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?

Nathan Gooden: Yes. Ygal, I’ll address the revenue portion first. So as I said in my opening remarks, the — where we’ll see the initial impact is bookings because as those flow through the revenue impact, it was immaterial in Q3 because it’s ratably recognized over the 12 months and Q4 will not be a material impact either. So it will take time for that the revenue contribution to build up where it’s a material impact to our total revenue, but very excited. I will say the — from what we had modeled from a retention standpoint, we’re continuing to exceed that as the legacy domains renew. So excited about that business, and I’ll let Anthony expand more on that.

Anthony Casalena: Yes. And I remain really excited about domains from two angles. One, that it just represents this notion that we’ve been working on that you should be able to start with Squarespace even if you don’t have a website with us, and it should be a fully featured experience. We have that with Acuity with Bio Sites, with Unfold, with Tock and now with domains where there’s just multiple entry points into our ecosystem. And I’d also emphasize that we continue to staff and build up the domains group at a really rapid clip, we launched new features and domains all the time, every month, and we have a ton of updates planned there to the interface and to the ability to very lightly cross-sell into our products. So I think I’m encouraged by the early results and things will only get better as we continue to roll out those improvements.

We just hired a general manager of that group. The President of — General Manager is here. He is kind of new as of this time last year, and it’s been very positive in the other areas, and I expect it to be positive in domains.

Operator: Our next question is from Ken Wong from Oppenheimer.

Ken Wong: Great. Fantastic. I wanted to circle up on payments. You guys just initiated the U.S. rollout. Any early comeback from customers in terms of what you’re seeing there? And how we should think about any potential changes to KPIs or financial metrics as you roll this out broader across your business?

Anthony Casalena: Yes. It’s really early days there still, although it is an amazing milestone for us to be actually processing, having customers in the wild sign up for it and have a full-fledged experience. Right now, it’s single-digit percentage of customers in the United States who has it available, and those are all new, not really existing. And so the in-year impact is going to be very, very limited. Reason for that is this is a new area for us, it carries risk with it. We want to monitor things really closely and make sure that experience is positive for people and make sure we’ve got those other aspects of this business like fraud, et cetera, under control. So I’m not — in terms of changes to KPIs, in the long run, because we’re recognizing this is net, it just means a higher take rate on our GPV and so as the GPV continues to climb and we have these multiple ways of cell and people are selling courses and sending invoices using the platform, et cetera, et cetera.

The more of that that’s flowing through this, the more of that — it’s just going to generate more cash for us. And also, of course, the reason for doing it is, it is a better customer experience. People are in one place as a unified platform, one place for customer support, et cetera, et cetera. So that’s the state of payments, but really a big milestone for us to actually have that in the wild and be kind of turning the dial and letting more people into it versus just talking about when that release is coming.

Operator: Our next question comes from Matt Pfau from William Blair.

Matt Pfau: Great. Great to see the improvement in GPV growth. And so I just wanted to ask how you’re sort of thinking about that longer term. How should we think about GPV growing in relation to overall revenue? Do you think it can get in line with that or perhaps even above, would just be great to hear your perspective on that?

Anthony Casalena: Well, it’s certainly a major focus for us. And we’ve got a combination of things that contribute to our GPV, right? Obviously, physical products is a big one and remains important to us, and we continue to work on features for larger sellers to ensure that they can process using Squarespace. Services-based commerce is, of course, where we’ve been focusing a little bit more of our product efforts as of late, we saw Refresh courses and our products for classes and courses is rolling out. Services for project-based sellers starting in the form of invoicing and then Tock and Acuity, both have a GPV component as well, Tock a take rate on the prepaid bookings and then Acuity having a take rate on more stuff related to the appointment booking, and the processing of the payment for the appointment in person or over SMS.

And so we have a — there’s just so many things flowing into that GPV number. And we’re — some are very early, right? Like the classes and course, the invoicing stuff. I mean, this is two months old, it will take some time before that can actually affect a number like the number we’re showing at $1.5 billion in the quarter. So we expect some of that stuff to pick up. Again, we’re going to have these macro seasonal events as well that will sometimes be tailwinds to one category, sometimes be headwinds to some categories, and it’s a conglomeration of those that remains important. But growing that across these multiple ways to sell and with Squarespace Payments, I think, is a compelling position to be in terms of having a GPV be a positive impact on the business.

