Chit Chat Stocks - Squarespace (SQSP) | Deep Dive

Episode Date: April 29, 2021

Squarespace is a low code website building and hosting tool. Platforms like Squarespace allow clients to establish an online presence with simple drag and drop website creation. Listen in as Ian, Brett, and Ryan dive into what Squarespace does and how the company can perform going forward. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:15) Industry | (6:29) Management & Ownership | (8:17) Valuation | (11:19) Earnings | (14:49) Balance Sheet | (16:47) Our Analysis | (20:55) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. This is the Thursday Deep Dive episode. We have Ian Gray on as always. Ian, how are you doing today? We're heading right into the heart of earnings season. Have you had any

companies report yet? I know it's an exciting time coming out of the boredom of the last few months. Yeah, I was just checking out the Pinterest earnings. We talked about them last week, as most people probably know, but pretty good quarter, I think. And it's, you know, I think big tech is going to continue. Not that Pinterest is big tech, but I think big tech is going to have some big numbers. We saw some Google numbers today and looking forward to seeing what Apple puts out.

Great quarter guys. Great quarter. Yeah. But it's going to be big tech. Right. Right. Exactly. All right. But today we're going to be talking Squarespace, a company that has not IPO yet. They're about to, I'm actually not IPO and they're doing a direct listing sometime soon, but they dropped the S1.

So we're going to do a pre IPO show or sorry, I'm going to say IPO, just know it was a direct listing and it's going to be similar to the one we did on Roblox back before they went public and Bumble and Bumble as well. So we're not going to have any valuations to go off. We're going to play the valuation prediction game, but everything else should be very similar. So Ryan,

why don't you kick things off? Before we do that, we got a word from our sponsor, our friends at 7invest. We are getting very close to May 1st when the next recommendations will drop. And if you want access to those at a discount, use our code CCM. You get $10 off. It's usually $17.

It's only $7 for your first month. Seven stock picks each month. Wide range of companies, biotech, healthcare, software, retail, fintech. A lot of experts over there. We love them all. Yep. All right. Without further ado, I will get to Squarespace.

So if you're not familiar, I feel like most people have probably heard of Squarespace. space, but if you don't know what it is, it's a do it yourself or do it for me website building and hosting tool. Um, so if you don't know how these kinds of things work, it allows it, let's say you wanted to build a website, anybody, literally any occupation, you could just want your own blog, whatever it is. You, uh, it's a freemium platform. So you kind of put in what you're trying to do, whether it's a blog, photography site, gym, fitness classes, something like that. They'll have some templates for you, but then you can kind of edit, drag and drop, change it the way you want, create pages. And it's really all seamlessly done. It's no code.

I guess you can code, you can add code to it, but it's mostly no code. So basically anyone that It doesn't know how to, isn't a programmer still able to build the website they want? They also have more to the platform though. It's not just the website hosting. There's commerce functionality, scheduling. So let's say you had like a yoga place, a yoga studio or something like that. You could build sort of a schedule for people to kind of book and stuff like that. There's email campaigns, search engine optimization, management, hospitality stuff.

So reservations, bookings, that kind of stuff for restaurants. um the as far as cost of goods sold they will so they they run on aws and google cloud but when you pay them so let's say you've built the website you want you it kind of looks good then you're gonna when you go to publish it you'll ask for a certain domain name that's where you're gonna have to subscribe for either a year two years three years something like that and uh And so they will give you the domain, they will publish it, you get security, and then you obviously get hosting capabilities. And so that's their cost of revenue, essentially, is everything that you're buying. And then it's about 84% gross margin. So they make a lot of profit on that. But they're headquartered in New York, New York. They have 1,200 employees, roughly, most of which are in the U.S. They have an office in Dublin, Ireland. There's about 100 employees out there. A little bit about the history. They were started in 2003 by Anthony Casalena. I think I'm saying that right. um but uh he actually started it in his dorm room costellano was a programmer since about the age of

