Q4 2023 SEMrush Holdings Inc Earnings Call

Participants

Brinlea Johnson; IR; SEMrush Holdings Inc

Oleg Shchegolev; President, Chief Executive Officer, Co-Founder, Executive Director; SEMrush Holdings Inc

Eugene Levin; President; SEMrush Holdings Inc

Brian Mulroy; Chief Financial Officer; SEMrush Holdings Inc

Presentation

Operator

Hello, and welcome to the Semrush fourth-quarter and full-year 2023 earnings call. My name is Alex, and I'll be coordinating the call today. (Operator Instructions)
I'll now hand it over to your host, Brinlea Johnson of Investor Relations. Please go ahead.

Brinlea Johnson

Good morning, and welcome to the Semrush Holdings fourth-quarter and full-year 2023 conference call. We'll be discussing the results announced in our press release issued after market close on Monday, March 4. With me on the call is our CEO, Oleg Shchegolev; our President, Eugene Levin; and our CFO, Brian Mulroy.
Today's call will contain forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to statements concerning our expected future business and financial performance and financial condition, expected growth, adoption and demand for our existing and any new products and features our app center expansion industry and market trends. Our competitive position market opportunity does marketing activities, the sufficiency of our staffing levels. Our guidance for the first quarter of 2024 and the full year 2024 statements about future pricing and operating results, including margin improvements, revenue growth and profitability. But looking statements are statements other than statements of fact can be identified by words such as expect, anticipate, intend, plan, believe, seek or will these statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements when looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. For a discussion of the risks and important factors that could cause our actual results, please refer to our most recent quarterly report on Form 10 Q and our annual report on Form 10 K filed with the Securities and Exchange Commission as well as other filings with the SEC.
During the course of today's call, we refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued yesterday after market close, which can be found at investors dot suntrust.com. And I wanted to highlight that starting with our guidance for the first quarter and full year 2024, we are updating our guidance measures and non-GAAP definition, we'll no longer provide guidance for the non-GAAP net income, and that will guide to both non-GAAP operating margin and free cash flow margin.
As for the as presented in our earnings release. We are also updating our definition of non-GAAP income from operations. How much GAAP operating margin is calculated to exclude amortization of acquired intangible assets, acquisition-related costs, restructuring costs and other one-time expenses outside the ordinary course of business, for example, our extra costs incurred primarily in 2022.
In addition to the current exclusion of stock-based compensation, is it clear all currently and previously reported historical actual Perfect. Our prior definition, which only excludes stock-based compensation, the updated definitions and reflected when we report our first quarter 2024 financial with our year end earnings release. We are also providing a reconciliation from the old definition to the new definition for the periods presented in anticipation of this change. We are now providing guidance. Using this updated definition. We believe this update will allow investors to better understand our financial performance, better align with the measures used internally by management in operating our business and permit a better evaluation of the efficacy of the methodology and information used by management to evaluate and measure our performance.
And with that, let me turn it over to Oleg.

