Semrush Holdings, Inc. (NYSE:SEMR) Q3 2023 Earnings Conference Call November 2, 2023 8:30 AM ET
Brinlea Johnson – Investor Relations
Oleg Shchegolev – Chief Executive Officer
Eugene Levin – President
Brian Mulroy – Chief Financial Officer
Conference Call Participants
Adam Hotchkiss – Goldman Sachs
Chris Cantera – Morgan Stanley
Rob Morelli – Needham & Company
Michael Vidovic – KeyBanc Capital Markets
Wayne Trinh – Piper Sandler
Thank you for standing by and welcome to the Semrush Third Quarter Earnings Conference Call. [Operator Instructions] I’d like to hand over to Brinlea Johnson to begin the call. Please go ahead.
Good morning and welcome to Semrush Holdings third quarter 2023 conference call. We will be discussing the results announced in our press release issued after market closed on Wednesday, November 1. 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 AppCenter expansion, industry and market trends, our competitive position, market opportunities, sales and marketing activities, the sufficiency of our staffing levels, our guidance for the fourth quarter of 2023 and the full year 2023, and statements about future pricing and operating results, including margin improvement, revenue growth and profitability.
Forward-looking statements are statements other than statements of facts and can be identified with words such as expect, can, 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. 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 reports 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.
Also, during the course of today’s call, we refer to certain non-GAAP financial measures. There is a reconciliation schedule showing the GAAP versus non-GAAP results currently available in our press release issued yesterday after market close, which can be found at investors.semrush.com.
And with that, let me turn the call over to Oleg.
Thank you and good morning to everyone on the call. Our team executed well this quarter delivering revenue of $78.7 million, up 20% year-over-year. Importantly, we also generated strong profitability, reporting non-GAAP net income of $8.4 million. Due to our solid performance this quarter, we’re raising our full year non-GAAP net income guidance as we continue to drive towards sustained profitability. We have built a business focused on driving strong sustainable growth with improving profitability, and this quarter was no exception.
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 we discussed on our last earnings call and share why we’re excited about the future of Semrush. On our last call, I talked about how we have heavily invested and continue to invest in a unique combination of data assets and products to create a software platform that helps customers improve their online visibility across all major channels. While there are point product competitors, we believe Semrush has become the platform of choice for businesses of all sizes, across all industries, all over the worlds, to improve their online visibility.
We remain differentiated in our markets. Importantly, we are uniquely positioned to help our clients because of our strong data assets and because of certain industry dynamics. Our strong competitive positioning that comes from our unique data assets is based on a combination of our own intellectual property and historical data that we have collected from our customers, used together with new data that’s being fed into our algorithms. Collectively, this allows us to generate strong predictive capabilities that can drive significant ROI for our customers.
When looking at industry dynamics, big tech search engine companies primarily make their money from advertising. As a result, their tools are designed to get the clients to optimize paid advertising on their own platform. Because of this, we believe it is not in their best interest to give those clients unbiased advice on optimal use of their marketing efforts, particularly, if the best ROI would come from organic efforts or advertisements on a platform other than their own.
Semrush, on the other hand, provides unbiased advice to its customers and seeks the highest expected ROI marketing activities across a vast array of platforms. This is important because we continue to benefit the tectonic shift of dollars being allocated away from physical visibility towards online visibility. Historically, companies spend their efforts creating their physical world brands. They were able to be competitive without a significant online presence that leveraged search, organic, social media, and digital PR. But the world has changed, and in order to be successful, businesses now must not only embrace these new ways to create awareness for their brands, but they must excel at them. Now, more than ever, brands recognize that the competitive world we live in demands that they distinguish themselves online.
To be successful, businesses need to be easily discovered online, they need to appear at the top of the rankings, and they need to be a part of the discussions that are happening on social media channels, as these are critical components to connecting with consumers in the places where they now spend their time. We are still in the early innings of this exponential shift, and we believe the compelling ROI provided by Semrush only continues to strengthen as online markets become more saturated.