14 14 and initially he kind of built it exactly how i would imagine he built it so he was trying to build a website he had too much difficulty doing it and so he said i will make a tool for building websites it's a lot like the shopify initiation story exactly um so he worked started working on what is now called squared space he launched the platform publicly in 2004 hired his first employee in 2006. So this was built both before Shopify and before Wix. In 2010, Squarespace received investments from Excel and Index Ventures. I always find it funny that you always hear about the funding round, but it was founded in 2003, 2004. For six years, they were just running on any money they could get. I listened to an interview with the founder and he said like his

first, his last year in college, he made 50,000 from subscription revenue, just him personally. And then like his second year, he made 200,000 in subscription revenue. So that was kind of running the company. You can see it on their income statement, pretty lean. I think that's kind of stayed with them in the culture. And I like it when a company has to go without funding because it feels like it usually sticks with them. But they launched their commerce offering in 2013. They were actually net income profitable by 2016. So less than 10 years after their first funding round, bloggers were the early adopters. That's kind of how they got off the ground. It was all just bloggers looking for a place to easily set up shop. And then they

filed their S1 April 16th. So really recent. Yeah. Yeah. And they're going to do a direct listing. So I don't think they're raising any money. They just did a funding round before, which makes the share count all confusing. They got like three different things here, but I'm going to hit the industry landscape competition. Competitors include, like Ryan that shopify there's wix there's weebly weebly is owned by square i believe so square is technically a competitor as well there's big commerce who is a shopify clone also has that e-commerce function or functionality and there's a lot of other website builders as well um you could argue facebook is a competitor a lot of businesses use that as their home page on the internet and then

google maps also as well uh for restaurants kind of a competitor some people just leave it up to like google maps especially if you're a restaurant just to take care of everything although I would argue that typically that doesn't work out that well. Just a little anecdotal evidence there when I'm looking for something to eat. But the industry is large and growing. There's 800 million small businesses worldwide and self-ventures globally, with around half of them not online today. Some of those obviously are in countries that are maybe a bit poorer than some of the Western areas. A lot of those people have zero access to even the internet in general. So it's kind of a flawed set, I thought, from the S1, but still

giant opportunity to go after. Hard to quantify their industry, but like none of these website aggregators or like e-commerce tools have more than 10 million subscribers. I think Shopify is kind of close to Squarespace at about 4 million. I really don't have the numbers in front of me. I know Wix has like five and a half million. So a lot of ground for all of these companies to to grow. Um, and they believe their addressable market is about $150 billion. Uh, seems a bit aggressive, but still there's, I mean, there's tons of small businesses out there that need these types of tools. It feels like everyone needs a website, uh, to get their ownership on the internet, but yeah, that pretty much covers it. Very simple industry. Ian, do you

want to talk management? Yep. So as Ryan mentioned, Anthony Castellana is still the CEO. He was the founder um he says that with squarespace they not only want to help people get online but also grow online and so i think that's something that's really pervasive throughout the entire industry now but back when they first started that would have been kind of different like the big hurdle was actually getting people online but now they see the the goal is growing growing people's presences online um squarespace one of the things that sets it apart is it has a focus on beauty um and direct access to customers but particularly kind of the beauty side it's very much like a lot of the templates look artsy maybe, or have kind of some design elements or things that are a little

less utilitarian than some of the other designs. But, and we'll get into this later, but in my personal experience, I've found that sometimes that's not actually what I'm looking for in a website. But they do appeal to that segment of the market, I think. One thing about the company that I think kind of shows what the management team is thinking about is their mission. Their mission says, Squarespace exists to help people with creative ideas stand out and succeed. We enable millions to build a brand and transact with their customers in an impactful and beautiful online presence. So even in that mission statement, you can see that they're talking about creative ideas, beautiful online presence. That's really an emphasis. As far as compensation goes,

the CEO had a bit over a million dollars in compensation last year, but just signed a new um, agreement where he's only going to receive $1 in base salary going forward, but there's basically a stock, uh, plan that will, that has 10 different tranches that if they hit different price targets, um, and the stock, uh, stock price, and I think the first one's about a 25% premium from their last valuation going up to like, um, basically like a, uh, like a 400% premium um he's um that's where he gets a bunch more stock options vesting and so it's like 219 million dollars in unvested shares um and the value of the unvested shares right now and so a pretty big so his compensation is basically tied to how well the stock performs which generally

