Semrush (SEMR): The leader in SEO analytics and digital competitive intelligence
Semrush has built a great brand in the online marketing space
Semrush (SEMR) provides an online visibility management SaaS platform, which allows companies to identify and reach the right audience through the right channels and keywords. Semrush went public on March 25th, raising $140 million at $14 per share.1
S-1 Summary:
Offers 50 products across SEO, competitive research, advertising, social media, content marketing
67,000 paying customers (up 24% yoy), with no single customer representing more than 1% of revenue2
404,000 active free customers (up 21% yoy)
Net retention rate of 114% in 2020 (120% in 2019)
Revenue CAGR of 50% between 2016-2020
ARR per paying customer went from $1,823 to $2,123 in 2020
Positive operating cash flow of $5.9m in 2020
Semrush had 980 employees as of Dec 2020, most of them based in Russia
The company was founded by Oleg Shchegolev and Dmitry Melnikov 12 years ago. They initially experimented with a product called SEOquake focused on search engine optimization. When it gained traction, the founders introduced additional products and features and decided to establish a company.3
Initially, they only showed the product to their friends in the IT industry using a freemium model, which is still in use today. SEMrush was bootstrapped for several years, and later raised $37 million.
The company aggregates, crawls and processes huge amounts of data, including search engine data, website traffic, backlinks, social media data combined with data from their customers collected through APIs. This allows them to create a complete view of a company’s online visibility, which helps them identify specific keywords, channels or ads that are driving traffic to the specific property or to the properties of competitors.
In addition, they integrate with third-party workflows which include analyzing trends and opportunities to increase visibility and measuring the effectiveness of digital marketing campaigns.
The company offers its solutions both a on a free and paid basis, and many customers usually start in the free tier and gradually upgrade to premium products. Subscribers are billed usually monthly, and the contracts can be cancelled anytime, with no long-term commitments. SEMrush offers multi-tiered pricing, with total monthly costs of $100-$400 or annual costs of $1,000-$4,000.
Free. The free offering grants access to SEMrush platform and limits the number of results, keywords to track, and projects.
Pro. With Pro, customers get access to the platform and have the ability to run their SEO, PPC, and SMM projects with over 50 advanced tools and features.
Guru. Guru provides the same features as Pro, with the addition of Content Marketing Platform, historical data, extended limits, and Google Data Studio Integration.
Business. Business provides all of the same features as Guru, plus white label reports, API access, extended limits and sharing options, and share of voice metric.
SEMrush products and features
Their products cover a broad range of online marketing features:
SEO: backlink analytics and audit, link building tool, keyword gaps (compared to 5 competing sites), position tracking, keyword magic tool, site audit to improve search ranking
Content: tracks brand mentions online along with estimated audience reach, referral traffic, topic research, content audit, estimate of reach for articles posted on external sites
Advertising research: monitoring of competitor’s display ads, estimates of competitor’s ad spend, competitor product feed analysis, gathering and analysis of keywords for PPC campaigns
Social media: analyzes the frequency of posts by competition and follow count, Facebook ads manager, scheduling and posting for multiple accounts
Competitive research: market research to identify key competitors in a market or niche, organic research to discover keywords that drive traffic in a particular niche
Local marketing: tracking of google maps, reviews
Prowly: media influencers contact database for targeted marketing, CRM system, custom e-mails and newsroom pages
Sellerly: Amazon traffic insights, Amazon split-testing tool, Amazon listing quality check for products
According to their founder, the most popular feature is the Keywords Research function.6 The volume of voice search is growing and gaining share and SEMrush has also products that address this market.
Online marketing
Online marketing is a very wide term and includes SEO strategy, public relations, social media, paid marketing and many other channels. Companies usually rely on several strategies to drive users to their online properties. Paid ads are the easiest but costliest way to do it. Social media and SEO can drive significant amounts of traffic to your site, however they require a lot of time and investment in content.
SEO involves the largest amount of work but pays off big over the long run and can last for months or years, compared to days or weeks on paid ads and social media. Getting to higher spots on Google can improve your traffic by an order of magnitude.
SEMrush value proposition
Medium sized companies lack the technology or funds to aggregate all the data from their various marketing channels and therefore derive useful insights from them. Closed platforms like Google and Facebook only provide visibility into their own traffic stats, which doesn’t give companies the full picture.
SEMrush has built a very unique database comprised of over 200 million domains, 20 billion keywords, click stream panel data from billions of events per week, over 33 trillion backlinks, over 17 billion URLs crawled per day on average, 310 million Google Display Network banner advertisements, over 1 billion events analyzed per day, and a range of data aggregated from social media networks, all of which scale continuously as customers use the platform.
