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spk05: Good morning, my name is Ellen and I'll be your conference operator for today. At this time, I'd like to welcome everyone to Squarespace's second 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you change your mind and would like to withdraw your question, please press star followed by two on your telephone keypad. Thank you. I'll now like to call over to your host at Squarespace, Claire Perry. Claire, please go ahead whenever you're ready.
spk00: Good morning, and thank you for joining Squarespace's second quarter 2023 earnings conference call. This is Claire Perry, head of investor relations. I'm joined by 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. These measures should not be considered in isolation from nor a substitute for our gap 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 risks and uncertainties that could cause our actual results to differ materially. These risks are further defined in our most recent filings with the Security and Exchange Commission. Any forward-looking statements that we will make on this call are based on assumptions as of this day, August 8, 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.
spk09: Hello, everyone. I'm pleased to announce another solid quarter of strong financial performance for Squarespace. Revenue grew more than 16%, and we achieved a 22% unlevered free cash flow margin, putting us within striking distance of the rule of 40%. The positive trends that we saw in Q1 continued this quarter, highlighting the strength of our core business and customer enthusiasm for our products and services. For the second consecutive quarter, website trials in our core products set an all-time high. We attribute this to a variety of factors, including the new Squarespace Blueprint onboarding flows, changes to our advertising mix based on updated internal marketing attribution models, strong international performance, and favorable macro elements. We have a number of exciting product launches set to go live through the end of this year to enable more functionality for service-based sellers in classes and courses and for payments. Stay tuned for our Squarespace Refresh product event coming in early October for more product updates and a roundup of everything we've accomplished this year. In June, we announced our intent to acquire Google Domains assets, which includes up to approximately 10 million domains. Domains are a critical part of web infrastructure and essential to an entrepreneur's online presence. We're using this unprecedented opportunity to also invest in and relaunch Squarespace domains, which we are operating as an independent domain registrar. Squarespace is already a leading and trusted domain registrar, relied on by millions of domains customers. At this point, we've been perfecting our domains offering now for nearly a decade. As a Google Domains customer myself, I'm personally committed to making sure this transition is seamless for all of us. Some might wonder why I was a Google Domains customer when we had a domain offering at Squarespace. The answer is that the domain offering from Squarespace was historically very website-centric, and I had many domains accumulated over the years that were simply parked or used for email. The Squarespace domains product that we are investing in will cater to these types of customers, as well as the ones that have domains centered around a website. Whether you use Squarespace products or not, we want to be the easiest and most straightforward way for you to manage your domains. We'll be building on Google's infrastructure as a foundation for our Scorespace domain service, and customers can expect the same level of reliability as we move along with the migration to Scorespace. We're thrilled to be working with Google on the management of these domains and looking forward to deepening our relationship. We're already one of the largest resellers of Google Workspace in the world and have been reselling it for close to a decade. As part of this deal, for a minimum of up to three years, we will also be acting as the exclusive domain provider when customers purchase domains through Google Workspace. This quarter, we introduced Squarespace Blueprint in five new languages. With the introduction of Squarespace Blueprint earlier this year, we integrated a modular design experience at customer onboarding. With Blueprint, users can now begin their journey without having to navigate the template store during onboarding, making each website at the end of the Blueprint setup process unique. We think this, along with our curated template store, represent the best setup experiences we've ever offered on our platform. And these continue to contribute to our expanding market share as more and more customers choose ScoreSpace. During the quarter, we continued integrating generative AI technology into our CMS in areas where customers are presented with text they need to generate or edit. This new integration, alongside our leading CMS and dominance in design, helps our customers get set up faster than ever before. Expect further developments coming soon that will integrate copilot-like experiences into our support interface, which already includes AI-powered recommendations trained on our knowledge base. We're currently in the process of rolling out a new homepage and brand identity for Acuity Scheduling. Acuity Scheduling is an important part of our product portfolio. It can be used as an extension of our website product via deep integrations or completely standalone if you're a larger enterprise or have your website hosted elsewhere. We will continue to invest in this standalone channel as we grow Acuity over the next few years, and we'll be expanding the Acuity team significantly in line with the opportunity we see in the market. Finally, I'm also excited to note that we processed our first payment through Squarespace Payments on production infrastructure as part of our alpha test program. We are on track to deliver Squarespace Payments to new customers in Q4 of this year, and I'm looking forward to sharing more when we finally launch. We have an incredible set of releases lined up for the second half of 2023, and I remain incredibly encouraged by our strong financial performance, which brings us very close to the rule of 40 this year. Beyond our performance, I'm delighted to serve our millions of customers across so many different endeavors as we continue to power entrepreneurship everywhere. With that, I'll turn it over to Nathan to review the financials.
