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spk16: good morning my name is emily and i'll be your conference operator today at this time i would like to welcome everyone to squarespace's first quarter 2023 earnings conference call all lines have been placed on mute to prevent any background noise after the prepared remarks there will be a question and answer session if you would like to ask a question during this time simply press start followed by the number one on your telephone keypad if you would like to withdraw your question press start followed by two thank you I'll now turn the call over to your host at Squarespace, Claire Perry.
spk00: Claire, please go ahead. Good morning, and thank you for joining Squarespace's first quarter 2023 earnings conference call. I'm Claire Perry, head of investor relations, and with me today are Anthony Casalena, Squarespace's founder and CEO, and Nathan Gooden, CFO. After their prepared remarks, we will open the call to your questions. Earlier today, we posted a press release and shareholder letter to the investor relations section of our website. On today's call, we'll be referencing both GAAP and non-GAAP financial results and operating metrics. You can find additional information on how we calculate these metrics, including a reconciliation of GAAP to non-GAAP measures in today's press release and shareholder letter, which can be found in the investor relations section of our website. These measures should not be considered in isolation from nor a substitute for our GAAP reporting. We will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which include, but are not limited to, statements related to our future financial performance, our strategies, and our ability to integrate new technology into our core platform. These forward-looking statements are subject to risk and uncertainties that could cause our actual results to differ materially. These risks are further defined in our most recent filings with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of this day, May 9, 2023. We undertake no obligation to update these statements as a result of new information or future events except where required by law. Please also note that all comparisons are on a year-over-year basis unless specifically noted otherwise. I will now turn the call over to Anthony.
spk14: Thank you, Claire. Good morning, everyone, and thank you for joining us today. Last month we celebrated a major milestone, our 20th anniversary. Across the past two decades, the Squarespace platform has been used by millions to build beautiful brands and businesses online. This quarter, We delivered exceptionally strong performance with over 14% top line growth and an unlevered free cash flow margin exceeding 28% of revenue. The powerful combination of growth and profitability underscores Squarespace's solid business model. The majority of our business remains subscription-based with over 92% of revenue coming from recurring revenue streams from our 4.3 million unique subscriptions. Q1 2023 had the most trial starts in our core product and Squarespace's history. surpassing any pandemic quarter. In March, we saw a strong customer acquisition, which continued into April. This continued strength gives us the ability to raise our full year guidance today. Squarespace's core website business outperformed our expectations in the first quarter of 2023, with outperformance driven by both new customer additions and higher adoption of our premium plans. Last year, we delivered over 100 new features and updates to our customers across our product lines, which included the release of Fluid Engine, a transformation of our primary page builder experience. We believe Fluid Engine is the simplest and most expressive way to publish to the web, and our focus on democratizing access to great design remains a key competitive advantage. Adoption of our higher value plans, along with our ability to responsibly increase pricing, is beginning to be reflected in our revenue, driving average revenue per unique subscription higher to $213 each. Average revenue per unique subscription grew faster than unique subscriptions this quarter, and we expect that dynamic to continue as higher intent to sell customers join our platform and adopt additional products. Our investments in international markets over the past year are showing early signs of success as well, with positive growth across all target markets. Many of our international markets are seeing both CAC improvements in growth rates that exceed our growth rates domestically. Our commerce products also saw double-digit growth across the board. One notable outlier within the quarter was increased adoption of our email campaigns products, which benefited from macro changes in the competitive environment. Free products are increasingly becoming more restrictive in pay only, which further drives customers to consider alternatives to incumbent players. Our portfolio of products for entrepreneurs has never been stronger, and we continue to invest in our brands that are adjacent to our core Scorespace brand, Acuity for scheduling, talk for hospitality and time-slotted businesses, and unfold in bio-sites for social media creators. To remain relevant in an ever-changing technological landscape, it's essential to have tools that can seamlessly integrate and adapt to evolving customer needs. Squarespace has evolved from being a publishing platform to becoming a holistic, commerce-forward content management system. Our products allow entrepreneurs to transact in a variety of ways as they monetize physical goods, services, and content. Squarespace has always offered hundreds of curated templates for customers to choose from when they're building a site. In the first quarter of 2023, we introduced Squarespace Blueprint, a new onboarding experience that lets users custom build a starting point without having to select from our template store. We've seen record levels of demand in Q1 as customers onboard with Squarespace Blueprint and adopt the myriad of updates on our core platform, which is both easier to use and more expressive than ever. The mainstream accessibility of artificial intelligence large language models is something we are paying close attention to, and efforts are underway to build this functionality into our core platform. In our shareholder letter, we discussed in depth how this technology fits into Squarespace's core onboarding and editing experiences, including the newly launched Squarespace Blueprint. This technology helps us solve one of the core reasons customers find themselves in a difficult spot while onboarding. They do not have their content ready. The availability of AI models augments our tools perfectly, helping customers with setup and writing, while also preserving the power that Squarespace provides as an editing tool, hosting platform, commerce platform, and more. Yesterday, our Circle community received a beta release of new text generation features powered by OpenAI in our production environment. These enhancements will be made available to all customers in the coming weeks. Squarespace Payments remains on track to launch in the back half of 2023. Our engineering and product teams are building towards an integrated solution to deepen our relationship with customers and provide a seamless experience at every step within our platform. Finally, we recently published our first environmental, social, and governance report. We're proud to showcase how our mission and ways of operating our business support our ESG goals. The report can be found at the ESG section of our investor relations website, and we invite you to read about our positioning and progress. We continue the year with immense gratitude to our customers and remain focused on delivering innovative products to enable entrepreneurs everywhere. Thank you to all of our customers and employees who've been part of this journey with us over the past two decades. We remain an incredibly modern company and are delivering better products and more functionality than we have in any previous year of our existence. We look forward to serving you for the decades to come. And now I'll turn the call over to Nathan.
