10-Q: Semrush Reports Q2 Loss Amid Rising Costs, Flat Customer Growth

Semrush Holdings, Inc. reported a net loss for the second quarter and first half of 2025, despite strong revenue growth, driven by increased operating expenses and a slight decline in customer retention.

Summary

• Revenue for the three months ended June 30, 2025, increased by 20% to $108.9 million, up from $91.0 million in the prior year period.
• Revenue for the six months ended June 30, 2025, increased by 21% to $213.9 million, up from $176.8 million in the prior year period.
• The company reported a net loss attributable to Semrush Holdings, Inc. of $6.6 million for the three months ended June 30, 2025, compared to a net income of $1.7 million in the same period last year.
• For the six months ended June 30, 2025, the net loss attributable to Semrush Holdings, Inc. was $5.7 million, a decline from a net income of $3.8 million in the prior year period.
• Gross profit increased by 16% to $87.8 million for the three months ended June 30, 2025, but gross margin decreased to 81% from 84% in the prior year.
• Operating expenses surged by 27% to $92.1 million for the quarter, primarily due to increases in sales and marketing (29%), research and development (23%), and general and administrative (27%) costs.
• Annual Recurring Revenue (ARR) grew to $435.3 million as of June 30, 2025, from $377.7 million as of June 30, 2024.
• The number of paying customers remained flat year-over-year at approximately 116,000 as of June 30, 2025, with a decrease of approximately 2,000 customers during the quarter.
• Dollar-based net revenue retention rate was approximately 105% as of June 30, 2025, a slight decrease from 106% as of December 31, 2024.
• ARR per paying customer increased to $3,756 as of June 30, 2025, from $3,253 as of June 30, 2024.
• Free cash flow for the six months ended June 30, 2025, decreased to $14.9 million from $19.6 million in the prior year period, with free cash flow margin declining to 7.0% from 11.1%.
• The company authorized a share repurchase program of up to $150.0 million of its Class A common stock on July 31, 2025.

Sentiment

Score: 4

Explanation: While revenue growth and strategic investments in AI are positive, the shift to a GAAP net loss, declining gross margin, and reduced free cash flow are significant concerns. Flat customer growth and a slight dip in retention also weigh on sentiment, indicating operational challenges despite top-line expansion.

Positives

• Strong revenue growth, with a 20% increase for the quarter and 21% for the six months ended June 30, 2025, indicating continued demand for the platform.
• Annual Recurring Revenue (ARR) increased by $57.6 million year-over-year to $435.3 million, demonstrating growth in recurring subscription base.
• ARR per paying customer increased to $3,756, suggesting successful upsell and cross-sell activities with existing customers adopting premium offerings and new functionalities.
• Strategic acquisitions of Third Door Media, Exploding Topics, Ryte GmbH, and Brand 24 S.A. are expanding content, enterprise SEO, public relations, and customer base.
• Increased investment in research and development, particularly in AI-specific products and features, positions the company for future innovation and market relevance.
• Authorization of a $150.0 million share repurchase program signals management's confidence and commitment to returning value to shareholders.

Negatives

• Shift from net income to a net loss for both the three and six months ended June 30, 2025, indicating a deterioration in GAAP profitability.
• Gross margin declined to 81% from 84% for the quarter, primarily due to a 41% increase in cost of revenue driven by higher integration, data, personnel, depreciation, and hosting costs.
• Operating expenses increased significantly by 27% for the quarter, outpacing revenue growth and leading to an operating loss.
• Free cash flow decreased by 24% for the six months ended June 30, 2025, to $14.9 million, and free cash flow margin declined to 7.0% from 11.1%, indicating reduced cash generation efficiency.
• The number of paying customers remained flat year-over-year, with a decrease of approximately 2,000 customers during the quarter, primarily at the lower end of the market due to macroeconomic pressures and increased paid search costs.
• Dollar-based net revenue retention rate slightly decreased to 105% from 106%, suggesting a minor weakening in the ability to retain and expand revenue from existing customers.

Risks

• The share repurchase program may not be consummated at favorable prices or fully, could increase stock price volatility, and diminish cash reserves.
• Exposure to rapid technological change and competitive pressure from substitute products or larger companies.
• Challenges in protecting proprietary technology and managing international activities.
• Dependence on third parties and key individuals for business operations.
• Ability to maintain the security and availability of internal networks and the platform.
• Challenges in attracting new paying customers and converting free customers into paying customers.
• Ability to retain and expand sales to existing paying customers, including upgrades and add-on offerings.
• Ability to access, collect, and analyze data effectively.
• Ability to successfully expand in existing and new markets, including executing on anticipated market opportunities and growth strategies.
• Challenges in effectively managing growth and future expenses.
• Ability to continue to innovate and develop new products and features, improve data assets, and enhance technological capabilities, including AI.
• Uncertainty regarding user behavior online, including the use of traditional search engines and newer AI-driven search technologies.
• Ability to maintain, protect, and enhance the brand through informational resources, advertisements, and referrals.
• Compliance with modified or new laws and regulations, especially in new jurisdictions.
• Attraction and retention of qualified employees and key personnel.
• Related impacts from recent changes to the executive management team.
• Successful defense against litigation.
• Identifying, evaluating, executing, and integrating strategic acquisitions and related financial considerations.
• Impact of global financial, economic, and political events, including changes to trade laws, rising inflation, fluctuating interest rates, currency exchange rates, and market uncertainty and volatility.
• Foreign currency exchange risk, particularly related to expenses denominated in euros, which can negatively impact non-GAAP income from operations margin.

