Squarespace, Inc. (NYSE:SQSP) Q3 2023 Earnings Call Transcript

Squarespace, Inc. (NYSE:SQSP) Q3 2023 Earnings Call Transcript November 7, 2023

Squarespace, Inc. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $0.12.

Operator: Good morning, everyone. My name is Seth, and I’ll be your conference operator today. At this time, I would like to welcome everyone to Squarespace’s Third 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 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 Third Quarter 2023 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 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 strategy 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 results 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, November 7, 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: Good morning, everyone. I’m delighted to review Squarespace’s third quarter 2023 results with you today. Our strong financials were driven by the strength of our core business and reflects our ongoing mission to build products that help entrepreneurs stand out and succeed. In the quarter, we delivered 18% revenue growth, expanded our unlevered free cash flow margin of 21% and have crossed $1 billion in annual run rate revenue for the first time. In September, we closed our acquisition of Google Domains, which further contributed to our bookings growing 18% this quarter. On top of our financial performance, we delivered on multiple major releases, which we summarized at Squarespace Refresh in October. These include Squarespace payments, which we are onboarding new customers to now as well as improvements to our classes and courses products, more tools for service sellers, including invoicing and continued major improvements to our domain offering as we prepare for the Google Domains migration.

Our ultimate goal is to provide entrepreneurs with a single online hub for all their web-based needs. We are continuing to invest in our portfolio of brands, including Squarespace, Acuity, Tock, Unfold and Bio Sites, that help our customers publish and transact online, no matter where they might start the journey. This quarter, Acuity Scheduling new branding and rollout of enhanced features is an example of our progress in this direction. Available on a stand-alone basis or attached to a website, Acuity exemplifies our efforts to create new entry points for customers, allowing them to adopt our products in line with their needs. Our commitment to online presence is further strengthened by the relaunch of Squarespace domains, the next evolution of our domains offering.

We have transformed Squarespace domain into a product for Domain-first customers, now offering some of the most comprehensive domain registration tools in the industry, all embedded within our integrated platform. This investment follows our acquisition of Google Domains, which we closed in September. Squarespace and Google remained focused on ensuring a seamless migration for our customers. It is still early in terms of the impact to our business, but we remain excited about this transformative deal. We will begin migrating domains from Google shortly that we are already processing all new registrations from customers coming from that platform. On the product release front, we have also started introducing Squarespace payments to new customers in the U.S., and that rollout will continue throughout the end of the year and into 2024.

We are thrilled to be able to offer a completely integrated payments platform with Squarespace, and we’re looking forward to introducing this functionality across all of our product lines. Squarespace Payments has been a significant investment for us, and it would be great to have our customers using it. Squarespace Refresh also previewed capabilities of Squarespace AI, a website building experience that is powered end-to-end by generative AI. We’ve been using machine learning models to support parts of our platform for the better part of the decade and are more than ready to integrate the evolution of these technologies. We are continuing to be thoughtful regarding what we work on and are first focusing on integrations that solve customer pain points and streamline the website building process.

Additionally, we’re working to add Squarespace AI to Squarespace Blueprint, focusing on visual elements in addition to text. Squarespace Blueprint is our template free onboarding experience for websites where we guide customers through setup, helping them come online more quickly with a personalized website. We continue to push the boundaries of our platform by placing more powerful and dynamic tools in the hands of entrepreneurs worldwide. We now offer customers 22 currency options and are working to increase our supported languages as we prepare to onboard Google Domains international customer base. International expansion remains a key growth opportunity for our business, and we saw positive gains in key markets this quarter. In summary, I’m thrilled with both our in-quarter performance and the opportunities we have in front of us, especially considering the product releases we have just recently put in the market.

Thank you to our employees for making this possible and our customers for choosing us. We are looking forward to helping you with your entrepreneurial journey no matter how it may start. And with that, I’ll turn it over to Nathan to review the financials.

Nathan Gooden: Thank you, Anthony. Good morning, everyone, and thank you for joining us today. Our solid Q3 2023 results were driven by the strength of our core business. We grew revenue and unlevered free cash flow this quarter. both metrics surpassing the high end of our guidance. These strong results allow us to raise our outlook today to over $1 billion in total revenue at an unlevered free cash flow margin of 23% at the midpoint of our 2023 range. We believe this growth, which follows record website trials during the first half of the year demonstrates that our powerful product suite continues to attract and resonate with customers worldwide. Total revenue this quarter was $257 million, growing 18% as reported and 16% in constant currency.

