Squarespace, Inc. (NYSE:SQSP) Q1 2023 Earnings Call Transcript

Squarespace, Inc. (NYSE:SQSP) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good morning, my name is Emily, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Squarespace’s First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to your host of Squarespace, Clare Perry. Clare, please go ahead.

Clare Perry: Good morning, and thank you for joining Squarespace’s first quarter 2023 earnings conference call. I’m Clare Perry, Head of Investor Relations, and with me today are Anthony Casalena, Squarespace’s Founder and CEO, and Nathan Gooden, CFO. After their prepared remarks, we will open the call to your questions. Earlier today, we posted a press release and shareholder letter to the investor relations section of our website. On today’s call, we’ll be referencing both GAAP and non-GAAP financial results and operating metrics. You can find additional information on how we calculate these metrics, including a reconciliation of GAAP to non-GAAP measures in today’s press release and shareholder letter, which can be found in the Investor Relations section of our website.

These measures should not be considered in isolation from nor a substitute for our GAAP reporting. We will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to, statements related to our future financial performance, our strategies, and our ability to integrate new technology into our core platform. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are further defined in our most recent filings with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of this day May 9, 2023.

We undertake no obligation to update these statements as a result of new information or future events, except where required by law. Please also note that all comparisons are on a year-over-year basis unless specifically noted otherwise. I will now turn the call over to Anthony.

Anthony Casalena: Thank you, Clare. Good morning, everyone, and thank you for joining us today. Last month, we celebrated a major milestone, our 20th anniversary. Across the past two decades, the Squarespace platform has been used by millions to build beautiful brands and businesses online. This quarter, we delivered exceptionally strong performance with over 14% top-line growth and an unlevered free cash flow margin exceeding 28% of revenue. The powerful combination of growth and profitability underscores Squarespace’s solid business model. The majority of our business remain subscription-based with over 92% of revenue coming from recurring revenue streams from our 4.3 million unique subscriptions. Q1 2023 had the most trial starts in our core product in Squarespace’s history, surpassing any pandemic quarter.

In March, we saw a strong customer acquisition, which continued into April. This continued strength gives us the ability to raise our full year guidance today. Squarespace’s core website business outperformed our expectations in the first quarter of 2023, with outperformance driven by both new customer additions and higher adoption of our premium plans. Last year, we delivered over 100 new features and updates to our customers across our product lines, which included the release of Fluid Engine, a transformation of our primary page builder experience. We believe Fluid Engine is the simplest and most expressive way to publish to the web and our focus on democratizing access to great design remains a key competitive advantage. Adoption of our higher-value plans, along with our ability to responsibly increase pricing is beginning to be reflected in our revenue, driving average revenue per unique subscription higher to $213 each.

Average revenue per unique subscription grew faster than unique subscriptions this quarter, and we expect that dynamic to continue as higher intent to sell customers join our platform and adopt additional products. Our investments in international markets over the past year is showing early signs of success as well with positive growth across all target markets. Many of our international markets are seeing both CAC improvements and growth rates that exceed our growth rates domestically. Our commerce products also saw double-digit growth across the board. One notable outlier was in the quarter with increased adoption of our Email Campaigns products, which benefited from macro changes in the competitive environment. Free products are increasingly becoming more restrictive and pay only, which further drives customers to consider alternatives to incumbent players.

Our portfolio of products for entrepreneurs has never been stronger, and we continue to invest in our brands that are adjacent to our core Squarespace brand, Acuity for Scheduling, Tock for hospitality and time-slotted businesses, and Unfold and Bio Sites for social media creators. To remain relevant in an ever-changing technological landscape, it’s essential to have tools to continuously integrate and adapt to evolving customer needs. Squarespace has evolved from being a publishing platform to becoming a holistic commerce-forward content management system. Our products allow entrepreneurs to transact in a variety of ways as they monetize physical goods, services and content. Squarespace has always offered hundreds of curated templates for customers to choose from when they’re building a site.