spk01: Thank you, Anthony. And good morning, everyone. The first quarter demonstrated the strength of our business as we delivered robust growth during the quarter and beat our financial guidance across all key metrics. Revenue and unlevered free cash flow in Q1 2023 exceeded the high end of our guidance. This was driven by strong performance of our core business, which was bolstered by healthy demand from new customers and stable retention of our largest customer cohorts receiving price increases. We believe our strong customer retention rate relative to the increased subscription prices speaks to the enduring value of our product as we continue to invest and deliver more value to our customers. As Anthony mentioned, last year was transformative for our platform with the release of more than 100 new features and updates, including a new page editor fluid engine. Our platform today includes best-in-class tools, which makes it easier for entrepreneurs to run, and grow their businesses. Products across our offering, campaigns, member areas, and acuity scheduling are seeing growth as more customers integrate them into their workstreams. Q1 2023 bookings of $266 million grew by 16% as reported and 17% in constant currency. This acceleration was driven by growth in unique subscriptions and the continued success of our price increases, which launched in Q3 2022. In August 2022, we announced a price increase for our legacy customers, which we began rolling out in September. This was the first increase to legacy customers in our history. Now, as we conclude our second full quarter of realizing these updated prices in our base, Customer cohorts demonstrate strong cash retention and lower customer churn than our projections. Our largest cohorts of legacy customers renew in the first quarter, and renewal rates were in line with historic levels. The increased mix of higher-value plans had a positive impact on our bookings during the quarter. It is important to note that bookings is a forward-looking indicator as the majority of our subscription customers adopt annual plans. First quarter total revenue was $237 million and grew 14% and 15% on a constant currency basis. This exceeded the high end of our guidance range of $232 to $234 million and accelerated for the second consecutive quarter. Our strong results were driven by robust customer retention through the pricing increases and new website acquisition. When compared to the first quarter of 2022, Foreign currency fluctuations acted as a slight headwind to our top-line growth by approximately 2.8 million, or 130 basis points, as rates remained relatively low. We saw a favorable website plan mix to higher-value plans in the quarter, which shows more customers shifting to business and commerce plans. March 2023 was a particular strong month in the quarter as new website acquisitions surpassed our expectations. We believe our marketing efforts are effectively targeting high-intent customers. Squarespace continues to deliver an essential service to entrepreneurs looking to bring a business online. International revenue was $67 million in Q1 2023, representing 10% growth and comprised 28% of total revenue. Excluding the FX impact, international revenue would have comprised 29% of total revenue and grown at 15%. Our platform continues to evolve toward an international audience as we localize key product features and focus our go-to-market efforts in key geographies worldwide through partnerships. We have been targeting design-minded entrepreneurs internationally with expanded engagement through our circle professional community. New website acquisition from international markets grew more than total website acquisition. We believe international markets remain an important growth opportunity, and we are still in the early innings of what we believe will be an exciting channel for new customer growth. Our product localization and targeted marketing efforts position us to succeed internationally. As Anthony mentioned, ARPUs grew 4% to $213 in the quarter. ARPUs is calculated from our total revenue during the preceding 12-month period divided by the average of the total number of unique subscriptions at the beginning and end of the period. This metric includes revenue from all subscription types, ranging from unfold at the low end to talk, our highest priced subscription. Seeing this metric increase over time demonstrates our ability to sell more products and higher value subscriptions to our customers. We continue to innovate and deliver additional functionality and tools to help entrepreneurs grow their business. Growing ARPUs reflects our ability to raise prices alongside the value we provide, as well as increased mix to our higher value plans. Our continuous innovation strengthens our platform's functionality, better serving our entrepreneurs as they build their brands and transact with customers. Our strong Q1 results were broad-based across the majority of our product offerings. with higher-value website subscriptions growing year-over-year. Commerce revenue was $73 million, growing 14% and 15% in constant currency. As Anthony mentioned, our commerce products saw year-over-year growth, with notable strength in commerce websites, acuity scheduling, and talk. GMV process across our platforms declined 2.6% year-over-year to $1.5 billion. Despite double-digit GMV growth from talk, our acuity scheduling contributions were soft in the first two months of the year. We saw this trend stabilize in March. In addition, outsized performance from acuity scheduling in Q1 2022 created a difficult comparison for the product. But we are encouraged by the progress that the team has made to the product to drive more transactions on platform and refresh user experience on mobile. Acuity scheduling attach rates were higher in the quarter than we expected, and we are delighted to see sustained interest