spk06: Thank you, Anthony. Good morning, everyone, and thank you for joining us today. Squarespace's second quarter 2023 demonstrated the power of our core business. Our products are well suited to provide today's entrepreneurs with the best in class tools to build a beautiful brand and launch a business online. Our results surpassed the high end of our top line and unlevered free cash flow guidance as customer demand surpassed our expectations. Throughout the quarter, we leveraged our brand momentum across the globe to deepen our connections with entrepreneurs and drive strong revenue growth. In Q2, revenue was $248 million, growing 16%, both as reported and in constant currency. The positive results of our pricing increases and strength in new unique subscriptions, both in the U.S. and international, give us confidence for sustained top-line growth in 2023. Bookings kept pace with our top line, growing 16% as reported and in constant currency to $256 million, driven by healthy demand from new customers and stable retention as we completed our third consecutive quarter of pricing increases rolling out to legacy customers. Q2 2023 revenue growth of 16% represented an increase of approximately $34.8 million over the same period last year. The primary driver of growth was the strength in unique subscriptions, both the retention of existing and contributions from new, which contributed $20.1 million, or 58% of the growth of this quarter. This expansion includes additional revenue resulting from attached subscriptions and talk, another meaningful opportunity to drive growth. Increasing the attach rate of our products with our existing base of over 4.3 million unique subscriptions provides us the opportunity to equip customers with more tools to power their businesses, all from one streamlined platform. The impact of pricing increases from our legacy customers was also an important driver during the quarter, which represented approximately $10.4 million across both presence and commerce website subscriptions, and with about 30% of the growth of this quarter. The legacy price increases have an outsized impact on our presence business and represented growth of 17%, both as reported and in constant currency. As of quarter end, approximately 90% of eligible customers have received a price increase, a process which we began in Q3 2022. Consistent with all previous quarters, customer retention outpaced our expectations against this period of price optimization, which has also resulted in a robust total cash retention rate in Q2 2023 that is nearly 1,000 basis points higher than the same period last year. Squarespace is firing on all cylinders as we grow with customers, culminating in a highly cash-generative business model with strong margins and predictability over future revenue. Customers continue to adopt higher-value plans when choosing between our subscription offerings and an increased rate compared to last year. This is the third consecutive quarter where we have observed this trend, and the mixed shift is impacting our ARPUs, which grew above $219 at a growth rate of 7%. On a net basis, we continue to see gains in our unique subscriptions despite continued churn from lower-value Unfold subscriptions. We are beginning to see Unfold customers gradually stabilize from elevated rates which plagued much of the past 12 months. We are encouraged to see continued traction with BioSites as customers choose a BioSite as a hub to share social media links and a beautiful layout to match their individual style and branding. Commerce revenue grew to $75 million, or 14%, as reported and in constant currency in the second quarter, which represents approximately 30% of total revenue. Subscription revenue related to commerce websites, acuity scheduling, and talk were the main drivers of growth in the quarter. We saw a reversal of GMV trends with positive growth during the quarter as GMV reached over $1.5 billion. Softness and acuity scheduling abated, and we are encouraged by early customer trends we are seeing there following a revamp of new customer engagement with an optimized onboarding wizard. International revenue represented approximately $70 million, or 28% of total revenue, in Q2 2023 and grew 17%. 15% in constant currency as foreign exchange rates acted as a tail end relative to currency prices in Q2 2022. We are energized to see strong revenue growth coming from our international markets as we have been prioritizing ex-US geographies to drive new customer adoption. As a percentage of total revenue, the mix of international and US revenue has trended flat over the past three quarters, largely due to the impact of our legacy price increases, which have overwhelmingly impacted USD customers. Understanding the impact of FX is also important for appreciating the underlying dynamics, which have prevented the mix from increasing. As we look ahead to the rest of the year and lap depressed FX rates, we expect to see a larger impact to revenue mix shift year over year. I would also note our international business is primarily driven from websites. Higher growth products such as Talk, Acuity, and other attached products are still nascent in international markets. Turning now to our margin profile, our non-GAAP gross margin was 84% in Q2, where we saw nearly 100 basis points of sequential improvement and remained steady compared to the same period last year. Our non-GAAP marketing and sales expense with $69.3 million in the quarter, or 28% of revenue. This degree of expense was down sequentially from Q1 2023, in line with seasonal trends, and shows over 100 basis points