SQSP S-1 Teardown
For our second S-1 teardown, the airCFO team took a deep dive into the all-in-one website / brand building giant, Squarespace, Inc. (“Squarespace”) which, in April, filed to go public by way of a direct listing. Launched in 2004 and currently hosting 3.8 million unique sites, Squarespace is a familiar face in the web-based business landscape and remains founder-led with CEO Anthony Casalena retaining majority voting power.
While the nontraditional nature of the direct listing inherently creates some uncertainty around valuation, the Company’s March 2021 private placement, considered alongside its S-1 disclosures, provides a reasonable starting point from which to base our analysis. With that reference point of $68.42 per share, implying a ~$10 billion valuation, we believe Squarespace offers a compelling investment opportunity relative to some of its publicly traded comparables. The long-term performance of the stock, however, will depend on the Company’s ability to attract new customers, both domestically and abroad, while continuously strengthening its core product offering through expanded functionality and design innovation.
Squarespace offers a multi-faceted, web-based platform that provides software-as-a-service (“SaaS”) products that help businesses manage their online presence and operations. Built as a comprehensive all-in-one platform, the Company’s primary offerings include websites, domains, e-commerce, social media & marketing management tools, and scheduling capabilities. Its customer base is primarily comprised of small and medium-sized businesses (“SMBs”) including sole proprietors and individual freelancers, though an increased focus on enterprise accounts is part of Squarespace’s growth strategy. Squarespace derives 70% of its business from US-based customers but has a presence in 180 countries globally with plans for further expansion and increased penetration.
Squarespace occupies a somewhat unique position in the competitive landscape due to its all-in-one approach to meeting the various needs of businesses and individual creators. While there are big name competitors overlapping virtually all of Squarespace’s solutions (e.g. GoDaddy for domains, Wix for website-building, Shopify for e-commerce, etc.), you would be hard pressed to find a competitor that checks all these boxes. Combined with the Company’s early-mover advantage, knack for design (i.e. template library and customizability), and ease-of-use, Squarespace has managed to compete and grow steadily throughout its relatively long operating history.
Direct Listing Transaction Overview
Squarespace will be listing its Class A Common shares to be traded on the NYSE under the ticker, SQSP with an expected IPO date of May 19th, 2021. Post-IPO, Casalena will retain approximately 68% of voting rights through his ownership of Class B shares, which entitle him to 10 votes per share.
Unlike a traditional IPO, which provides a structure of price discovery based on the advanced sale of shares (which are underwritten by investment banks) leading up to the listing in a process known as “book building,” a direct listing will result in initial pricing based on the supply-and-demand for shares at the time of listing. In the case of Squarespace, however, the Company’s recent $300M investment round in March provides potential IPO investors with some idea of what price range they might expect to see when placing “buy” orders once trading commences.
Here are some summary-level takeaways on Squarespace’s recent financial performance:
- Healthy topline growth of 28% and 31% for the most recent annual and quarterly results, respectively, with 2021 full-year guidance of $770M in revenue, representing 24% year-over-year growth. Subscription-based revenue accounted for 94% of total revenue in 2020, down slightly from 96% in 2019.
- Robust and expanding gross margins: From 82% in 2018 to 84% in 2020, the Company’s strong gross margin profile has enabled it to invest heavily in R&D and Sales & Marketing while keeping G&A growth relatively modest. Direct costs of revenue consist primarily of domain registration fees, credit card and payment processing fees, hosting costs and app fees. The gross margin expansion over the past two years suggests Squarespace is managing growth well and realizing economies of scale.
- Product-mix is shifting from Presence revenue (plans that offer core platform functionalities) towards more Commerce revenue (plans that offer presence features with added marketing and commerce transaction tools). This shift has driven increasing gross merchandise value (“GMV”) flowing through the platform. Quarterly GMV in Q1 2021 grew 100% year-over-year to $1.2 billion.
- Robust cash-flow generation and historical profitability that have enabled the Company to reinvest into the business both organically and through strategic M&A such as the most recent acquisition of Tock, an online reservations, takeout, and events platform for the hospitality industry.
Management is explicit in their prioritization of growth and intent to continue investing heavily in R&D and Sales & Marketing spend which represented 26% and 43% of total revenue over the last twelve months. While the Company does have ROI targets for its marketing projects, management takes a flexible approach in evaluating all opportunities. Both organic and inorganic investments are evaluated based on their ability to offer long-term growth and complement the existing platform and services portfolio.
