in proceeds from the exercise of stock options, partially offset by cash outflows relating to payments on capital leases of$1.4 million .
Contractual Obligations and Commitments
Our principal commitments consist of obligations under leases for office space and leases for data center facilities. For more information regarding our lease obligations, see Note 3 to the consolidated financial statements of this Annual Report on Form 10-K. In addition to our leases, we also have multi-year commitments with certain data providers expiring at various dates through 2026. For more information regarding our commitments with data providers, see Note 13 to the consolidated financial statements of this Annual Report on Form 10-K. We expect to fund these obligations with cash flows from operations and cash on our balance sheet.
Recent Accounting Pronouncements
Refer to sections titled "Recent Accounting Pronouncements" in Note 2 to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.
Critical Accounting Policies and Estimates
Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these audited consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates. We believe that of our significant accounting policies, which are described in Note 2 to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our audited consolidated financial condition and results of operations.
Revenue Recognition
Revenue Recognition Policy
We generate revenue primarily from subscriptions to our online visibility management platform, which is comprised of subscription fees from customers accessing our SaaS services and related customer support. We offer subscriptions to our platform primarily on a monthly or annual basis, and we sell our
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products and services primarily through a self-service model and also directly
through our sales force. Our subscription arrangements provide customers the
right to access our hosted software applications and customers do not have the
right to take possession of our software during the hosting arrangement.
We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.
We recognize subscription and support revenue ratably over the term of the contract, beginning on the date the customer is provided access to our service. These subscriptions are generally stand-ready obligations as the customer has access to the service throughout the term of the subscription, and our performance obligations are satisfied with the customer over time. We consider the SaaS subscription and related support services to have the same pattern of transfer to the customer. As such, they are accounted for as a single performance obligation.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. We primarily invoice and collect payments from our customers for in advance on a monthly or annual basis.
Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that is expected to be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as non-current in the accompanying consolidated balance sheets.
Revenue is presented net of any taxes collected from customers.
Costs to Obtain a Contract
We capitalize incremental direct costs of obtaining revenue contracts, which primarily consist of sales commissions paid for new subscription contracts. We amortize these commissions over a period of approximately 24 months on a systematic basis, consistent with the pattern of transfer of the goods or services to which the asset relates. The 24-month period represents the estimated benefit period of the customer relationship and has been determined by taking into consideration the type of product sold, the commitment term of the customer contract, the nature of our technology development life-cycle, and an estimated customer relationship period based on historical experience and future expectations. Sales commissions for renewals and upgrade contracts are deferred and amortized on a straight-line basis over the remaining estimated customer relationship period of the related customer. Deferred contract costs that will be recorded as expense during the succeeding 12-month period are recorded as current deferred contract costs, and the remaining portion is recorded as deferred contract costs, net of current portion. Amortization of deferred contract costs is included in sales and marketing expense in the accompanying consolidated statement of operations and comprehensive loss.
Stock-Based Compensation
We measure stock options and other stock-based awards granted to employees and
members of our board of directors for their services as directors based on the
fair value on the date of the grant and recognize the corresponding compensation
expense of those awards over the requisite service period, which is generally
the vesting period of the respective award. We have only issued stock options
with service-based vesting conditions and record the expense for these awards
using the straight-line method.
We estimate the fair value of each stock option grant using the Black-Scholes
option-pricing model, which uses as inputs the estimated fair value of our
common stock and assumptions we make for the volatility of our common stock, the
expected term of our stock options, the risk-free interest rate for a period
that approximates the expected term of our stock options and our expected
dividend yield.
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-------------------------------------------------------------------------------- We determined the assumptions for the Black-Scholes option-pricing model as discussed below. Each of these inputs is subjective and generally requires significant judgment to determine. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions and estimates are as follows: Fair value-Prior to the IPO, we estimated the fair value of our common stock. Our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock as awards were approved, including utilizing thirdparty valuations to assist with the determination of the estimated fairmarket value and common stock price. Following the closing of the IPO, our Class A common stock is publicly traded, and therefore we currently base the value of our Class A common stock on its market price. Expected dividend yield-The annual rate of dividends is expressed as a dividend yield which is a constant percentage of the stock price. As of the date of this Annual Report on Form 10-K, we have not paid dividends and do not anticipate paying a cash dividend on common stock in the foreseeable future and, accordingly, use an expected dividend yield of zero. Expected term-The expected life of an option represents the period of time that an option is expected to be outstanding. The expected term of an award is determined using the simplified method for plain vanilla options, consistent with applicable accounting guidance. Risk-free rate-The riskfree interest rate is based on the rate ofU.S. treasury securities with maturities consistent with the estimated expected term of the awards. Expected volatility-As we do not have a trading history of our common stock, there is no historical basis of the stock volatility. Accordingly, the expected volatility is based primarily on the historical volatilities of similar entities' common stock over the most recent period commensurate with the estimated expected term of the awards. The weighted-average fair values of options granted during the years endedDecember 31, 2022 and 2021 were$6.36 and$8.45 per share, respectively. The weighted-average assumptions utilized to determine the fair value of options granted are presented in the following table: Year Ended December 31, 2022 2021 Expected volatility 53.3 % 52.1 % Weighted-average risk-free interest rate 2.72 % 1.07 % Expected dividend yield - - Expected life - in years 6 6 JOBS Act Accounting Election We are an "emerging growth company" as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that have not made this election.
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