of leverage versus the same period last year. We expect marketing and sales expenses to increase during the remaining two quarters of the year, but still show improvement relative to 2022 levels. Non-GAAP R&D expense was $44.6 million during the quarter and represented 18% of revenue, as hiring continued to ramp during the quarter but at a slower rate than anticipated. Finally, non-GAAP G&A expenses were $21.1 million, 8.5% of revenue. We have improved our margin here by approximately 370 basis points compared to the same period last year as we see opportunities to sustain operating efficiencies. Overall, we are tracking ahead of plan, and I am proud of the efficiencies that many of the teams are driving across the organization. In the second quarter, our adjusted EBITDA increased to $73.4 million at 30% of total revenue, growing 68%. Our adjusted EBITDA margin improved by over 900 basis points when compared to the same period last year. The culmination of top-line improvements and the discipline on our investments is driving this improvement. We are excited to see this leverage as our business model produces growth, tremendous cash generation, and profitability. Seasonally speaking, Q2 adjusted EBITDA tends to be stronger relative to other periods due to timing of our marketing and sales expenses. Our balance sheet remains healthy with cash and cash equivalents of $274 million and approximately $18 million of available borrowings. Total debt was approximately $494 million at the end of the quarter, of which approximately $41 million is current. We amended the terms of our 2020 credit agreement in June to establish an additional term loan commitment of $100 million. The additional commitment is intended to fund a portion of financing related to our announced acquisition of the Google Domains assets. Upon the closing date of the acquisition, which is still subject to regulatory approval and customary closing conditions, the loan will fund. Once again, we delivered strong cash flow in the quarter. Our cash flow from operating activities grew 44% to $52.5 million for the trailing three months, compared to $36.4 million for the trailing three months into June 30, 2022, primarily due to continued strength in bookings and overall investment efficiencies. For the same period, our unlevered free cash flow reached $54.8 million, growing 51 percent year-over-year and representing over 500 basis points of improvement at 22.1 percent of total revenue. Our share repurchase program continues to be active. While there were no repurchases in Q2, as of quarter end, we still had approximately $54 million available for repurchase under our current authorization. Since initiating the program in May of 2022, we have returned approximately $146 million to shareholders. Turning to our guidance for Q3 and full year 2023. In the third quarter of 2023, we are targeting total revenue in the range of $250 to $253 million. The midpoint of the range represents 16% growth. We expect unlevered free cash flow during the third quarter to be in the range of $47 to $51 million, which implies an unlevered free cash flow margin of 19.4% at the midpoint of the range. The strength that we continue to see in our core business gives us confidence to raise our full-year guidance today. In 2023, we expect total revenue to be in the range of $987 to $995 million, representing growth of 14% at the midpoint of the range. up from our previous guidance of $969 to $981 million. Unleveraged free cash flow is expected to reach between $217 and $225 million and implies a margin of 22.3% at the midpoint of the range. This is up from our previous guidance of $192 to $207 million. We continue our trajectory towards sustained profitable growth and expect some improvements to our 2023 non-GAAP gross margin relative to the non-GAAP gross margin we delivered in 2022. We are seeing efficiencies across areas of our business without sacrificing essential investments for continued innovation in our product offerings. In June, we announced our intention to acquire Google Domains assets, including approximately 10 million domains currently managed by Google. We expect the acquisition to close in Q3 2023 and to begin to see a positive impact on both revenue and unlevered free cash flow following the close, though the amount depends on the timing of Google Domains customers' contracts and the number of domains which migrate to Squarespace. As such, we have not included any impact to our financial results in our Q3 and full-year 2023 guidance. We expect to provide additional modeling points and impact to key performance indicators on a future date following the close of the acquisition. We had an exceptional quarter, surpassing our expectations and achieving remarkable results across our business. We are investing in areas to fuel our future growth and deliver increasing value for our customers. The strength of our recurring revenue and customer retention enable us to innovate, invest, and capitalize upon future growth opportunities. Finally, I want to thank our employees for their dedication and passion for helping our customers succeed and building a platform to enable entrepreneurs everywhere. With that, operator, please open the line for the Q&A portion of the call.
spk05: Thank you. We will now enter our Q&A session. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. And if you change your mind and would like to revoke your question, please press star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally. Our first question comes from Egal Aranian from Citigroup. Egal, your line is now open. Please go ahead.
