Squarespace, Inc. (NYSE:SQSP) Q4 2022 Earnings Call Transcript March 7, 2023
Operator: Good morning. My name is Alex, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Squarespace’s Fourth Quarter 2022 Earnings Conference Call. After the prepared remarks there will be a question-and-answer session. Thank you. I will now hand the call over to your host of Squarespace, Clare Perry. Clare, please go ahead.
Clare Perry: Good morning, and thank you for joining Squarespace’s fourth quarter and fiscal year 2022 conference call. I’m Clare Perry, Investor Relations Manager. And with me today are 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 Web site. On today’s call, we will be referring 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, which can be found in the Investor Relations section of our Web site.
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. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks 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, March 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, and thank you for joining us today. 2022 was an extraordinary year for Squarespace, and I’m proud to announce very strong Q4 results alongside a positive outlook for 2023. During Q4, we achieved record bookings of $232 million, growing over 18% year-over-year in constant currency. This growth speaks to the enduring ways our products help our customers succeed online at a moment when digital presence is central to how entrepreneurs engage with our audiences. Commerce revenue grew to three-year CAGR of 42% bolstered by new commerce subscription growth as a view to prioritize tools and features for entrepreneurs everywhere. The growth in our commerce revenue continues to outpace our presence revenue growth.
Our Q4 unlevered free cash flow was more than triple the amount last year, resulting in an overall unlevered free cash flow margin of 19% for 2022. We plan on continuing our disciplined approach to balancing cash flow growth and revenue growth, and improving this margin in 2023 by continuing to improve operations, growing our product lines, and continuing to invest both domestically and internationally. Our outstanding results are a testament to the power of our products. They are influenced by our rapid pace of innovation as we delivered new technology and drove improvements across our entire platform throughout the year. In September, we introduced Squarespace Refresh, our annual recap of product releases. This year, we highlighted more than 100 improvements across the platform.
These releases included Fluid Engine, a new design system for building pages on Squarespace which represents one of the biggest changes that we’ve brought to our content management system in a decade. Fluid Engine drove measurable usability improvements for our customers and pro community while also expanding the number of designs our customers are able to create. We’ve been consistently updating it since launching over the summer, and continue to receive positive feedback from our customers. We believe with the improvements we’ve made to the platform in 2022, that we are both the easiest to use and most expressive content management system on the market. Last week, Fast Company named Squarespace as one of the world’s most innovative companies in 2023 for our ecommerce improvements.
Custom merchandize, our print-on-demand service, video hosting, and our expanding payment tools provide digital-first entrepreneurs with the technology they need the monetize content and create new revenue streams. Our decade-plus investment in digital commerce helps customer retool their businesses with Everything to Sell Anything. Our product investments for service-based sellers have improved immensely in 2022, and we’re delighted by the recognition. Our growing set of products and corresponding investments in new go-to-market initiatives continue to strengthen the underlying drives of our business. Our commerce capabilities, international expansion, enterprise initiatives, and our pro user community circle remain key to our future growth.
We made progress on advancing each throughout 2022. Our commerce revenue growth continues to be an important driver of our business. Commerce Web site subscriptions represent an increasing percentage of our total Web site subscription mix and its mix shift to commerce is one of the main attractors why average revenue per unique subscription increased by 3% year-over-year to $209, in 2022. This continued remix to higher value services will continue to boost Squarespace’s business in 2023, and beyond. Tock, our platform for managing hospitality and time-slotted businesses also had a standout year. It processed record levels of GMV on its platform, and tens of millions of diners booked reservations through Tock in 2022. Matt Tucker, former President and COO of Olo, joined at the end of the year to drive Tock’s next stage of growth.
And I’m excited about the progress he’s already made in his short tenure. Acuity Scheduling, our product for customers managing calendar-based businesses also had a fantastic year. We recently welcomed Dan Chandra, who brings over 15 years of experience with time management software and payment solutions to our team to lead Acuity to its next stage of growth, and we’re excited for what’s to come. Acuity benefits greatly from the integration with and funnel from the Squarespace platform, and we look forward to continuing both these integration efforts as well as growing Acuity as a standalone brand. Many large customers may not use Squarespace as their Web site provider, and we want to make sure our product lines can grow independently of one another when we have that opportunity.
International remains a greenfield opportunity for Squarespace. Last year, we expanded language support with three new languages, and added the ability to host multilingual Web sites on our platform. International customers represented about 30% of our total bookings. Throughout the year, we developed tailor-made marketing campaigns for key markets, and we anticipate continuing to scale investment in these markets where we saw opportunities to grow. Our professional partner community, Circle, also had a great year, and we hosted our first Pro User Day, in 2022, for our Circle members. Over a thousand members participated in the event, with 150 joining us live in New York. We continue to invest in tools for this community as pro users have always been important to our growth.