The fundamental drivers across our business remain strong. Against this backdrop of growth, we remain focused on the bottom line as well, growing our adjusted EBITDA 52% to $66 million at a margin of 26% and representing over 500 basis points of improvement. On September 7, 2023, we closed our acquisition of Google Domains. Note that all discussion of unique subscriptions and average revenue per unique subscription do not account for single domain subscriptions originally sold by Google as part of the acquisition. We collectively refer to these acquired domains as acquired domain assets. Q3 2023 revenue contribution from acquired domain assets was immaterial. As a reminder, we recognize subscription revenue ratably over the period and impact will first appear in total bookings.

During the quarter, we achieved $267 million in total bookings, an increase of $42 million, growing at 18% and 16% in constant currency. Unique subscriptions were the primary driver of growth, both the retention of existing and the addition of new. The acquired domain assets was the second largest driver of bookings growth during the quarter, which we began realizing following the close of our Google Domains acquisition on September 7, representing a period of 23 days. The impact of legacy price increases from our customers to our total bookings weighing during the quarter as we fully lap the 12-month period since we began rolling price increases out last year. Q3 2023 revenue growth of 18% represented an increase of approximately $39 million.

The primary driver was the growth of unique subscriptions, both the retention of existing and contributions from new. Unique subscriptions contributed $17.5 million or 44% of the growth this quarter. As a reminder, unique subscriptions and ARPUs do not include our acquired domain assets. As of September 30, 2023, we had over 4.4 million unique subscriptions on our platform, an increase of $225,000 or 5% growth. We continue to see strength in our higher-value website plans, helping drive our ARPUs to over $226 this quarter, and representing growth of 10%. The largest drivers of ARPUS in the quarter were price increases across several of our subscription plans and the revenue mix shift toward higher value subscription plans. We lapped the one-year anniversary of our legacy price increases, which we started rolling out in August 2022 to USD customers.

The impact of price increases across our subscription offerings was the second largest contributor to our total revenue growth during the quarter and represented approximately $13 million across both presence and commerce website subscriptions and accounted for approximately 32% of the growth in Q3. Price increases had an outsized impact on our presence revenue, representing $12 million of growth. At the end of this 12-month period, I am delighted to see strong retention, which demonstrates the stickiness of our products and the value we deliver to our customers. We believe we still have room to bring existing customer prices closer to list price. Both contributions from pricing and the growth of unique subscriptions contributed to strong rates of total cash retention exceeding the same period last year.

Squarespace benefits from a diversified commerce portfolio, which supports our customers’ varied e-commerce needs, including physical goods, service sellers and hospitality customers. Commerce revenue grew to $78 million or 15% as reported and 13% in constant currency during the third quarter, representing 30% of total revenue. The increase in commerce revenue was primarily the result of growth of unique subscriptions, which contributed approximately $7 million to total revenue. We saw a second consecutive quarter of accelerating gross merchandise value with growth of 6% to approximately $1.5 billion in GMV. We are excited to see year-over-year GMV growth across all of our commerce products with momentum building in online stores. As Anthony mentioned, with Squarespace Refresh, we launched exciting improvement in our commerce tools that aim to help our customers sell more effectively.

New features include fulfillment options customized by product; Shop pages optimized for mobile; and improvements in the checkout experience to offer in the customers a consistent brand experience. Annual run rate revenue surpassed $1 billion, an increase of over $152 million, growing 18%. Stable subscription retention, continued acquisitions and price increases drove strength in the quarter. We believe that annual run rate revenue exceeding $1 billion is a testament to the strength of our business and the power of our platform. We continue to see growth in international markets, with international revenue at $73 million, growing 21% as reported and 13% in constant currency despite typical seasonal slowness. Currency was a tailwind for us this quarter, adding $4.5 million as we continue to see support from foreign exchange rates relative to the same period last year.

