SEMrush (SEMR) Q2 2025: Enterprise & AI ARR Set to Double, Offsetting 83% Low-End Customer Drop

2025-08-05 | By EarningsIQ Research

SEMrush accelerated its shift upmarket this quarter, as enterprise and AI solutions now drive the bulk of growth, even as low-end customer softness persists. Management’s resource reallocation away from freelancers toward high-retention enterprise and AI segments is reshaping the business model and margin profile. Investors should watch for continued ARR expansion in enterprise and AI, as SEMrush expects these products to approach $50 million by year-end, anchoring its long-term growth narrative.

Summary

• Enterprise & AI Focus Intensifies: SEMrush is doubling down on high-value segments as lower-tier customer softness accelerates.
• Resource Reallocation Drives Mix Shift: Marketing and engineering spend is migrating to enterprise and AI, reshaping future growth drivers.
• Buyback Signals Confidence: New $150 million share repurchase underscores management’s conviction in long-term opportunity.

Performance Analysis

SEMrush delivered 20% year-over-year revenue growth in Q2, led by a decisive pivot toward enterprise and AI products. The enterprise SEO solution is now the largest single contributor to overall growth, with 260 enterprise customers averaging $60,000 in annual recurring revenue (ARR). This segment’s momentum is reflected in the 83% increase in customers paying over $50,000 per year, a sharp contrast to ongoing contraction at the low end.

AI-driven products are scaling rapidly, with the AI Toolkit reaching $3 million ARR within months of launch and the new enterprise AI optimization product adding $1 million ARR in just a few weeks. Combined, enterprise and AI products are expected to reach $50 million ARR by year-end, up from $25 million at Q2 close. Meanwhile, SEMrush’s average ARR per customer rose 15% year-over-year, even as total customer count declined due to churn among freelancers and unsophisticated users. Operating margin remained solid at 11%, though foreign exchange headwinds trimmed margin expansion potential, and free cash flow was negative for the quarter, consistent with seasonal renewal and tax payment cycles.

• Enterprise ARR Dominance: Enterprise SEO and AI products now account for the majority of new ARR, eclipsing legacy segments.
• Low-End Churn Accelerates: Freelancers and low-ARR cohorts continue to contract, with acquisition costs rising and retention falling.
• Unit Economics Drive Discipline: Management is prioritizing capital allocation toward high-retention, high-ARR segments, sacrificing near-term volume for long-term value.

This mix shift is reshaping SEMrush’s business fundamentals, with higher average contract values and retention rates offsetting the contraction in lower-value cohorts. The company’s ability to cross-sell digital marketing solutions to existing enterprise customers is a key margin and growth lever as the product suite expands.

Executive Commentary

Strategic Positioning

1. Enterprise Upmarket Migration

SEMrush’s core strategic pivot is a deliberate migration upmarket, focusing on sophisticated enterprise buyers who value advanced SEO and AI-driven solutions. The company now counts 9,000 enterprise accounts, but fewer than 5% use its enterprise SEO solution, highlighting a substantial untapped opportunity. With 83% more customers exceeding $50,000 ARR, the enterprise motion is reshaping both growth and retention profiles.

2. AI Product Acceleration

The AI Toolkit and enterprise AI optimization are SEMrush’s fastest-scaling products ever, with new launches planned for Q3 and Q4. These tools are not only driving incremental ARR but also increasing engagement with SEMrush’s legacy SEO Toolkit by 20%, reflecting high product complementarity. Management expects AI-related ARR to double by year-end, positioning SEMrush as a leader in the emerging AI-powered search landscape.

3. Resource Reallocation and Cost Discipline

Marketing and engineering spend is being redirected away from low-ROI customer acquisition at the low end and toward enterprise and AI, where returns are strongest. This shift is expected to pressure near-term revenue but drive sustainable margin and cash flow. Importantly, these investments are being funded through internal efficiencies, not by expanding the overall cost base.