from service sellers with our tools. Additionally, we believe improvements that we are making to our member areas product will offer additional value to service-based commerce as we continue to improve the product. We are still early in the stages of monetization, with the majority of our revenue, 92%, being subscription-based. TALK is also in an area where we continue to have high expectations, and we have increased the size of the sales team to support its growth. This quarter, TALK saw year-over-year strength in GMB, some of the highest months in its history. TALK also saw growth in unique subscriptions and reservations on Explore TALK. We expect continued growth in these areas with the additional GTM support and overall improvements that the team has made to its solution deployment and customer onboarding process. We remain optimistic about the potential of our diverse product portfolio. We delivered a non-GAAP gross margin of 83%, down slightly by approximately 50 basis points year-over-year due to investments in customer operations and an increased share of TOC's hospitality business, which has a different margin profile on account of its payments business. This decline is in line with our expectations as TOC processes increasing amounts of GMV on its platform. We improved non-GAAP operating efficiency and delivered a non-GAAP operating margin of 13%. We reduced marketing and sales expenses by optimizing our channel mix to unlock opportunities to scale our marketing efforts in key geographies. This ultimately resulted in operating leverage for the business. As a percentage of revenue, non-GAAP marketing and sales expenses represented approximately 41% of revenue. an improvement of more than 1,000 basis points as it represented 52% of revenue during the same period last year. Brand spend decreased year over year as we leaned into efficiently converting the large funnel we have built over the past several quarters. Additionally, we drove efficiency in G&A expenses by approximately 130 basis points as compared to the previous year. As a percentage of revenue non-GAAP G&A expense, represented 10% in the quarter. Non-GAAP R&D expense as a percentage of revenue represented 20%. In the first three months of 2023, our adjusted EBITDA was $31 million, growing at significant rates compared to the same period last year as we increased our revenue and reduced marketing and sales spend, though the amount was partially offset by an increase in headcount year over year. Squarespace has the advantage of generating substantial amounts of cash. Our balance sheet has a healthy cash and cash equivalence position of $239 million. Our total debt was $504 million, of which $41 million is current. Our cash flow from operating activities grew 36% to $64 million due to momentum in bookings and a reduction in our marketing and sales spend. In Q1, we generated robust, unlevered free cash flow of $67 million for the trailing three months. 47% higher than Q1 2022, representing a margin of 28% and surpassing the high end of our guidance range of $63 to $65 million. As a reminder, historically, Q1 is our strongest quarter of free cash flow generation, a result of outsized customer cohorts renewal, larger annual mix versus monthly subscription plans, and the seasonality of our marketing spend. We continued our share repurchase program during the quarter. As of March 31, 2023, we returned approximately $146 million to shareholders under the current repurchase program since it was authorized by our Board of Directors in May 2022, $25 million of which was purchased during the first quarter of 2023, which represents approximately 1.3 million shares at an average weighted price per share of $22.04 on the open market. At quarter end, approximately $54 million remained available for repurchase. Turning to our guidance for Q2 and the full year 2023. In the second quarter of 2023, we are targeting total revenue in the range of $241 to $245 million. This represents 14% growth at the midpoint. We expect unlevered free cash flow during Q2 to be in the range of $49 to $53 million, which implies an unlevered free cash flow margin of 21% at the midpoint of the range. For the full year, we are raising our revenue and unlevered free cash flow guidance. We expect total revenue to be in the range of $969 to $981 million, representing growth of 12% at the midpoint of the range, up from $955 to $970 million. Unlevered free cash flow is expected to grow throughout the year to the range of $192 to $207 million and implies a margin of 20% at the midpoint of the range. This is up from $183 to $198 million. The core website strength we saw in March and continuing in April gives us confidence to raise our guidance for the full year. This strength speaks to the resilience of our platform and the essential service it provides to millions. We continue our trajectory towards sustaining profitable growth and expect our 2023 non-GAAP gross margin to be similar to the margin we delivered in 2022. Our marketing and sales efficiencies are slightly offset by higher R&D as a percentage of revenue as we prioritize key growth initiatives in 2023. Additionally, we expect to see improvements in G&A this year. We have started the year outperforming against our expectations. We have a strong forecast, diversified business model, and a high level of recurring revenue with solid cash flow generation, all of which contribute to our confidence in the outlook and underlying momentum in our business. We are well positioned to deliver on our guidance. We believe our strategic investments align us perfectly to provide more value to our customers worldwide. Our results are a testament to the amazing work by our employees to deliver for our customers. Thank you for the work you do each day to help entrepreneurs everywhere stand out and succeed. Now we will open the line for your questions.
