Squarespace, Inc. (NYSE:SQSP) Q1 2024 Earnings Call Transcript May 7, 2024
Squarespace, Inc. misses on earnings expectations. Reported EPS is $-0.29483 EPS, expectations were $-0.09. SQSP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Alyssa and I will be your operator today. At this time I would like to welcome everyone to Squarespace’s First Quarter 2024 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 hand the call over to your host at Squarespace, Clare Perry. Clare, please go ahead.
Clare Perry: Good morning and thank you for joining Squarespace’s first quarter 2024 earnings conference call. This is Clare Perry, Head of Investor Relations. I’m joined by 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 will 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. These measures should not be considered in isolation from nor substitute for our GAAP reporting.
We will make forward-looking statements pursuant to the safe harbor provisions of the Private Security 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 7, 2024. We undertake no obligation to update these statements as a result of new information or future events, except we’re required by law.
Please note that all comparisons are on a year-over-year basis unless we state otherwise. I will now turn the call over to Anthony.
Anthony Casalena: Thanks, Clare, and good morning everyone. I’m pleased to share that Squarespace’s Q1 was a strong one, with our revenue up 19% and bookings up 23%, beating the high end of our guidance on both metrics. Unlevered free cash flow margin within the quarter was 32%, further setting us up for a fantastic year. On the back of the strong performance, we’re pleased to raise our fiscal year 2024 outlook today from both the revenue and free cash flow perspective. The quarter was driven by continued organic growth momentum in the core business, specifically websites, where we saw strong retention and new customer growth domestically and globally. Squarespace is now positioned as a leader in three primary categories that are critical to all small businesses, websites, domains, and email.
Squarespace’s domains has been a big focus for us in 2024, as we complete the migration of domains from Google, as well as launch constant improvements to our domains platform. Already millions of domains from Google have been migrated, and we are on track to complete this migration over the summer. The acquisition of Google Domains positions us as one of the top registrars in the world. And we are especially encouraged by the new domains business we are seeing, a funnel which is showing a strong attach rates into our core web building tools, as well as a strong uptake of Google Workspace. We have nearly reached 100% rollout of our partnership from the Google Workspace side, where Squarespace acts as the exclusive domain provider for any customer purchasing a domain along with their workspace subscription from Google.
Squarespace payments is also off to a great start, now available to 100% of customers in the United States and feedback so far has been very positive. We launched our migration tool, which lets our existing Stripe customers move their accounts to Squarespace payments in just a few clicks while retaining their transaction history and without having to re-verify their business data. We also introduced Klarna to Squarespace payments, the first of many other ways to pay we will be adding. Klarna is the first alternative payment mechanism we introduced in three years, and our ability to rapidly innovate on our payments product will unlock multiple new features through the end of the year. A primary focus of ours is enabling selling across all of our plan types at Squarespace, and Squarespace payments is a critical unlock for us, as we’ll be bundling it within our various SaaS tiers and adjusting our take rate for higher value plans, which is the first in our history.
We believe this will attract both larger sellers that are not accommodated by our current plan structure, and smaller sellers who are just getting started and now have access to even more of our tools. I’m also excited to announce that we’ve recently introduced our AI philosophy as it pertains to web design called design intelligence by Squarespace. It is rooted in the principle that AI should augment human creativity rather than replace it. It combines two decades of industry-leading design proficiency with AI-driven content generation and guidance. This integration will empower entrepreneurs to leave their mark with confidence. While AI will feature in all of our products, design intelligence offers customers clear insights into how its application should be applied to their websites.
Explore more about how AI is shaping our current and future endeavors at squarespace.com/designintelligence. All said, it is a very exciting time for our company. I’d like to extend a huge thank you to our customers, team, and supporters as we continue our pace of innovation throughout 2024. And with that, I’ll turn it over to Nathan.
Nathan Gooden: Thank you, Anthony. Good morning, everyone. And thank you for joining us today. The investments we have made into building a powerful ecosystem for entrepreneurs everywhere have delivered strength across all elements of our business. We entered the year with strong Q1, 2024 results building on our momentum in 2023 and benefiting from a combination of catalysts, including strength in our core business, pricing and packaging optimization, international expansion in our domain business, both the organic and Google migration. All of these catalysts will continue to drive revenue growth and unlevered free cash flow expansion in 2024 and over the long term at Squarespace. We exceeded our top line and unlevered free cash flow guidance with revenue growth of 19% and an unlevered free cash flow margin of 32% over 340 basis points of improvement.