As of quarter end, international revenue represented 28% of total revenue in Q3 2023. Note that our international business is primarily driven from the websites, and we still have opportunity with Acuity Scheduling and Tock, which are still nascent in the international markets. Our marketing attribution model has been efficiently directing the mix of spend to marketing channels, helping us drive customer growth this year. During the third quarter, we continued to lean into direct response channels. We closely monitor the return on investment from our spend to inform our marketing strategy as we look to scale into new markets. Turning to our margin profile. Our non-GAAP gross margin was 82% in Q3, a decline of over 200 basis points, increased customer operation costs and domain registration fees associated with our acquired domain assets impacted our margin during the quarter.

Note that domain registry fees are expensed Upfront upon sale, not ratably over the period like revenue. Moving to operational expenses, our non-GAAP marketing and sales expense was $72 million in the quarter or 28% of revenue and represents over 350 basis points of improvement. We offset slight increases in advertising expense with savings in head count and organizational structure relative to the same period last year. Non-GAAP R&D expense was $45 million during the quarter and represented 17% of total revenue as we saw savings from increased capitalization of payroll. Additionally, we saw broader savings related to hiring, ensuring we are intentional and disciplined when evaluating headcount. Finally, non-GAAP G&A expenses were 10% of revenue or $26 million.

Our G&A margin improved by approximately 170 basis points as we generally kept expenses flat relative to an increasing revenue base. Overall, I am pleased with the efficiency that we have achieved across each of the operating expense areas. In the third quarter, our adjusted EBITDA increased to $66 million or 26% of total revenue, growing 52%. Our adjusted EBITDA margin improved by nearly 600 basis points when compared to the same period last year. The increase of our total revenue, coupled with our operational discipline, drove efficiencies to our bottom line. We are pleased to see this sustained leverage. We maintained a healthy balance sheet with cash and cash equivalents of $216 million and approximately $18 million of available borrowing.

Total debt was approximately $581 million at the end of the quarter, of which $49 million is current and reflects the upside of our credit facility by $100 million to partially fund our acquisition of Google Domains. We utilized approximately $80 million of cash on hand for the remainder of the purchase. I remain comfortable with our leverage ratios today with net debt to our trailing 12-month adjusted EBITDA at 1.6x 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 29% to $53 million for the trailing three months ended September 30, 2023, primarily due to the strength in bookings and offset by an increase in cash-based payroll and associated benefits as well as the timing of payments.

Related to payments during the quarter, we prepaid domain registry fees in conjunction with our acquisition of Google Domains. In Q3, our unlevered free cash flow was $54 million, growing 29% and representing a 21% margin. Over 170 basis points of year-over-year improvement, the beauty of this business is that we generate a lot of cash. Our share repurchase program continues to be active. While there are no repurchases in the third quarter, as of quarter end, we still had approximately $54 million available for repurchase under our current authorization. Since initiating the program in May 2022, we have returned approximately $146 million to shareholders. Turning to our guidance for Q4 and full year 2023. In the fourth quarter of 2023, we are targeting total revenue in the range of $261 million to $264 million.

The midpoint of the range represents approximately 15% growth. We expect unlevered free cash flow during the fourth quarter to be in the range of $56 million to $60 million, which implies an unlevered free cash flow margin of 22.1% at the midpoint of the range. The strength that we saw in Q3 gives us confidence to raise our full year guidance today. In 2023, we expect total revenue to be in the range of $1.002 to $1.006 billion, representing growth of approximately 16% at the midpoint of the range, up from our previous guidance of $987 million to $995 million. Unlevered free cash flow is expected to reach between $232 million and $236 million and implies a margin of 23.3% at the midpoint of the range. This is up from previous guidance of $217 million to $225 million.

I would like to outline some modeling points for Q4 and the remainder of this year. First, these ranges assume minimal contributions from our acquired domain assets. Generally, domain subscriptions are annual paid Upfront, and we recognize associated revenue ratably over the course of 12 months. As legacy Google Domains customers renew their subscriptions, impact will first be seen in total bookings. Keeping in mind the revenue recognition pattern, we anticipate continued impact to our gross profit margin in Q4, though this change will not be representative of our long-term margins once our legacy Google Domains customers complete their renewals on our platform. Domains have been a part of our offering for nearly a decade and even with the addition of millions of customers from our acquired domain assets, we expect our domain business to run in a similar manner.