spk16: Thank you. As a reminder, if you would like to ask a question today, please do so now by pressing Start, followed by the number 1 on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. When preparing to ask your question, please ensure that your microphone and your device are unmuted locally. Our first question today comes from Egal Arunian with Citigroup. Please go ahead.
spk07: Hey, good morning, guys. Anthony, I thought you did a good job in the investor letter talking about AI and impacts there. But maybe we could just spend a little bit more time on your thoughts on the evolution of AI, how that impacts the web builder space in general, and then what you guys are doing to stay ahead of those changes. And I know some of the key factors, I guess you could think of the front end CMS and how it impacts on the actual building of the web page. And then, you know, the back end and all the business tools that you highlighted that, you know, you guys kind of layer on on top of that and how each of those might change and how you approach each with your large language models as well over time.
spk14: Yeah, sure. Thanks for the question. You know, no mistake that we devoted a good amount of space in the investor letter to commentary on AI considering where it is in people's minds right now. Our industry is really no stranger to it. There have been AI-based onboarding tools in various forms affecting different parts of our industry for eight plus years now. But what I'll focus on is kind of like where we are right now and where we're going and how those tools will fit into that roadmap. So just kind of where we are right now. I mean, Squarespace's core business is helping people make websites without code, and we've been doing that for two decades. And another thing I kind of wanted to highlight in the letter is, you know, our plan started $16, $18 a month, and you don't just get a thing that makes a website. You get hosting, storage, bandwidth, CDN, DDoS protection, customer support teams and infrastructure teams at around 24-7, domain registration, DNS services, SSL certificates if you're using our email product, email delivery and monitoring services. So there's kind of a lot that's baked into that subscription that's just outside the onboarding and the setup of the code. But if you go beyond that, you look into the future, we're super excited about this stuff and have been either playing with it in various forms in our product and kind of following along as they develop. So I'll focus on two of those items verbally. One is large language models in terms of dealing with what we call content not ready. So the main reason why people don't sign up for a website in our self-reported surveys, they don't have their content ready, they don't have their imagery ready, they don't have their text ready, they don't know kind of what to do. So just yesterday in production, in beta for our Circle members, and this will be available in general release over the next couple weeks, I don't see any reason why it wouldn't be, is just integrating the large language model improvements from OpenAI into just our open text fields, right? You're sitting there, there's an open text field, you don't know what to put in it, We've all seen the magic of what ChatGPT can do, and we want to make that accessible to everybody. Of course, it's also worth highlighting that after that text goes into the field, you need to edit it, which is why we have a content management system that's what we have. So it was great to be able to release that yesterday, and it really does provide a magical experience for people. It's just awesome to see where it's going. The other thing I would highlight is, and this is also in the letter, And leading to some of the outperformance you see in the quarter is something we're calling Squarespace Blueprint, which is a way for people who don't want the pre-generated template to come on and build a template from pieces visually based on kind of the parts that we provide to them. How this will integrate, I think this is a great thing to highlight because it integrates very well to large language models and generation in a form that's not maybe obvious initially. Because what we can do with this is say, all right, You know, some people do kind of come to Squarespace and say, hey, I want to look through the store. I need inspiration. I need to know what these things look like. They can't, from the top of their mind, just generate, you know, they need help in getting set up. Blueprint gives them some flexibility. And what we can do on top of that is not just take large language models with prompts, but do what we're calling, and I think we didn't invent this phrase, but it's essentially prompt engineering and say, all right, you don't know what to type into this box. Here's some ideas on what to say on fonts. Here's some ideas to say on colors. Let's talk about the tone of text you might want to use. And that engineering can go into the large language model and go into a framework like Blueprint and really help people with those starting points. So we're super excited about that. Blueprint's already showing improvements in our sign-up process even without that. But I just kind of say in closing, there are a lot of ways people are going to need to get started with this product and receive help. And I think what we do as a creative partner to give people these ideas of starting points and all that other stuff we do, the list I rattled off on the back end, especially at a price point like $18 a month, is... you know, is great. So, look, we're really excited about these developments. Those are a couple ways we'll be integrating these. We have some demos coming out later, which I think people will get really excited by, and, you know, it's great for us.