Through our unique data set and 15 years of expertise and investments in R&D, we have built a platform for companies to enhance and maintain a competitive online presence across all channels. This is the essence of what Semrush does. We are GPS of the Internet. We help companies establish, maintain, and enhance their online presence. Our customers can choose which marketing content is the most efficient for their business, and they can map out new routes and change routes at any time.
Let me provide a client example of an SMB furniture manufacturing client, whose organic rankings and online sales were stalled for 3 years. Then they began their journey with us, and everything changed. First, they started with site audit to fix website problems and generate a strong site health score. Then, they added the backlink audit tool to improve their online visibility.
Next, they built a keyword strategy using our Keyword Magic and Keyword Overview tools, and explored what their competitors were doing, and how they were faring with our Organic Research report and Position tracking tool. They began to show impressive step-ups in engagement. And over the next 2 years, they saw a 73% increase in organic traffic. This example underlines how businesses are increasingly shifting their time, effort, and money to create awareness of and visibility for their businesses online.
We believe businesses that are best able to analyze, plan and execute on this shift will have the potential for exceptional results, and Semrush provides all of these tools in one place where they can do this. These industry tailwinds and our unique software offering positions us well to enjoy lasting, durable growth. We are excited about where we sit today and what the future holds for Semrush.
I will now turn the call over to Eugene and Brian to discuss the results of the quarter in more detail.
Thank you, Oleg. We delivered another solid quarter and continued to be focused on 3 main pillars of growth to set us up for long-term durable growth, and we’re making progress on each front. To review, our 3 main growth pillars are one, increasing new user growth, two, maximizing the value we generate from our users, three, adding new products to our portfolio to address clients needs and market trends.
Let me provide an update from this quarter. First, we continued increasing new user growth. We now have over 106,800 paying customers within our core platform, and believe we have a long runway of adoption ahead of us. In Q3, we achieved solid net new customer additions and registrations with a more efficient sales and marketing engine than we’ve seen in prior quarters. By using our platform for our own internal use and optimizing our sales and marketing spend on organic efforts, we boosted our own online presence.
Turning to the second growth pillar. We have a strategy to grow as our customers grow and maximize the value we generate from our users. During Q3, we saw continued success leveraging our brand to cross-sell and upsell into our user base. This quarter, we also initiated a rollout of some new pricing. We took the opportunity to optimize our pricing strategy to better align with the tremendous value our product delivers.
During Q3 and into early part of Q4, we tested price increases with a cohort of customers, and we were encouraged by the response, as net adds and retention were in line with our expectations and recent trends. In our view, this indicates customers have a strong need for our offering and are willing to pay more given the unique benefits it provides. While we are still in early phases of pricing adjustments, this initial findings suggest that there may be more room to prudently raise prices to better capture the value we provide, which we think over time would also contribute further to our growth. Our plan is to be thoughtful and measured. We expect to continue testing and analyzing data so that any broader pricing changes are backed by customer insights, while maintaining our commitment on delivering exceptional value.
The last pillar of our growth strategy is adding new products to our portfolio to set us up for long-term durable growth. And during Q3, we made good progress on this front. During this quarter, we saw excellent adoption of some of our AI products and features and launched new monetization initiatives for our social media tools. We also saw continued adoption of AppCenter, which is one of the ways in which we are efficiently adding tools and capabilities for our clients to further increase their ROI from our platform. We’re pleased about the adoption of additional customer products, especially in our mid-market and enterprise segments. As we move upmarket, clients find more value in our products, continue to add more functions and features. And as a result, we’re able to generate higher average revenue per user.
In summary, I’m very pleased with our success driving customer growth, maximizing the value of our user base and expanding our product portfolio. 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.
Thank you, Eugene. Before I discuss our third quarter results in more detail, I’d like to reflect on what I’ve learned here over my first two quarters as CFO. I’d also like to lay out my vision for how Semrush will operate as a finance organization, both internally and externally.