Oleg Shchegolev

Thank you and good morning to everyone on the call. I'm pleased with our team's ability to execute in 2023. We succeeded in accelerating our growth, increasing our pipeline of new customers and expanding our platform as we continue to drive towards sustained profitability.
In the fourth quarter, we delivered revenue of $83.4 million, up 21% year over year. And over the full year, revenue grew 21% to $307.7 million. Importantly, we also generated strong profitability exceeding our guidance. We reported non-GAAP net income of $11.4 million in the fourth quarter, while closing out the full year of $16.3 million in non-GAAP net income, as demonstrated by our 2024 guidance our business is focused on driving strong sustainable growth, expanding profitability and generating free cash flow.
Before handing it over to Eugene and Brian to talk about the quarter in more detail I would like to touch on a few highlights about our synergies to continue to scale the business and capture our significant market opportunities. On our last call, I talked about our strong competitive positioning as the platform of choice for businesses to improve their online visibility.
I'll also discuss our differentiation in the market to our unique data assets and positive industry dynamics we firmly believe our success and ability to grow is more about fosters what is in our control and less of our content. We have a significant greenfield market opportunity ahead of us, and we continue to focus on educating our customers about the value of our unique data assets and diverse portfolio of products. Put simply businesses need to be seen online and in places where consumers are, we sell to customers in a number of ways. We help them organize the website in order to run highly for search engines to find them and to be proven in the conversations in social media, we assist them with the Cumulus digits to achieve higher ratings. Also, we help businesses optimize their location specific elements about the site so that they shop in the locality, but it also needs to gather intelligence about consumers and competitors. And our platform provides them with those capabilities to illustrate our solutions considered how a potential customer's journey might look, a customer would come to Cirrus initially seeking to innovate the digital business with higher rankings on search engines, higher level of customer engagement and more visibility across several marketing channels. We will start by researching the competitors' ads and selected Canvas to figure out which ones have the best ROI potential. We're able to then use our ads launch assistant to run campaigns using those cables. As we begin to understand the limitations of relying only on paid media, we would then use our platform to make the physical store more easily discoverable on Google Maps, their subscription so much local would automate their online routine updates in over 70 directives. And whenever possible, we would check the rankings in maps for cameras. Of course, we would also want to use our social tool and leverage our AI features to this point to reduce quickly, while at the same time generating content grows high value keywords included as a result of the engagement with our tools we could choose to share variable data give us which we could then use to cover increase the accuracy and predictability of our organization. Co2 is a hypothetical example, and to demonstrate the breadth of our platform, we would also like to want to use our tools to find these influencers reach Vacon collaborative to better enhance their brand visibility and credibility with the help of a social content generator. We could then treat reuse and reuse in seconds for Instagram and TikTok to capitalize on our organic promotion opportunities. It's hypothetical customer journey provides us with a growing set of businesses of all sizes, investing more time, effort and resources into indicating there may be richer reaches a trend. Tim Brazil continued to benefit future. We believe businesses that are best able to analyze plan and execute via digital marketing activities will have the potential for exceptional results. And as you can see, our platform provides all the tools in one place where they can do this. We have also created a network effect as we share highly actionable insights we have from our customers and may enrich our share of a proprietary data with us. This dynamic makes our business stronger and even more predictive, enabling a flywheel effect was stronger and more predictive. Our algorithms are received there. Our customers are these fuels, new Ergo. Looking ahead to 2024, we are focused on continuing to grow our core business, upselling and cross-selling our offerings, expanding our platform and exploring new acquisition opportunities.
In conclusion, I'm very optimistic about 2024, and I'm excited about our strong competitive market position and ability to capitalize on future growth opportunities.
I will now turn the call over to Eugene and Brian to discuss the results of the quarter and our outlook in more detail.