Nathan Gooden: Which we did see a nice turn this quarter, specifically on Acuity, reverting to double-digit growth this quarter. We have 6% growth this year or this quarter year-over-year is an acceleration from what we’ve seen in the past quarter. So as Anthony said, I think as these come to fruition the investments that we’re making in these areas, I would expect that this continues to tick up.

Operator: Our next question comes from Deepak Mathivanan from Wolfe Research.

Zach Morrissey: This is Zach on for Deepak. I just wanted to — I guess, the first one on the kind of usage-based pricing test. Just hoping you could provide kind of more color on kind of the early learnings from this initial test? And kind of what are the mile markers that you need to see before we can see a kind of more broad test or roll out of this kind of initiative?

Anthony Casalena: Sorry, what was the beginning of the…

Nathan Gooden: Usage-based pricing.

Anthony Casalena: Usage-based pricing. Yes. So we really haven’t executed on a usage-based pricing test in a way that I kind of want to. We did a minor test trying to bundle some products together but also do kind of — the way we were doing the usage-based testing was around grouping like it was more like range based instead of like how I would like to scale true usage-based pricing. So I would consider usage-based pricing test not executed at this point. But just given our current billing system, we wanted to see if there was something we could squeeze out with some repackaging. And it turns out the form of that test didn’t work. But that’s fine, I mean we run countless tests, and some don’t work and some do. And so you’ll continue to see more from us.

We have a lot of ideas about more usage-based pricing, especially in products outside the website product like Acuity, where there’s a very natural way to scale pricing based on usage that we haven’t executed on yet. So lots to come with that in 2024, and I expect some of those to be quite impactful.

Zach Morrissey: Great. And then just the second one, just on the kind of marketing strategy. I know you’re not kind of guiding to next year formally yet. But kind of with the revamped attribution model, kind of the new product that you’ve announced in the Refresh international expansion opportunities, do you see kind of opportunities to lean into marketing heading into next year or kind of realizing the efficiencies and this could be a source of leverage kind of going forward?

Anthony Casalena: It’s a good question. I think it depends per market for me. I think that we’re much more comfortable with some inefficiencies in international markets while they build up. And the U.S. — look, if the model is returning, we’ll keep leaning into it. But otherwise, it’s about making the spend appropriate for the returns that we’re seeing.

Operator: Our next question comes from Chris Zhang from UBS.

Chris Zhang: So unique subscription saw very strong growth in the third quarter as you added almost 100,000 in the quarter, and that’s probably the highest Q-on-Q increase in nine quarters. And just a couple of things we noticed in the quarter, just the — there’s definitely a couple of new product areas. And from the release, there seems to be a lack of the unfold headwinds that maybe also played a role. And also related, you mentioned having lending to direct response channels and decrease some of the partnership spend in terms of marketing? So maybe can you unpack some of the drivers of the strength in terms of — the strength in the new subscriptions add in terms of different product areas or channels and maybe how should we think about your revenue and free cash flow guide in the fourth quarter and the [indiscernible] of the strong — in the third quarter?

Anthony Casalena: So we usually talked about Unfolds and whatnot being the volatile thing within the quarter. I’d say that’s a bit steady state right now. Here’s an important thing to point out in the third quarter. So after we closed the Google Domains acquisition, what happened on that day is that new registrations at Google Domains were pointed to Squarespace. And so we have a steady state of domains being subscribed with us every month. And that took a significant step up after that registration funnel was pointed to us. That’s one of the biggest things you’re seeing within that unique subscriptions number that is totally new. And so that’s awesome, right? I mean that means we’re successfully onboarding many, many more people that we can potentially cross-sell and upsell and also manage on Squarespace and introduce to our products and the ecosystem.

So that’s a seismic change and is a big contributor to that number. I don’t think there’s much else to call out, but it’s not. It’s work as usual.

Nathan Gooden: We continue to see strong retention of our existing core and the new acquisition that we talked about earlier on the call, and that continues to be one of the biggest drivers for our unique subs. The softening of unfold is less impactful too.

Anthony Casalena: Right. And that new registration funnel is substantial.

Operator: Our next question comes from Gabriela Borges from Goldman Sachs.

