Squarespace - Website Builder To A Shopify?

Summary

• Unique subscribers show a lower growth in 2020 of 23% to 3.7m unique subscriptions, while bookings.
• Squarespace recorded an increase in revenue growth from 24% increase in 2019 of $484.8m revenues to 28% YoY to $621.1m revenues in 2020.
• Thus, if we were to look at LTV/CAC, it has a 4.9x, which is decent, even if they increased the marketing expense to lead to higher CAC, they can afford.

https://mitchchan.substack.com/p/squarespace-website-builder-to-a?r=kiqi3&utm_campaign=post&utm_medium=web&utm_source=copy

Squarespace was founded in 2004 by Anthony Casalena with the goal to empower anybody to be able to build, maintain and grow a beautiful, smartly-branded website [1], which till today has always emphasize the design-aspect of Squarespace compared to the now many competitors such as Wix.com, Wordpress or even Shopify in the commerce segment. Think of it as platform to build a beautiful blogging site or your company’s website with a simplified version of Shopify’s commerce abilities.

Squarespace has since raised over $578m in funding from the likes of General Atlantic, Tiger Global, Accel, Dragoneer, Fidelity, Index Ventures and others [2]. While carrying out several acquisitions such as Tock in Mar’21 for over $400m to further extends its product line from just being a website builder.

Squarespace has filed its S-1 and is going public through a direct listing under the ticker SQSP [3].

Summary P&L

Source: S1

• Squarespace recorded an increase in revenue growth from 24% increase in 2019 of $484.8m revenues to 28% YoY to $621.1m revenues in 2020

• The growth is driven by an uptick in the Commerce side of Squarespace, which had a 78% revenue growth and now makes up 23% of revenues compared to 17% in 2019 and will further increase, as the commerce side further grows as an upsell of existing subscribers

• Gross margins has maintained relatively consistently at a typical high margin software business of 84% in 2020

• While sales & marketing expense had an increased of 41% YoY in 2020, and increased from 38% of revenues in 2019 to 42% in 2020. This is mainly to acquire more unique subscribers, as I believe they think lifetime value of their customer could increase due to biggest revenue streams resulting in higher investment to acquire more unique subscriber to upsell further

• Overall, EBITDA margin drops to 6% in 2020 from 13% in 2019, as increased investment in S&M and R&D expense in OPEX

• As many businesses are forced to go online in 2020 due to COVID, it remains to be seen whether these businesses would continue to be a customer or many could even churn out, as they go out of business, as seen in many SMEs software players

Metrics and KPIs

Source: S1

• Unique subscribers show a lower growth in 2020 of 23% to 3.7m unique subscriptions, while bookings grew YoY 29% in 2020

• ARPU per subscriber have not changed much since 2018 with 5% increase over the past 2 years

• GMV processed through the platform has increased 91% in 2020 to $3.8bn, highlighting the further growth driver being the Commerce segment of Squarespace, although the implied take rate (Commerce revenue/GMV) have decreased marginally from 3.9% in 2019 to 3.7% to 2020%

Unit economics

• With a cash retention rate of 86%, by typical enterprise software business, this is not great compared Snowflake’s 168% or Shopify’s 100%. However, they do serve predominantly SMEs compared, which would naturally have higher churn due to turnover of the SMEs compared to enterprises.

• Thus, if we were to look at LTV/CAC, it has a 4.9x, which is decent, even if they increased the marketing expense to lead to higher CAC, they can afford to invest more in growth

• I would think they need to further increased their ARPU to contribute to stronger unit economics, as retention rate maintains at the mid-80% mark

• Looking at it from a typical software player, the rule of 40 in 2020 is not great at -6% compared to 36% in 2019, but at least from a unit economics standpoint, they’re doing okay

Source: S1

• Subscription as percentage of revenues decreases by 2% in 2020, as further commerce revenue take focus, which has a take rate business model, while there international revenues increased steadily to 31% in 2020, which would lower the concentration risks in the US

Valuation

Source: Financials and forecast from Capiq (latest as of 27th April 2021)

• The most probable comparable in terms of valuation comps is Wix, where they show similar revenue growth rate of 30% in 2020 with increased focus in commerce as a revenue stream and are carrying out acquisitions in ancillary verticals to further support an aggregated product, while having a large consumer base in SMEs compared to Shopify, which focus are in the big enterprise. Wix has lower margins compared to Squarespace, but they also have 50% more revenues than Squarespace. They are getting traded at EV/’20A revenues of 17.7x currently

• With last round of funding about a month ago at a valuation of $10bn [4], which is about 16x FY2020A revenues, this is relatively consistent with comps currently.

• Thus, I would expect at an IPO valuation giving an enterprise value of around $10-13bn, although the market is a bit frothy at the moment.

• And their focus on SMEs could be their downturn, as it would struggle to maintain retention rates while maintaining growth rates

Overall, Squarespace has to figure out how to further grow the business, while maintaining retention rates. They have carried out multiple acquisitions to further boosts its product line and increase stickiness, but its simplicity might result in their customers in E-commerce going big to eventually shift into Shopify, which has a much more robust product. I am probably neutral about Squarespace, with a lot of competition and risks of SMEs as a major customer base.