spk07: Thanks, Anthony, and looking forward to seeing those demos. That was really helpful. If I could just, on a follow-up, on the business more near-term, Let's just dive into the record trial volume. If we could just expand on that a little bit, I think it's great to see that coming back and especially impressive that it's higher than it was during the peak of COVID when we really saw pretty major industry tailwinds there. And then that coming at the same time with the improved marketing efficiency, you're spending less, you're on marketing and you're driving better record, you're driving record trial volume. Can you just talk about how those two things are tied together as well? Thanks.
spk14: Sure. Yeah, they're all interrelated. Honestly, reporting on the trial number was kind of great to see and is a bit of an interestingly shocking result. I think what you're seeing there is improvements to the attribution model changes, which we were starting to roll out in August and in Q4, and really deploying spend against that in Q1, which is Q4, Q1, which is, of course, our Our seasonality, you know, a lot of the website business seasonality is focused there. Things like fluid engine, you know, maturing, blueprint being released, mobile path to publish in Q4 of last year. All this stuff kind of works together. And, you know, you can't point to any one of them and be like, this alone changed it all. But together, it is producing a great result for us. You know, look, I'm... encourage that, you know, the demand in the business remains strong. And I'd also mention that a lot of what we have that we're releasing during the year around service-based sellers in the classes and courses area in, you know, workflow products for people who have workflows that are not in e-commerce checkout, related to a physical e-commerce checkout, we're going to be able to sell into this base. And I think... That, of course, won't be something that hits in Q3, Q4 necessarily in a big way, but I think absolutely into next year, there's just a huge opportunity here, and I think we have permission to sell into that base because why people are coming to us.
spk01: I would layer on there. I think the attribution model is really enabling us to invest in the right channels to get the highest performance and the right customers with the highest intent to sell. and that we're seeing that both unlocked internationally, as we saw a strong growth there, that we can scale in the right opportunities there, but also, in March specifically, we started to see a good acceleration of our core business that led to us increasing, obviously, guidance for the year, but we would attribute a lot to that we're directing to the right customer.
spk11: Thanks, guys, really helpful.
spk15: The next question comes from Trevor Young with Barclays. Trevor, please go ahead.
spk05: Great. Thanks. First one for, I guess, Anthony or Nathan. Just on pricing, any updated thoughts on whether you'll push another round of increases on renewal to those customers that are still well below list price or pushing pricing to those non-USD customers given the strong retention trends among the customers that have already seen those increases as well as that strong international growth? And then second question, Nathan, on the unlevered free cash flow guide, it implies some margin compression in the back half versus both the front half of this year as well as the back half of 22. Can you help us foot that versus your commentary on kind of steady gross margin for the full year, maybe some R&D investments offsetting the marketing efficiencies and then G&A already fairly lean? Just trying to understand whether that's conservatism or if we should assume like a more market ramp in R&D in the back half.
spk14: I'll start with your first question and let Nathan comment on the second. With regard to further price increases this year on people in the core, that was not baked into anything that we have. But for non-USD customers, sorry, let me clarify. For people we've already increased prices on in USD, no, we're not planning a further increase yet this year. But for non-USD, Because we saw success in USD, we are looking to raise the international currencies to list and all this, or sorry, not to list all the time, but just raise them. And that's in Nathan's model. Nathan, you want to comment on the free cash?
spk01: Yeah, so Trevor, as you saw, we did raise the high end of our range by $9 million for the year for unlevered free cash flow. The Q1 impact is really driven by three things. One, as Anthony said, seasonality of our business. That is the highest renewal quarter for our business. Secondly, we skew to annual plans. So 75% of our business is annual plans, and with that renewal, that has a high bookings impact in Q1. And then the last thing I would say is timing of spend, which kind of went to where you were going with the R&D spend as we ramp the investment throughout the year, but also for the advertising and marketing spend, which we see heavier
spk12: in q4 and lighter in q1 so that's why that is reflected that way great thank you both our next question comes from city panagrahi with mizuho please go ahead uh thank you uh thanks for my question uh it's good good uh quarter Just wanted to ask you on that follow-up on the pricing question, what percentage of your legacy customer already moved to the new pricing? Maybe I'll have a follow-up to that.
spk14: It's around 75%. And again, that's not necessarily moving the model. Okay, good. Correct. And then, you know, it's, of course, waiting for either the annual renewal, because a lot of our legacy base is on annuals, And then obviously if it's monthly, they've already received it. Yeah.
spk12: Okay, good. And then question about unique subscriber growth. I see your sales and marketing, it's kind of pretty much tied to the unique growth and I see it was down. Are you planning to increase your sales and marketing span maybe later part of this year?