is something i like to see some people it's kind of similar to like the elon musk plan and some people don't like that because of just how much stock compensation it is but um it's entirely dependent on how the stock performs, which is a good thing. He has about 68% of voting power. And according to my calculations, it looks like about 36% of shares outstanding. You probably want to double check on that, but that's, that's what I was calculating. I know those three share classes really, it's tough. Yeah, it's tough. And you never know exactly how it's going to shake out after a new round of funding and a direct listing and stuff, but it looks like it was about 36% of shares. So very,

he's got a sizable stake in the company and the voting power. So you really want to make sure that you're comfortable with his management team before investing in this company, just because of how much voting power he does have. Yeah. All right. I'll hit valuation, which in this case, there's no valuation. I think the last, I don't know, did you guys have a private valuation? I tried to calculate, I think it was like 10 or $9 billion. I may have been getting that wrong. I was using the pro forma share count and that count. They had a share price in the S1. I think it was like nine billion dollars from that last funding round in march so maybe it'll be around there uh but the ticker is going to be sqrp obviously public valuation it's not sq sq sp sq sp excuse me sq sp

and uh the offering is not done yet so we're going to play the valuation prediction game um what do you guys think the market cap will be uh oh i have no idea i mean so the ipos have been so absurd lately uh what would i consider it at probably anywhere below like seven and a half billion uh it would have to be below that last private funding round i don't think it deserves 10 billion it might get there but i don't think i'd consider it above seven and a half yeah i think it's gonna be somewhere in the range of 12 to 15 billion which is based on uh, Wix, I think is trading at about 17 times, um, revenues, and this would put Squarespace at about 20 to 25 times. And it's a little bit growing at about the same pace,

but I think, um, there's just something about a direct listing or an IPO that gets people's juices going. Yeah. Right. So I expect it'll get somewhere maybe in that 20 to 25 times range. Well, we talked Bumble last time. I remember we were like, uh, we had said some optimistic ones And then it was like, the valuation was like twice as high. So I feel like that could happen here as well. Yeah, I mean, five to $7 billion seems kind of reasonable looking at their margin profile, but it's probably going to be higher.

That's the crazy thing is I could see a world in which this gets a higher valuation than Wix, even though it's about half the size as far as financial, maybe a little more than half the size in financials and customer count. You get a TAM, I don't know. They have the exact same TAM. No, well, you know, but some people can make the argument that, you know, so yeah, at a smaller company, you can rationalize something. Yeah, but it seems like all these companies kind of like Shopify gets that real premium valuation. I mean, if we're going to value it at Shopify's multiple, it's going to be a $25 billion valuation. But I don't think it has the sentiment of a Shopify. But Ian, did you have anything?

i was just going to add to it it's interesting to me because i've been starting to see a lot of squarespace ads on television and um yeah i think yeah i think that maybe there's some like i don't want to call them stock pumpers either but i think between uh that i've seen this a few times with companies that are about to go public that all of a sudden you start seeing their ads all over the place and stuff coinbase just did that too i've been seeing those yeah exactly so and whether that's like i don't think that's directly to um bring it on investors radars maybe it is maybe they think that'll raise their profile and kind of get some people into it but then i i think it's probably more about trying to drive customers before an ipo but um just an

interesting thing i've noted i mean if you can make a lot of noise in in your ipo it can drive I think, just awareness. And awareness is a big thing for these no-code, low-code development platforms because they're competing for those customers really initially. I mean, it's probably fine if you get a good ROI on that marketing spend. But speaking of that, Ryan, do you want to go through earnings? Yeah. So I'm going to go with the non-pro forma because they made an acquisition that kind of complicated things. So they had $621 million in 2020 revenue. That was growing 28% year over year. They had 3.7 million unique subscriptions up about 22% year over year. They had 84% gross margins, $150 million in operating cashflow up

almost 50% year over year. And I think unlevered free cashflow was 152 million. So it's about 24, 25% free cash flow, operating cash flow margins. And that's including SBC? No. No? You took out SBC? They gave the unlevered free cash flow number was that was

$150. I mean, that was above operating cash flow. So I imagine that that was added back. Yeah, so it includes SBC? Yes. Okay. I just wanted to make sure. Wait, hold on. I'm sorry. I'm thinking about it. They didn't take it out.