spk02: Hey, good morning, guys. I want to focus on that last point Nathan made just on future growth drivers and Anthony, you talked about Squarespace Refresh and key product improvements in the letter. You talked about new technologies coming through. You accelerated real nicely here into the mid-teens, but you also quantified the impact from the price increases so far in the quarter, and I guess you kind of translate all the guidance into 4Q and implies a little bit of a step down, I guess, as we're lapping some of those pricing increases. As we kind of work our way through this and into 2024 and the new products coming out, just hoping we can kind of like, you know, paint the picture of that transition and whatever you're willing to share, you know, ahead of Squarespace refresh on products and roadmap and, you know, how you're thinking about some of the things to come.
spk09: Hey, yeah, sure. Thanks for the question. You know, this refresh is, I'm glad you're pointing the refresh. This refresh is going to be a big one for us. because we have so much coming out over the next, frankly, 45 days and into Q4. Just a couple of highlights there. One, we've got a number of large product releases with respect to products for selling classes and courses on the platform, and also tools for our service-based sellers who run businesses based on invoicing, et cetera, both of which provide a combination of both an opportunity for SAS fee increases as we sell certain plans related to those products, as well as moving a lot of GMV onto the platform that wasn't previously being processed through us. In addition, huge amount of investment in Squarespace domains, which is taking a... It's something we have an increased interest in making really, really work as we you know, hopefully look to close the, the, um, the acquisition of the Google domains assets. So a lot will be updated there. A lot of visuals will show up during a refresh. We accepted our first payment on the Squarespace payments platforms and our production infrastructure. Now that's an alpha, so it's not yet in front of a wide variety of people, but nevertheless a positive milestone there. And we anticipate having, um, customers onboarded, not an alpha or beta in production in Q4. And we are launching a refresh of the Acuity brand, which you'll see happen over the next 30 days. And there'll be more on that in refresh. So that's just five areas. All of those are pretty substantial in terms of just the amount of effort we've put on things and the scale we think we can get out of those updates. And then on top of that, anything we're launching in terms of releases related to generative AI being integrated or co-pilot like experiences, we think we'll just accelerate, hopefully accelerate across all those product initiatives. So probably one of the best refreshes we're going to have up to this point and a lot of product changes, a lot of product updates coming out. So really looking forward to that.
spk02: Thanks. That's helpful. And just a quick follow-up on that. Nathan mentioned customers choosing higher price point packages on average and kind of moving up there. In the past, you talked about kind of repackaging the product as like a next lever of an opportunity to move our booth up. Is that already happening? Is the strategy evolving? Just update us on thoughts around that. Thanks, Ken.
spk09: Sure. Yeah, we're always, you know, running some kind of price test, you know, every other month basically. I think that as we look towards the future, I think looking at usage-based pricing and using it, looking at just ways to make the product, ways to get more of the product in more people's hands earlier while still retaining the ability to kind of keep more upside if you become a power user or a heavy user of the product. You'll see this in our classes and courses release where you know, on the low end, you know, if you're just getting started with the product, you're paying, you know, less of a SASE and we're having more of a GMV take rate. If you become really successful on the platform, our idea is you're paying more of a SASE and we're taking much less of a GMV take rate. I think, you know, a lot of customers in businesses like this don't want to feel like they're being penalized for their success. And so there isn't one just big mega change that's going to happen but you know us rolling some of these subscription plans into our core introducing new ones in in niche environments like classes and courses and kind of taking it from there thank you thank you our next session comes from matt fowle from william blair matt your line is now open please proceed to your question
spk07: Great. Thanks for taking my questions and great results. I wanted to ask on the record trial volume that you're seeing, perhaps you can just give us a little bit more detail on what's driving this specifically. And then the follow-up there is within those record trials, how has conversion been trending relative to historical levels? Thanks.
spk09: So I'm actually really glad you're asking about this because it's kind of one of the, a point that we were really just kind of pleased to see. So a couple things are contributing to the trial volume being up. Again, that trial volume is a, it is an all-time high for Q2, including any pandemic quarter. And we saw a reversal of for the first time in seasonal trends from Q1 to Q2 in the core product. Normally, Q1 is the stronger volume month, and then Q2, it decelerates a bit, and then goes back up in Q3 a little bit, and then down again in Q4. But we saw a reversal of that trend. So why? First off, we've been talking about changes to our internal attribution model since about this time last year, when we started to introduce what we were calling Attribution 2.0. And then as we moved forward through Q4 and Q1, retraining that model and launching attribution 2.1, et cetera, et cetera. What that does, it's allowing us to deploy our cash more intelligently. And so we're just seeing more effectiveness in terms of the core funnel. So more optimized landings, more trials coming from those landings, and conversion remaining strong while those factors are up. So that's really positive. Two, we talk about Squarespace Blueprint, which is our way of onboarding people to the product and letting them quote-unquote bypass the template store and getting a more bespoke starting point for when they want to create their site. We've rolled that out in five additional languages now, so that's kind of up and running and contributing to more people finding the product easier to use. The product is easier to use. Things like Fluid Engine, we're redesigning the internal nav. So it's a combination of the product being the best it's ever been, the onboarding being the best it's ever been, and just increased intelligence and our ability to deploy dollars and get people onto the platform. Also worth mentioning that certain international markets are outperforming the U.S. very nicely. Again, it's not just one magic thing we're doing. It's years and years of effort and results and tweaking and tuning. So it's a very encouraging number for us because, again, that is right now the core product representing the majority of revenues.
