Squarespace Earnings: Pricing Upside and Resilient Retention Drive Strong Start to Fiscal 2023

We raise our fair value estimate for no-moat Squarespace SQSP 15% to $22.50 following a stellar start to fiscal 2023, which exceeded our expectations. During the quarter, Squarespace benefited from resilient customer retention despite the continued rollout of like-for-like price increases, greater uptake of higher value solutions, and record customer trials, suggesting potential countercyclical demand for website design software. Following the result, we have lifted our fiscal 2023 and medium-term assumptions for top-line growth and profitability. However, at current prices, Squarespace shares continue to screen as overvalued, trading at a hefty 22% premium to our updated fair value estimate.

First-quarter fiscal 2023 revenue increased 14% year over year, due to higher-than-anticipated price realization and net new client additions, partly offset by weaker year-on-year demand for scheduling software and foreign exchange headwinds. This top-line growth and improved marketing efficiencies supported profitability gains ahead of our expectations, with the firm reporting operating margins of about 1%, relative to an operating loss in the prior period.

For full-year fiscal 2023, we raise our revenue growth forecast 260 basis points to 13%, at the top end of management’s updated guidance. Our outlook is driven by higher forecast average revenue per subscription following impressive pricing upside in the first quarter. We expect improved pricing and continued demand for higher value solutions to boost operating margins to 4%, up 270 basis points from our prior forecast, partly offset by a forecast uplift in marketing and product innovation investment during the remainder of the year.