In the first quarter of 2023, we introduced Squarespace Blueprint, a new onboarding experience that lets users custom build a starting point without having to select from our template store. We’ve seen record levels of demand in Q1 as customers onboard the Squarespace Blueprint and adopt a myriad of updates on our core platform, which is both easier to use and more expressive than ever. The mainstream accessibility of artificial intelligence, large language models is something we are paying close attention to and efforts are underway to build this functionality into our core platform. In our shareholder letter, we discussed in depth how this technology fits into Squarespace’s core onboarding and editing experiences, including the newly launched Squarespace Blueprint.

This technology helps us solve one of the core reasons customers find themselves in a difficult spot while onboarding; they do not have their content ready. The availability of AI models augments our tools perfectly, helping customers with set up in writing while also preserving the power that Squarespace provides an editing tool, hosting platform, commerce platform and more. Yesterday, our circle community received a beta release of new text generation features powered by OpenAI in our production environment. These enhancements will be made available to all customers in the coming weeks. Squarespace Payments remains on track to launch in the back half of 2023. Our engineering and product teams are building towards an integrated solution to deepen our relationship with customers and provide a seamless experience in every step within our platform.

Finally, we recently published our first environmental, social and governance report. We’re proud to showcase how our mission and ways of operating our business support our ESG goals. The report can be found in the ESG section of our Investor Relations website, and we invite you to read about our positioning and progress. We continue the year with immense gratitude to our customers and remain focused on delivering innovative products to enable entrepreneurs everywhere. Thank you to all of our customers and employees who have been part of this journey with us over the past two decades. We remain an incredibly modern company and are delivering better products and more functionality than we have in any previous year of our existence. We look forward to serving you for the decades to come.

And now, I’ll turn the call over to Nathan.

Nathan Gooden: Thank you, Anthony, and good morning, everyone. The first quarter demonstrated the strength of our business as we delivered robust growth during the quarter and beat our financial guidance across all key metrics. Revenue and unlevered free cash flow in Q1 2023 exceeded the high end of our guidance. This was driven by strong performance of our core business, which was bolstered by healthy demand from new customers and stable retention of our largest customer cohorts receiving price increases. We believe our strong customer retention rate relative to the increased subscription prices speaks to the enduring value of our product, as we continue to invest and deliver more value to our customers. As Anthony mentioned, last year was transformative for our platform with the release of more than 100 new features and updates including a new page editor, Fluid Engine.

Our platform today includes best-in-class tools, which makes it easier for entrepreneurs to run and grow their businesses. Products across our offering, Campaigns, Member Areas and Acuity Scheduling, are seeing growth as more customers integrate them into their work streams. Q1 2023 bookings of $266 million grew by 16% as reported and 17% in constant currency. This acceleration was driven by growth in unique subscriptions and the continued success of our price increases, which launched in Q3 2022. In August 2022, we announced a price increase for our legacy customers, which we began rolling out in September. This was the first increase to legacy customers in our history. Now as we conclude our second full quarter of realizing these updated prices in our base, customer cohorts demonstrate strong cash retention and lower customer churn than our projections.

Our largest cohorts of legacy customers renewed in the first quarter, and renewal rates were in line with historic levels. The increased mix of higher value plans had a positive impact on our bookings during the quarter. It is important to note that bookings is a forward-looking indicator as the majority of our subscription customers adopt annual plans. First quarter total revenue was $237 million and grew 14% and 15% on a constant currency basis. This exceeded the high end of our guidance range of $232 million to $234 million and accelerated for the second consecutive quarter. Our strong results were driven by robust customer retention through the pricing increases and new website acquisition. When compared to the first quarter of 2022, foreign currency fluctuations acted as a slight headwind to our top-line growth by approximately $2.8 million or 130 basis points as rates remained relatively low.

