Squarespace Earnings: Healthy User Growth and Pricing Upside Underpin Strong Period

We raise our fair value estimate for no-moat Squarespace SQSP to $26 from $25 per share following strong third-quarter results with both top-line growth and profitability exceeding our expectations. Following the result, we have revised our near- and long-term profitability assumptions as higher like-for-like pricing falls to the bottom line, and Squarespace benefits from a mix shift to higher-value solutions and improved operating efficiencies, partly offset by greater contribution from lower-margin domain registration revenue. Despite our upgraded outlook, Squarespace shares continue to trade in 3-star territory.

Revenue in the third quarter increased 18% year on year underpinned by strong net new customer additions aided by a redirection of demand from Google Domains, robust retention across presence and commerce solutions, price increases, and foreign exchange tailwinds. Average revenue per user growth of 10% to $226 was above our expectations on a mix shift to higher-value website subscriptions and price increases. This top-line growth paired with headcount cost containment supported impressive GAAP operating margins of 11% during the quarter, a sizable jump from 5% in the prior year.

For full-year fiscal 2023, we raise our revenue growth forecast by 150 basis points to 18%, ahead of management’s updated guidance which we view as conservative. Our outlook assumes high-single-digit average revenue per subscription growth on price increases and an ongoing skew to higher-value solutions, and an immaterial contribution from the acquired Google Domains assets. Following the strong third-quarter result, we now expect operating margins to reach 9% for the full year, up from our prior forecast of 5%, partially offset by an uptick in the cost of sales stemming from the upfront recognition of domain registration fees and higher customer service costs.