Deep Dive: Squarespace
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What they do: Squarespace is a DIY/DIFM website building and hosting tool. If you aren’t familiar with these platforms, it allows creators to build the internet presence they want by simply dragging and dropping different features. More and more of the websites being built on the internet are being done this way. Squarespace also offers more to its platform though. There is commerce functionality, scheduling (think about like a yoga place or something), email campaigns, SEO management, hospitality stuff (reservations, bookings). But the basics of Squarespace is a freemium website building platform. You build the website you want, then if you want to publish it, you pay Squarespace a yearly/monthly rate. Customers pay Squarespace for hosting capabilities, security, and a domain. That’s basically Squarespace’s cost of revenue.
They’re headquartered in NY, NY and have ~1,200 employees. Most of which are in the US, about 100 or so are in the EU in their Dublin office.
History: Squarespace was started in 2003 by Anthony Casalena in his dorm room. Casalena has been a programmer since about the age of 14. Initially he was trying to build a website for himself, but he found it difficult to do. So he started working on what is now Squarespace. He launched his website building tool publicly in 2004, and hired his first employee in 2006. So this was actually built before Shopify or Wix.
In 2010, Squarespace received investments from Accel and Index Ventures. Always find it fascinating that the companies can stay alive for so long without any funding. I typically like when companies are forced to start lean, since it usually leaves a mark on the culture as they grow. Launched their commerce offering in 2013 and were actually net income profitable by 2016. Bloggers were the early adopters, that sort of the avenue they grew through. And they filed their S-1 April 16th.
Competitors include Shopify, Wix, Weebly, BigCommerce, and other website builders. Also Facebook in some cases where that can serve as a business homepage on the internet
Also Google Maps for restaurants kind of a competitor
Industry is large and growing. 800 million SMBs and self ventures globally, with around half not online today
Hard to quantify the industry, but none of these website aggregators have over 10 million subs, so plenty of room to grow for Squarespace and others
They believe addressable market is over $150 billion
Management and Ownership:
Anthony Casalena is the Founder and CEO of Squarespace
Says they want to not only help people “get online” but also “grow online”
A focus on beauty and direct access to customers
“Mission: Squarespace exists to help people with creative ideas stand out and succeed. We enable millions to build a brand and transact with their customers in an impactful and beautiful online presence.”
Had a bit over $1,000,000 in comp last year
219mm in unvested shares that apply to stock price targets. Seem like fairly aggressive targets, only $1 in base salary
68% of voting power, about 36% of shares according to my calculations
CFO was previously at Booking.com and National Geographic
Ticker is SQSP, valuation is unknown since the offering is not done yet
What is our valuation prediction here? Market cap?
Looks like valuation was $9 billion in March funding round but they have 3 share classes so it is quite confusing
Earnings: Non pro-forma
$621M in 2020 revenue, up 28% YoY (pro forma adds about $20M in revenue)
3.7M unique subscriptions, up 22% YoY
84% gross margin
$150M in OCF, up 47% YoY
They are GAAP profitable, but they upped their spending on S&M and R&D this year.
Spent about 5% of revenue on SBC
Unlevered FCF Margin is about 24.5%. Less if you take it as a % of ARRR
ARPUS was $187. Pricing is very similar to competitors
Balance sheet and liquidity:
Cash and marketable securities of $215mm
Debt of $536mm
Floor of 1.25%, cap of 2.25%
Basically $300mm special dividend to shareholders/bonus to employees in December 2020
3% of the valuation dividend recapitalization
About 50% of assets are goodwill due to the tock acquisition
Definitely a bit concerning
Good interest rates though
Only about 5% debt to EV
Only $3mm in debt service, could get up to 8-10, still not super concerning
Product Experience/Anecdotal Evidence:
(Ryan) Used the platform to see if we should port over chitchatmoney.com. A little difficult to navigate, I’d probably end up going with Wix if we had to switch. Just bc that’s the design platform I know. Templates weren’t great on Squarespace.
(Ian) Not super competitive option for just a website for a project that I am working on
(Ryan) Marketing. This space is a bit like cloud storage/content collaboration (dropbox, g-suite, office 365). Once you’ve gotten acclimated to a certain system, switching can be a pain. So being the first one customers see is crucial, and it feels like (anecdotal) Squarespace has a high share of mind. Probably seen those commercials. For bloggers, I think they have a leg up in design.
(Brett) Switching costs would be the one for me. Like with Shopify and Wix, the reason these companies are so loved by investors is the low churn excluding bankruptcies. With the cycle of SMBs being somewhat high this does leave some potential turnover exposure to other platforms, but if Squarespace has a good offering this shouldn’t be a concern. Small worry that this is just a commodity product though.
(Ian) Maybe a focus on beauty, Squarespace feels very classy, nothing really strong though in my opinion
Future growth opportunities:
(Ryan) DIFM templates. Getting a leg up on the templates is crucial to keeping those early customers. Having a plethora of templates, so people have fewer changes to make will keep them there and make them more acclimated to sign up. Right now Wix has about 800 templates vs. Squarespace with ~125. If they want to compete, they’re going to need to add more.
(Brett) Acquisition of Tock, inc. for $415 million. Tock is a reservation, pickup, delivery, and online payments solution for restaurants. It basically has all the software tools an SMB restaurant would need for success. Would work well with website tools to upsell this to existing customers (really feels like they are copying Wix here). Looking at pro forma results it looks like Tock isn’t doing much revenue currently, only bringing $13 million in gross profit to the table
(Ian) Add on services to raise ARPUS from $187 (between the bottom two levels). Need to have high retention and have businesses grow on the platform. Commerce growing very quickly (78% growth YoY).
Highlights and lowlights:
(Ryan) Highlights: The world is shifting to DIY/DIFM. Right now, low-code/no-code makes up 10% of web development, it’s expected to be north of 50% by 2025. Lowlights: If you google “website building software” a bunch of sites pop up ranking the best ones, and most of them have Wix as number one. If you think that isn’t important take a look at this year, where COVID spurred accelerated adoption. Wix added 1 million premium subscriptions and Squarespace added ~670k. Each added subscriber makes the platform better (better custom templates, users tell you what they need, more transaction revenue). That feels like Wix is sort of pulling away.
(Brett) Highlights: Overall a great business model, love how they are lean on G&A so they can spend heavily on S&M while still generating cash. Lowlights: Would worry that e-commerce offering is a commodity and not as robust as Wix and especially Shopify, and $3.9 billion in GMV is nowhere near as large as what competitors are doing, subscription revenue only grew 18% last year which is not great, but not terrible. Casalena has a Musk-like 10 level equity comp plan based on share price appreciation. Don’t love these but he is eligible for less than $200 mil so not crazy amount of dilution coming if he hits it
(Ian) Highlights: Commerce revenue growth, good platform Lowlights: Not sure about Tock acquisition, dividend recap, voting power, balance sheet (just don’t have the cash)
More or less interested?
After finishing the show on Squarespace, Ian decided he was less interested in the stock, while Ryan and Brett both said they were slightly more interested. Find out why by listening to the podcast!
*Chit Chat Money is sponsored by 7investing. Use our link or enter promo code “CCM” at check-out to get $10 off your first month of the service.
Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.