Oh, I'll figure it out in the second half of the show, but, uh, they are gap profitable. They upped their spending on sales and marketing and research development this year. So gap, uh, net margin looks a little lower. Uh, but I think, I mean, I'm fine with that if I were a shareholder because it's, uh, it was a year to go after as much customers as you can, since so many people were transitioning online. Uh, they spent about 5% of revenue on stock-based compensation. I think that was around $31 million for 2020. Average revenue per unique subscription was $187. Pricing is very similar to competitors. It's hard to charge too much because there's a lot of alternatives. But ARPU was going up steadily. It's been going up steadily.

Yeah. That's a good sign. They've got that beautiful cohort analysis on their S1. Love the wave of the cohort. Yeah. That's pretty much all I have for earnings. Ian, you got balance sheet and liquidity? Yep. So I'll try and keep this fairly quick, but it is a little bit more of a complex balance sheet than we've looked at recently. They've got cash and marketable securities of about $215 million. And with this, as Brett mentioned, it's a direct listing. And so they just raised money. So they will not be raising money with the direct listing. It's just creating liquidity for their current shareholders. So that number should stay about the same in the next report that comes out. They've got debt of $536 million, which the vast majority of that is a term loan, a $500 million term loan that has an interest rate of somewhere. Basically, it has a floor of 1.25% interest and a cap of 2.25% interest. So a low interest rate, but a fairly sizable loan, especially given their cash balance.

This is one of the few businesses we've looked at recently that has more debt than cash, especially when it's not convertibles. So part of the reason they have this debt is they basically paid a $300 million special dividend to shareholders back in December. It was basically a dividend recapitalization. And so they took on debt to pay out a dividend to shareholders, which was about 3% of the value of the company based on the most recent valuation. So a little 3% dividend to all the shareholders. We'll probably get into that a little bit more later. but they also have about 50% of assets are goodwill, which is due to the talk acquisition. And so if that doesn't work out, you know, you could see some write downs and things like that.

So there's definitely some things to kind of be concerned about some yellow flags here. The good news is that it's good interest rates, only about 5% debt to enterprise value if it comes in at evaluation at what the private money valuation was. And so it's not a crazy amount of debt. Uh, I'm calculating it at somewhere between three and $5 million in debt service right now, which if interest rates rose, you know, it could get up to eight to 10% when they had to refinance the debt or sorry, eight to $10 million in debt service. But for a company that's doing as much revenue as they are, it's not a huge deal. Um, the only thing is I don't love to see like the dividend recap right before they go public, because it seems a little bit like the existing

shareholders are getting some money out, putting some debt on the company and then, you know, pawning it off to other shareholders. Like I said, it's only 5% debt to enterprise value. And so it's, it's not like saddling the company with a ton of debt, but it's, it's, it's not something I'd love to see, I guess. Yeah. And they're offering cash, they're cashflow positive. So that should be okay. And most of that, most of that debt is due, I think four to five years out.

So, I mean, when you're generating 150 million and operating cashflow, I think you're going to be all right, but it is weird. And I don't like to see companies that treat going public like a dump, like they've made it. And so now we get to reward everyone prior to giving shareholders access. Yeah, I mentioned Coinbase earlier. That's kind of the feeling I have with that company as well. It feels icky because as an outside shareholder, they're supposed to be treating you well. Obviously, you're not the primary concern.

It's great for employees, but that's just not shareholder friendly. so i mean and i imagine most people listening are more shareholders than employees yeah and the special dividend yeah that's also like all right well it's taking cash out paying it out before you know but match group had to it doesn't mean like the company's gonna do bad like match group did that and i was like uh all right uh and you know it's worked out uh but it's like uh all right there's gonna be a bit of a headwind you know what i mean well and it's just something it's something to look at like i don't think it's a reason not to invest by any means but it's definitely something to be aware of um and and i honestly i haven't done enough research to

see how often companies do this like you said match group um did it and we looked at that i think and um but it you know it's not something that every company does but it is not um entirely uncommon either yeah for sure all right let's take a break and then we're going to get back and talk about uh further analysis on squarespace cox panoramic wi-fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link.

And now all your computer can play is... Red color, red color, where are you? All blocked, thanks to Advanced Security, included with Cox Panoramic Wi-Fi. Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back in. next up, we're going to have the new quick segment, anecdotal evidence and product experience.