As with our current business, we expect new customers to join and attach websites and other services. Additionally, there is always an element of churn. We are still early to realize the benefits of this transformative acquisition, and we remain incredibly excited about what is to come. As Anthony mentioned, Squarespace Payments is now available to limited customers in the U.S. We expect to recognize this revenue net, and we do not anticipate a material contribution to our revenue in Q4. To summarize, we had a great Q3. We executed well with strong top line growth, profitability and cash flow. Our core business continues to grow with existing and new customers as we make solid progress on our strategic priorities, seeding investments to drive our long-term growth.

I am pleased with the traction we are seeing today at Squarespace. Finally, I would like to express my gratitude to our employees for their commitment to our customers’ success. With that, Operator, please open the line for the Q&A portion of the call.

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Q&A Session

Operator: [Operator Instructions] Our first question on today’s call comes from Trevor Young at Barclays.

Trevor Young: Great. Now that you’ve lapped the pricing increase that started last fall, can you just remind us of what proportion of [indiscernible] rate card? And is there any specific products where there’s like a greater or lesser proportion of customers that are below rate card? And relatedly, do you intend to take price again on renewal for some of those products that are maybe customers are still well below rate card?

Anthony Casalena: Sure. You broke up a little bit on the early part of that question, but I think you’re asking what portion of our customers are below rate card right now on the primary products. I don’t think we have that broken out, it’s — how to characterize this. If you look at the history of the product over the past 10 years, there are currently more people on presence subscriptions than commerce subscriptions overall, even though we get more money from the commerce subscriptions. And so there is a significant portion of below rate card. And what we’re planning on doing is after a certain period of time elapses, we didn’t want to do it within a year, maybe within 18 months, 24 months, kind of revisit these and start to kick them up again sort of in very similar ways to what we did in the first pricing renewal.

So say, “Hey, we’ll either raise it by $1 or $2 at the max of 10% or 15% to those customers.” So there’s still room to move in terms of moving these cohorts up. And I’d say that group is a nontrivial amount.

Trevor Young: Okay. Great. So it sounds like maybe some time in ’24, potentially revisit that?

Anthony Casalena: That’s right.

Operator: Our next question comes from Ygal Arounian from Citi.

Ygal Arounian: So coming off first half of record trials and maybe just some commentary on what you’re seeing in terms of conversion of those trials, how they’re flowing through, what that cohort looks like? And understandably, you can’t have a record quarter every quarter, but just maybe an update and as the macro seems to be getting a little bit soft to hear what you’re seeing from the top of funnel, what you’re seeing from your SMB customers. And then I have a follow-up on that.

Anthony Casalena: Sure. In terms of trials in the primary product, it was another record quarter, although by a very — a little bit. I mean it was — I would call it more in line even though the number is technically higher than last quarter. So we were pleased to see that. They continue to have strong conversion. Again, our primary product, like the website product and the subscriptions, the trials I’m talking about, is really at the top of its game. I mean if you take a look at the updates from Refresh, which we put online a month ago, I mean the expressability within the Squarespace product, the ease of use, what we’re doing with onboarding, the ideas around integrating AI, all of this — and this is a really formidable product right now.

So that, combined with all of the commerce initiatives we have around it, it’s the best the product’s ever been so it’s like the reverse of atrophy. It’s amazing. So yes, macro demand very positive for us and the product in a very positive place. Again, I point people to Refresh, it’s a great real visual update of a lot of what happened this year. And also a lot in Refresh is stuff that got released in Q3. So it’s a very up-to-date view of what’s going on.

Nathan Gooden: I would add to that, Ygal, both for bookings and revenue, I think that the primary driver being the retention of our existing and the acquisition of new is evidence of the core business acceleration of that top-of-funnel impact that we’ve seen in the first half of the year. And as Anthony said, another record trial in Q3.

Ygal Arounian: Okay. Awesome. That’s very helpful. And then just on domains for a little bit, just — Nathan, you talked about the revenue contribution being immaterial in Q3. Any insights to what the revenue contribution should be in 4Q as we think about what’s embedded in guidance? And then Anthony, you also mentioned that Google Domains migration will be starting soon. Can you talk about that a little bit more, expand on what that might look like and how we could think about the impact from that?