spk01: So first let me comment on the unique subs. The unique subs, as you know, is a compilation of all of our subs, both unfold, which we have spoken Q3 and Q4 of last year, continue to see the erosion there. So it's not necessarily impacting the total unique subs of 4.3 million, growing 2.5% year over year. But our core business is continuing to grow and accelerate in March, and we saw that goodness in April as well. Concerning the marketing, we are seeing the efficiency, and we're happy with the efficiency that we're seeing that's allowing us to decrease and still get the higher intent and higher trials, which is converting. So we feel good about where our marketing spend is and don't necessarily feel that we need to increase it, but we are moving it around to the right channels. We have decreased our brand spend as we built that funnel in the United States, and then internationally we have increased the brand spend as we pour into those markets So I think that's the balance that we are doing.
spk11: Great color. Thank you.
spk15: Our next question comes from Matt Fowle with William Blair. Please go ahead, Matt. Your line is open.
spk08: Hey, Gray. I wanted to ask a follow-up on incorporating AI into the platform. And how do you view it? From a monetization perspective, is it more of increasing conversion or do you plan to charge for these perhaps in premium tiers? Thanks.
spk14: Right now, we are thinking of it as a tool for conversion, not something we are going to be monetizing directly in the other tiers.
spk08: Got it. Okay. And then wanted to follow up just on the commentary around GMV and the tough comps there on acuity scheduling. So maybe it would just be helpful to provide some additional commentary around that, given you're seeing good subscription additions there, but yet the GMV growth is lagging. So maybe just helpful in terms of what's driving that.
spk01: So the Q1 2022, we did have a very strong quarter for scheduling. And so that comp is somewhat skewed for Q1 2023. However, we are seeing strength across the other areas of MGMV. TOC had another record quarter in Q1. Our core business, as we continue to invest in service sellers, is moving in the right direction. It was just the comparison to what we saw the strength in early Q1 2022 carrying over from 21 that creates that tough comparison.
spk08: Okay, great. Thank you.
spk15: Our next question comes from Ken Wong with Oppenheimer and Company.
spk16: Ken, please go ahead.
spk06: Great, thank you for taking my question. The first is just a question about the record customer trials. How much of that do you think is driven by the new attribution model, maybe a rebound in demand, or is there potentially just heightened seasonality in Q1 that you guys have started to see? Any color on whether or not you know, that could potentially extend through the year, or does it start to kind of dip back down after a strong Q1?
spk14: Yeah, it's really a combination of everything. I mean, that is partially, you know, Q1 is seasonally the highest quarter in websites, yes, but we're comparing to other high seasonal quarters. It's, you know, a combination of what we're doing on onboarding, the attribution model changes, improvements, certain international markets are starting to improve, fluid engine product getting attention. It's just all those factors in one. It's not like one of them is the reason. It's probably a bit early for me to comment on just pure macro stuff, except that we just continue to see strength into the year, and that continues into April.
spk06: Got it. And then on the international side, Right now, international is growing roughly in line with domestic. You guys have highlighted some marketing investments over the past year. Should we start to see that international business start to outpace U.S. sometime this year, or is that still a bit of a lag before we start to see that flow through?
spk01: I think that we're still in the early innings here, Ken. As we continue to localize our product and make a fully – localized experience for our entrepreneurs with translation and local currency. As we make that investment, I think that the years to come, we'll start to see that outpace. For 2023, I think that we will stay fairly confident with where we've seen the growth to date. But we are very excited about the key markets where we are seeing double-digit growth in our international markets. I think this is reflective of the investment we made in 22 with brand and product. and starting to see that come to fruition.
spk14: I'd also highlight that certain product releases go to the U.S. first before they go internationally. So Blueprint, MobilePath, the publishers, things that I was kind of mentioning that are leading the strength in the core business. We do U.S. first, and then once we've validated that, we think it's going to be a positive thing. you know, test result than we spend the effort internationalizing it. So it always is going to kind of have that lag.
spk11: Got it. Thanks for the clarity.
spk15: Our next question comes from Andrew Boone with JMP Securities. Andrew, please go ahead.
spk09: Good morning, and thanks for taking my questions. I wanted to go back to international as well. Nathan, in the letter, I think your section talked about it being early innings of channel growth for international. Just, Anthony, to the point that you just made, can you talk about where you are in the process of localizing products that may be specific to international? What is not available if you think about the parity set of the U.S. versus international markets? Can you just provide a little bit more details on the international kind of roadmap? And then we haven't talked much about Squarespace payments. Can you just update us their thoughts on timing as well as just any broader updates? Thanks so much.