But Ryan, you have that correct or clarification on operating cashflow is just as they stated it, they added back the SBC. So if you're going to try to X that out, just take out about $30 million worth of stock-based compensation. Some people prefer to do that. Some people don't, some people kind of go halfway and take 50% and exit out. But that's up to people's personal opinions. My experience with the product, I went on this morning to see, because we're looking for a new website hosting platform for chitchatmoney.com. We're considering switching away from WordPress. WordPress stinks. It does kind of stink. So I looked on Squarespace to see if we could port it over.

it was a little difficult to navigate um if we if i had to choose one today i'd probably end up going with wix wix is the one we use for archcapitalfund.com uh and so i'm kind of used to that platform also the templates weren't that great on squarespace um at least for what we were going for um they really only had one for like podcasts and media so i i just didn't exactly it wasn't super intuitive to me but it's almost like the cloud storage and content collaboration space how you just get acclimated to a certain type of software whether it's dropbox g suite office 365 you get used to it and then you're just kind of like i don't want to switch i understand sort of the ins and outs of this software and so that's kind of me with wix versus squarespace yeah you

guys have anything no i know nothing special ian you got something i just echo what you were saying I've been looking to, uh, do a website for a project I'm working on and Squarespace was one of the options I was looking at, but it pretty quickly, um, became not one of the options I was looking at because of mostly because of the lack of templates and not like some super competitive pricing either. Like it's, it's about the same as everything else, but it wasn't like, it wasn't a deal compared to other things. And I didn't really love the templates. They put a lot of emphasis on design. Um, and rightfully so. I know a lot of, uh, that had some stats in there that people that view websites know within like a split second whether or not they like it based solely

on the design um and design does matter but i thought the functionality wasn't quite as good it wasn't as intuitive for uh like building the website you want um as something like wix and i think the ratings when you go and look at the ratings of the website development platforms i think it kind of reflects that yeah it doesn't seem as robust as shopify or wix for sure um But that, you know, maybe they're just a little smaller. Maybe that could change over time. I mean, if you're looking for the pretty site, they probably do have the most sort of, I guess, sexy designs. Yeah, if you're looking kind of as like a shop that's trying to be trendy or fashion type stuff, that could be the best.

That was kind of their examples, like a watch shop or something like that. Ian, what do you have? Right, or like people are making a lot of these portfolio sites that have things like their film projects or their photography or things like that. And this like Squarespace, I think would be the obvious place to go for something like that, just because of the style of a lot of their templates. Yeah. And you're looking, especially as like a photographer, you're looking for kind of the, you want an aesthetically pleasing, like that's sort of the focus of your website. I just don't know if that necessarily applies for all types of websites, commerce and stuff like that. No, it definitely doesn't. And it's just kind of what company, what the company's decided to focus on, like Wix focused on their niche.

and we don't have to get into whatever they decided to focus on. It seems like Squarespace is focused on a specific niche and then Shopify obviously focused on e-commerce. It's whatever you focus on, you're probably going to be the best at and then lacking in the other stuff. But no need to harp on that forever. Next up is competitive advantages. Ian, what do you have?

Yeah, we'll flow right from that right into my competitive advantage. So I don't think there's a great competitive advantage here, but if there is something, it is this focus on beauty and really design and giving people an opportunity to find something that's really beautiful, I guess. And just kind of cutting edge of design. It's not going to be, like your website's going to look professional.

It's going to look good. It's going to, it's not necessarily going to look like a pre-made template. It's going to, it's going to, it's more focused on beauty, I guess. And so if that's, if that appeals to certain segments of the customer base, then that's a little bit of a competitive advantage.

yeah i'd say the ones we have here like they're not the true ones i don't think we're really finding anything super profound like we're not we're not all saying this has a moat or anything this is kind of we're trying to feel out maybe something they could potentially have in the future um but ryan what do you have yeah i mean this just really isn't we had a discussion with a member of nzs capital this week and it was kind of like in the digital age their their big thing is in the digital age there really aren't any moats um or a moat can kind of be a vulnerability I think that really applies here because it's hyper-competitive and your biggest advantage is the ability to constantly innovate and make new iterations and make something really pleasant for your customers. So there isn't going to be something that, like any one trait, that's a massive competitive advantage.