Squarespace comes to market with a history of bottom-line profitability. The Company reported Net Income and Adjusted EBITDA of $40M and $127M over the last twelve months, respectively. Unlevered free cash flow for the same period was $151M and has grown by a CAGR of 36% since 2018. Pro forma for the IPO, Squarespace will hold approximately $321M of net debt as of March 31, 2021, equating to a Net Debt / Adj. EBITDA ratio of 2.5x. Management believes that their margins and cash flow profile, in conjunction with sustained growth, will enable them to further deleverage in the coming years.
Key Operating Metrics
As of March 31, 2021, Squarespace had 3.8 millions unique subscriptions with an Average Revenue per Unique Subscription (“ARPUS”) of $190. ARPUS has grown steadily from $181 at the end of 2019 and management has stated that they have not relied on price increases for revenue growth, instead favoring subscription growth and upselling. Notably and disappointingly, the Company has not disclosed the average lifetime of customers, which would enable us to calculate a customer lifetime value (“LTV”). However, on a year-over-year view of revenue retention, Squarespace reported an improving “cash retention rate” over the past three years, as shown in the chart below.
Further supporting the Company’s focus on subscription growth and increasing ARPUS attributable to upselling and increasing e-commerce, the chart below suggests that new cohorts continue to provide higher returns in a shorter amount of time compared with prior cohorts.
Although this is encouraging, it is difficult to estimate the ROI and overall efficiency of its customer acquisition strategy in absence of an LTV. The Company has also not explicitly disclosed its customer acquisition costs (“CAC”). The airCFO team has estimated CAC in the table below. Using these estimates, we can approximate a CAC payback period of almost 3 years. If accurate, this suggests that even a 5-year customer lifetime would yield an LTV:CAC ratio of just 1.75x.
While other highly anticipated tech companies have been on-trend with direct listings (see Roblox and Coinbase), Squarespace might be viewed as offering investors a refreshing change-of-pace characterized by historical profitability and a long track-record of growth and cash generation. The management team has consistently underscored a long-term approach to investing and growth. Having identified key growth levers of commerce (further enabling customers to transact with their customers); product development (new use cases and functionality); and international expansion, Squarespace seems well-positioned to continue doing what has historically been working. That, in itself, is pretty impressive considering how much the internet, e-commerce, and even web design aesthetics have changed since it first began operations.
With an addressable market estimated at $150 billion (based on ARPUS and 800 million SMBS and self-employed ventures), Squarespace’s scale, brand, and industry tailwinds should all help to fuel continued growth which, in-turn, would provide funding for continued investment. When asked about the effect of the pandemic as an accelerant for market trends, Casalena summarized it well by stating “Squarespace saw a large boom as a result… [but] its part of a more permanent trend. We don’t see that businesses that have moved online are suddenly going to find that their online presence is irrelevant.”
Investor materials cite the significant fragmentation of the online hosting and related business services industry as a key factor in the inherent appeal of Squarespace’s all-in-one platform. This same fragmentation, however, means that there will always be room for competing niche products that seek to optimize one or more of Squarespace’s bundled services. So far, Squarespace has managed to stay ahead of the curve, exemplified by its partnership with leading payment companies such as Stripe, PayPal, and Square and by recent complementary bolt-on acquisitions, such as Tock. Staying at the forefront of innovation and product development, however, is undeniably challenging, costly, and past performance is often not indicative of future results. When considering the Class A shares, investors will also need to get comfortable with having no say in corporate governance issues, at least for the foreseeable future.
If Squarespace’s shares begin trading in the $70 range pegged in its March funding round, the stock will be trading at a TEV / 2021E Revenue multiple of approximately 12.8x. This compares with GoDaddy (domains), Shopify (e-commerce), and Wix (website building / hosting) multiples of ~5x, ~38x, and ~16x. Given the pureplay nature of these comparables and the multi-faceted nature of Squarespace’s operations, such a valuation seems justifiable and may make for a compelling investment if you can get on board with the bull case outlined above. If, however, market forces push the price higher, investors may want to spend some additional time and effort in determining how to weight those peer multiples when considering what Squarespace’s business looks like now and in the future.
Author Note: Joseph comes to airCFO from a role as an associate at a leading investment firm focused on high-growth startups in the legal cannabis sector. Before that, he began his professional career as an investment banker at Jefferies, where he advised private and public companies on numerous M&A, debt, and equity transactions with over $500M in aggregate deal value experience.