We saw a favorable website plan mix to higher value plans in the quarter, which shows more customers shifting to business and commerce plan. March 2023 was a particular strong month in the quarter, as new website acquisitions surpassed our expectations. We believe our marketing efforts are effectively targeting high-intent customers. Squarespace continues to deliver an essential service to entrepreneurs looking to bring a business online. International revenue was $67 million in Q1 2023, representing 10% growth and comprised 28% of total revenue. Excluding the FX impact, international revenue would have comprised 29% of total revenue and grown at 15%. Our platform continues to evolve toward an international audience as we localize key product features and focus our go-to-market efforts in key geographies worldwide through partnerships.

We have been targeting design-minded entrepreneurs internationally with expanded engagement through our Circle professional community. New website acquisition from international markets grew more than total website acquisition. We believe international markets remain an important growth opportunity, and we are still in the early innings of what we believe will be an exciting channel for new customer growth. Our product localization and targeted marketing efforts position us to succeed internationally. As Anthony mentioned, ARPUS grew 4% to $213 in the quarter. ARPUS is calculated from our total revenue during the preceding 12-month period divided by the average of the total number of unique subscriptions at the beginning and end of the period.

This metric includes revenue from all subscription types ranging from Unfold at the low end to Tock, our highest-priced subscription. Seeing this metric increase over time demonstrates our ability to sell more products and higher-value subscriptions to our customers. We continue to innovate and deliver additional functionality and tools to help entrepreneurs grow their business. Growing ARPUS reflects our ability to raise prices alongside the value we provide as well as increased mix to our higher value plans. Our continuous innovation strengthens our platform’s functionality, better serving our entrepreneurs as they build their brands and transact with customers. Our strong Q1 results were broad-based across the majority of our product offerings with higher value website subscriptions growing year-over-year.

Commerce revenue was $73 million, growing 14% and 15% in constant currency. As Anthony mentioned, our commerce products saw year-over-year growth with notable strength in commerce websites, Acuity Scheduling and Tock. GMV processed across our platform declined 2.6% year-over-year to $1.5 billion. Despite double-digit GMV growth from Tock, our Acuity Scheduling contributions were soft in the first two months of the year. We saw this trend stabilize in March. In addition, outsized performance from Acuity Scheduling in Q1 2022 created a difficult comparison for the product, but we are encouraged by the progress that the team has made to the product to drive more transactions on platform and refresh user experience on mobile. Acuity Scheduling attach rates were higher in the quarter than we expected, and we are delighted to see sustained interest from service sellers with our tools.

Additionally, we believe improvements that we are making to our member areas product will offer additional value to service-based commerce as we continue to improve the product. We are still early in the stages of monetization with the majority of our revenue, 92% being subscription-based. Tock is also in an area where we continue to have high expectations and we have increased the size of the sales team to support its growth. This quarter, Tock saw year-over-year strength in GMV, some of the highest months in its history. Tock also saw growth in unique subscriptions and reservations on explore Tock. We expect continued growth in these areas with the additional GTM support and overall improvements that the team has made to its solution deployment and customer onboarding process.

We remain optimistic about the potential of our diverse product portfolio. We delivered a non-GAAP gross margin of 83%, down slightly by approximately 50 basis points year-over-year due to investments in customer operations and an increased share of Tock hospitality business, which has a different margin profile on account of its payments business. This decline is in line with our expectations as Tock processes increasing amounts of GMV on its platform. We improved non-GAAP operating efficiency and delivered a non-GAAP operating margin of 13%. We reduced marketing and sales expenses by optimizing our channel mix to unlock opportunities to scale our marketing efforts in key geographies. This ultimately resulted in operating leverage for the business.

As a percentage of revenue, non-GAAP marketing and sales expenses represented approximately 41% of revenue, an improvement of more than 1,000 basis points as it represented 52% of revenue during the same period last year. Brand spend decreased year-over-year as we leaned into efficiently converting the large funnel we have built over the past several quarters. Additionally, we drove efficiency in G&A expenses by approximately 130 basis points as compared to the previous year. As a percentage of revenue, non-GAAP G&A expense represented 10% in the quarter. Non-GAAP R&D expense as a percentage of revenue represented 20%. In the first three months of 2023, our adjusted EBITDA was $31 million, growing at significant rates compared to the same period last year, as we increased our revenue and reduced marketing and sales spend, though the amount was partially offset by an increase in headcount year-over-year.