Unidentified Analyst: This is [Dru] on for Gabriela. So maybe just one on international, that remains a key growth opportunity for you in terms of the number of modules and then the broader [indiscernible] opportunity. Could you maybe briefly describe where this part of the business fits in your growth strategy? And where do you see the revenue mix maybe trending medium to longer term and key drivers on that front?

Anthony Casalena: Could you repeat the question?

Unidentified Analyst: Right. So just on the international markets, maybe you could describe where you see this fitting into your growth strategy? And the revenue mix trending medium to longer term and drivers on that front?

Anthony Casalena: Yes. Got it. So the international component has always been a huge part of our growth strategy. I mean, we’ve been in many markets for the better part of the decade now. I figure how many currencies are we in after Google, 22-ish. And then we keep internationalizing the main product. That became very additionally important to us after Google Domains because that’s a more international mix than we’re used to. But it remains very important, we have outside investment in international growth in those markets. And as I mentioned in the previous question, we’re more comfortable with taking some losses and not having as tight — if you compare our international revenue mix to certain peers, we clearly [Audio Gap] versus domestic U.S. for us versus going in the other direction.

Nathan Gooden: Concerning your question on longer term, we’re not talking about 2024 today. But hopefully, Q3 results and Q4 guidance gives you a good indication of how we’re thinking about the business and the progress we’re making. I would say, as Anthony laid out earlier, our platform has never been stronger, and with all the goodness from Squarespace Refresh, we’re very excited about where we can take this both domestic and international.

Operator: Our next question is from Siti Panigrahi from Mizuho.

Siti Panigrahi: I want to dig a little bit into the gross margin impact. Nathan, you talked about impact from domain cost this time. That’s quite a bit sequentially, if you look at almost like 380 bps. So help us understand a little bit, is it for the cost for the new domain that you register? And how does the revenue recognition and the cost usually works for domain? Or is it for the 10 million domain that Google has? And then another quick follow-up on to that is, do you have any sense what percentage of that 10 million domain do you have a customer mix among the overlap with your customer base from that 10 million domain?

Nathan Gooden: Yes. Siti, thanks for the question. So we have historically operated on 80-plus percent margins, very healthy margins. We’ve been in the domains business for over a decade. And so the dip that we see here is not a surprise. We certainly expected it with onboarding new domains, we do recognize the cost of the registry costs Upfront. So that’s fully burdened in our cost of goods sold, whereas revenue is recognized ratably over the 12 months. So because of that discrepancy, you do see a greater impact on gross profit margin. But over the long term, I would say we expect to see the margins normalize. As Anthony talked about earlier on the call as well, the exciting part and transformative part of this deal is that cross-sell opportunity as we bring these customers on opening them up to the ecosystem of Squarespace and attached products. Did you want to say anything more, Anthony?

Anthony Casalena: No. I mean that covers it for me.

Siti Panigrahi: And how about the overlap between that 10 million?

Anthony Casalena: On the overlap, I’m sorry. Yes, I’d say the substantial amount of the 10 million is not overlapped. I mean, if you just looked at the unique subs that we had before and the fact that a lot of the domain attach was from us, a substantial portion or not overlap, even just if you look at just the raw numbers divided our [indiscernible] accepted half and said, okay, well, what’s the max impact it could be? Max overlap.

Operator: Our next question is from Alexei Gogolev from JPMorgan.

Alexei Gogolev: Anthony, you said in your prepared remarks that you have introduced the biggest advancements in commerce products and various other releases during the Refresh earlier this year. Could you elaborate how your customers are choosing higher price point packages post those new releases?

Anthony Casalena: So yes, so to just emphasize that within the quarter, we have payments being introduced to a single-digit percentage U.S. customer. So we’re rolling that out. And then we had improvements to our classes and courses product and our invoicing products as well as multiple improvements to our existing service-based selling products and Acuity. And just all in, it’s the most improvements we’ve ever delivered in a year. I think that we have a lot of ideas about the go-to-market and the packaging and the pricing of those products that have yet to be realized. I think we’re a little bit ahead of ourselves in terms of like — I think we have functionality that’s sort of like undiscovered. And so in 2024, there’s a lot we want to do with the brands around those products and how we package them that I think will influence the planned choices people are making and simplified this whole experience for people.