But I will say the big thing for them is probably marketing. I think they have a pretty significant sort of share of mind in terms of people that… Well, at least in the United States. Yeah. I mean, obviously they don't have the largest market share, but they're sort of notable. And I think a lot of people know what they do, even if they haven't built their own website. And we talk about the stickiness, which I know you're going to mention, but it's a lot like that cloud storage. So if you can get to the customer first, I think you're going to lock them in for a long time. So I guess really being the first one of those customers and whether that is ad spend on Google, commercials, anything like that,

that's where they gotta kind of spend the money in my opinion yeah i agree with all that you know anything on that i'll move on to mine okay mine's switching costs i took the easy one again i don't know i've been doing these first so i get i get the easy ones i don't think it's too high like we are we talk about how uh microsoft excel and some autodesk products are maybe have super high switching costs squarespace stuff like this is it's like maybe i don't know a third as good as that. Like with ShopFindWix though, the reason that companies like this get high valuations from investors is because they expect the low churn, excluding like if a company goes out of business, there's no reason they're going to cancel the website over a decade if it works well.

But with the cycle of small businesses kind of being high, with the high turnover, it doesn't mean you're locking in these large enterprises for a few decades or something like that, or even a decades. So, you know, when someone say goes out of business, starts a new one, they have a chance to start all over. And that just gives an exposure to some turnover there. But if Squarespace has a good offering, there shouldn't be a worry there. However, or go ahead, Ryan. Churn may seem, I mean, I don't even know if they gave a churn number, but it may seem artificially high because not because people are switching to competitors, but just simply because people aren't re-upping for whatever reason. Because there's bankruptcies in small businesses

all the time. I do worry it's a bit of a commodity product, the stuff they're doing. I feel like we struggle to get any competitive advantages here. And that can be a sign that the business isn't as special as maybe their S1 is making out to be. But I mean, the numbers look fine so far. Anything else on that? If not, future growth opportunities, Ian, what do you have? I'll just make one final comment on that. For a business like this that might be a little bit bit of a commodity, the management team matters even more, I think. And I think we'd all agree on that, that it's really about this innovation and constantly iterating and making a great product that's going to lead to sustained success for a stock that doesn't have a big competitive

advantage like this. And it's a competitive market. And so just make sure you really take a look at a management team like this. So, you know, someone like Toby Lutke at Shopify has really made that company into what it is. And so trying to get a handle on, do you trust this management team to continue to iterate. As far as a future growth opportunity, I think it all comes down to raising the, they call it average revenue per unique subscription. So right now, that number is currently at $187 a year, which puts it right between its kind of lower two tiers for its annual subscription rate for a website. So if they can continue to grow that and to grow customers and clients into higher tiers and help them really grow their businesses, as they said

in their mission, they want to grow the businesses, not just get people online, but grow them. That's going to really be the growth opportunity. And so I think adding good value add services on top that get people to go up to those next levels of subscriptions is really going to be where the success comes from. And one example of that is commerce is growing very quickly. And so uh 78 growth year over year so that's going to be a big big piece of um i think raising that average revenue per uh unique subscription yeah and adding there's a ton of opportunities within e-commerce they i don't think they have their internal payments thing that works in shop if i have and big commerce i'm assuming has that as well there's there's a ton of stuff with e-commerce

I'm not an expert on Squarespace's offering, but it seems like it's not as robust, I guess I've said that already, as Shopify's is. Yeah, I could definitely say a world in which some of these website development platforms' business solutions revenue starts to surpass subscription revenue eventually if they have enough sort of bolt-on functionality added to the actual subscription itself. But I'll talk about my future growth opportunity. Um, so it's do it for me templates. Um, templates in my opinion are like a huge differentiator in product, uh, which product people pick. Um, and I think it's back to no code. Yeah. Yeah. And I think it, that comes down that, that I think is a large determining factor in whether or not those customers that see your site stick around. I think if I would have got a better template on Squarespace this morning when I was looking at it, I may have done more with it and eventually stuck around. If you get people into the late stages of that freemium cycle, it's hard to get them to just after three, four, five days of work, go and switch to a Wix. And so the template is sort of that first piece because then people don't have to start from scratch. they can kind of just like swap out a picture, change, you know, what the heading says, change