Over the past two quarters, I traveled to several Semrush offices and I’ve met with our team leaders to discuss their businesses. I’ve been incredibly impressed with our team and their command of their respective markets and products. I see a meaningful opportunity for Semrush to achieve durable growth over the next several years by further penetrating our served markets with our online visibility platform. Importantly, I see an opportunity for us to do this while also driving significant improvements to our profitability. To facilitate, I have a relentless focus on data and metrics for decision-making throughout the finance organization. Because Semrush has such a valuable customer data set, the finance team has the ability to segment our user base to understand their buying patterns, churn dynamics and interest in new products, among many other things.
Our plan is to rigorously analyze the data to allocate our investment in sales, marketing and products. We expect the outcome of this will be a disciplined approach that enables us to capitalize on our biggest opportunities, while simultaneously driving operational 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. This will take some time to be fully realized in our results, but we are already deep into our 2024 planning and have begun using this framework. We’ll give you more details on our 2024 outlook when we report next quarter, but I feel very encouraged by what we’re seeing so far and I look forward to sharing them with you in approximately 90 days.
With that, I’d like to turn to our third quarter results in more detail. We had a very strong quarter across the board. Our Q3 revenue was $78.7 million, with growth accelerating to 20% year-over-year. Growth was driven by solid new customer additions and continued growth in 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 third quarter was 109%. We expect our dollar-based net revenue retention to trough within the next quarter or so and then begin to trend up as we increase adoption of our full portfolio of products, tools and add-ons within our installed base.
Annual recurring revenue surpassed $320 million, growing 21% to $322.8 million year-over-year. We reported significant improvement in our operating margin, which was up 1,900 basis points year-over-year and up 700 basis points sequentially. This significant improvement is a result of a number of factors. First, we reported significant improvement in gross margin, which was up 230 basis points year-over-year, up to 83.4%. Gross margin continued to benefit from higher revenue and our continued ability to gain scale and leverage from our platform. We continue to expect strong gross margin above 80% in the near-term.
Second, we continue to execute on our commitment to drive efficiencies, carefully manage expenses and drive towards sustained profitability. One example of this is in marketing, where we made the strategic decision to slow paid spend and prioritize organic and brand spend, which is delivering impressive results. We saw strong demand for our products across new subscribers, growing our total paid subscriber base by 14% while also lowering our customer acquisition cost. And across the company, we continue to carefully manage expenses and plan to maintain our current headcount for the near-term. We believe we are sufficiently staffed to execute on our growth strategy, deliver on our strategic priorities and manage the operations of the business. Within that context, our Q3 operating income also benefited from the timing of some expenses that we originally expected to occur during the third quarter that we now expect will happen in the fourth quarter.
Moving down the income statement, non-GAAP net income was positive $8.4 million, surpassing the high end of our guidance range. The outperformance of our non-GAAP net income relative to our guidance was a result of the flow-through of our operating income performance.
Turning to the balance sheet. We ended the quarter with cash and cash equivalents and short-term investments of $230.1 million, up from $223.8 million in the previous quarter. Our cash flow from operations in the third quarter was positive $6.4 million. Looking at the fourth quarter, I’m confident in the underlying trends in the business and capabilities of our team to continue on the path to deliver strong growth and profitability. We are updating our top line guidance to a new range of $307 million to $308 million compared to our previous guidance range of $307 million to $309 million.
We are also meaningfully raising our non-GAAP net income guidance to account for our improved efficiency. We now expect non-GAAP net income in the range of $9 million to $11 million, up from our previous range of $2 million to $4 million. This takes into account the strong operating profit we delivered in Q3, but also reflects a few offsetting factors, including the timing of our tax provision and the timing of some expenses we had originally planned in the third quarter but now expect will occur in the fourth quarter. For the fourth quarter, we expect revenue in the range of $82.7 million to $83.7 million. We expect fourth quarter non-GAAP net income of $4.1 million to $6.1 million.
Finally, our updated 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, which will drive improved efficiency and profitability even while we invest in future growth opportunities that we expect will drive long-term value and growth to our shareholders.
With that, we are happy to take any of your questions. Operator, please open the line for questions.
Your first question comes from the line of Adam Hotchkiss with Goldman Sachs. Your line is open, sir. Please go ahead.