Eugene Levin

Thank you all. We delivered another solid quarter and continued to focus on our three main growth pillars that set us up for long-term durable growth. And we're making progress in each front to review, we are focused on one, increasing new user growth with our existing offering, two, driving expansion revenue by delivering higher value to our customers by cross-selling and upselling within our base and three, adding new products to our portfolio.
Let me provide updates for this quarter. First, we continued increasing new user growth. We have nearly 108,000 seat customers today, but there are tens of millions of marketers and small business owners that we believe will benefit from our platform and product offerings.
In Q4, we achieved solid net new customer additions and registrations was a more efficient sales and marketing engine than we've seen in prior QUARTER.
Looking at this further, organic marketing is one of many channels companies leverage to enhance their online presence. It has multiple benefits and our tools provide the data and technology that allows customers to fine-tune, analyze and measure the impact of various organic launches and initiatives. Over the past year, we have seen some considerable improvements in optimizing our sales and marketing spend were we pivoted towards our organic efforts to boost our own online presence, much of our success can be attributed to leveraging our own Somera's tools and following recommendations to deliver very successful results. While every marketing channel has its place in the effective marketing and strategy, organic marketing can be more cost effective in the long run. And importantly, it is trustworthy. You are more likely to trust an organic search result for relevance and quality than a paid ad that anyone can please, based on your search, organic marketing is like owning a house where you're building acquisitions, whereas the media can be like renting a house where you get to leave it there. But when you're done paying, we don't own any real estate. As already highlighted, Sam brushes tools are focused on boosting company's organic presence. In contrast to the focus that companies like Google and Facebook have on feedback. This is one of Sandra's key competitive differentiators and something that we believe provides us with a clear path into EcoSys, the efficiency with which we generated our results this quarter demonstrate the power of our organic strategy.
Turning to the second growth pillar, we have a strategy to cross-sell and upsell our customers in an effort to expand our average ARR per customer, which as reported today is over $3,100. Our cross-sell focus is on search engine optimization, search engine advertising, social media, local marketing, digital, PR, content, marketing and competitive intelligence. These are our core competencies where we believe Cembra clearly differentiates itself in the marketplace and we saw continued success in Q4.
Before we talk about our third growth pillar, which is adding new products to our portfolio, I'd like to take a few moments to discuss the segment of our customer base that we believe represents a significant growth engine for us, companies that fall into the broad segment, our businesses that tend to have multiple marketing team members that are each sand brush users, and they generally have significantly higher RPU for average revenue per user than our average customer. While this is a reasonably broad description, the point I'm trying to demonstrate is that they are different from our solo for newer and small business customers. What's exciting about this more sophisticated accounts is that they add additional products to their subscriptions at a healthier clip, then our average customer. So their RPU grows rapidly as they leverage more Cembra tools to achieve their business goals and to their net revenue. Retention is meaningfully higher than our average this cohort of accounts already comprises a meaningful double digit percentage of our ARR, and we expect that this will grow significantly as time goes on. We believe that this high-level metrics covering RPO growth and net revenue retention demonstrate that the adoption of our products within this more sophisticated accounts points to a bright future for this customer segment and will help support strong sustainable growth for Sam brush. Overall, we also believe that the relative strength of this customer set gives us increased confidence that our new enterprise product will be met with a strong adoption, further supporting our goal of driving strong durable growth on both top line and bottom.
This leads me to our third growth pillar, expanding our product portfolio during 2023, we launched numerous AI apps and tools and added multiple apps to the app center. We officially launched an enterprise SCO product into the market, although we are in early stages, and this will take time to be a material contributor to our overall revenue. The early signs we are seeing are very encouraged. Our enterprise offering has the opportunity to create a meaningful inflection of our RPU as this product carries RPUs that tend to be down to 15 times our client EverQ. We believe our early adopter customers are experiencing significant returns on their investments after migrating to the platform, features like automated workflows, corporate level access controls, customizable dashboards and build in professional services, our helping our customers drive meaningful improvements in efficiency while also delivering significant time and cost savings to support this anticipated growth in our enterprise products, we've spent the last several months analyzing our go-to-market infrastructure and sales motion and making the requisite adjust. As a result of this very detailed exercise, we reallocated the headcount of several SMB focused sales teams into more enterprise facing. We believe this will result in Optimiz LTV to cap ratio as we leverage our product lab, low-touch sales strategy, downmarket, while we shift more of our investment focus to the high value enterprise area.
In summary, I'm very pleased with our success, driving new customer growth, our success, upselling and cross-selling, and our ability to expand our product portfolio and move upmarket.
I will now turn the call over to Brian, who will provide a more detailed discussion of our financial performance and guidance, though I had Brian.