the tabs, stuff like that. And so making it so that people have just less steps is great. Problem is right now Wix has about 800 templates and Squarespace has about 125. I think they're going to have to add more if they're going to steal more market share. It's a huge problem, probably the biggest downside. And so that's where I think most of the growth ends up coming from. yeah no yeah agree with all that um mine is going to be the acquisition of talk which was for 415 million uh in march and talk is a reservations pickup delivering online payment solution for restaurants similar to what this is a bit similar to olo which we covered with brad uh a little different because it's for small businesses and it's similar to the company that wix acquired a

bit i mean they all do kind of different i would yeah i would not say this i would say this is more of a speedy tab than an olo it's olo but for you know this is like hospitality management like you're yeah it's it's more like you're making reservations it's not like olo has well they have pickup delivery and online payments integration so i think it's similar yeah i don't think they're doing the exact same thing though i think olo's uh making the process seamless of uh choosing the optimal delivery or third-party courier i don't think uh talk has that but i guess i don't know all right and then it's basically it has all the software tools you know like an smb would need to succeed it works well you know with the website if you already

have a squarespace website easy to upsell theoretically into here to the existing companies and it feels like they're kind of coughing wicks here who acquired speedy tab right at the same time a little suspicious squarespace uh looking at the pro forma results though acquisition was expensive yeah they're only bringing 300 sorry not 300 13 million in gross profit to the table last year um acquisition was 415 million so that's a steep gross profit multiple yeah that you got to think the integration is going to start generating lots of gross profit i don't know it's it's a it's a high acquisition a little bit of a low light there for me honestly uh anything else on that i would just yeah i just reiterate what you said if they're if they think

that they can sell this to their existing 3.6 million subscribers whether i don't know how many of those are restaurants then maybe this is a good acquisition but it does look like they paid a really hefty multiple and it looks like maybe i guess i don't have the dates in front of me but it might have been a copycat move uh yeah i swear they cop i mean we know wix a lot just because we own it and we're obviously a little biased but it seems like squarespace just copies wix um the e-commerce stuff you know this yeah and the design stuff focusing on that trying to copy that with them. I don't know. I'm obviously biased towards Wix, but it seems like they're just doing whatever they do. That's a sign, tiny bit of a yellow flag. Yeah. All right. Highlights and lowlights,

Ian, what do you have for Squarespace? For highlights, I've got the commerce revenue growth I think is impressive. And we've seen that throughout the whole industry. So if they're able to maintain that, that'll be a big deal for the business. A couple of lowlights, not sure about talk acquisition seems like they probably overpaid for it and um you know you kind of have to trust that they believe there's enough of those types of customers on their platform that they're really going to have a lot of upselling opportunities with it so we'll see um and then like i mentioned kind of the balance sheet stuff and the dividend recap um one thing like they've only got like i said about 215 million dollars in cash whereas wix has closer to a billion dollars in cash

which just puts them at a disadvantage as they move forward um and also like i don't know what you guys think about this but they're they have true debt they have this term loan that's got between one and two percent interest rates basically whereas when looking at wix wix has got some debt but it's all convertible notes and i think there's a discussion to be had about what's actually the better way to go about it with the one to two percent that's pretty cheap money um for squarespace um but it is you know it is a commitment that you have to be paying where Wix probably won't that those I assume those convertible notes will probably convert and um so it's it's kind of a question do we do you really want to do you want to be funding with

equity or funding with debt and in some ways especially for a business that's cash flowing like it it might actually be a highlight that they're funding more with um yeah with this low cost debt I like these better convertible notes can be sneaky expensive um as long as it's you know that that interest rate seems pretty solid yeah as long as you're cash flow positive why not why not use those if you really want to use that to fund uh fund yourself now using it to fund a dividend degree cap maybe not but i would have preferred to see that just hit like i would rather have see them just have that money on the balance sheet in cash because it seems like like they probably have plenty of cash to do what they want to do but it just seems like they're at a

disadvantage against a company like Wix who has five times as much cash as they do. Yeah. Agreed. Right. And that, yeah, I don't mind them adding a little bit of leverage because the,

the cashflow really is like super predictable because they lock in on these long-term sort of bookings. Especially I think they offer like the three-year deals. So I think if, if they're forecasting that that operating cashflow is going to be stable. Yeah. Go for it. to add a little bit of leverage, but not if you're going to use the money to pay yourself back and

then acquire a talk for an absurd multiple. Yeah. Those, all those together, um, wouldn't be too happy if I was a shareholder. Well, I would have gotten the dividend payout, but if I came in after, yes. Uh, I, I guess my highlights, I kind of have similar low lights to you. This, I will say this, as far as low lights go, this felt a lot like, it felt like this business really belonged to Casalina. Like it, it's, he, it almost, when I watched an interview with him, he did like a Google talk, it's on YouTube. You can kind of just see him almost treating it like it's his, which I guess is good. You know, some people like that sort of founder relationship, but you don't want too much control that you're unable to make them budge.