4. Shareholder Capital Return

The announcement of a $150 million share repurchase program signals management’s confidence in the business model transition and current valuation. With $258.5 million in cash and robust free cash flow generation, SEMrush is able to balance growth investments with capital return, a rarity among SaaS peers at this stage.

Key Considerations

This quarter marks a clear inflection in SEMrush’s business model and capital allocation strategy. The deliberate pullback from lower-value segments in favor of enterprise and AI is reshaping both the revenue base and long-term margin profile, but also introduces new execution risks as legacy cohorts shrink.

Key Considerations:

• Enterprise Penetration Remains Early: Less than 5% of enterprise accounts use SEMrush’s top-tier solution, providing a long growth runway if conversion rates accelerate.
• AI Adoption Fuels Engagement: Customers purchasing AI Toolkit show 20% higher usage of core SEO products, supporting cross-sell and retention strategies.
• Low-End Contraction Not Yet Stabilized: Management emphasizes that softness is contained to freelancers and unsophisticated users, but this cohort still represents 40% of ARR.
• FX Exposure Undermines Margin Expansion: With 30% of expenses in euros and nearly all revenue in USD, margins are unhedged against currency swings, muting operating leverage.

Risks

SEMrush’s strategic pivot heightens exposure to execution risk in enterprise and AI, where sales cycles are longer and competitive intensity is rising. The ongoing contraction among freelancers and the low end could accelerate if macro or competitive pressures intensify, and FX volatility remains a persistent margin headwind. With 40% of ARR still tied to shrinking cohorts, stabilization is critical for maintaining top-line momentum.

Forward Outlook

For Q3 2025, SEMrush guided to:

• Revenue of $111.1 million to $112.1 million (midpoint: 15% YoY growth)
• Non-GAAP operating margin of approximately 11.5%

For full-year 2025, management lowered revenue guidance to:

• $443 million to $446 million (18% YoY growth at midpoint)

Full-year non-GAAP operating and free cash flow margin guidance was reiterated at 12%, absorbing roughly $9 million in incremental FX headwinds. Management’s confidence in delivering on these targets rests on continued enterprise and AI momentum, with ARR in these products expected to double in the back half of the year.

• Enterprise and AI ARR expected to approach $50 million by year-end
• Share repurchase program to commence in Q3

Takeaways

SEMrush is executing a decisive business model transition, prioritizing high-value, high-retention enterprise and AI segments while deprioritizing low-end customers with weak unit economics. This strategy is driving higher average ARR per customer and improved margin potential, though at the cost of near-term revenue softness and increased execution risk.

• Growth Engine Shift: Enterprise and AI now anchor growth, with legacy segments in structural decline and management pulling back on low-ROI marketing.
• Margin Resilience Despite FX Drag: Operating discipline and internal funding of new investments are supporting margin stability, even as foreign exchange volatility trims upside.
• Future Watchpoint: Sustained enterprise and AI adoption, stabilization of low-end churn, and currency management will be critical to maintaining the growth narrative into 2026.

Conclusion

SEMrush’s Q2 marks a turning point as the company bets on enterprise and AI to deliver durable growth and margin expansion, even as legacy low-end segments contract. The $150 million buyback underscores management’s conviction, but execution in upmarket segments and further FX management will determine whether SEMrush can sustain its new trajectory.

Industry Read-Through

SEMrush’s results highlight a broad SaaS trend: upmarket migration and AI integration are increasingly essential as low-end customer acquisition becomes less economical. Rising paid search costs and shrinking freelancer demand mirror macro headwinds facing other digital marketing and SaaS platforms. The rapid adoption and cross-sell of AI toolkits suggest that vendors who can drive incremental value from AI will gain wallet share, while those dependent on small business or freelancer cohorts face structural contraction. Currency exposure remains a critical watchpoint for global SaaS businesses with unhedged cost bases.

SEMR Technology SaaS Digital Marketing Enterprise AI ARR Share Repurchase