Q1 2024 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; Chief Strategy and Corporate Development Officer; SEMrush Holdings Inc

Brian Mulroy; Chief Financial Officer; SEMrush Holdings Inc

Scott Berg; Analyst; Needham

Surinder Thind; Analyst; Jefferies

Jackson Ader; Analyst; KeyBanc Capital Markets

Adam Hotchkiss; Analyst; Goldman Sachs

Elizabeth Porter; Analyst; Morgan Stanley

Mark Murphy; Analyst; JPMorgan

Presentation

Operator

Hello, everyone, and welcome to the SEMrush Holdings first quarter 2024 results conference Call. My name is Drew, and I'll be the operator for today's call. (Operator Instructions)
With that I'll hand over to Brinlea Johnson Investor Relations. Please go ahead.

Brinlea Johnson

Good morning, and welcome to SEMrush Holdings first quarter 2024 conference call. We'll be discussing the results announced in our press release issued after market close on Monday, May 6. With me on the call is our CEO, Oleg Shchegolev; 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 existing and any products and features our expected growth of the customer base and specific customer segments, expansion of our content, check tool industry and market trends, our competitive position, market opportunities, sales and marketing activities, future spending and incremental investments.
Our guidance for the second quarter of 2024 and the full year 2024 and statements about future pricing and operating results, including margin improvement, revenue growth and profitability. Forward-looking statements are statements other than statements of fact and can be identified by words such as expect, plan, 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 as of any subsequent date. We do not undertake any duty to update these statements.
Forward-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 affect 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 our other filings with the SEC.
During the course of today's call, we refer to certain non-GAAP financial measures. There's 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.
As noted last quarter, our results for the first quarter and our forward-looking guidance uses our new non-GAAP definition, we are no longer providing guidance for non-GAAP net income and instead guiding to both non-GAAP operating margin and free cash flow margin. Definitions for these are presented in our earnings release has also updated our definition of non-GAAP income from operations on which non-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 exit costs incurred primarily in 2022. In addition to the current exclusion of stock-based compensation, the updated definitions are reflected in our first quarter 2024 financial results. All future financial statements will reflect the new definition for the current and prior periods. We are also providing a reconciliation the old definition to the new definition for the periods presented. We believe this update allows investors to better understand our financial performance, better align with 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.
Now let me turn the call over to Oleg.