All-in-one solution. Their product range encompasses SEO, SEM (search engine marketing), content, advertising, competitive research, SMM (social media marketing), and digital PR. This helps their customers save money as they don’t have to purchase from several vendors and also helps them simplify their marketing strategy and analytics.
Integration. As with many SaaS products, SEMrush integrates with other platforms such as Google Analytics, YouTube, Facebook, Twitter, Domo, Yext, and Microsoft Outlook to allow customers to manage every single part of their digital marketing strategy.
Competitive research and audit. SEMrush allows customers to analyze search volumes in their targeted market, undertake SEO and site audits to optimize performance and research particular keywords to help increase traffic to online properties.
How does SEMrush collect its data?
Algorithmic collection through their proprietary data collection techniques, including web crawling of third-party websites;
They purchase data from independent third-party data providers, which includes clickstream data, search engine data, online advertising data, and data from social media sources;
Reference data that their customers grant them access to, which includes the customers’ website and social media data. The social media APIs connect primarily to Facebook, Twitter, Instagram, Pinterest, and LinkedIn.
This has allowed them to build a proprietary and unique database, that can’t be easily replaced or copied by their competition.
SEMrush financials
The company grew 36% last year and earned revenues of $124.9m. The growth in revenues was mainly attributable to an increase in paying customers (54k to 67k), as well as higher revenues from existing ones.
In the quarter ending December 2020, revenue increased by 41% to $36.4m, the fastest growth rate in at least a year. Based on consensus analyst estimates, the company is expected to hit $167m in sales (up 34%) this year and $212m next year (up 27%).4 I usually don’t pay that much attention to sell-side estimates, as the growth rate can vary widely based on many factors, but it can be used in valuation as a very rough estimate (base case scenario).
Gross margin went from 75.5% to 76%, a slight improvement. According to their S-1: “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.” Gross margins could therefore increase above 80% in the future as the company scales further.
The largest expense item is sales and marketing, on which they spent $54.5m in 2020 (up 30%) and which represents 44% of sales. Research and development expenses were up 23% last year and represent 14% of sales.
SEMrush posted a $6m operating loss in 2020, which is okay when compared to many other SaaS companies with 30%+ negative margins and the company seems pretty close to GAAP profitability. They are already cash flow positive, with operating cash flow of $5.9m in 2020 and free cash flow of $2.4m.
In their S-1 filing, the company expected to raise 15 million shares at $15 and a resulting pro-forma cash balance of $242m and total assets of $260m. These can be reduced by $85m as they sold 10 million shares at $14 at their IPO. This would result in total assets of $174m and cash balance of $157m.
This is actually pretty good, as the majority of assets are in cash. This suggests that they need very little in both physical and intangible assets to conduct their business, which results in very large return in capital (ROIC) in the future. For example, assuming a 10% operating margin and net assets of $17 million (excluding cash), they would have a 73% return on assets (ROA) using their latest numbers, which is an incredible number.
At the end of 2020, the company had long-term contract obligations of $23m, mainly composed of hosting purchase commitments and operating leases. On January 2021, Semrush executed a credit agreement with access to $45 million in additional funding. It’s unclear how much is outstanding today, but the total debt is still not that significant compared to their cash holdings.
The company has achieved a net retention rate of 114% in 2020 and the revenue from older cohorts expanded steadily over the years.
Market size and opportunity
The company estimates, that their total addressable market (TAM) globally is roughly $13 billion. Almost 95% of their paying customers are in the SME segment (less than 500 employees), and the average ARR (annual recurring revenue) from these customers is around $2,000. Their enterprise customers aren’t that numerous, however their ARR is $4,200.
Around 54% of their revenue comes from outside the United States. When estimating their TAM, the company assumed a 50% online penetration among small customers (less than 20 employees) and a 100% penetration among medium and large ones. Out of the total TAM, SEMrush estimates that only $150 million will be attributable to large enterprise customers, which means that they do not expect any major wins in this space and their focus remains on SMEs.
Third-party estimates of the market size vary widely. According to SEO.co, the total SEO market in US is worth at least $42 billion, with an expected CAGR of 3.5% until 2025.5 Based on data from 99firms.com, the SEO market already reached $80 billion in 2020 in the US.
In the past, SEO used to be only about Google, but Amazon has increased their market share significantly and now commands 19% of search ad revenue based on eMarketer data.6 It’s good to see that SEMR has also features that address marketing and selling on Amazon.
