Website and ecommerce tools provider Squarespace (NYSE:SQSP) beat analysts' expectations in Q3 FY2023, with revenue up 18.1% year on year to $257.1 million. Guidance for next quarter's revenue was also optimistic at $262.5 million at the midpoint, 2.3% above analysts' estimates. Turning to EPS, Squarespace made a GAAP loss of $0.12 per share, down from its profit of $0.07 per share in the same quarter last year.
Squarespace (SQSP) Q3 FY2023 Highlights:
- Revenue: $257.1 million vs analyst estimates of $251.9 million (2% beat)
- EPS: -$0.12 vs analyst estimates of $0.12 ($0.24 miss)
- Revenue Guidance for Q4 2023 is $262.5 million at the midpoint, above analyst estimates of $256.5 million
- Free Cash Flow of $47.4 million, similar to the previous quarter
- Gross Margin (GAAP): 79.9%, down from 82.1% in the same quarter last year
Founded in New York City in 2003, Squarespace (NYSE:SQSP) is a platform for small businesses and creators to build their digital presences online.
Today, only slightly more than half of US small and midsize businesses have an online presence, and for many that do, they are outdated and lack modern functionality. It has long been difficult and expensive for small businesses or entrepreneurs to build and manage websites and online stores, let alone manage online marketing activities.
With Squarespace, entrepreneurs and small businesses can create a website or online store quickly with little to no technical skill for less than a few hundred dollars per year. Although there are many website builders and e-commerce platforms in the market, Squarespace has differentiated itself in two key ways. The first is a heavy focus on design, its website templates are generally more curated and polished than its rivals. Second, by creating an all-in-one platform that has functionality ranging from basic websites to more complex ecommerce sites, Squarespace can facilitate many different types of online businesses: product, services, content, and subscription. Over time, Squarespace has been growing out the range of its commerce capabilities through integrations with other vendors like Quickbooks (for tax management) and with acquisitions like Tock, which added the ability to book reservations for restaurant and hospitality businesses.
While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.
Squarespace’s main competitors are Wix (NASDAQ: WIX), GoDaddy (NYSE: GDDY), and Shopify (NYSE:SHOP).
As you can see below, Squarespace's revenue growth has been mediocre over the last two years, growing from $201 million in Q3 FY2021 to $257.1 million this quarter.
This quarter, Squarespace's quarterly revenue was once again up 18.1% year on year. Looking at the last two quarters, we can see that Squarespace's revenue increased by $9.5 million in Q3 while it grew $10.5 million in Q2 2023. This steady quarter-on-quarter growth shows that the company can more or less maintain its growth trajectory.
Next quarter's guidance suggests that Squarespace is expecting revenue to grow 14.7% year on year to $262.5 million, improving on the 10.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 10.9% over the next 12 months before the earnings results announcement.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Squarespace's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 79.9% in Q3.
That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite the recent drop, Squarespace still has an excellent gross margin that allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Squarespace's free cash flow came in at $47.4 million in Q3, up 23.6% year on year.
Squarespace has generated $193.3 million in free cash flow over the last 12 months, an impressive 19.9% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Squarespace's Q3 Results
With a market capitalization of $4.1 billion, Squarespace is among smaller companies, but its $257.1 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
It was good to see Squarespace's strong revenue guidance for next quarter, which topped analysts' expectations. We were also glad to see solid free cash flow. On the other hand, its gross margin declined. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is flat after reporting and currently trades at $30.09 per share.
Is Now The Time?
When considering an investment in Squarespace, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although we have other favorites, we understand the arguments that Squarespace isn't a bad business. However, its revenue growth has been weak over the last two years, and analysts expect growth to deteriorate from here. On a positive note, its impressive gross margins indicate excellent business economics.
Squarespace's price to sales ratio based on the next 12 months is 3.8x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. In the end, beauty is in the eye of the beholder. While Squarespace wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price point right now.
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