Currently, our Circle community accounts for over 9% of new sites created on our platform. Releases like Fluid Engine do not just target consumers, our Circle community uses the same tool to produce a wide variety of sites for clients, and we’re delighted to hear their positive feedback. 2022 was a building year in Enterprise. We strengthened our team, advanced our sales enablement assets, and released new product features to support enterprise clients. We launched a shared template store, new dashboard features which included additional functionality around permissioning and analytics, and improved features related to single sign-on, used by many enterprise customers. Progress toward Squarespace Payments continues, and we’re still on track on launch our service in the back-half of 2023.
As we continue to move more payment volume on to our platform, Squarespace Payments represents an important piece of the customer experience we ultimately want to deliver. 2023 is set up to be a fantastic year for our company. As Squarespace, we see a future where everyone can be entrepreneur, and we remain excited to continue to deliver exceptional products that help millions as they embark on that journey. I’ll now turn it over to Nathan to go through the financials.
Nathan Gooden: Thank you, Anthony. Today, we reported a strong fourth quarter, which culminated in a strong year for Squarespace. Both our full-year 2022 and Q4 results exceeded our top line and unlevered free cash flow guidance as we closed 2022 with revenues of $867 million, up 11% and 14% on a constant currency basis, with a 19% unlevered free cash flow margin. These achievements speak to Squarespace’s solid financial profile. We are driving growth and generating positive cash flow, a combination that affords us the opportunity to deliver more to our customers in 2023, and continuing to deliver for investors. I can tell you after working with the team these past five months leaves me energized by the incredible opportunity ahead of us today.
Photo by The New York Public Library on Unsplash
I am confident in the vision we have guiding Squarespace, one which prioritizes innovation for the benefit of customers, and empowers their entrepreneurial aspirations with the tools they need to stand out and succeed. Q4 bookings, of $232 million, grew by 15% as reported and 18% in constant currency, a sequential increase from the 10% and 14% constant currency booking growth in the third quarter of 2022. Full-year 2022 bookings, of $906 million, increased 11% as reported and 15% in constant currency driven by growth in unique subscriptions and in our hospital services through Tock, as well as the successful implementation of price increases for both new and existing customers. We are delighted by the momentum we achieved in 2022 as bookings increased through the year.
Revenue of $229 million exceeded the high end of our guidance of $219 million to $224 million in the fourth quarter, which represents growth of 14% in constant currency. Since providing guidance in November, foreign currency fluctuations positively impacted our fourth quarter revenue by $1.6 million. Our Q4 results were driven by strong customer retention and acquisition, along with the continued success of legacy pricing initiatives which we initiated for existing customers at the end of Q3. We continue to see better-than-expected retention from our stable base of over 4.2 million subscriptions as we methodically roll out that price increase. Our product offering, more powerful than ever before, provides an essential service to our customers.
International revenue was $244 million for the year, representing 2% growth, and comprised 28% of total revenue. Excluding the FX impact, international revenue would have comprised 30% of total revenue, and grown at 14% on a constant currency basis. From a product and partnership standpoint, we are making consistent progress in our efforts to drive new international customers. We are now supporting multilingual extensions in 100% of our target markets. We have localized payment mechanisms, and we have added other localization features that fine-tune our platform’s suitability to the needs of entrepreneurs globally. Though we are still in the early stages, as we look forward, international expansion will be a key growth driver for our business.
As Anthony said, commerce continues to be a driver and focus at Squarespace as we roll out more solutions to help our customers transact online and engage with their audiences, enabling the sale of merchandise, time-based services, and content. In Q4, Commerce revenue was $72 million, growing 12% and 14% in constant currency. Commerce subscriptions, Tock, and our scheduling product drove growth in the quarter. Our Commerce revenue includes contributions from GMV-related revenue share resulting from the value of services, merchandize, and digital content. GMV was $1.6 billion in the quarter, down 11% due to lower transaction volume from our scheduling product and commerce Web site subscriptions. This result is consistent with the guidance we provided during the last quarter and in line with our expectations.
Scheduling showed particular strength in Q4 2021 setting up Q4 2022 for a tough comparison. Despite the slowdown from scheduling in the quarter, we saw strength from Tock. Tock had its highest quarter ever for GMV as more businesses choose Tock to help manage time-based reservations and events. We believe we have a significant opportunity to provide further value for service-based businesses selling through digital channels as we prioritized investments in Tock and scheduling products in 2023. We are encouraged by the continuing trends we are seeing within our Web site subscriptions with a greater proportion of customers using our higher valued plans compared to prior years. We believe this demonstrates a greater intent to sell as these offerings include fully integrated ecommerce options and other features that enable digital sales.
I believe ARPU is a useful metric in evaluating our ability to sell higher high value plans, add-on subscriptions, and hospitality services. At the end of 2022, ARPU was $209 representing an increase of 3% from $203 in 2021. Growth in ARPU is due to an increased mix of higher tier plans across our Web site subscriptions, planned pricing increases, and the continued growth of our commerce offerings and attached products. As well, as the addition and subsequent growth of Tock which began impacting revenue in Q2 2021 following its acquisition. Our model benefits from our ability to sell more to customers and also from new customers joining our platform. Unique subscription surpassed $4.2 million at the end of 2022, growing 3%. We have noted softness impacting overall unique subscription growth throughout the year from Unfold, our product that helps customers manage their social media presence.