spk07: Very helpful. Appreciate you taking my questions.
spk05: Thank you. Our next question comes from Siti Panigrahi from Azure. Siti, your line is now open. Please go ahead.
spk11: Great. Thank you. Congrats on a good quarter. And also good to see the Squarespace payment now in alpha. So my question is, could you talk more about your Squarespace payment offering? I know that you said you'll launch in Q4. Are you going to migrate all your customers, maybe currently using Stripe, to that? Or what's your target when you launch it in Q4?
spk09: The target in Q4 is going to be new customers, not existing customers. We want to make sure we're able to ramp them up and get volume onto the platform without taking somebody who's been a very successful seller and just moving them over on day one. Certainly, we're also releasing it in beta to our Circle community before a more general release, and so hopefully we'll be able to work through some of the early days in that platform with that community and with people we're really, really close to. So that's the main plan. And then as we move into next year and we get confidence in the platform, Yeah, we will provide incentives, and we will be working with existing customers who have higher volume and move over. Yeah, and it's going to be an incentive-based process.
spk11: Great. And a follow-up on equity business. I know Q1 was weak, but you talked about some of the improvement you're doing. How should we think about it when you think equity business could bounce back, and what are the things you are doing to help it?
spk09: Well, we're super excited to announce the brand relaunch. It looks fantastic. And I think it just shows this commitment to a dual-pronged approach. The Acuity acquisition was very successful for us in terms of there is a significant funnel coming from people attaching Acuity in the core product, which was the thesis. And then there's a number of people that, frankly, are big customers and don't need to use Squished, a DIY website builder, but they have a robust business that relies on employment. So I'm really excited to be attacking both of those at the same time. And the brand refresh that's more targeted towards the standalone business is hopefully going to be a driver there. I think one of the things that we saw in Q1 is there were a lot of COVID testing sort of businesses that were on the, you know, big drivers of acuity GMV. Those are more, have come to pass at this point. And so I think we'll be able to, you know, predict acuity in a more normalized way moving forward with the absence of those sort of anomaly type sellers. So again, highest, you know, more headcount growth in acuity than in other parts of the business right now as we, invest in that both standalone and attached story together, which is something that wasn't front and center, let's call it, two years ago.
spk11: Great. Congrats again for another good quarter. Thank you.
spk05: Thank you. Our next question comes from Trevor Young from Barclays. Trevor, your line is now open. Please proceed.
spk12: Great. Thanks. Anthony, you mentioned ramping investments in acuity, heavy investments in domains, plus all the initiatives with payments and the whole new refresh. Realize you're not getting to 24 yet, but how should we think about margins as we look beyond this year? Is a lot of that investment already reflected in the current cost base, or should we expect OPEX to grow a bit faster from here? And then second question, the letter mentioned strength in English-speaking international markets. What are you seeing in non-English speaking markets in particular in Europe? Some peers have flagged strength there. Others seem to be showing some weakness, just trying to understand what's going on in continental Europe.
spk09: For sure. So in terms of thinking about margins moving forward, you know, a lot of that is baked in. You know, it's our intent to continue to tick up that free cash flow margin into next year and beyond. I don't see any significant reason why it needs to erode. The way we intend to invest in these growth businesses, well, I mean, a lot of what you mentioned, we already have the investment there, right? We already have the investment in acuity and domains and in payments. So what we can do after making that initial investment is just make sure we're disciplined about how we ramp more headcount onto those products vis-a-vis how much revenue they're bringing in. So I think we have a good handle on all that. So again, just see cash flow margins continuing to tick up into next year. Nathan?