We continue to drive meaningful revenue growth, improve profitability and deliver strong incremental cash flow. Q1 total bookings of $326 million grew 23%. We are seeing strong growth come from our core website business and our acquired domain assets. Our platform has never been stronger and we are encouraged by the retention and acquisition of new subscriptions. Our acquired domain assets help drive our growth as well. As a reminder, our acquired domain assets consist of single domain subscriptions originally sold by Google as part of our acquisition of Google Domains. Renewal rates from this customer base continues to surpass our expectations. Revenue of $281 million exceeded the high end of our guidance, up $274 million to $277 million in the first quarter, which represents 19% growth as reported and 18% in constant currency.
Outperformance of our revenue guidance range was primarily due to the strength in our core business where we saw strong new subscription acquisitions from websites. Retention and acquisition of unique subscriptions contributed approximately $26 million or over 59% of the growth during the quarter. Organic growth excluding revenue associated with our acquired domain assets was 13% in the quarter. The second largest contributor to revenue growth this quarter was from our acquisition of Google Domains, which contributed approximately $13 million, representing 29% of growth during the quarter. This amount includes revenue associated with our acquired domain assets, domains referred from Google, and resold domains through our exclusive workspace reseller agreement.
We continue to see a positive halo effect following our acquisition of Google Domains where we see robust referral traffic to Squarespace. As of March 31st, 2024, our customer base represented over 4.9 million unique subscriptions, up 15% and representing a net increase of 648,000 unique subscriptions over the 12-month period. This strength includes websites as well as new domain subscriptions as we see strong demand for Squarespace domains. ARPUs was $227 in Q1, 2024, growing 7%. Residual revenue impact from 2022 pricing increases and increased attachment rates for certain commerce offerings drove ARPUs growth in the quarter. The quarter-over-quarter ARPUs comparison reflects the fact that a larger number of our Q1, 2024 new unique subscriptions in the quarter were domain subscriptions, which carry a lower price point.
Note that unique subscriptions and ARPUs do not account for our acquired domain assets. In Q1, presence revenue grew 22% as reported and in constant currency to $201 million. As a reminder, associated revenue from our domains is recognized as presence revenue. Strength in our unique subscriptions were the primary driver of growth, contributing over 56% of the growth. We saw solid retention of existing subscriptions and continued acquisition of new subscriptions in both our personal and business plans. Another important driver of revenue growth was our acquired domain assets, which represent renewals from legacy Google domain customers. Additionally, we continue to see some benefit from our legacy price increases, which we began rolling out to customers in Q3 2022.
Squarespace benefits from a diversified commerce portfolio, serving our customers varied e-commerce needs, including selling physical goods, services, content, time, hospitality and events. Commerce revenue grew to approximately $80 million or 11% as reported and 10% in constant currency. The increase in commerce revenue was primarily the result of unique subscription growth, which represented approximately $6 million. Many of our customers who are sellers choose our business plan and therefore fall under presence revenue. So that dynamic can mass some of the underlying growth we are seeing in commerce. Growth payment volume or GPV was $1.6 billion in the quarter of 8% over 100 basis points of momentum versus Q4, 2023, breaking historical seasonal trends.
Affected with Q1 2024, we have changed our nomenclature for this metric to GPV from GMV, growth merchandise value. We have not changed the calculation or definition. GPV represents the total dollar value of orders processed through our platform in the period, net of refunds and fraudulent orders. This new nomenclature better captures Squarespace payments, which we launched at the end of 2023. We saw GPV momentum continue from Q4 2023 with notable strength driven by acuity scheduling and increased commerce transactions occurring on our customer’s website plans. We exited Q1, 2024 with annual run rate revenue of $1.1 billion, up 19% or $176 million. Increases in our unique subscriptions, the impact of the acquired domain assets and price increases across several of our subscription plans were the primary drivers of growth for the period.
We have updated our calculation of annual run rate revenue to represent quarterly revenue from subscription fees and revenue generated in conjunction with associated fees in the last quarter of the period multiplied by four, rather than calculating based off the most recent monthly revenue figure multiplied by 12 to normalize results for the run rate each quarter. International revenue was $80 million, growing 19% and 18% in constant currency and representing 28% of our total revenue. International is a key area of focus for the business as we bring our ecosystem into new markets where we see clear synergies with design and strong product market fit. Our growing domains footprint further expands our reach internationally. We now support 25 currencies adding 21 in the last 12 months and 11 languages looking to launch more new languages in 2024.
Turning to our margin profile, our non-GAAP gross profit margin was approximately 73% in Q1 2024. As we have called out previously, comparisons of gross profit margin to prior year reflect higher cost of revenue primarily due to the domain registration fees associated with our acquired domain assets. As legacy Google Domain customers renew their domain subscriptions, we pay registry fees up front while recognizing the associated revenue rateably over the course of the subscription. Q1 2024 is the trough for our gross profit margin and we expect improvement building each quarter as we progress through the year. Non-GAAP operating expenses grew by only 4% in Q1 2024 to $173 million or 62% of revenue. This ratio represents over 800 basis points of improvement.