Brian Mulroy

Thanks, Eugene. Before I discuss our results in more detail, I'd like to remind you what I highlighted last quarter on my plan for the finance organization. As I sit here one quarter later, my confidence has only gone stronger in our ability to drive durable growth over the next several years as we further penetrate our served markets, evidenced by our recent results and guidance, I see it as an opportunity for us to do this while also making significant improvements to our profitability to bring this to fruition.
Our finance team focuses on data and metrics for decision-making throughout the organization because Sunrise has such a valuable customer dataset, we have the ability to segment our user base to understand their buying patterns, retention dynamics and interest in new products.
Among many other things you heard Eugene talk about this a moment ago and taking that example of how our corporate accounts have extremely robust characteristics for growth, retention and RPU. We rigorously analyze this data and allocate our investments in sales, marketing and product. Accordingly, we expect the outcome of doing this on a regular basis to result in a disciplined approach that enables us to capitalize on our biggest opportunities while simultaneously driving operating efficiencies. We expect this ROI framework will apply to our capital allocation decisions, whether that is for internal projects, external M&A or the optimization of our capital structure with that I'd like to turn to our fourth quarter results in more detail. We had a very strong quarter across the board, and our revenue in the fourth quarter was $83.4 million, growing 21% year over year. For the full year, revenue increased 21% to $307.7 million. Growth was driven by new customer additions and expansion of our average revenue per customer as we continue to execute on our cross-sell and upsell strategy.
Our dollar-based net revenue retention for the fourth quarter was 107%. We expect our dollar-based net revenue retention to trough within the next quarter or two as we increase adoption of our full portfolio of products, tools and add-ons within our installed base. Annual recurring revenue for the quarter grew 23% to $337.1 million compared to a year ago. We reported significant improvement in our operating margin, which is up approximately 2,500 basis points year over year. This improvement is a result of a number of factors. First, our gross margin improved 100 basis points year over year to 83.6%. Gross margin benefited from higher revenue and our continued ability to gain scale and leverage from our efficiently engineered platform. We continue to expect strong gross margins above 80% in the near term and viewed the way in which our stack is engineered as a key competitive differentiator our healthy gross margins also provides us the flexibility to invest below the gross profit line, which gives us a structural advantage in the market.
Second, we continue to execute on our commitment to drive efficiencies, carefully manage expenses and further expand our profitability.
In the short time I've been here, I have implemented policies and programs to objectively examine spending initiatives, and I believe there are additional opportunities to drive durable growth while also expanding our profit margins through focus and discipline.
During 2023 across the Company, we carefully manage expenses and maintained our head count.
Moving down the income statement during the fourth quarter, we had positive non-GAAP net income of $11.4 million and $16.3 million for the full year, both surpassing the high end of our guidance range. The strong non-GAAP net income relative to our guidance was a result of the flow-through of our operating performance and the accounting treatment for gains on investments we made in 2021 and 2022.
Turning to the balance sheet. We ended the quarter with cash and cash equivalents and short-term investments of $238.6 million, up from to $30.1 million in the previous quarter. Our cash flow from operations in the fourth quarter was $11.6 million.
Turning to guidance, we're very confident in the underlying trend in the business and the capabilities of our team that continue on the path to deliver strong growth and profitability. Our business is very strong and we are encouraged not only by what we've accomplished so far, but we are optimistic about what we see as the opportunities in front of us. Looking at the first quarter, we were off to a strong start with respect to net customer additions as we're seeing a similar seasonal pattern to previous years for customers that paused their subscriptions in the fourth quarter returned to the platform in Q1, a trend we attribute to the holidays. As mentioned in the forward-looking statements, we are now guiding to revenue, non-GAAP operating margin and free cash flow margin. For the first quarter of 2024, we expect revenue in the range of $84.7 million to $85.3 million, which translates into a growth of approximately 20% because we are already two months into the first quarter. This range is a bit narrower than what we expect to normally provide during the remainder of the year, we expect a first quarter non-GAAP operating margin to be approximately 8%. For the full year 2024. We expect revenue in the range of $364 million to $368 million, which translates into growth of 18% to 20%. We expect full year 2024 non-GAAP operating margins to be between 10% and 11% and full year free cash flow margins to be in the range of 7% to 8%.
To help you with your modeling the difference between our non-GAAP operating margin and our free cash flow margin is a result of interest income offset by capital expenditures and cash taxes. Finally, our guidance assumes a euro exchange rate of 1.08. As a reminder, approximately 30% of our expenses are denominated in euros.
In closing, we are confident in our ability to grow and scale our business and remain committed to a disciplined and a balanced approach to spending in 2024, we are focused on driving improved efficiency and profitability, even while we invest in future growth opportunities that we expect will deliver long-term value to our shareholders.
With that, we are happy to take any of your questions. Operator, please open the line for questions and keep.

Question and Answer Session

Operator

(Operator Instructions) Surinder Thind, Jefferies.

Oleg Shchegolev

And thank you for this is just starting with the margin part of the story here.