spk06: Yeah, I'll just add on there. Trevor, I think that we as a company have demonstrated strong fundamental financials, and that certainly is not going to change. As we look at growing investments in some of these key areas, we would pull back in other areas that are either more mature or not getting the ROI that we want to maintain the operating margins that we have and continue to see that improve.
spk09: Your second question was around sort of international markets, both English-speaking and non-English-speaking. We see strength in both. And I think we have split out kind of exactly where that's coming. But again, a 10-year investment in the core platform in terms of its ability to be internationalized. So when we do things like roll out Scorespace Blueprint in five additional languages, we do see that impacting growth rates in those markets. So it's never just one thing with international. It's all the things it wants, payment methods, languages, blueprints, product innovation. So, yeah, I think we're seeing positive results worldwide.
spk06: Yeah, we're continuing to see double-digit growth in all of our key international markets, Trevor.
spk13: Great. Thank you both.
spk04: Thank you. Our next question comes from Vikram Koseva-Bottler from Baird.
spk05: Vikram, your line is now open. Please go ahead.
spk10: Yeah, thank you for taking the questions. My first one is on the free cash flow margin guidance for this year. It looks like the guidance reflects some contraction in the second half relative to the first half. I'm just wondering if you can give us some more color on the drivers of the sequential performance there. And then separately, I also wanted to ask you about pricing. It sounds like you've been pleased with the retention rates you're seeing from the recent price increase. And so I'm curious if you can talk about how this experience is impacting your broader philosophy around pricing. And specifically, do you think you can raise prices more frequently going forward and what your plans are for fiscal 24 at this point? Thanks.
spk06: Yeah, thanks. I'll take the first on the free cash flow. I think, you know, overall, we're very excited to raise the high end of the guidance by 18 million for the year to reach 22 million. point three percent margin and what this reflects if you look at the whole year is really seasonality because we do see an uptick in Q3 Q4 specifically around marketing and advertising cash outlay and so for the the I would not cash you know as I said my opening remarks Q2 is generally a lighter quarter so just following that seasonal trend and we flowed that through for the full year. So excited where we are landing for the full year.
spk09: Yeah, and I'll comment regarding pricing and pricing leverage. You know, we have been so conservative for so long about any kind of pricing increases. We still don't even have, you know, all of our customers across all of our plans at our even current list price. And we haven't made a plan yet on exactly when we wanted to begin that second wave of, again, just increasing them to lift price, not even raising beyond that. I think it's pretty clear that we will continue to have pricing leverage just based on the strength of the product. Where I'm focusing more instead of just saying, you know, how high can we make all the pricing plans, which I don't think is the right way to remain competitive, is what niches do we serve where a higher price plan would be viewed very favorably? So we talked about classes and courses earlier. Is there an add-on subscription? If you get eventually basically all of our functionality somewhere in the core, and then we're charging a bit more for people who are really at scale, at volume, we can translate that into higher SATCs, what can we do there? If you're an incredibly successful business on Squarespace and you don't want to pay a percentage of GMV, back as any kind of tax on top of the main processing fees, you know, does a $200, $300 SaaS fee sound like a really cheap product to run a multi-million dollar business? I think, you know, we think it does. You see similar dynamics in the top business where the SaaS fees can be much higher and there's more of an emphasis on making sure the GMP take rate's lower.
spk10: Okay, thank you.
spk05: Thank you. Our next question comes from Deepak Mathesanan from Wolf Research. Deepak, your line is now open. Please go ahead.
spk08: Great. Hi, guys. Thanks for taking the question. Anthony, can you elaborate on the new AI technologies you're building in order to launch in co-pilot type experiences? Is that all built on top of open AI, APIs, or are you also thinking about other LLMs? More broadly, how do you think about the extensibility versus sort of go-to-market speed for some of these technologies over the next 12 to 18 months. And then maybe one for Nathan. Can you unpack the subscriber additions between gross ads, conversion, and churn? Seems like overall macro is getting a little bit better, but what is the path for net ads to kind of get back to, you know, pre-COVID or sort of like the historical levels? Thank you so much.