Oleg Shchegolev

Thank you and good morning to everyone. In the first quarter, we generated revenue of $85.8 million, up 21% year over year, and overall growth of 21% year over year. We reported income from operations of $1.5 million, non-GAAP income from operations of $9.7 million in the first quarter. Importantly, we generated free cash flow of $12 million and a free cash flow margin of 14%. We exceeded our prior guidance and I am pleased to say we are raising our full year 2024 guidance. Our business is focused on driving strong sustainable growth while also expanding profitability and generating free cash flow.
Before handing it over to Eugene And Brian, I would like to touch on a few highlights about our strategy to continue to scale the business and capture the significant market opportunity we see ahead. We have strong competitive positioning as their platform of choice for businesses to improve their online visibility of this growing trend of businesses of all sizes, investing more time, effort and resources into enhancing their online visibility via leveraging our unique data sets to differentiate ourself in the market.
So we continue to make progress on each of our growth pillars. In the first quarter, we reported nearly 112,000 paying customers and now have over 1,125,000 active users. We believe there are millions of marketers and business owners who will benefit from our platform, and we plan to grow both our paying customers and our free equity base.
So we have an extensive, loyal install base, which spans over 160 countries across all industries and market segments from solar panels to Fortune 500 companies. We continue to deliver higher value to our customers by cross-selling and upselling within our base. And we increase our focus on moving upmarket. We expect an increase in average. Our pool reached an important today is nearing 32 hundreds are strong profitability, a continuous mode and accretive to our base, our of us to continue to invest in the business. We continue to build on our technology and customer foundation with investments designed to cover our business objectives.
Our reinvestments beverages includes launching new AI based tools like compensate and expanding into enterprise. As we highlighted last quarter, we officially have soft-launched an enterprise issue of product into the market in late October 2023, and we are pleased to announce it is now generally available. It is already being used by a select number of large-scale business customers, including one of the largest apparel companies and one of the largest market research companies. While we are still in the early stages, the initial signs are we are seeing a very encouraging. Importantly, our enterprise offering and has the opportunity to create a meaningful inflection in our pool. And this product carries our pools, which tends to be 10 to 15 times on a company average.
We believe our Illinois adopter customers are experiencing significant returns on the investments after migration to the platform, features like automated workflows, corporate-level SG&A controls, customized dashboards and building professional service network are helping our customers drive meaningful improvements in efficiency while also delivering significant time and cost savings. Since then, if I recall, we remain focused on continuing to grow our core business, upselling and cross-selling our offerings and expanding our platform.
In conclusion, I am very pleased with our start to 2020 outlook, and I'm optimistic about our ability to capitalize on future growth opportunities throughout the year.
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, Ole. We delivered another solid quarter, and I'm increasingly optimistic about our ability to deliver durable growth over the long term.
I wanted to start with the migration. Cembra is making up marks last quarter, I discussed a segment of our customer base, sophisticated accounts that we believe represents a significant growth engine for us. Companies that fall into this broad segment are businesses that tend to have multiple marketing team members that are each Cembra user and they generally have significantly higher RPU or average revenue per user than our average and meaningfully stronger net revenue retention than ours.
The relative strength of this customer set users increased confidence that our new enterprise product will be met with strong adoption, further supporting our goal of driving strong durable growth on both our top and bottom line to service this upmarket customers most effectively, we have been making several important adjustments to our go-to-market model to optimize LTV to cap ratio over the past several quarters, we are leveraging our product-led low-touch sales strategy and shifted more of our investment focus to the high value enterprise area. First, we have been realigning some of our sales investments from the SMB sector into this upmarket category to focus on converting our existing enterprise customers to use our new enterprise SCO product.
Second, we have been making investments in our quote-to-cash process to properly handle the complexities that often surround enterprise clients. These are things like establishing a deal desk and building out proper discipline around large deals, sales parts we have been making this investments for some time. And the significant presence we already have in this segment gives us confidence in our ability to successfully handle the ramp that we foresee from our enterprise product.
In addition to enterprise product initiatives, we continue to leverage AI in our platform. We continue to see excellent adoption of some of our AI products and features included in our recently released a high-powered content creation tool called content chips. Content shake is a smart pricing tool that combines AI with real live competitor insights to guide you from ideation to publishing directly to the blog, January's SEO friendly articles, Kris personalized content ideas, composes copy with AI and helps you optimize for organic traffic engagement and ranking.
We're monetizing content shake on its own, but it is important to understand that we are also monetizing AI in several different points. First, we have a features built into all of our tools and the inclusion of those features help us drive new clients acquisition and also aid in retention as they improve the customer experience.
Second, we have structured some of our product tiers to only include the AI. features in the higher price tiers. This attracts clients to the higher price tiers and contributes to overall RPU growth. And the third way we monetize AI is through separately sold subscriptions like the content shake products I just mentioned. We're also using AI to help drive efficiency in our own R&D departments. And we have recently seen success using our AI tools for all marketing efforts where we are not only producing more content, but we are also making higher quality content.
Step ranks well and drives improved engagement in summary, I'm confident in SAM, Russia's positioning in search market and our extensive product portfolio. We're seeing increased adoption of our AI products and continuing to innovate and bring new offerings to the market. Our sophisticated accounts are growing and helping to fuel our prudent and strong net retention. And I'm very excited about our ability to service our market customers and continue to expand our portfolio of offerings.
I will now turn the call over to Brian, who will provide a more detailed discussion of our financial performance and guidance. Go ahead, Brian.