spk14: Sure. So if I start to get into a lot of the international, there's just going to be a lot of details. I can highlight a couple. Like, for instance, in the past quarter, this will sound like kind of mundane, but like we spent a lot of time looking at things like our contact form block and making sure they work in all the countries where we're present. And it's just immense amount of work getting all the zip code types right, address types right, phone number formatting right, all this like currency format, all this stuff that people are expecting in a local market that maybe we've gotten sort of right, sort of wrong. Checkout methods, currency, you know, making sure they can transact in their local currency, making sure our support queues are staffed in those currencies. In those markets, obviously, when you get into commerce, like our customers' commerce component, there's a whole other level of kind of complexity or like local shipping and whatnot that we may not be fully up to speed on that we are in in a U.S. market. So all that's kind of floating around within that number.
spk01: I do think that, before you jump into payments, I'm just going to layer on. Why I said it's early earnings here, I think that we still have quite a bit of room to go to get to parity in some of the key markets that we're in that will continue investment this year that will obviously drive growth. That's why I said early earnings. We still, we're not at parity in all regions that we're in.
spk14: Yeah, and payments, all I have is positive commentary. We are on track there. You know, it's not something that's going to appear in the financials for this year, but we expect to have customers in production onboarding to payments by the end of this year in Q4, and maybe some in beta a little before that. So we are rolling along quite nicely, and that'll be a more exciting thing to talk about over the next couple of calls.
spk11: Thank you.
spk15: Our next question comes from Josh Beck with KeyBank. Josh, please go ahead.
spk02: Thank you for taking the question. And I apologize for my voice. I'm a bit under the weather. But yeah, I wanted just to go back to some of your commentary around March, April. You know, it really sounds like, you know, as you looked at the monthly cadence, that trends actually improved, which, you know, I would say, versus maybe some of the broader consumer-oriented spending data points with kind of opposite and certainly a positive standout. So any other color you can share on what may be changed with respect to the monthly cadence would be great.
spk14: You know, as I said, it's a little hard. Yeah, we're encouraged by it as well. I think while it's hard for us to comment on anything too macro at this point. We mentioned a number of the changes that we're going into the outperformance right now, which is attribution, changing how we're spending, Blueprint, mobile path to publish, et cetera. After we get maybe a couple more months behind us, we'll be able to kind of tease out what may be going on from a macro standpoint or not. Yeah, and Nathan, would you add anything to that?
spk01: No, I think that I agree with you. I think it's a combination of everything that we've seen as we continue to invest in the product and we're realizing the investment that we've made in brand spend in early years and that we saw in 2022.
spk02: Okay, great. And then maybe just, you know, a follow up on just how to think about maybe more of the midterm growth algorithm obviously this year there's a really nice impact related to pricing you're getting really good as you mentioned record trials so lots of of drivers between subscriptions ARPU you've obviously talked to layering on payments revenue and other initiatives but just you know what I guess framework you know would you put around kind of the the more mid-term growth algorithm as we think about the future years?
spk14: So I think that we would look into the various, now I'm putting like a task between the products aside, as we think about the products themselves, improvements in classes and courses, improvements in workflows around people who are selling on the platform that are, you know, service-based sellers, lots of stuff happening within Acuity. We've got Sort of the opportunity there, obviously early stages and they're experimental with bio sites and we haven't done any monetization there. You've already mentioned payments that's on track for late Q3, Q4. Yeah, I mean that's a lot of the stuff we're focused on trying to make people more successful on the platform. And then hopefully over the next five years shift a little bit away from SaaS towards more payment volume. From a macro standpoint, this is, of course, something we have less control over, but we hope it'll build up over time.
spk11: Super helpful. Thanks, guys.
spk15: Our next question comes from Clark Jeffries with Piper Sandler.
spk16: Clark, please go ahead.
spk04: Hi. Thank you for taking the question. First one is just a clarifying question. Nate, what was constant currency bookings in the quarter?
spk01: In the quarter was 17% in constant currency for year-over-year growth.
spk04: Perfect. Thank you. And then follow-up question, you know, how are you thinking about capital allocation? I mean, is there any appetite here to accelerate the pay down of the debt? Or how are you thinking about incremental cash from here?
spk14: I'll take a pass and then Nathan can give his view. You know, we of course want to use the cash on hand for growth, but also, you know, our theme is always responsible growth. And so we have overinvestment in certain areas of R&D where we feel that the team is light and we have an ability to outpace on revenue if we invest there, and we've really modulated certain growth and marketing and sales and R&D in targeted ways to kind of get blended away in the big number. But, you know, I've said it before on various causes, I think we should just be kind of constantly taking up the free cash flow margin, so just continuing to grow responsibly. We, of course, want to keep something available for opportunistic M&A that comes up. I've also talked about the fact that we want to be, you know, we're mostly looking at smaller deals there, but we remain open to whatever might come across our desk. Nathan, what would you say?