Great. Thanks for taking the questions. I guess to start, could you just give a little bit more color on the price increase strategy you mentioned? Any early reads on what magnitude customers may be willing to tolerate here without meaningfully impacting churn? And then how do you think about this internally in terms of balancing price increases with the current macro, any updates on macro impacts you’re seeing the customers as well would be helpful?
Thank you. Great question. So, as I mentioned earlier really just testing it with a relatively small cohort of existing customers as well as new customers. In both cases, haven’t seen any impact on underlying user metrics. So everything was pretty much in line with our expectations, which makes us very optimistic about similar moves in the future. Of course, like you said, we need to be very prudent and find the right timing to do this considering macro environment. But I think what we’ve learned is that our product just delivers tremendous value and people who use it, who understand this value willing to pay more. And there is – and we’ll keep you posted.
Great. That’s really helpful. And then just on the macro side, anything you’ve seen into whether that’s the end of the quarter or just broadly in the quarter around macro impacts to customers? It seems like given the ARR acceleration, the impact isn’t super meaningful, but any update there would be useful? And then lastly, just on Gen AI, as you’re seeing Gen AI changes at search engines in the ecosystem broadly, I would just be curious if you’ve been surprised in any way from AI applications or customer behavior responses and how you’re sort of tackling that broader issue in the ecosystem?
This is Oleg. Take a first question. Let’s start with macro. Look, from one side, I would say macro is still the same. We don’t see any kind of pre receive macro, and we don’t see resizable macro schedule. So the better – we expected, it will continue to the same environment probably next year or years, and we plan – all our strategy we plan, our products we plan all of our futures based on it. At the same time, we see high demand, we see a good portion of traffic. We see good interest to our projects and so on. And this year, with price adjustment with new product features with new I think what we delivered for our customers, we were able to accelerate our revenue growth, and we are very positive about our future even with current macro environment. So is still a very good potential for all our products. And related to AI things, Eugene?
Yes. So thank you for asking – we – I think with – when it comes to AI, we’re still in early innings of the game. But I think at this point, it becomes more mature technology. So we now much better understand how to use it across our product portfolio. And I think there are several use cases works really great and where we see very high engagement from our users, things like generating book post or social media post, things like replying to reviews – and even things like core class ring, so those are areas where we see strong usage of AI, and we’re implementing it everywhere we can. This quarter was no exception, seeing great traction, for example, without reply-to review feature in our local product. And in general, right now, we’re seeing this as a tailwind from product adoption point of view as well as demand generation point of view as we start seeing a lot of new customers come in for us specifically for AI-powered features.
Great. Really, helpful. Thanks, Oleg. Thanks, Eugene.
Hey. This is Chris Cantera on for Elizabeth Porter. Thanks for taking our questions. I wanted to ask and get your latest thoughts on your free-to-pay conversions and how those have been trending more recently. I know you all mentioned the monetization of some of the products that free users, power use, such as social media. So, it would be great to kind of get an update on where that stands now.
Yes, sure. Thanks for the question. So, yes, a couple of things just to get everybody up to speed on for users. First of all, we are really pleased to see that it continues to grow and it grows at a meaningful rate. But we have multiple strategies that we are executing on with our free user base. So, first and foremost, we have our platform in a number of universities, and we are training the next generation of marketers to leverage the Semrush platform as a defector standard tool in the workflow and enabling them to do their best work. And when they enter the workforce and begin to grow in their marketing careers, we will continue to benefit from that. The second thing is we have products that we offer on a free basis and don’t currently have a means to – or don’t currently have a monetized version of it, but we put it into market the tests and see adoption rates. And at times, we look to monetize that. And finally, in the third case, we have a free version of our core platform that customers can use as a trial or when they are beginning their journey as a Semrush customer just use the version for a means to be able to get educated and see the power and value that our platform provides for their business. It’s that third category where we are focused on conversion from free-to-paid, and that’s been very strong. We are really pleased to see the continued growth and evolution of our customer base, the quick value that they see and our ability to convert those to paying customers. But it’s been consistent. It’s something we are pleased to see.