Brian Mulroy

Thank you, Eugene. As Oleg and Eugene mentioned, we had a strong first quarter across the board. Our revenue was 85.8 million, growing 21% year over year 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 annual recurring revenue for the quarter grew 21% year over year to $354.2 million. There are several factors that can cause our net new ARR to fluctuate from quarter to quarter. And as a result, we believe ARR trends are best observed on an annual rather than quarterly basis. Our calculated ARR per paying user grew 9.8% year over year. And our dollar-based net revenue retention for the first quarter was 107%.
We believe our dollar-based net revenue retention has troughed and over time should begin to trend back up, particularly as our more sophisticated accounts increase as a percentage of our mix. Since these customers have higher net retention than our company average, we recognize the importance of having strong retention metrics and accordingly, have recently made some changes to our sales team's incentives that we expect could exert some gentle upward pressure on these figures.
Moving down the income statement. During the first quarter, we had positive non-GAAP operating income of $9.7 million. We reported another significant improvement to our non-GAAP operating margin of 11.3% which is up 20 basis points year over year and surpassed our guidance for the first quarter. This improvement is a result of a number of factors.
First, our gross margin improved nearly 80 basis points year over year to 82.9%. 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 view 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 while also pursuing growth. It is important to note that we have been able to increase our operating margins while making go-to-market investments for our enterprise products. We expect that we will continue to be able to make incremental investments to strengthen our position here while also driving further operating leverage in the business. And we don't expect to see any headwinds to a more traditional SMB business as we realign these resources. This is because we pursue a product-led growth strategy that leverages a self-service sign-up process and drive meaningful leverage that we're able to reinvest.
Turning to the balance sheet, we ended the quarter with cash and cash equivalents and short-term investments of $243.1 million, up $4.6 million from the previous quarter. Our cash flow from operations in the first quarter was $14.8 million.
Turning to guidance, I'm confident in the underlying trends in the business and capabilities of our team that continue to deliver strong growth and profitability. Our business is off to a strong start this year, and we are encouraged not only by what we have accomplished so far, but we are optimistic about what we see as the opportunities in front of us.
For the second quarter of 2024, we expect revenue in the range of $89.1 million to $90.1 million, which at the midpoint would represent growth of approximately 20% year over year. We expect second quarter non-GAAP operating margin to be approximately 11%. For the full year 2024, we are raising our guidance and expect revenue in a range of $366 million to $369 million, up from our prior range of $364 to $368 million, which translates to growth of 19% to 20% and represents a $1.5 million increase at the midpoint.
We expect full year 2024 non-GAAP operating margins to be between 10.5% and 11.5%, up 50 basis points from our prior guidance range and full year free cash flow margins to be approximately 8%. To help you with your modeling, the difference between our non-GAAP operating margin and our free cash flow margin is the 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 balanced approach to spending, 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 your questions. Operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Scott Berg, Needham.

Scott Berg

Hi, everyone. Next quarter here and thanks for taking my questions. I have two, I wanted to start with a macro question a little bit more high level, your ARR additions last three quarters have been and very good, especially on a year-over-year basis?
Yes, we're seeing demand for software that's predominantly sold to SMB type companies be a little bit inconsistent or softer over the last several quarters. Can you help us understand maybe something in the product or maybe something in your go to market strategy that's helping you kind of bucked this trend to deal through off some really good results last couple of quarters.

Brian Mulroy

Thank you. And you have a list of if market condition, I would say we don't see any kind of significant changes of the macro for all businesses in all segments, we believe which is still challenging. At the same time we delivered, I believe, not Lumistar results in current and current environment. And we have a right?
Yes. I mean, Scott, the key for us is no macro is impacting us just like every other company. But we're faring really well. We have a really strong market position, really good market secular market shifts that are happening. We're suspending and companies are shifting from one area to an area where we actually provide good technology and service, and we have a really strong competitive moat. And then more recently, we've been able to launch a lot of new AI products that we're monetizing in the three ways that Eugene mentioned earlier. And of course, we have our upmarket play into enterprise. So we think there's a lot of factors that are allowing us to navigate through this environment and still deliver really strong durable growth.

Scott Berg

Got it. Helpful. And then the last question for me is, Brian, you mentioned you expect in our to trough in this most recent quarter here sounds like you make some system changes on the sales side to maybe incent that cross-sell expansion a little bit more. But how do we think about the impact of your new enterprise sales motion on our overtime. Is that a sale that's still very much a land and expand opportunity, maybe buy modules or seats or are your enterprise customers having the opportunity to maybe land much larger that might not offer some expansion opportunities there?