Brian Mulroy

Can you maybe walk us through the thought process of how you're balancing the growth with the profitability? It looks like, Mark, the margin trajectory appears to be well ahead of expectations of, I think where everybody was just any color commentary there.
Yes, good morning. Thanks for the question. I have looked at the trade-off between growth and profitability. Is something that we think about every day. And it's a really extremely important question and something we need to get right out. So our goal at SAM rushes to achieve what we call it efficient frontier. So essentially, we're going to continue to invest in the business so long as that investment drives results and growth. But we don't want to spend past that where the increment of return doesn't justify that incremental investment. And for 23, 24 and for the foreseeable future, we do see opportunities to invest in the business and drive durable growth new Oleg Eugene mentioned this in the prepared remarks where we have an extensive market opportunity and we've been able to deliver a really good durable growth over the last few quarters, we're uniquely positioned to capitalize on that opportunity. We have 108,000 paying customers over 1 million for users. We're expanding our portfolio and that's creating a really good compelling cross-sell and upsell growth sector for us. So as we said, our business is very strong. We're encouraged by what we've seen and we're really optimistic about what the business has in store for us going forward. So I say this just to say, look, growth is our priority. We're going to be investing in the business and efficiency and profitability is really important to us on this framework we outlined in 23, and we're continuing to operate with that framework. In 24. We're after efficient growth. So we committed to sustained profitability. The last year, we originally guided 0 to 3 million of non-GAAP net income and ended up landing the year at 16.3, which was a 40 plus million increase in net income. So we're really pleased to see the results. We're going to continue with that framework in mind being disciplined and balanced and making sure that we have the appropriate trade-off between investing in the business driving growth, but also doing that in an efficient way.
That's helpful. And then in terms of just the new enterprise platform, getting it to general availability and any insights at this point on from the initial set of users? And then how are you thinking about on the given it's an enterprise sale customer acquisition costs in and maybe payback, sorry for something like that.
But thank you for the questions.

Eugene Levin

So early traction is very good.
And we are really working hard every day to scale on our ability to onboard customers and delight them on. But first batch of customers that we brought into the product, they're all very happy. A lot of them see great ROI, especially some of the early customers can use our link recommender workflows. So there will see already seen good results in terms of traffic improvements. So yes, we expect general availability in first half of this year working really hard a lot of very positive traction in terms of sales motion. And really, we just on train several sales reps. We made a couple of new hires, know people who have experience selling up market, but also, you know, when you when you go to, let's say, $50,000 per home per year range, you don't need an entirely new sales team. So we already have a lot of A. players, and we just reallocated resources effectively from our SMB selling team to our enterprise selling team will build on several new workflows in our CRM systems, like, you know, adding a lot of CPQ components and other standard components for enterprise selling. But it's really just our normal course of business. So everything is relatively straightforward and we're seeing very good ROI. If anything, we actually seeing much better ROI.

Brian Mulroy

And when we use the enterprise set of sales reps versus what you've seen historically with SMB sales reps and even SMB segment, where we're making tons of money on through our sales teams and an enterprise, we're seeing efficiencies even better, better you have noticed that on the financial side we are, but just a few things to add on the financial side, we're really excited about the opportunity that enterprise provides for us that Eugene and Oleg mentioned that it presents in RPU inflection for us where the price one is about 10 to 15 times what our average ARR is per paying customer and of course, the customer acquisition costs are going to be higher, but we're preparing for that. And I'd say two things. One is we're not going to see a significant change to our expense to revenue ratio on sales. As Eugene mentioned, we're driving efficiencies in our S&B selling motion and able to reinvest it back into enterprise. And we've already started making investments and building a foundation for enterprise focus on three main things. First is bringing people and talent into the organization that are able to build relationships with senior level executives and move on from a transaction to more of a partnership with the customers we serve. We're building out a deal that's going to have a deal that's already started to build and navigate through the negotiation and procurement dynamics that come with an enterprise deal. And of course, we're building out an enterprise selling motion and process within our CRM system that facilitates the process from demand generation through the negotiation and close of the deal. So yes, enterprises, different the cost structure is different, but we have the foundation in place and we're now starting to scale that up to be able to prepare for future growth.
Well, I think I appreciate the additional color.

Operator

Thank you.
Our next question comes from Scott Berg of Needham & Co. billings is now open. Please go ahead.