Future Outlook

The company anticipates increasing demand for third-party online visibility software, particularly enterprise and artificial intelligence solutions, to drive platform adoption. It plans to continue investing significantly in product development and Generative AI to enhance data assets, expand offerings, and improve technological capabilities. Management expects sales and marketing expenses to fluctuate as a percentage of revenue and general and administrative expenses to decrease as a percentage of revenue over time. The company believes its existing cash, cash equivalents, and short-term investments will be sufficient to meet operating and capital needs for at least the next 12 months. The company is assessing the impact of the recently enacted One Big Beautiful Bill Act (OBBBA) on its consolidated financial statements.

Management Comments

• We expect increasing demand for third-party online visibility software, particularly enterprise and artificial intelligence solutions, to accelerate adoption of our platform and products.
• Our recurring subscription model provides significant visibility into our future results and we believe Annual Recurring Revenue (ARR) is the best indicator of the scale of our platform and products, while mitigating fluctuations due to seasonality and contract term.
• We believe there is significant opportunity to expand within our existing customer base as customers often initially purchase our entry-level subscription.
• 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.
• We intend to continue investing in product development and Generative AI to improve our data assets, expand our products and enhance our technological capabilities.
• We believe these investments will improve customer experience, make our platform more attractive to new paying customers, and provide us with opportunities to expand sales to existing paying customers and convert free customers to paying customers.
• We believe our existing cash, cash equivalents, and short-term investments will be sufficient to meet our operating and capital needs for at least the next 12 months.

Industry Context

Semrush operates in the highly competitive and rapidly evolving online visibility management software-as-a-service (SaaS) market. The company is actively integrating AI into its platform, including Enterprise AIO and AI Toolkits, aligning with the broader industry trend of leveraging artificial intelligence to enhance digital marketing capabilities. While the company notes increasing demand for third-party online visibility software, it also acknowledges macroeconomic pressures and rising paid search costs impacting the lower end of its customer base, reflecting broader economic headwinds affecting small and medium-sized businesses' digital advertising budgets. The company's focus on enterprise solutions and AI-powered tools positions it to capitalize on the growing sophistication of digital marketing needs, but also exposes it to intense competition from larger companies and rapid technological shifts.

Comparison to Industry Standards

• Semrush's dollar-based net revenue retention rate of 105% is generally considered healthy for a SaaS company, indicating that existing customers are, on average, increasing their spending, though it slightly declined from 106% in the prior period. Top-tier SaaS companies often aim for 120% or higher, suggesting room for improvement in customer expansion.
• The company's gross margin of 81% is strong for a SaaS business, though the 3% decline from the prior year's 84% warrants attention, as it indicates rising costs of revenue, potentially from data acquisition or hosting, which could impact long-term profitability if not managed.
• The shift to a GAAP net loss and a decline in free cash flow margin (from 11.1% to 7.0%) contrasts with many mature SaaS companies that prioritize profitability and strong cash generation. This suggests Semrush is in a heavy investment phase, similar to growth-stage companies, but it deviates from the expectation of consistent profitability for a publicly traded entity of its size.
• The flat year-over-year paying customer count, coupled with a quarterly decrease of 2,000 customers, particularly at the lower end, indicates a challenge in customer acquisition or retention that is not typical for rapidly expanding SaaS platforms. Competitors like HubSpot or Salesforce, while serving different market segments, generally demonstrate consistent customer base expansion.

Management Changes

Legal Proceedings

• The company may become involved in legal proceedings or be subject to claims arising in the ordinary course of business.
• Management believes the ultimate costs to resolve any pending matter will not have a material adverse effect on its business, operating results, financial condition, or cash flows.
• Litigation can have an adverse impact due to defense and settlement costs, diversion of management resources, and other factors.

Stakeholder Impact

• Shareholders: Potential for increased share price volatility and reduced cash reserves due to the share repurchase program, alongside a net loss impacting earnings per share.
• Employees: Increased personnel costs, including higher wages and stock-based compensation, but also potential for restructuring costs and severance.
• Customers: Continued platform enhancements and new AI-powered tools aim to improve customer experience and value, but a decrease in lower-end customers suggests some are facing macroeconomic pressures or finding alternatives.
• Creditors: Repayment of acquired debt impacts cash flow, but overall liquidity remains strong with substantial cash and short-term investments.

Next Steps

• Continue investing in product development and Generative AI to enhance the platform and expand offerings.
• Focus on retaining and expanding sales to existing customers, particularly through premium offerings and Enterprise SEO/AIO solutions.
• Monitor and manage operating expenses, particularly sales and marketing, and research and development, to improve profitability.
• Assess the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements.
• Execute the authorized $150.0 million share repurchase program, subject to market conditions and management discretion.

Key Dates

Recommendation

Semrush's strong revenue growth and strategic investments in AI and acquisitions are positive long-term indicators. However, the immediate shift to a GAAP net loss, declining gross margin, and reduced free cash flow, coupled with flat customer growth and a slight dip in retention, signal near-term operational challenges. While the share repurchase program offers some support, the overall financial picture suggests a period of re-evaluation. A 'hold' recommendation allows investors to observe if the significant investments translate into improved profitability and renewed customer expansion in upcoming periods, without taking on additional risk given the current financial performance.

Keywords

SaaS, Digital Marketing, SEO, AI Optimization, Online Visibility Management, Software-as-a-Service, Marketing Technology, Enterprise SEO, Content Marketing, Paid Advertising, Social Media Management, Brand Marketing, Analytics, Customer Retention, Annual Recurring Revenue, Share Repurchase