Oleg Shchegolev

Yes, sure. Yes. So two things and are really pleased with the performance I'm pleased with the performance over many quarters, we've been able to maintain very strong, durable retention on a gross and a net basis. And in the most recent fourth quarter, we've seen a trough at 107%. And we have talked about that over the past couple of quarters that it is somewhat of a lagging metric that measures performance over 21, 24 month period. So it's doing exactly what we expected and troughing, and we expect it will tick up over time, especially as we move up market and start to take advantage of the enterprise SEO product.
The key for us is for sure, there are land-and-expand components to our enterprise play, but our early potential there is more of an expands. We've been talking about the fact that we do already have more than 5,000 enterprise accounts. They've been very loyal and have adopted a majority of our platform and are asking for more features to do their best work. We've delivered that with the launch of our new enterprise SEO products. And as you know, that commands are prove about 10 to 15 times what our average ARR per paying customer. So we do expect that to be in the early days and expand of our existing enterprise accounts and therefore, having good upward pressure on our metrics.

Scott Berg

Understood. Thank you for taking my questions.

Operator

Surinder Thind, Jefferies.

Surinder Thind

And thank you a follow on to kind of the enterprise customers in your local markets. Can you maybe talk about them behavior or potential between the US enterprise customers and maybe international opportunity?

Eugene Levin

Yes. Thank you. Thank you for the question. Also. Of course, United States is a number one market right now for us, almost half of the opportunity from our point of view at the same time. If you actually look at a list of our early customers that we acquired since soft launch in the end of October, we are at least half of them are international companies. We have very strong traction in Germany and France and other markets. And as you probably know, in general, we always had a philosophy in mind to build products for global use because even our US customers there are a lot of them are also multinational companies who sell overseas and across the globe.
So from that point of view, product is definitely built for global use. And in terms of go to market again, Cembra also has presence in over 100, three different countries for enterprise. The list is probably going to be a little bit smaller, but still we're going to ramp on our team is based on geographic presence of our customer base proportionately.
And another thing you know, world is actually not as big as it might seem because from a go-to-market point of view, what matters the most is, what languages people speak. And you know, you probably know there are only several really popular languages and will need to scale sales force with native speakers who can help us with go-to-market in those markets. But that's really pretty much all the work that needs to be done in terms of international, our international expansion.

Surinder Thind

Thank you. And then as a follow-up on just the sales structure for the enterprise opportunity here, how would you describe the changes that you've made? I mean, you've kind of talked about it on the call, but how disruptive are the changes or how significant are the changes? Because obviously, SMB sales are very different than enterprise sales. And then how much more change should we expect before we kind of get to what I would call full productivity levels?

Brian Mulroy

Yes. So good question. Just two questions there. One is what changes that we're making to SMB and how does that impact it? And then what investments in enterprise?
So on the SMB side, we've been very fortunate that we have a very low cost, frictionless selling process. We've been able to enhance that over the last couple of years with AI and automation that has allowed us to really maintain good success and efficiency with a product-led selling motion. And because of that, we've been able to efficiently grow and manage the transactions for our SMBs and mid-market customers that's given us a structural advantage.
It's allowed us to reinvest that efficiency into an enterprise upmarket play. And we have been doing that over the past couple of years. And there's three fundamental things that we're focused on. One is their systems and infrastructure that we need sort of a demand generation engine, a CRM engine that manages the lead to opportunity process in an ERP system to manage quote-to-cash. So we've been investing that and preparing for these types of transactions.
From a human resources perspective, we're investing in a deal desk to help facilitate the transactions and the negotiations with procurements and of course, on scaling up the enterprise sellers that have that skill set and experience to be able to develop relationships and strong partnerships with companies to be able to evolve from just a transaction to a value-based sale that will allow us to be successful. So we're making those investments.
We're not expecting that this will be disruptive because the SMB dynamics have been things efficiencies that have been building in the business over time, and we're able to see the impact and then adjust the investments accordingly. And for enterprise, it's new for us. So while we do have more than 5,000 enterprise accounts, this top market selling motion and the enterprise SEO product is new and we're taking into account the risks and the opportunity and setting expectations accordingly.

Operator

Scott Aelita, KeyBanc.

Jackson Ader

Hey, guys. It's Jackson Ader from KeyBanc Capital Markets. I hope you're doing well. So the first question is from Brian. I know you guys have talked about the balance of growth and profit. But just given the results of late, have shown more more upside kind of being heavily skewed toward margin, is there a could you in fact, deliver a little bit faster ARR growth if you were to make some additional investments. And I'm curious if the answer is yes, like where would you make those investments?