Brian Mulroy

Hi, everyone.
Congrats on the quarter. This is Ron really on for Scott. So customer additions were lighter than expected, but net new ARR added in the quarter versus that customer count was quite high as a result of signing larger customers this quarter. Are you seeing better cross-sell activity to existing customers to drive that net new ARR added.
Thank you.
Yes, hey, Rob, thanks for the question. Really good questions. So I think we should step back and just talk about our growth vectors. And then I'll specifically get to the fourth quarter. So we've been very focused on three main growth vectors. One is to continue to expand our net new adds. We're at nearly 108,000 paying customers. And we believe we're in the early innings of adoption. There's millions of marketers and business owners out there who will gain value from our platform. And we're going to continue on that path in executing that strategy and extending out of the number of net new adds in 2023, we did add 12,000 net new paying customers. So we're really pleased with that progress.
The second growth vector is around cross-selling and upselling. We do have a very extensive platform and portfolio of products, and we continued to invest in that.
And to your point, yes, that is creating an inflection point in our pool. We're able to increase our cross-sell and expansion and then drive ARR up. And finally, we have very strong gross profitability. Our gross margins at 83.6 in Q4, and that's up 100 basis points. And it creates a structural advantage for us to be able to reinvest back into the business to enable strong partnerships and develop products that continue on that trajectory for the fourth quarter.
Specifically Of note, one thing, it is a seasonally low quarter for us. So because we have so many customers, nearly 108,000 paying and we extend from solar panels all the way up to Fortune 500. There is a cohort of smaller customers that tend to pause their subscriptions during the holidays and then they returned in the first quarter. We're actually seeing very good traction in January and February and seeing that trend play out. So it's one quarter and something we just attribute to a seasonality dynamic.
Got it.
That's helpful color.
And then Oleg, you mentioned acquisitions in 2024.
How should we think about that opportunity here?
Small tuck-ins? Are you looking to execute on something more strategic?
Thanks.
Our auditor of the group, are you paying a lot of attention to strategic visions. And I would say we will be focused more on.
Yes, sales related to MA, our digital, just to PR and content marketing of course, I will give more attention to all these opportunities, what we have in front of us.
And financially, we're well positioned to engage in M&A. So we have 200 nearly 250 on the balance sheet, we're projecting 7% to 8% free cash flow margin in 24 and starting to see private valuations get much more in line so our appetite for M&A is something that will occur. We'll keep everybody updated, but for sure something we'll look at in 2024.
Appreciate the color, and congrats, guys.

Operator

Thank you.
Our next question comes from Adam Hodgkinson of Goldman Sachs. Your line is now open. Please go ahead.

Brian Mulroy

Great. Thanks for taking the questions. How would you characterize what the competitive environment looks for you. It looks like for you in the enterprise for those businesses that aren't using some rush today in the multiuser category, what are they typically doing an online visibility? And then and how does your view on that inform the enterprise sales motion that you're going after?
I think you have to talk about the Company. I think if you talk about competitive environments, a look in our core business, we don't see any kind of significant changes from our competitors and at the same time, ARGUS Enterprise. So we are very optimistic about what further could you launch?
We should know very good traction and we see very positive feedback from our customers. And it is a little bit hard to talk about our competitors here or we can talk about it just from point of view of our customers. And once again, we received very positive feedback and we don't see any kind of significant activity from all from our customers, which is like a greenfield opportunity. And we built a very a very different solution if we compare to other players, but still but we have a route to just to add a couple of points.
You know, we already have 5,000 clients who are large corporations and they are perfect targets for us to sell our upmarket products and those customers don't really use anything else, usually even some of them do. But most of those deals, like Alex said, there are greenfield deals where you're not really competing with anyone on. And in general, even when deals are competitive, we see very good win rates. So and I think that's market dynamics of that. It's very favorable for leading brands like Cembra of where our product is so much better that there is a lot of greenfield opportunity for us and existing user base, but also our even when we have go head to head and other, let's say, enterprise SEO players, our product portfolio is very, very strong in terms of adoption rates for other products. There's definitely going to be a big factor in our product portfolio that we bring onboard upmarket. So the first candidates for enterprise level products would be those categories where we already have a strong traction, which is of, for example, competitive intelligence or our local markets products where our digital PCR products.
So on the Rob feel again, there's quite a lot of traction already across the board and those will be good of products for us to add to the portfolio of enterprise products.
Okay, great. That's really helpful. And then what are your updated thoughts on free-to-paid conversion and any changes in the way you're approaching free customers either through and product additions that you're making are in platform marketing that's giving you a little bit more visibility into what the opportunity there looks like, Adam, I can take that as the way we think about free users, and we're really pleased to see it grew 30%. So we're now over 1 million. We think about free users in three ways. First is we're training the next generation of marketers. So we're in over 60 universities as a core part of the curriculum and investing in that next generation and ensure that we can sustain durable growth when that next generation comes into the workforce and looks the same rush to be able to facilitate and add value to the work they're doing every day. We also use it to test products. So we often put free products into the marketplace and we get a lot of free user adoption. And then over time, as we get traction and we get feedback and we fine tune that technology, we monetize it and we did that with the social media platform that we launched a while ago and then monetize it in the third quarter. So you'll often see products being pushed in expansion of our free user base and then had them coming back out when we convert them to paid.
And then finally, there are a cohort of users who are small customers who are very early in their journey and can leverage the free version to start training their market and marketing capabilities and ultimately converting into a paying customer in the future. So we don't look at free users as a near term metric to convert directly into pay and customer. It's more of a longer-term source of developing the foundation and building our business in the long run.
Okay, really helpful color.
Thanks.
A lot, Brian.

