Squarespace Stock Dips Despite Q3 Growth in Key Segments

Shares of Squarespace, Inc. SQSP experienced a downturn, closing at $29.16 with a 1.6% fall on November 8th, in the wake of its third-quarter earnings release for 2023. Contrary to expectations of positive earnings, SQSP reported a loss of 12 cents per share, diverging from the Zacks Consensus Estimate which had projected earnings of 12 cents per share. This scenario marks a decrease from the 7 cents per share earned in the comparable quarter of the previous year.

The decline in the company's earnings can be partly attributed to a larger income tax provision, although this was opposite to the company's substantial top-line growth. Revenues saw an 18.1% increase from the prior-year quarter, amounting to $257.1 million and surpassing the consensus estimate by 1.96%. This growth persisted in constant currency terms, with a year-over-year increase of 16%.

This revenue boost was fueled by notable performances in SQSP's Presence and Commerce segments, which have shown robust growth and are fundamental to the company's overall revenue stream.

Revenue Breakdown by Segments

The Presence segment, responsible for 69.8% of total revenues, saw an uptick of 19.6% year-over-year, reaching $179.5 million. In constant currency, this segment's revenues were up by 17% compared to the previous year.

Similarly, the Commerce segment, although accounting for a slightly reduced percentage of total revenues at 30.2%, exhibited a 14.6% increase year-over-year with $77.6 million in earnings. The constant currency growth here was consistent at 14%.

The company experienced a positive trajectory in total bookings and unique subscription numbers. Third-quarter bookings rose to $267.0 million, an 18% increase year-over-year, while the number of unique subscriptions climbed to over 4.4 million, a 5% increase from the 4.2 million reported at the end of the previous year's third quarter.

The Annual Run Rate Revenue (ARRR) also showcased a strong 18% year-on-year growth, reaching $1.014 billion at the quarter's close. Furthermore, the Average Revenue Per Unique Subscription (ARPUS) demonstrated a fortifying trend, up by 10% year-over-year to $226.05, signifying improved monetization per customer.

Expense and Profitability Analysis

Though gross margin saw a contraction of 230 basis points to 79.9% on a GAAP basis, the company's adjusted EBITDA made impressive strides, expanding by 52% from last year, now at $66.5 million. This pushed the adjusted EBITDA margin upwards by 580 basis points to 25.9%.

On the flip side, operating expenses witnessed a 6.3% rise to $177.7 million, with research & development costs and marketing & sales expenses being the key contributors to this increase. Meanwhile, general and administrative expenses saw a decline of 6.1%.

Balance Sheet Conditions and Forecasts

As the quarter concluded, cash and cash equivalents stood at $216.5 million, a significant rise from the $92.7 million recorded a year earlier. Net debt also saw an increase, climbing to $580.7 million from $494 million recorded at the end of the second quarter. Unlevered free cash flow amounted to $54.1 million, representing 20.7% of the quarter's total revenues, improving from the previous year's $42.1 million.

Looking ahead, SQSP aims for fourth-quarter revenues to be in the region of $261 million to $264 million with an unlevied free cash flow expected between $56 million and $60 million. For the full year 2023, the company anticipates revenues to land between $1.002 billion and $1.006 billion, reflecting a 15%-16% increase from 2022.

Investment Alternatives in the Sector

Presently, SQSP holds a Zacks Rank #3 (Hold). Investors seeking better opportunities within the broader tech sector might consider stocks such as Anterix Inc. ATEX, a wireless communications firm based in Woodland Park, New Jersey; Snowflake Inc. SNOW, which offers cloud-based data platforms and is headquartered in San Mateo, California. Both ATEX and SNOW carry a Zacks Rank #2 (Buy) and offer attractive investment opportunities with varying growth dynamics and market outlooks.

Squarespace, Earnings, Stock