Brian Mulroy

Yes, this is a really, really good question. It's something that we think about every single day. We're always challenging ourselves and the leaders throughout the organization to make sure they're focusing on investments that will drive long-term growth and value for us and our shareholders and our goal here, we've talked about this our goal at some rushes to achieve in an efficient frontier. So we want to be investing in the business. So long as that investment drives incremental results, but we don't want to be overspending and getting past that efficient frontier where the incremental return doesn't justify the investment for Sam rush in 2024. We are investing quite a bit.
So we're investing on this enterprise upmarket play, as evidenced by the most recent general availability of enterprise SEO. We've been doing a lot of product investments in a I knew Gene talked about one new product content shake, a I and a number of others earlier this morning that we've monetized in a few different ways, and we're constantly focused on what that next close adjacency is for our customers that will allow us to expand our platform beyond our core competency. So we're continuing to invest. We do believe in 2024 and the foreseeable future that there is a lot of opportunity. We have a strong foundation with 112,000 paying customers over 1 million for users. And we have quite a bit of cash on the balance sheet to put to work and we'll be doing that over time.

Jackson Ader

Okay, great. And then just a quick follow-up kind of practical question. Does those 5,000 enterprise customers that you're talking about? What is can we get a sense for like for what their current RPU looks like. It looks like today today, the propensity or the know that willingness I guess, to spend 10 to 15 times more than your typical customer?

Eugene Levin

Yes, definitely, they already pay more and their expansion, their LTVs much higher than average as well. So they're not just of <unk> buying more expensive subscriptions. They're more active they're more likely to have multiple people using the product of. So they have all the signs that that correlate with PI will end.

Operator

Adam Hotchkiss, Goldman Sachs.

Adam Hotchkiss

Great. Thanks for taking the questions. I guess to start, I just wanted to touch a little bit more on the enterprise product. When it when we look at the early access page, we see stats like Ten-X, faster SEO productivity and generating a 360 degree view of customer data, which seems like a pretty ambitious message to send that prospective enterprises.
So could you just take a step back and give us a sense for what enterprise customers are asking for that the tiered offerings aren't giving them today. And then when you think about how much of that is just a function of customers wanting to run more volume through your system versus actively looking to you to co-innovate on incremental products? How would you describe the balance of that customer relationship?

Eugene Levin

Great question. So our yes, I mean, of course, you know to sell you have to sell. So of course, Ten-X is definitely achievable, but people need to put work in the you know, fine tune the product to their needs, which we help them win. But to give you just a couple of examples of why I think 10 access, maybe even conservative, we have, for example, customers who use our internal linking module. And when you do internal Lincoln for a small website, it's hard you can do it using whiteboard. You just put 20 pages and figure out how to connect them now our enterprise customers, they have millions of pages.
So there is no whiteboard in the world that is big enough to put all those pages and figure out how to connect them. So that's why we crawl their website. We understand what other websites linked to them. So we can figure out externally profile internally and profile the map of the website and figure out what pages should be connected to other pages and sort of share that authority of the page with other pages using AI and machine learning.
And if you if you think about the incremental value, it's not just being 10 times more productive, it's actually finally being able to do the work that you would not be able to do without this technology and the difference between tiered offerings like that, we sell to SMBs and enterprise that SMBs don't have websites with millions of pages. So they don't need those features while large enterprises have millions of pages. So they need additional products. And that's technically a philosophy that we have with Enterprise Products, things that we build in enterprise cloud platforms. They're purely incremental. They're not things that are just fancy versions of things you can buy with our SMB offering. There are incremental to use the same technology and data, but they solve totally different scope of problems that only big companies.

Adam Hotchkiss

Okay. Thank you, Eugene. That's incredibly helpful. And then could you just talk a little bit more about your professional services strategy here? As you move up market that seem through what we've seen that you're opting to do that and collaborate with enterprise free rent fleet freelancers, excuse me, to help enterprises is it fair to say that this will exist in the place of building out more meaningful services in house.
And then maybe, Brian, if you could just touch on what the monetization arrangements look like with those free freelancers, that would be useful.