Unfold subscriptions are substantially lower in dollar value than other subscriptions we offer. Unfold’s application has been impacted by increased competition in the App Store and a greater evolution of trends on social media. Despite this slowdown, we are excited about Unfold’s Bio Site product. Bio sites are mobile first one-page Web sites. With a Bio site, customers can create a simple web presence, accept payments, connect across social platforms, and grow their audiences with one URL. Full-year adjusted EBITDA grew to $147 million representing a 17% margin. A 106 basis points of improvement compared to the previous year and 18% growth driven by our operational discipline. As a result of our annual impairment analysis, we incurred a $225 million non-cash goodwill impairment charge primarily due to market values deteriorating subsequent to our acquisition of Tock in March 2021.
The impairment charge impacted our operating expenses for the quarter and year. Moving beyond top line metrics, we delivered non-GAAP gross margin of 84%. Down approximately 130 basis points year-over-year as we prioritized faster and more scalable deployment through cloud-first delivery. Gross margins are also impacted by Tock’s hospitality business on account of its payments business. In 2022, we delivered a non-GAAP operating margin of 17% which represents expansion of approximately 430 basis points compared to the previous year. And excludes the impairment charge we incurred in Q4. We improved non-GAAP operating efficiency as we reduced marketing and sales expenses throughout the year, and in part by focusing our investments in areas that drives subscriptions and continuously adjust for demand.
We drove efficiencies in our marketing and sales spend throughout the year. And, delivered over 600 basis points of year-over-year improvement on a non-GAAP basis in 2022 where non-GAAP marketing and sales represented approximately 35% of revenue. Additionally, we reduced G&A expenses by 75 basis points to 11.5% of revenue on a non-GAAP basis. We realized this operating leverage while still investing in our future growth as we increased our R&D spend to 21% of revenue on a non-GAAP basis, up 125 basis points over 2021 and in line with the outlook we provided last year. Throughout the year, we took a disciplined approach to our expenses with intent to drive improvements from our 2021 expense allocation in line with where we saw opportunity for future growth.
Turning now to the balance sheet and cash flow statement, we finished 2022 with cash and cash equivalents of $197 million and investments of $32 million. Our total debt was $514 million of which $41 million is current. Our cash flow from operating activities grew 33% to $164 million. In Q4, we generated strong unlevered free cash flow of $41.5 million for the trailing three months or 18% of total revenue, a growth rate of 217% to surpass the high end of our guidance. The outperformance was due to higher bookings, driven by strong customer retention associated with Lexi pricing increases and favorable FX rates combined with operational efficiencies. We continued our share repurchase program authorized by our Board of Directors in May, which underscores the confidence, leadership has in our business and Squarespace’s opportunity for future growth.
As of December 31, 2022, we returned over $120 million of cash to shareholders under the current authorization. This represents purchases of approximately 5.5 million shares at an average price per share of $21.28 on the open market. At year-end, approximately $80 million remained available for repurchase. The shares we purchased in 2022 had an anti-dilutive impact and more than offset our stock-based compensation grants net of forfeitures and expiration. Turning to our guidance for Q1 and full-year 2023, in Q1 2023, we are targeting total revenue in the range of $232 million to $234 million. This represents 12% growth at the midpoint. We expect unlevered free cash flow during Q1 to be in the range of $63 million to $65 million, which implies an unlevered free cash flow margin of 27% at the midpoint of the range.
For the full-year, we expect total revenue to be in the range of $955 million to $970 million, representing growth of 11% at the midpoint of the range. Unlevered free cash flow is expected to grow throughout the year to the range of $183 million to $198 million, and implies an unlevered free cash flow margin of 20% at the midpoint of the range. This outlook is constructed from our stable recurring revenue model, 92% of revenue coming from subscription revenue and our continued commitment to operate our business with a focus on balancing profitability and investment. In constructing our guidance, we assumed continued positive impacts from our legacy price increases and a customer demand trajectory, which continues at a similar rate. We also assumed FX rates as of the end of February.
We look to sustain profitable growth for our business and expect to maintain a 2023 non-GAAP gross margin similar to the strong margin we delivered in ’22. We expect to see continued improvements in our marketing sales expense throughout the year. We balance this efficiency with increased R&D expense as a percentage of revenue as we invest for growth, we are always keeping an eye on the bottom line to rationalize spend, and ensure our resources are aligned with strategic priorities. Operating through the lens of scalable and profitable growth remains true to Squarespace’s core and is evidenced through our financial results. We believe we are in the early stages of addressing a large and growing global opportunity for our services and our technology has the ability to scale and empower millions more customers in the future.
Our results demonstrate our customer’s commitment to our platform and our ability to deliver both top line growth and bottom line margin expansion. We are inspired by the opportunities available to us today and see those opportunities expanding over the years ahead as we optimize our platform and launch additional services for our customers. Our singular focus on our customers is driven by the talented people who work at Squarespace. I will now open the call for any questions.
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