spk09: I can comment on the AI question. So right now, A lot of what we're building is based on models and API APIs that are widely available, which is frankly why in the industry, you see everyone sort of magically coming up with the same demos at the same time. It's good in a way because it means that our investment actually in doing the harder ML stuff is you know, equal to or lower than it was five years ago with, you know, much more, quote, unquote, magical results, if you will. So, we've already integrated generative AI stuff in the platform, you know, in the basic areas where you would expect it, you know, a blank text field, how do we help you edit that, you know, how do we improve that in the future so that you're editing text in that field and, you know, it's better, you could look at image generation and things like that, copilot-like experiences, which I'm very keen to do, but also in some ways very confused as to how we see it being presented from some of our competitors. Now, I'll mention two ways I'm a little confused by it. One is, right now, if you are a Squarespace customer and you want to write into live chat, you will be given results that an AI bot is returning based on our training on our knowledge base. And if those results don't work, you're routed to a world-class customer support team that we've invested in for two decades that will help you get to the result that you need. And it's going to be great to also integrate copilot-like experiences into that same UI because I think these things really build on each other, right? Self-service, the machine can do it for you. Okay, that's failing. I need more help with it. So that's kind of where we're integrating it versus saying, Oh, actually, it's this completely separate thing. You know, that's just I'm going to type like make my text folder and it gets folder, which is not really where we're seeing a lot of people like me need the most help. So excited about continuing to integrate it excited about the fact that the cost for us to integrate it's lower than ever. And yeah, we think it'll continue to make onboarding into the platform easier. That being said, Squarespace blueprint. is a visual onboarding system, and we found that that was what people, that set of steps and that process was something closer to what people actually wanted when onboarding to the platform. We have yet to encounter customers that want to type a couple paragraphs and have it make a website and then type more paragraphs and have it change the website. There's still a lot of value to visual systems for design, even though all of these technologies are incredibly exciting and will keep reducing cost and setup speed. So we think, as mentioned before, we think it's a tailwind. You're seeing it on the platform, so we're going to keep integrating it. Yeah, I'll turn it over to Nathan for the second part.
spk06: Devak, on your unique subs question, we don't get the breakdown of the different components of it, but what I will say is this, is we saw in Q1, and then we saw again in Q2, strong acceleration of our core business and strong retention. and stable churn, which causes to increase our overall guidance for the year. So we're very pleased with where we're seeing in the core business of the acceleration that we're seeing there. It is still somewhat tainted by the unfold churn that we're seeing, but that is reducing. And so we do think as we look forward, the core business acceleration causes to increase guidance and we feel confident of where that is going.
spk08: Got it. Thank you so much.
spk05: Thank you. Our next question comes from Brad Erickson from RBC Capital Markets. Brad, do you mind if I open? Please go ahead.
spk13: Yeah, thanks. So first for Nathan, I guess given the price increases you've had going now for a few quarters, the margin flow through there has been really high, obviously. Are these kind of the right contribution profit levels to think about longer term? And I know you mentioned the sales and marketing in the second half, but maybe looking sort of beyond that, talk about how you manage the growth versus the flow through bigger picture going forward and how that works at moments, say, when you're not raising price. That's the first one. And then second for Anthony, just adding on to that last comment around generative AI, just as you roll these tools out, maybe just would be curious for you to speak to your views, kind of the industry's ability to monetize those tools versus just being kind of competitive table stakes here where everyone builds that into their cost base. Thanks.
spk06: Yeah, Brad, thanks for the question. So speaking on the operating margin, you know, as I said earlier, I think that we have shown strong discipline here as from both a operating efficiency standpoint and still drive the top line. And so I think we will continue that practice. Anthony and I are very focused on making sure that we're making the right investments that is going to continue to drive the top line, but continue to see improvement on both our operating margin and our cash flow. So we feel very confident in the raise that we did for guidance of where we think the company is running. From a growth perspective, kind of layering on what Anthony said earlier, we will lapse the pricing increase that we did at the end of Q3 last year and Q4 this year. But I think that, as Anthony said, we're only getting started on the pricing. This is the first time that we've ever increased price on our Lexie customers, and we only increased by 10% to 15% by cohort. So there's still sufficient room between that and lists. And we would certainly tie that to the value we're delivering to customers, as Anthony said earlier. And as we continue to deliver more value and new product innovation, looking at using price as a growth driver.
spk09: And regarding the use of LLMs and AI technology, again, you know, it's an interesting benefit that we all kind of have access to these trained models, and especially for tax generation, sort of at the same time at a low cost. And if you think about it, this is why you have, I don't know, countless startups and countless companies with, frankly, the same demo. coming out that, you know, if you're a reasonably sophisticated company, you can integrate this in your product really rapidly. We all have. I think this thing that people are seeing now, or at least we're seeing maybe a little bit with the LLMs, is about a third of the population already had access to ChatGPT. And so it wasn't really like rocket science for them to write text in that box and dump it into Squarespace. Same with MidGenny, same with all these other ways they would generate these assets. So we're able to provide it as a convenience when they're in the product. And certainly, There'll be even more of a convenience where Copilot can take actions in the product that would have historically had to jump to a human advisor. So that'll just speed that up. But in terms of its impact to our core business, again, it's speeding things up. It's a tailwind. And we continue to focus on where people are, you know, the experiences that people are asking us for. Again, Blueprint is a very visual experience. And, you know, we've seen conversion rate improvements there, strength of that in international markets. So, yeah, we'll keep integrating, but that's sort of where more the product innovation is. It's the stuff unique to what we do and what we do for our customers.