Got it. And then I also wanted to ask around your enterprise product, which I believe is an early access now, if I have that right. What are some of the early customer conversations there looking like? And how much of a lift could this product beta ARR per customer?
Thank you for the question. So indeed, early days, we actually just launched it yesterday, and we already have several customers. They are providing feedback, including some LinkedIn post that you can find yourself. But in general, very positive feedback, still early days. When it comes to average revenue per customer for our initial cohort of beta customers is quite high. But those are relationships that we had for a while. I think on average, there is definitely pleased 5x, 10x potential in era per customer improvement for our enterprise segment as we start switching more and more users from their basic subscription to this enterprise level product. So, still very early, but really happy with the traction we are seeing now. If anything, it’s actually right now more about our ability to onboard customers, but demand is really strong.
Just one thing that I will add to that, just from a modeling perspective. And first and foremost, we see enterprise as an incredible opportunity, and it means to meaningfully expand our addressable market. And we are well positioned with a strong competitive moat and capabilities to capitalize on it. From a modeling perspective, though, as of today, our average ARR per customer just exceeded 3,000 and we are really pleased to see the growth and strength there. But enterprise provides a meaningful opportunity for us to inflect ARPU upwards. And on average, we expect our enterprise accounts to generate 10x to 15x our average in terms of average ARR per customer. So, it’s a great opportunity for us. We are pleased the product is now generally available and looking forward to giving you more insights into how that benefits us in the future.
Excellent. Very helpful color. Thank you.
Your next question comes from the line of Scott Berg with Needham & Company. Your line is open.
Hey. This is Rob Morelli on for Scott Berg. Thanks for taking the question. You noticed a solid ARR jump. Can you detail what factors you may have led to this for the quarter? Any larger bookings that were of note? And then did the price increase have any impact there as well? Thanks.
Yes. We are really pleased to see that. So, we achieved $20 million of net new ARR this quarter. That’s actually a record for us in the third quarter, which historically has been a seasonally lower quarter for us. And actually, relative to any quarter, it’s in the top three. So, we are really pleased to see it. We are making good progress, and in spite of the current macro continuing to see, as Oleg said, really strong demand and interest in our portfolio. Pricing did have an impact, let’s say, roughly 20% of that net new number is related to pricing, but we are also making progress on all of our growth pillars by getting customers to continue to grow and scale with us and gaining progress on our cross-sell and up-sell strategy. So, it’s a combination of a number of things, and we are really pleased to see, at least for a third quarter a record that we have been able to put up this quarter.
Got it. That’s very helpful. And then from just an overall business standpoint, anything to note regarding how certain geos and regions fared, how about customer sizes, enterprise to SMB? Thanks.
It was pretty stable quarter across the board. One thing that I would highlight is, for example, revenue per user grew a little bit faster in enterprise segment and mid-market segment. But in general, very stable quarter, haven’t seen any anomalies. So, pretty much in line with historical trends, when it comes to geo and other segments.
Got it. Thank you for the color. Thanks for taking the question.
Your next question comes from the line of Michael Turits of KeyBanc Capital Markets. Your line is open.
Hi. This is Michael Vidovic on for Michael Turits and thanks for taking my question. Just last quarter, you had talked about, I believe, a slight uptick in churn from macro causing tighter customer budgets optimization. Just curious if that’s gotten worse or changed at all in the last three months here?
No changes. This is Oleg. I would say we don’t see any kind of change here. It’s pretty stable, what’s showing us.
Okay. Great. And then just a follow-up. Are you guys seeing any, I will call it, uptick in conversion or free to paid from new generative AI offerings, or is it just still too early for you to see a real tailwind from that yet?
Very early to say because right now, we are actually in a phase where we are scaling demand generation for some of our AI offerings, combining organic growth strategies with like Brian was saying, technically drinking our own champagne and seeing a lot of organic growth with some of our premium generative AI offering. For example, we have launched Rephraser product. And you can go to Semrush and just check the amount of traffic we are getting from that product. So, that’s where we are focusing most of our efforts now. As we scale to a certain level, we will start focusing more on conversion. But of course, higher level of traffic already drives more revenue. But we think there is still room for improvement, both in volume of traffic that we generate for those AI-based offerings as well as conversion.
