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Squarespace (NYSE:SQSP) Beats Q3 Sales Targets But Quarterly Guidance Underwhelms


Full Report / November 08, 2021
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Website and ecommerce tools provider Squarespace (NYSE:SQSP) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 23.7% year on year to $200.9 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $204.5 million, slightly below analyst estimates. Squarespace made a GAAP profit of $2.83 million, down on its profit of $17.9 million, in the same quarter last year.

Squarespace (SQSP) Q3 FY2021 Highlights:

  • Revenue: $200.9 million vs analyst estimates of $197.9 million (1.53% beat)
  • EPS (GAAP): $0.04
  • Revenue guidance for Q4 2021 is $204.5 million at the midpoint, slightly below S&P Capital IQ analyst estimates of $205.2 million
  • Free cash flow of $45 million, up from $6.93 million in previous quarter
  • Gross Margin (GAAP): 83.6%, down from 84.8% 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only slightly more than half of US small and midsize businesses have an online presence, and for many that do, they are outdated and lack modern functionality.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.

Although the share of digital commerce is rising every year, the majority of the small and medium sized businesses have still not fully embraced it. Having a good looking, interactive website is becoming a must but most small and medium sized businesses don’t have expertise or resources to develop one from scratch. That in effect drives demand for no-code website building platforms.

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 strong over the last year, growing from quarterly revenue of $162.3 million, to $200.9 million.

Squarespace Total Revenue

This quarter, Squarespace's quarterly revenue was once again up a very solid 23.7% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.95 million in Q3, compared to $16.3 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 18.6% over the next twelve months, although estimates are likely to change post earnings.

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 83.6% in Q3.

Squarespace Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.83 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 a pressure from competition to lower prices.

Key Takeaways from Squarespace's Q3 Results

With a market capitalization of $6.03 billion Squarespace is small relative to other companies, but its more than $232 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.

Squarespace topped analysts’ revenue expectations this quarter, even if just narrowly. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 2.59% on the results and currently trades at $47.50 per share.

Is Now The Time?

When considering Squarespace, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Squarespace is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its strong free cash flow generation gives it re-investment options.

Squarespace's price to sales ratio based on the next twelve months is 7.5x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Squarespace and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $59.20 per share right before these results, implying that they saw upside in buying Squarespace even in the short term.

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