Non-GAAP R&D was $50 million in the quarter or approximately 18% of revenue. Historically, Q1 is our strongest quarter of demand from new customers and we therefore spend more marketing and sales dollars into this demand pattern. Non-GAAP marketing and sales expenses grew 4% to $100 million which represents approximately 36% of revenue, a decline of more than 500 basis points. Our marketing attribution model continues to efficiently direct the mix of our marketing spin across our marketing channels. Finally, non-GAAP G&A expenses were $23 million or 8% of revenue. G&A expenses improved on an absolute dollar basis and as a percentage of revenue as we continue to optimize investments and benefit from the scale of our business. In the first quarter, our adjusted EBITDA increased to $32 million or 11% of total revenue, more than 160 basis points of decline from the same period last year.
The impact to adjusted EBITDA from our strong growth in revenue was softened by higher domain registration fees. On a dollar basis, advertising expenses were higher, though as a percentage of total revenue, we saw over 300 basis points of improvement. Adjusted EBITDA can fluctuate quarter-to-quarter due to operating expense seasonality. We anticipate favorable leverage on adjusted EBITDA through the full year 2024 as we continue our disciplined approach to invest across our operations as we scale our revenue. Overall, our solid execution and core business strength demonstrates Squarespace’s ability to deliver profitable growth at scale. We are driving stronger cashflow and profitability despite the temporary gross profit margin headwind related to our acquired domain assets.
We intend to continue driving higher levels of profitability and longer-term shareholder return by prioritizing investments in our offerings. We maintained a healthy balance sheet with cash and cash equivalents of $242 million and approximately $18 million of available borrowing. Total debt was approximately $557 million, of which $53 million is current. I remain comfortable with our net debt to trailing 12-month adjusted EBITDA at 1.0 times as of quarter end. Turning now to our cash flow. We delivered strong cash flow in the quarter, surpassing our guidance. Our cash flow from operating activities grew 33% to $85 million for the three months ended March 31st, 2024, primarily due to the strength in bookings. In Q1, our unlevered free cash flow was $89 million, growing 33% and representing a margin of 32% surpassing the high end of our guidance.
The outperformance was primarily due to strong bookings driven by renewals and acquisition of website subscriptions. The year-to-year increase of over 340 basis points in unlevered free cash flow margin also reflects the timing of our Q1 tax pavement, which fell in Q1 a year ago and will fall in Q2 in 2024. Timing of payments may fluctuate in any one quarter. Our consistent levels of positive unlevered free cash flow afford us opportunities to innovate and develop new products, where we see opportunity to provide more value to our customers and to plant the seeds for long-term growth and return value to shareholders through our stock repurchase program. In February 2024, our board of directors authorized a $500 million share repurchase program.
We view share repurchases as an integral part of our capital allocation strategy. As of March 31, 2024, we returned over $12 million to shareholders under the current authorization, representing approximately 321,000 shares at an average weighted price per share of $33.33 on the open market. Now turning to our guidance for Q2 and the full year 2024. In the second quarter of 2024, we are targeting total revenue in the range of $291 million to $294 million, which represents approximately 18% growth at the midpoint of the range. We expect unlevered free cash flow during the second quarter to be the range of $61 to $64 million, which represents a margin of approximately 21% at the midpoint of the range. The implied Q2 margin relative to Q1, 2024 primarily reflects the timing of our Q1 corporate tax payment, as I noted a moment ago.
Because timing of such payments may cause fluctuations in any one quarter, we manage to the full year metric and margin. The strength that we saw on Q1, combined with our healthy expectations for Q2, gives us confidence to raise our full year guidance today. In 2024, we expect total revenue to be in the range of $1.193 billion to $1.208 billion, up from our previous range of $1.170 billion to $1.190 billion. The midpoint of our updated range represents 19% growth. Unlevered free cash flow is expected to reach between $298 million to $318 million and implies a margin of 26% at the midpoint of the range. This represents an increase from our previous estimate of $290 million to $310 million. To summarize, we had a great Q1. We saw strong momentum in the core business fueling our top-line growth, profitability and cash flow, supported by solid early traction from the migration of our Google Domain assets.
Our business continues to grow with existing and new customers as we make progress against our strategic priority to drive long-term growth while continuing to gain leverage, achieving profitable growth at scale. Thank you to our employees for their continued commitment to our customer success. I look forward to engaging with many of you at our investor day next week. With that, operator, please open the line for the Q&A portion of the call.
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Q&A Session
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Operator: Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from the line of Vikram Kesavabhotla with Baird. Your line is now open.
