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Squarespace (NYSE:SQSP) Reports Q3 In Line With Expectations But Quarterly Guidance Underwhelms


Full Report / November 08, 2022
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Website and ecommerce tools provider Squarespace (NYSE:SQSP) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 8.32% year on year to $217.6 million. However, guidance for the next quarter was less impressive, coming in at $221.5 million at the midpoint, being 1.62% below analyst estimates. Squarespace made a GAAP profit of $10.1 million, improving on its profit of $2.83 million, in the same quarter last year.

Squarespace (SQSP) Q3 FY2022 Highlights:

  • Revenue: $217.6 million vs analyst estimates of $215.7 million (0.88% beat)
  • EPS: $0.07 vs analyst expectations of $0.07 (4.38% miss)
  • Revenue guidance for Q4 2022 is $221.5 million at the midpoint, below analyst estimates of $225.1 million
  • Free cash flow of $38.3 million, up 12.5% from previous quarter
  • Gross Margin (GAAP): 82.1%, down from 83.6% 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only slightly more than half of US small and midsize businesses have an online presence, and for many that do, they are outdated and lack modern functionality.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 solid over the last two years, growing from quarterly revenue of $162.3 million in Q3 FY2020, to $217.6 million.

Squarespace Total Revenue

Squarespace's quarterly revenue was only up 8.32% year on year, which might disappoint some shareholders. We can see that revenue increased by $4.99 million in Q3, which was roughly the same as in Q2 2022.

Guidance for the next quarter indicates Squarespace is expecting revenue to grow 6.78% year on year to $221.5 million, slowing down from the 20.3% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 11% over the next twelve 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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 82.1% in Q3.

Squarespace Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Squarespace to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Squarespace is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Squarespace's free cash flow came in at $38.3 million in Q3, down 14.8% year on year.

Squarespace Free Cash Flow

Squarespace has generated $126.9 million in free cash flow over the last twelve months, a solid 15% of revenues. This strong FCF margin is a result of Squarespace asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from Squarespace's Q3 Results

With a market capitalization of $2.73 billion Squarespace is among smaller companies, but its more than $228.2 million in cash and positive free cash flow over the last twelve months give us confidence that Squarespace has the resources it needs to pursue a high growth business strategy.

It was good to see Squarespace produce free cash flow this quarter. On the other hand, it was unfortunate that revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $19.67 per share.

Is Now The Time?

Squarespace may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Squarespace is not a bad business. However, its revenue growth has been a little slower, and analysts expect growth rates to deteriorate from there. But on a positive note, its impressive gross margins are indicative of excellent business economics.

Squarespace's price to sales ratio based on the next twelve months is 2.9x, 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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