Website and ecommerce tools provider Squarespace (NYSE:SQSP) reported results ahead of analysts' expectations in Q2 FY2023, with revenue up 13.7% year on year to $247.5 million. Guidance for next quarter's revenue was also optimistic $251.5 million at the midpoint, 2.38% above analysts' estimates. Squarespace made a GAAP profit of $3.66 million, down from its profit of $10.1 million in the same quarter last year.
Squarespace (SQSP) Q2 FY2023 Highlights:
- Revenue: $247.5 million vs analyst estimates of $243.3 million (1.72% beat)
- EPS: $0.03 vs analyst estimates of $0.13 (-$0.10 miss)
- Revenue Guidance for Q3 2023 is $251.5 million at the midpoint, above analyst estimates of $245.6 million
- The company lifted revenue guidance for the full year from $975 million to $991 million at the midpoint, a 1.64% increase
- Free Cash Flow of $48.5 million, down 20.7% from the previous quarter
- Gross Margin (GAAP): 82.6%, in line with 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only slightly more than half of US small and midsize businesses have an online presence, and for many that do, they are outdated and lack modern functionality.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).
Sales Growth
As you can see below, Squarespace's revenue growth has been unremarkable over the last two years, growing from $201 million in Q2 FY2021 to $247.5 million this quarter.
This quarter, Squarespace's quarterly revenue was once again up 13.7% year on year.
Next quarter's guidance suggests that Squarespace is expecting revenue to grow 9.92% year on year to $251.5 million, in line with the 10.3% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 8.29% over the next 12 months.
Profitability
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 82.6% in Q2.
That means that for every $1 in revenue the company had $0.83 left to spend on developing new products, sales and marketing, and general administrative overhead. Squarespace's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Squarespace is controlling its costs and not under pressure from its competitors to lower prices.
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 $48.5 million in Q2, up 42.4% year on year.
Squarespace has generated $184.3 million in free cash flow over the last 12 months, an impressive 19.4% 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 Q2 Results
With a market capitalization of $4.33 billion, Squarespace is among smaller companies, but its $274 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 that its full-year revenue guidance came in higher than Wall Street's expectations. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 1.97% after reporting and currently trades at $32.69 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. We cheer for everyone who's making the lives of others easier through technology but in case of Squarespace, we'll be cheering from the sidelines. Its revenue growth has been weak, and analysts expect growth rates to deteriorate from there.
Squarespace's price to sales ratio based on the next 12 months is 4.3x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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