Vikram Kesavabhotla: Great. Thanks for taking the question. My first one is on the unique subscription number. It looks like that was up 15% year-over-year. I think that compares to 10% and 5% in the prior two quarters. So, just wondering if you can help us understand the drivers behind the acceleration in that metric? How much of that is a reflection of easier comparisons versus some of the tailwinds that you’re seeing from the work on the platform? And maybe you can offer some thoughts on how we should think about the growth of that metric this year. And then my second question is on the guidance. Just wondering if you could clarify your expectations for Google Domain’s contribution to the revenue ranges for the second quarter and fiscal ’24? And I’ll leave it there. Thanks.
Anthony Casalena: Great. I can get started on the unique subscribers. A lot of that is driven by new domain subscribers. Just to remind everyone, we’ve had even before the Google Domain’s acquisition, there were of course they sold domains for better part of a decade now. We had millions of domains on the platform. So it’s not exactly a new type of subscription for us. That being said, post the Google Domain’s closure, we’ve seen really greatly increased traffic in new domains coming onto the platform that are domain first instead of website first. So that’s a huge difference between now and this time last year. Again, to remind everyone, Google Domain’s transaction officially closed in September. So, we’re really encouraged by that.
We’re really encouraged by the attach rate to our core products on those new domains. And there’s a lot of factors contributing to that in the ecosystem, which we can touch on later. But it’s an entirely different world than it was last year and we’re the beneficiary of a lot of that inbound traffic. But that’s the primary driver of the unique subscriptions being higher. And I can turn it over to Nathan on the guidance.
Nathan Gooden: Yes. On the guidance Vikram, one, I would say we’re not going to continue to break out the contribution from Google Domain as we did for the full year in Q1. But what I will say, we were able to raise our guidance, and they called us a trifecta small business for a website, domain and email. And we are seeing continued strength from all three of those channels, and that causes us to raise the guide for the full year. So the organic business is continuing to maintain the same strength that we saw throughout 2023. And as a reminder, Google Domain, the revenue will, you do recognize that over 12 months, you’ll see that continue to gain momentum as part of revenue throughout the year. I will say Google Domain was the number one driver for bookings this quarter. So we are very happy to see that — yes, the overall domain business come through.
Vikram Kesavabhotla: Okay, great. Thank you.
Operator: Thank you. The next question comes from the line of Andrew Boone with JMP Securities. Your line is now open.
Andrew Boone: Good morning and thanks so much for taking my questions. Nathan, you talked about a 500 basis point improvement in marketing efficiency. Can you help us understand the drivers of that as well as the sustainability of that marketing efficiency going forward? And then going back to the last question, can you break down international? We’ve seen strong acceleration from 14% 4Q to 18% in 1Q, ’24 ex FX growth. Can you help us understand that, is that the subscriber number or is there anything else to highlight as we think about the international opportunity?
Nathan Gooden: Yes, I’ll take the marketing or marketing expense improvement. We did see 500 basis points on a non-GAAP basis. I’ll say this has continued impact from our marketing attribution model as we direct spend to the right channel. And that is driving a healthy top line. I would say we’re very efficient when it comes to marketing spend and investing in the right channels and shifting as we see inefficient spend there. And that’s just that coming through the model. I would say, we do expect to continue to maintain healthy margins on that. The other thing I’d point out, especially on a GAAP basis, you do see the amortization of the PPA from Google Transaction rolling through that, so on a GAAP basis, that’s why it’s not as impactful improvement.
Anthony Casalena: Okay. So on international revenue, we’re continuing to see lots of investments there that are continuing to pay off. We increased currency year-over-year by 21 currencies to 25 currencies. The momentum that we’re seeing in the United States, revenue is really a trailing indicator and the ones that we’re seeing that the momentum in Q1, we saw very healthy trials international. And so, we expect the investments that we’re making there to pay off throughout the year. But I will say we’re very excited to talk about international next week at our Investor Day is one of the key growth drivers we’re seeing going forward.
Andrew Boone: Thank you.
Operator: Thank you. The next question comes from the line of Ken Wong with Oppenheimer. Your line is now open.
Ken Wong: Great. Thanks for taking my question. It’s just one for you, Anthony. You guys brought up design intelligence. How do you envision customers will engage with that interface? Is this an opt-in? Will this be default upon interacting with Squarespace? How does that potentially roll out over time?
Anthony Casalena: Sure. So, as mentioned in the letter, people can go and take a look on our front site. It’s actually linked from the header, squarespace.com/design-intelligence. It’s just a real roundup of how we see our AI efforts applying to our design tools. As to your question this will be opt-in part of default experience. It’ll be part of the default experience. AI, this page focuses a lot on how we are maintaining design integrity while utilizing a lot of these solutions in various parts in our platform. But AI is going to appear everywhere within Squarespace. It’s mentioned on previous calls in the form of machine learning. It’s already appeared in our customer operations. We’ve had a, you know, AI chatbot trained on our knowledge base for the better part of a decade.