spk13: Got it. Thanks.
spk05: Thank you. Our next question comes from Ken Wong from Oppenheimer. Ken, please go ahead whenever you're ready.
spk03: Hi. This is Nancy on for Ken. Thanks for taking our question. My first question is on gross margins and how they'll trend as payments layer in, and do you expect further increases to the customer operations and web hosting costs? And then secondly, could you clarify around the terms of the three-year partnership with Google and if there's any opportunity to extend that partnership after the three-year mark and if it's conditional on the performance of the partnership or anything like that? Thank you.
spk09: Sure. Regarding the gross margins and the payments business, yeah, you will see the gross margin change, but it will all be a net impact in a positive way to the cash flows of the business. This is not something that's going to erode margins to the expense of cash flows. We're going to be generating a better take rate off of payments, all costs factored in after this is out versus before it was out. Otherwise, we would have just never done it. So we're going to be disciplined about the spend as we move into this product. Regarding the partnership with Google, yes, there's an opportunity to extend it. We've sort of, you know, we're in a process right now where we're waiting for the deal to close and, yeah, the terms of what is in there is sort of in our, is in the releases related to that announcement.
spk04: Thank you. Our next question comes from Franco Grande from DA Davidson.
spk05: Franco, please go ahead whenever you're ready.
spk04: Oh, Franco, we're not getting any audio through. OK, we'll move on to our next question. Franco, are you there? We'll move on to our next question from Andrew Poon from JP Morgan Securities.
spk05: Andrew, your line is now open. Please go ahead.
spk01: Great. Thanks for taking my questions. I wanted to ask about the new attribution model that you've rolled through on the marketing side. What does that help to unlock and how should we think about that contributing to just greater overall efficiency? And then on the pricing side, going to international, I thought you guys had kind of waited to the back half the year to talk about pricing for non-USD subscriptions. Can you guys just provide an update there? Thanks so much.
spk09: Sure. So just to contextualize the attribution model. So, you know, Squarespace operated the cash flow breakeven for the greater part of 15 years and has been profitable. for almost half a decade now. And that's really based on the fact that we have always done a lot of work internally to try and determine the best of our ability, the efficacy of our spend. And we have guidelines set around those spends that are always changing as the macro landscape changes and as our product changes that hopefully mean that we're spending efficiently. And what was great about these recent updates is that we did a major overhaul to our internal model that had been kind of in production for years and years and years. And when we backed up to the model, we were able to find that, oh, actually, we were underspending in certain areas, overspending in certain areas, and let's make those changes and try that. We do that, and it works. And then when it works, we can feed it back into the model and retrain it and do that on a more continuous basis versus before we were just training it less frequently. And so it was less adaptive to the environment around us. And so that's what's allowing us to spend more with confidence. And frankly, I'm glad other people are highlighting on the call that to have the Q2 trials in the quarter higher than Q1 and also higher than any pandemic quarter is quite a thing. Now, and there may be some macro contributing to that too, but we're certainly changing our activities as well. So there's that. And then, you know, as we move to international, we're seeing strengths there. Some of the product improvements take hold. The foothold takes hold. I think your question was around pricing with regard to international. I don't – when did we start increasing the international?
spk06: In March.
spk09: In March.
spk06: For you guys.
spk09: March of this year. We started moving some of the international subscriptions up to lists, so all that's not fully baked in. We've got a number of pricing projects started in international markets, even right now, which are looking at currencies where we need to, frankly, decrease pricing to be competitive. And so, again, the result of any of these tests will be a net positive. We won't roll them forward. But, yeah, we're in process there with international price tests.
spk01: Thank you.
spk05: Thank you. At this time, I'll now hand back to Anthony for any closing remarks.
spk09: Everyone, thank you so much for joining on the call. Thrilled with this quarter. Thrilled with what's coming up for Squarespace Refresh. And thank you for the thoughtful questions and looking forward to hearing from some of you.
spk05: This concludes today's conference call. Thank you all for joining. You may now disconnect your lines. Have a great rest of your day.
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