Operator

Thank you. Our next question is from Mike Clark, Jeffreys of Piper Sandler. Your line is now open. Please go ahead.
I have is when channel for Clark. Thanks for the question. I want to go back to the pricing. You announced back in Q3, I believe of 8% to new customers. Have you tested the five existing and how much of it is factored into guidance.

Brian Mulroy

I can start with the guidance and then Eugene can add some color on pricing in general. But yes, we did do in April that an 8% price increase in the third quarter. So we had about a half a year of the revenue. We did mention at that time that it was about three to $4 million of incremental ARR. So half of that in 23 and the other half coming through in 24, we're really pleased with the results we saw there and Eugene, you should talk through more on our pricing. We have very strong pricing asset and something that we're looking at all the time. But for now in our guidance, we've of course baked in the impact from the pricing changes that we made in 2023?
Yes.
So that was part of the question about increasing prices for existing customers. So we did that as well, but for a very, very small cohort of existing customers and of when you do those kind of pricing changes, we do of the different scenarios and Realogy was much better than we expected. So I think that's a really good proof that our product provides so much value that people are willing to buy it at the higher prices and of course, we use this information as we think about the future. I think the real question is when exactly we do, you know, more changes on. But even right now, we are ready, optimizing monetization and several of our add-on products. For example, social media product prices have changed recently, and we will keep doing of those changes when when it makes sense. We're also doing big pricing research for core plans to kind of finalize our thoughts about price elasticity and willingness to pay. And again, when the time is right, we'll do more, but there's unfortunately nothing to report right now, but we're very, very optimistic about our ability to improve monetization.
Great.

Operator

Thank you. And I guess I saw that retention dipped down a bit more of this quarter, it was pricing the main factor in that and I guess two months into Q1, what are you seeing so far? And what are you looking for in terms of a sign of a trough and recovery?
Thank you.

Brian Mulroy

It's great question. Our NRR net retention rate is very strong, and we're really pleased to see the traction we're making on retaining customers, renewing them and of course, expanding them as they adopt more and more of our expanding portfolio.
The net retention rate metric is actually a bit of a lagging indicator. So we have seen ARR and revenue reaccelerate. We did deliver 23% growth on ARR in 20% and 21% growth, respectively in Q3 and Q4. For revenue growth and our lags behind about two to three quarters just because it's measuring over a 24 month period. So we'll see that trough in the next quarter or so and then as we continue to execute on our strategy to cross-sell and upsell, which is a very important and successful growth vector for us and then move up market and start to see the advantage of our 10 to 15 times average RPU on enterprise. We'll start to see that flow through that metric.

Operator

Okay, great.
Appreciate it, frankly.
Our next question comes from Elizabeth Colson of Morgan Stanley. Your line is now open. Please go ahead.

Brian Mulroy

Great.

Brinlea Johnson

Thank you very much. Are there on a macro quickly? Any sort of changes did you see any changes in Q4 as it relates to Q3 and any initial observations as we head into 2024? And also, if there's any differences you're seeing between smaller or larger customers. I know you're kind of moving up market with that opportunity, but just if there was any sort of differences to call out between those two customer cohorts that would be very helpful. Thank you.
And just a question really you mentioned seasonality. It seems with a what we ship every year and probably this year it was a little bit stronger at the same time, our third quarter looks very strong. And if you think about environments, a very stable is good. Demand for all our products are for our core products and for new things which we launched last year and even for now for things like a revolutionary features and content marketing and so on, it's a good demand, I would say, environment is stable and welcome back.