Squarespace has the advantage of generating substantial amounts of cash. Our balance sheet has a healthy cash and cash equivalents position of $239 million. Our total debt was $504 million, of which $41 million is current. Our cash flow from operating activities grew 36% to $64 million due to momentum in bookings and a reduction in our marketing and sales spend. In Q1, we generated robust unlevered free cash flow of $67 million for the trailing three months, 47% higher than Q1 2022, representing a margin of 28% and surpassing the high end of our guidance range of $63 million to $65 million. As a reminder, historically, Q1 is our strongest quarter of free cash flow generation, a result of outsized customer cohorts renewal, larger annual mix versus monthly subscription plans and the seasonality of our marketing spend.

We continued our share repurchase program during the quarter. As of March 31, 2023, we returned approximately $146 million to shareholders under the current repurchase program since it was authorized by our Board of Directors in May 2022. $25 million of which was purchased during the first quarter of 2023, which represents approximately 1.3 million shares at an average weighted price per share of $22.04 on the open market. At quarter-end, approximately $54 million remained available for repurchase. Turning to our guidance for Q2 and the full year 2023. In the second quarter of 2023, we are targeting total revenue in the range of $241 million to $245 million, this represents 14% growth at the midpoint. We expect unlevered free cash flow during Q2 to be in the range of $49 million to $53 million, which implies an unlevered free cash flow margin of 21% at the midpoint of the range.

For the full year, we are raising our revenue and unlevered free cash flow guidance. We expect total revenue to be in the range of $969 million to $981 million, representing growth of 12% at the midpoint of the range, up from $955 million to $970 million. Unlevered free cash flow is expected to grow throughout the year to the range of $192 million to $207 million and implies a margin of 20% at the midpoint of the range. This is up from $183 million to $198 million. The core website strength we saw in March and continuing in April gives us confidence to raise our guidance for the full year. This strength speaks to the resilience of our platform and the essential service it provides to million. We continue our trajectory towards sustaining profitable growth and expect our 2023 non-GAAP gross margin to be similar to the margin we delivered in 2022.

Our marketing and sales efficiencies are slightly offset by higher R&D as a percentage of revenue as we prioritize key growth initiatives in 2023. Additionally, we expect to see improvements in G&A this year. We have started the year outperforming against our expectations. We have a strong forecast, diversified business model and a high level of recurring revenue with solid cash flow generation, all of which contribute to our confidence in the outlook and underlying momentum in our business. We are well positioned to deliver on our guidance. We believe our strategic investments align us perfectly to provide more value to our customers worldwide. Our results are a testament to the amazing work by our employees to deliver for our customers. Thank you for the work you do each day to help entrepreneurs everywhere stand out and succeed.

Now, we will open the line for your questions.

Operator: Thank you. [Operator Instructions] Our first today comes from Ygal Arounian with Citigroup. Please go ahead.

Q&A Session

Operator: The next question comes from Trevor Young with Barclays. Trevor, please go ahead.

Operator: Our next question comes from Siti Panigrahi with Mizuho. Please go ahead.

Operator: Our next question comes from Matt Pfau with William Blair. Please go ahead, Matt. Your line is open.

Operator: Our next question comes from Ken Wong with Oppenheimer & Company. Ken, please go ahead.

Operator: Our next question comes from Andrew Boone with JMP Securities. Andrew, please go ahead.

Operator: Our next question comes from Josh Beck with KeyBanc. Josh, please go ahead.

Operator: Our next question comes from Clarke Jeffries with Piper Sandler. Clarke, please go ahead.

Operator: Our next question comes from Brad Erickson with RBC Capital Markets. Please go ahead, Brad.

Operator: Our final question today comes from Deepak Mathivanan with Wolfe Research. Please go ahead.

Operator: That was our final question for today. So, this concludes today’s call. Thank you so much for joining. You may now disconnect your lines.