spk01: I think I'm in line with everything that you said. I don't think I would add anything different. Okay.
spk11: Thank you very much.
spk15: Our next question comes from Brad Erickson with RBC Capital Markets.
spk16: Please go ahead, Brad.
spk03: Hi, thanks. Just another generative AI question. You know, ChatGPT is obviously, I guess, the most well-known solution out there. But broadly, what do you expect will kind of be the main drivers as you guys look to select, you know, models and output partners you would use? Is it going to be kind of you know, easier, faster to time to market with working with a single all-in vendor. Are you seeing things out there from other vendors you're testing with at this point that are intriguing? And then a second part, maybe just a quick comment related to longer-term compute costs related to integrating some of this tech into your stack. And I think you spoke a little bit of this earlier of maybe not embedding it into your price per se, but just talk about the general sort of structural cost to compute associated with putting tech into your stack. Thanks.
spk14: Sure. Yeah. So we're mostly looking at large language models right now. Um, and what's, what's kind of interesting is I'm actually glad you brought up the cost. I think that where we see integration of these products, it's really in a very cost effective way because it's not like we're, we're integrating anything on like a, like a, like a traffic per query basis when everything we're doing is mostly related to setup, right? So if you have trouble with a text box or you're building a website, These things get you started and then the tool takes you from there. So we don't have like an API call per hit to your website or anything built in like that that would be a really detrimental kind of business model impact. On the contrary, I mean, we've been investing in machine learning internal to our company for, you know, eight plus years. So the fact that these are now available in API form is a huge benefit to us. I mean, all the stuff that's happening. If open AI wasn't, let's just say it was closed AI instead of open AI, and we had to take those technologies like we've had to do in the past and train them ourselves, build them ourselves, I mean, the cost to train these models is gigantic. So it's fantastic that we can get the benefit of this so quickly in the areas of the product where we think it's going to have the most impact. Again, most of what Squarespace does, that huge list of stuff I'd rattle off, Um, that stuff isn't currently changed by the presence of, of, of large, large language models. So again, mostly set up based cost lower than before, which is positive time to market faster than before, which is why you're seeing all these, like, I mean, the space you look at, but like maybe like a million AI startups in the past month or something like something crazy. There's not developing that. They're not developing that technology themselves. which is, again, why we're focused on what we're good at, the prompt engineering, what can we do on top of these models that would be the real value add. Yeah, so that's kind of how we're approaching it.
spk06: Got it. Thanks.
spk16: Our final question today comes from Deepak Matavanan with Wolf Research. Please go ahead.
spk13: Hey, guys, thanks for taking the questions. One more on the LLMs. How do you think it changes the distribution landscape in this space? You know, your point on kind of the compelling value prop of the Squarespace features, it makes a lot of sense. But do you think other large platforms could potentially integrate some of the website building capabilities, you know, using these LLMs as a part of their products? And curious whether, you know, curious on your thoughts, whether it creates some sort of like a distribution and competitive landscape shifts in this space? And then the second question may be for Nathan. It seems like the retention trends are very strong relatively despite the ongoing price increases. What do you think are sort of like the primary reasons for this dynamic for Squarespace? Thank you so much.
spk14: Yeah, Tati, the first part of your question around what disruption this will bring to some of the core fundamental things like hosting, storage, bandwidth, the CMS, CDNs, all that. I think it's a little, you know, DNS, it's a little less clear how it is going to immediately impact infrastructure. I think that there's a big open question in the industry around, frankly, what do R&D expenses really look like in a couple years with, you know, get a co-pilot type models that are helping the with developer efficiency, or what does your support cost really look like when you have higher and higher and higher deflection rates based on models that you have that are automating some part of support. It's actually worth mentioning that we've had, one of the main things we look at in our support group is how much our AI-based, not LLM yet, but it will be, based bots are helping with ticket deflection, all that. So there's some TBDs out there, but for the most part, there's just really excitement about integrating this with the product in the areas I've already mentioned. Anything?
spk01: Deepak, thanks for the pricing question. I guess there's three things that I would say. One, this is the first time in the history of the company that we've increased pricing for our legacy customers. And we're, as you've seen the results, continuing to see strong retention. I think that goes to two other things. One, they're still far below list. So as we increase them and moving them closer to list, there's still opportunity there that we've seen. And then lastly, I think this goes to really the value that we provide to our customers. We've continued to increase the product offering to them. We launched Fluid Engine last year. We offered 100 plus extra features that we launched last year as well. And we've never increased the price associated with that. So this is just realizing the value that we have already delivered to them.
spk13: Got it. Thank you both.
spk16: That was our final question for today. So this concludes today's call. Thank you so much for joining. You may now disconnect your lines.
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