Just due to how we’ve grown up, there’s a lot of different subscriptions inside Squarespace right now. And I think that if we get smarter about repackaging for essentially people personas, if you will. I’ll be able to more clearly comment on how they’re adopting those specialized, verticalized plans around this functionality.

Alexei Gogolev: Okay. And Nathan, very quick follow-up on your 4Q guidance. What FX impact are you incorporating into those forecasts?

Nathan Gooden: Sorry, what was the question?

Anthony Casalena: FX impact.

Nathan Gooden: FX impact. Our rates for FX are as of the end of September in Q4.

Alexei Gogolev: Okay. So roughly 2 percentage points impact. So constant currency wise, the midpoint of your guidance is about 13% in constant currency.

Nathan Gooden: We don’t give constant currency guidance.

Operator: Our next question comes from Andrew Boone at JMP Securities.

Andrew Boone: Anthony, can you talk about the benefits that you’re seeing from Squarespace AI in terms of conversion or anything else you want to highlight? And then how do we think about your AI road map as we’re moving into 2024?

Anthony Casalena: Sure. So we’ve done the common sense AI integration thus far, generative text inside of text fields, all of that, I mean, kind of the — I mean to say like the demo you’ve seen everyone give, we’ve also incorporated into the product. I think that what makes surprising people or not surprised people is that it really hasn’t had much of an impact on conversion. And why is that? Because everyone has access to ChatGPT already and they know how to copy and paste. And so it’s not really that big of a deal that you’re on the image field and it adds an image that came from Dolly or that you’re in a text field and they paste it in from ChatGPT for you. So it’s a convenience, our customers like it. They use it, but it doesn’t have any impact on conversion right now.

For the road map and thinking about how we think about it in the future, very visual demos that are posted on the Refresh site that we’ll do a better job of kind of showing how we see it impacting multiple parts of the product. Moving forward, and I would definitely encourage people who have questions about the — what AI might look like for Squarespace to go check those out. There’s a couple of minute long video there, and we talked through the different parts of the product and specific where we think it applies and all of that. But most of what we’re doing here applies to set up an onboarding the anticipated improving. But just sort of I would keep in mind that a lot of the technologies that are being demoed like — that are just API calls, all of our [indiscernible] competitors have and we’re integrating them at low cost and they’re just common sense, good things to do.

Operator: Our last question comes from Naved Khan from B. Riley.

Naved Khan: Just a couple please. I think last year, you guys had launched localization efforts and added some new markets. Any new effort in that direction, are you adding a few more markets internationally? And then a related question on international is just around advertising. Again, I think you benefited this year from the campaigns you did last year, Anthony. Is there any plan to sort of do another [reset] in terms of international ad campaign?

Anthony Casalena: Yes. So with the international ad campaigns, we’re always looking at which markets we think can grow in adapting our campaigns to those local markets and testing those and figuring out where we needed to adapt one or where actually the same concepts behind the English campaign, we’re totally fine. On the platform right now, during checkout, again, we have like 22 or so odd currencies that you can use to check out. I’m blanking on the number of languages we added within the year. It was like three or four, bringing it to like some…

Nathan Gooden: I think we have 11 in total.

Anthony Casalena: 11 total now. I can get a better answer from that. I’m sure it’s on the website, I just — yes, off the top of my head, I can’t remember. But yes, we continue that push, and we’ll continue to add different geos. We’re looking at some Asian geos right now and just trying to methodically go through these, where we see the biggest opportunity and where we think the product is most applicable with the least amount of translation or other effort.

Operator: This concludes the Q&A session. I will now hand back to the Squarespace team to conclude.

Anthony Casalena: All right, everyone. Thank you for joining the call. A fantastic quarter for us. Just really pleased with all the releases in the quarter, Refresh was the strongest ever. Great round up there, really just proud to be able to report a 400 basis point improvement year-over-year in margin while still delivering strong top line results and also with so many opportunities to grow. I mean we touched on classes and courses, invoices, payments, domains, cross-sell. I mean, there’s just so many things we have in market right now. So I’ll be excited to move into 2024 and hopefully be reporting back with how that stuff starts to materially change our business. Thank you all.

Operator: This concludes today’s conference call. Thank you all very much for joining. You may now disconnect your lines.