Squarespace Files to Go Public

Squarespace, a provider of software for creating websites filed to go public via a direct listing.  I’ll quickly cover the impressive topline numbers in the company’s S-1 and then delve into its efforts to move into commerce offerings.

Squarespace Topline Numbers

Squarespace knows what SaaS investors want to see.  Here’s a lead graphic from their S-1:

Squarespace is clearly a force to be reckoned with.  The company is large, growing nicely, almost pure subscription software–and it’s profitable.  You can immediately calculate that Squarespace is a “Rule of 50+” company.

Squarespace financials also show the following ratios to revenue:

• Gross Margin of 84.2%
• R&D of 27%
• Sales and marketing of 41.9%
• G&A of 8.8%, and
• Operating income of 6.5%.

In theory, these expense numbers include special bonuses and investments, so you can see a path towards a model SaaS P&L over time.

Squarespace’s SaaS Metrics

For those of us interested in SaaS metrics in the SMB market, Squarespace offers a few:

• Unique subscriptions grew 22.5% in 2020.  This is essentially a measure of the core number of customers the company has (unique websites).
• Average Revenue per Unique Subscription (ARPUS) grew 2.8% in 2020 to $187 per year as the company’s mix shifted to more expensive subscription packages.
• The “cash retention rate” for the past three years has been increasing from 83.2% in 2018 to 85.5% in 2019 to 85.6% in 2020.  This figure appears to be a net retention number.  If it is, it’s a little low relative to where Hubspot or Shopify is, but it is increasing.  Squarespace has only recently added products to upsell.  Most of Squarespace’s direct competitors do not seem to disclose this number.  Retention in the SMB market is relatively high as failure rates of small businesses are high.

The Move to E-Commerce

Squarespace offers websites, domain registration, email marketing, e-commerce, and even restaurant and scheduling solutions (through recent acquisitions). As a result, the company competes with Automattic, Wix, Shopify, GoDaddy, MailChimp, Mindbody, and now Toast.  Some of these companies sport 10-20x EV/Revenue multiples and up to $20 billion in market cap.  But, the big Kahuna is SMB e-commerce provider Shopify. Shopify sports a 48x EV/Revenue multiple and a market cap of $147B!  Squarespace wants you to know that is starting down the E-commerce path.  Right after the graphic above, Squarespace highlighted this graphic to focus us on the company’s fast-growing e-commerce segment:

While Squarespace reports as one segment for GAAP purposes, it does separate out what it calls “Presence revenue” from “Commerce revenue”.

• Presence revenue is subscription revenue to its core website plans, domain services, and social media offerings.  This revenue accounts for about 77% of total revenue and grew 18.2% in 2020.
• Commerce revenue is not quite what you might think from its name.  It’s not exactly transactional revenue tied to the $4B in GMV you see in the graphic.  Here’s how Squarespace describes it:

“Commerce revenue primarily consists of fixed-fee subscriptions to the Company’s plans that offer all the features of presence plans including additional marketing and commerce transaction tools. Commerce revenue also includes fixed-fee subscriptions to the Company’s scheduling services, non-subscription revenue derived from fixed fees earned on revenue share arrangements with Commerce Partners, and fixed transaction fees earned on sales made through its customers’ sites.”

This commerce revenue accounted for 23% of revenue in 2020, but, it grew at a much faster 78% growth rate over the prior year.

Subscription Versus Transactional Revenue

If we dig in a little further, it appears that almost 80% of commerce revenue is subscription revenue from sales of subscriptions to the company’s two premium “commerce” bundles which also include all of the marketing capabilities. In other words, to a large extent, commerce revenue is not yet transactional revenue.

Squarespace does receive referral fees from payments partners (e.g., Stripe, Paypal, and Square) but it is not a payments facilitator (except perhaps in a small restaurant business it recently acquired).  Shopify’s revenue, by contrast, is almost 69% “merchant solutions”, or payments/GMV-related fees, and 31% subscriptions.  (To be fair, the gross margin on subscriptions is much higher.) I’d expect to see Squarespace introduce its own payments offering and try to take a little bit more of the margin from merchant acquisition and payments processing than what they are getting on referrals.

Summary

There’s nothing wrong with being a much classier “Go Daddy” or Wix.  (And being classier than Go Daddy should not be hard!) But Squarespace, like its competitors, is gunning for a piece of the commerce.