Squarespace Earnings: Price Increases and Robust Retention Boost Profitability Amid Steady Demand

We raise our fair value estimate for no-moat Squarespace SQSP to $25 from $24 per share following sound second-quarter fiscal 2023 results. Top-line growth during the quarter and the full-year outlook met our expectations, but profitability once again surprised to the upside. Following the result, we have revised our near- and longer-term profitability assumptions upward as higher pricing falls to the bottom line. However, despite a post-release correction, Squarespace’s shares continue to screen as overvalued relative to our updated valuation, currently trading at a lofty 23% premium.

Revenue in the second quarter increased 16% year on year on like-for-like price increases, net new customer wins, robust retention, and some minor foreign exchange tailwinds. Squarespace continues to execute well on price increases for legacy customers with no material impact on churn, yielding impressive GAAP operating margins of 15% during the quarter, a sizeable jump from 4% in the prior-year corresponding period and coming in ahead of our expectations.

For full-year fiscal 2023, we maintain our revenue growth forecast of 17%, marginally ahead of management’s updated guidance. Our outlook assumes higher forecast average revenue per subscription on price increases and a skew to higher value solutions, as well as assumed incremental benefits from the acquired Google Domains assets from the fourth quarter. We expect pricing increases to boost operating margins to 5% for the full year, up 100 basis points on our prior forecast, offset by higher marketing and product innovation spending in the back half of the year, in part to expand existing domain registrar operations.