Got it. Thank you.
Your next question comes from the line of Wayne Trinh with Piper Sandler. Your line is open.
Hi. This is Wayne on for Clarke Jefferies. Wondering about margins as we head into 2024, you guys are kind of ahead of the target model on gross margin already. How should we think about leverage within OpEx? Would that be more R&D and G&A – sorry, S&M and G&A into next year?
Hey Wayne. Thanks for the question. Yes, we are really pleased that we have been able to make really good progress on our path to profitability. We have been able to achieve that with really strong gross margin, which we expect will continue and gaining efficiencies across the board. I mentioned earlier today that we are relentlessly focused on data and metrics and analyzing it to really make decisions about how we are allocating spend and capital. And we will update everybody into next year when we report our fourth quarter earnings and give guidance. But we are committed to profitability. We have been able to gain strong efficiencies this year and do it earlier than expected, and we will continue on that journey going into FY ‘24.
Okay. Great. And how should we think about potential price realize to existing customers? Maybe what’s the penetration so far and the potential uplift?
Thank you. So, we are definitely not guiding anything yet, but if the question is like if there is a room to improve pricing for existing customers, yes, there is definitely room for improvement. The timing is, of course, a question. We need to be cautious when it comes to things like this, especially about how market perception works. But from a price elasticity point of view, there is no doubt there is room for improvement.
Okay. Great. Thanks guys.
Our final question comes from the line of Brent Thill with Jefferies. Your line is open.
Hey. It’s James on for Brent. Thanks for the question. I know it’s early, but can you just talk about some of the growth areas that you are most focused on for 2024? And how should we think about the App Center, and how that plays into your growth strategy for next year?
Sure. Yes. So, Eugene mentioned earlier today just about our – for sort of our growth vectors. So, first and foremost, we are continuing to focus on growing new customers, and we are in the very early innings of that. We are exceeding 100,000 paying customers, there are millions, but marketers and small business owners out there that will benefit from our platform, and we will continue on that journey into FY ‘24. We also continue to diversify our portfolio. So, for many years, we have invested in core search engine optimization, and we have now diversified our portfolio to get into social media, digital PR, intelligence and local. And we have been making some good strides in those new businesses. So, we will continue to execute on our core strategy of growing new users. We will continue to cross-sell and up-sell with our existing portfolio. And we have got – we will continue to invest in our really strong and talented R&D team and partner with a lot of successful companies out there to continue to extend our reach to close adjacencies to what we were already able to provide out there in the market. So, it’s a combination of all of those factors that will continue to drive growth and allow us to obtain durable growth into the future.
Great. And then one – I am sorry. Go ahead.
Sorry. Yes. You have asked about App Center, and I kind of always like when people ask about App Center. Really excited about, first of all, multiproduct usage, so a number of people who buy multiple products. We don’t necessarily report this metric every quarter, but really happy with current trends. And especially with our launch of social media tool monetization, that metric grows even faster. So, overall, really happy with what we are seeing, and we will share more in the future.
Great. And then just one quick clarification question. Do you have any exposure to just the Israel region or anywhere adjacent to that, that could be impacted by the conflict, or is there no real material impact?
No material impact. Zero impact on us.
Yes. I mean of course, as employees and people, tremendous impact, and we are sad to see what’s happening there. But from a business perspective, we don’t have employees or operations there, and we haven’t seen an impact on our customers.
As there are no further questions, I will turn the call back to management for closing remarks.
Thank you for questions and sorry for note [ph] to give us troubles. In closing, I wanted to remind everyone, we have delivered best third quarter. We accelerated revenue growth and added $20 million in ARR. We believe in – we believe our first quarter ARR acceleration and productivity improvements set a very good stage for strong 2024. Thank you for your support. Have a good day.
Ladies and gentlemen, we thank you for joining and for your patience today. You may now disconnect your lines.