Brian Mulroy

Elizabeth, just on the question on the segmentation, as Eugene mentioned earlier, that we do have a cohort of more sophisticated enterprise accounts that are growing faster they do adopt our expanding portfolio at a faster clip. The retention rate and expansion rates are higher. We are going to share a bit more about that and the stability it provides for the business and the ability to upsell with our enterprise platform. We'll talk more about that in the next couple of quarters.
Great.

Brinlea Johnson

Thank you. And then just as a follow-up your tool, we are able to drive a lot of efficiency for customers and their sales and marketing spend. You mentioned also using similar tools internally. So just hoping to double click to hear about how you are integrating your old own tools, particularly some of the AI initiatives into your business and what types of improvement you're seeing within sales, marketing and where that could go? Thank you.

Eugene Levin

You are also using a lot of our own products. You know, it's really for us almost the benchmark.
You know, our products need to be so good that our own teams would use had been our teams are very, very picky and they can buy anything. And most of the time they they choose some rational, almost everything they do. But I do sort of like said, double-click on this particular question, Al, once a AI improved in terms of content creation, we are very, very quickly decided to scale up our content production operation, and we're not just producing more content now, but we are also making content of a higher quality on both in terms of how it trends but and in terms of how people read it and engage with it. And so really just different volumes of content production, different quality and the tools that we use, of course, we use, for example, our organic and keyword research to understand topics that are, you know, relevant for our audience, but maybe not covered yet through all content on and then of course, we use our content pricing tools such as writing assistant content shake to really ARM, put our content production on steroids and just ship a lot of great content, very efficiently and we also, of course, use our products and especially competitive intelligence defined audience overlaps to improve our affiliate marketing partnerships. We use all the same tools to identify good digital asset acquisition. So sometimes we buy content instead of just building ourselves. So on a tons and tons of applications, of course, our social media teams use our social media posts are of course, our influencer marketing team uses our influencer marketing tools. Our PRs using the PRC was using our PR tools. But that's like I said that that's pretty much given, right, because Mike said, one of the success criteria for us in products in terms of how we measure quality of our products is that our own teams use.
Great.

Brinlea Johnson

Thank you.

Operator

Thank you.
Our next question.
Our final question for today comes from Mark Murphy of JPMorgan. Your line is now open. Please go ahead.

Brian Mulroy

Thanks for taking the question.

Oleg Shchegolev

This is already on for Mark Murphy on you guys talked about the kind of shift of resources from the SMB up to a number of markets. I think that makes a lot of sense that you guys expect any headwinds as you guys are kind of shifting those resources away from the SMB as we kind of get those fire zone and the op margin?
Thanks, Al.

Eugene Levin

Thank you for the question. So no, we actually see both sides of the market being great.
It's more of a, you know, just number of customers that we already have that are large enterprises reached a certain point where we just couldn't ignore that. Are you know, when you have thousands of customers who come to you on the regular basis and they say no, I'm willing to pay more money, but you have to build this. And this and this for me, as volume, those conversations increases, you know, we started to realize how big is the opportunity there doesn’t mean we’re Yes, I'm happy with what we see on SMB front. And on SMB front, we're adding a lot of great products, especially with our recent focus on AI capabilities. We're seeing a lot of traction and all those products. And we've recently launched monetization of our social media tools, which is doing great. We have very good traction with our local marketing products with a lot of SMBs using that on a regular basis, pretty much daily.
So yes, I don't I don't think there is any kind of headwinds. We're very excited about both sides of the market.

Brian Mulroy

At the end of the day, small companies need more traction and big companies need more traffic, and we're there to help And one thing I'd add just building on Elizabeth's question is Elizabeth was asking about our use of AI. That's a big contributor to the efficiencies we're seeing in the business. We're now automating over 40% of the customer interactions and the use and continued expansion of that is giving us a lot more efficiency on the SMB side and giving us the capability to be able to reinvest that into enterprises just while we're saying our EDR for sales won't expand overall despite the investments.
Great.

Oleg Shchegolev

That's very helpful.

Operator

Thank you. And at this time, we have no further questions. So I'll hand back to Alex for any further remarks.

Oleg Shchegolev

Thank you for your support of.
We are now very pleased with our results and our execution has been a great benefit and we are very optimistic about our future.
Once again, I thank you all for your support and Kip and look forward to keep you up updates on our progress.

Operator

Thank you for joining today's call. You may now disconnect your lines.
No, no, no.