Brian Mulroy

Yes, great question. And I probably should have answered this in the first quarter as well because, of course, our services is another another area where enterprise product is differentiated from SMB product. And as you mentioned, big companies, they need extra services. They need someone to hold their hand. They need someone to provide second opinion and guide them. And of there are two options that companies software companies have when they tackle this problem. Sometimes they decide to build a service arm inside the company, which has some benefits. But from our point of view, it's actually margin dilutive and we're a software company.
We want to run very high margin business. And the other approach is actually what we are doing to partner with industry leading experts in different areas and connect them with the pool of customers that we have. And we are starting with freelancers and experts over time. We think we could expand this to our agency clients as well and generate additional leads and demand for them by allowing them to work with our brand customers. And in terms of financial arrangements, what we do is we will productize their services and we arm provide for billing and handle transactions and then take our our small commission for facilitation and then pass other main revenue to our freelancers. So we recognize as revenue only our commissions, so it's a clean, high margin revenue for us.
Okay, really useful. Thanks so much.

Operator

Elizabeth Porter, Morgan Stanley.

Elizabeth Porter

Great. Thank you so much. Just given the focus on the cross-sell and upsell plus addressing larger enterprise customers that can be a material upside to our film.
So what how should we think about the growth algo between new customers and RPU shifting between these two factors. I think historically, it's been a little bit more balanced may be skewed a bit more toward customers. So just wanted to level set on the growth I'll go in the forward outlook as we go down these new initiatives.

Brian Mulroy

Thank you. It wasn't as prime, yes. So we'd expect, as we've experienced in the past, that both will be significant growth drivers for us. So we're still very pleased to see the amount of net adds that we experience every single quarter, the SMB and mid-market, which tends to be the bulk of the incremental net adds for us has been very strong and healthy, and we expect that will continue to be a growth driver for us at the same time as we've been talking about, we do see much healthier metrics as we're moving upmarket.
We've talked about things like the retention, the average ARR per paying customer and even growth for that particular segment. So I think going forward, you might see a slight shift where the number of accounts and or sorry, the growth would actually shift a little bit more towards upsell and higher valued accounts, but we still expect that we'll see healthy growth from that as well.

Elizabeth Porter

Great. And then as a follow-up, actually on the net add side that as of 4,000, but up just a bit below the 5,000 you've consistently added in prior Q1's. So just curious if there were any factors to call out and then also touch on the seasonal trend of customers leaving in Q. one Q. four, but coming back in Q1 and how did that play out relative to prior years?

Brian Mulroy

So just building on what we're just talking about like any metric they can fluctuate from quarter to quarter. There's always seasonal dynamics within one quarter or even year over year that could affect that number. But I think what you're seeing is just because we're putting more focus on higher valued upmarket enterprise accounts that you could see that as we're putting more focus on that but you could see that net add metric the impact going forward.

Operator

Mark Murphy, JPMorgan.

Mark Murphy

Hey, this is already grew on promoting Murphy. Thanks for taking my question and congrats on the quarter. On the book to some of these investments you guys are expecting to make particularly on the on the upper end of the market on. Can you give us any sense of how you expect hiring trends this year?

Brian Mulroy

Thank you. It was tough to hear you. It was a little bit on a little bit choppy. Can you just ask it again?
Sorry, Barrio, it's tough to hear you, but it's not giving you the better your It's breaking up a little bit, but Trikon and my question was just around hiring and how we should expect headcount growth, particularly sales and marketing to transit this year and maybe compared to last year and year before that, I say, yes, good question. We're not expecting a significant change. So we've been talking about our investments in enterprise are being funded by the efficiencies we're seeing in SMB and mid-market. And of course, the quantity of SMB and mid-market sellers is was higher. So now that we've been able to take advantage of leveraging AI and automation and really push a lot of the SMB sales through our e-commerce platform and take advantage of the product-led growth strategy. We're able to reinvest back into the enterprise. So while we're investing significantly and making a strong push into the enterprise, you shouldn't expect to see sales expense from an EDR perspective or even sales headcount change materially.

Operator

There are no further questions in the queue at that time at this time. That concludes today's Q&A session. I'll now hand back over to the management team for closing remarks.

Oleg Shchegolev

Thank you all for joining us today. And I want to say again, we are very pleased with our execution in the first quarter and strong start to 2024, and we look forward to keeping you updated on our progress. Thank you.

Operator

That concludes today's call. You may now disconnect.