According to eMarketer, global digital ad spend is expected to hit $389 billion this year, and climb to $526 billion by 20247, and will represent 63% of all ad spend in the world.
While Semrush does not get fees from money spent on marketing campaigns, there are still thousands of companies out there with very limited digital marketing experience and they will all need to move online in order to survive. As a result, Semrush will benefit from the continuing trend of digitization in the world.
Valuation
I believe that SEMR is significantly undervalued compared to other SaaS peers that trade at 20 or 30x their forward revenue, with similar growth rates and margin profiles. The IPO was underfollowed and many investors still don’t realize the quality of Semrush’s business. Assuming they can grow at least 30% per year, revenues could reach $470 million by 2025 and using a multiple of 20x sales would imply a forward valuation of close to $10 billion in 5 years.
Their contracts are short-term in nature, so the stability or revenue visibility is low as customers can cancel at any point. However, if the company keeps introducing great features and new products, I believe they can grow much further, as the TAM is really large.
Growth strategy
The company plans to invest in acquiring additional free and premium users, expand the share of paying users, introduce additional products and features and grow through add-on acquisitions, such as their purchase of Prowly.com in August 2020.
When it comes to sales and marketing, the company uses its own tool to analyze traffic to their sites, brand mentions and keywords. In addition, they also utilize online ads, podcasts, ebooks, webinars or blogs to drive traffic. They established the Semrush Academy, a free online learning program, that has been accessed by more than 300,000 students with 130,000 certificates given out. It helps them increase brand awareness and also source potential ideas for product improvement.
Competition
SEMrush has several established competitors, which offer similar products to their software. Ahrefs, Moz, KWFinder, Yext or Sprout Social are some of the most visible ones. One of the founders of Moz, Rand Fishkin recently estimated on Twitter that Semrush still maintains their lead in the space and is the #1 player:
Both Yext (YEXT) and Sprout Social (SPT) are publicly traded and here are their numbers:
As you can see, SEMR has the fastest growth and highest gross margin, it would therefore make sense for it to trade at a higher EV/Sales multiple than SPT. It also has a much lower operating loss (-5%).
There are likely hundreds and maybe even thousands of firms that compete indirectly with Semrush, as the digital marketing and SEO industries are just massive.8
Major shareholders of Semrush
The largest shareholder after the IPO will remain Oleg Shchegolev with 46% interest and a similar voting power. Second founder Dmitry Melnikov will retain 22.5%. Private equity fund Siguler Guff & Company will continue to hold a 13% stake (under the entity SEMR Holdings) and venture capital firm Greycroft Partners will retain a 9.4% stake.
SEMrush reviews
SEMrush products are highly rated on all software review platforms, including 4.5/5 at G2.com9 and 4.7/5 at Capterra10, with hundreds of five-star reviews.
The company itself has a 4.4 rating on Glassdoor, with a CEO approval rating of 89%, which is really good. Generally, I look for companies with at least a 4-star rating on the site and a CEO approval above or close to 90%. It has been proved in many studies, that happy employees are more productive and have less turnover.
The best companies always attract the best talent, which works like a flywheel and helps them attract even more great people. As the saying goes, birds of a feather flock together, highly talented people want to work with other similarly talented individuals so it’s important that SEMrush is perceived as a great place to work.
Major risks
Competition. The industry is intensely competitive and there are hundreds of tools that online marketers can choose from. The biggest advantage of Semrush is their ability to constantly innovate and add valuable products for their customers. So far, they have executed extremely well and have built a great brand in the SEO space.
Economic slowdown. A prolonged slowdown in economic activity, such as that experienced in March 2020 could have a negative impact on their sales. While digital marketing is growing its market share compared to traditional advertising, a general decline in advertising activity would impact SEMrush as well.
https://www.venturecapitaljournal.com/vc-backed-semrush-raises-140m-for-ipo/#:~:text=Boston-based%20Semrush%2C%20an%20online,shares%20at%20%2414%20per%20share.
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001831840/5447dee4-f929-4c24-9606-c3e85de2ac82.pdf
https://hackernoon.com/founder-interviews-oleg-shchegolev-of-semrush-d3a6456825
https://www.marketscreener.com/quote/stock/SEMRUSH-HOLDINGS-INC-120780866/financials/
https://seo.co/market-size/
https://www.emarketer.com/content/amazon-s-share-of-us-digital-ad-market-surpassed-10-2020
https://www.emarketer.com/content/global-digital-ad-spending-update-q2-2020
https://gaps.com/seo-industry/
https://www.g2.com/products/semrush/reviews
https://www.capterra.com/p/151962/SEMrush/