on anything. It's a big bet on one person. Yeah. Highlights for me, the world is really shifting to do it yourself or do it for me type web development right now, low code, no code makes up about 10% of all web development. That number is expected to be North of 50% by 2025. I think that's a Gardner Gardner report. Low lights for me. If you Google website building software, a bunch of sites pop up that rank sort of the best ones. Most of them have Wix as the number one and if you don't think that's super important this year is like a great case study for why it is because so many covid spurred a lot of adoption to online a lot of companies restaurants especially had to move uh and build a website online fast and wix added a million

premium subscriptions maybe a little more squarespace added about 670 000 um i think percentage basis they were about equal but nominally Wix had was able to add a lot more I think a lot of that also comes down to the custom templates I would have rather seen them take that leverage and just plow it into R&D and build a whole bunch of custom templates so it's easy for any possible business I guess it felt a little bit to me like Wix is sort of pulling away um when you look at the and the thing is each incremental user so every time so when wix is adding a million and squarespace is adding 670 000 that's 330 000 more websites that wix is able to witness and see okay how did they alter it so that we can build a better custom template for the

next one and so i think that's why it's going to keep growing that spread in templates maybe i'm wrong but that's there's a bit of advantage of scale yeah and oh gosh i was gonna forget there's there's space getting opened by wordpress because wordpress isn't even a real company it's like a open source thing and then they have companies built on top of it so it's it's a whole jumbled mess and there's just a ton of space opening up because wordpress uh it feels like a legacy solution it's really not great i i'm the one that kind of runs it here and i hate it uh so there's a of space for both these companies to get users from them as well. Yeah. Ian, do you have anything on that or no? Okay. I'll hit mine. Highlights, you know, overall great business model. Financials

look really good. At least income statement and cashflow statement looked really good. I liked how their lean on the general and administrative expenses that allows them to spend heavily on sales and marketing. I think it was 40% of revenue while still staying operating cash flow positive and GAAP profitable. But low lights, I worry that their e-commerce offering isn't that good as a commodity versus Wix's and especially Shopify's and probably BigCommerce as well, although I don't know BigCommerce very well. And they tout a $3.9 billion GMV number, but that's not nearly as large as what their competitors are doing. And GMV doesn't necessarily, it just means payments flowing through their platform. It doesn't mean they have a take rate

on that. You know, there's a huge difference between GMB and GPV. GPV means you're actually getting revenue. GMB is just kind of, well, whatever, it's GMB. I don't know, you're not making any money on it. So yeah, and subscription revenue only grew 18% last year, which isn't great. It's fine. But you would have thought maybe it'd be higher. And then Ian mentioned that Musk like equity comp table with the 10 levels. At first I looked at that and I was like, oh, this again, you know, he's kind of inspired a lot of people to do something similar. I think Dropbox has one, but, you know, it's only based on share price appreciation, which I think aligns as long as it's on a long-term timeline that aligns, you know, management with shareholders.

And he's only eligible only, I guess, in air quotes for $200 million in shares at the current price. So, or maybe Ian, you had a different, you had a more exact number maybe, but it won't be a crazy amount of dilution. Unlike the one that they have at Tesla, which can be like $50 billion. So yeah, not, not, not as bad for sure. Yeah. Just because it's the much Musk like tranches doesn't mean it's the same as, as crazy, the same nominal number of our level of equity compensation. Yeah. Yeah. I saw that and I was like, Oh, okay. Only 2 million shares. Doesn't that. It's not crazy. Although, you know, it's still high CEO pay, but it's not, it's not. Right. But like, like the top level of it, and this is the top level, but the top level of it

is like, is unlocked at $400 a share. And so, and it's around, like, I think about $80 a share today. So still, and the lowest level is $100 a share. And so there's, there, you know, it's not like they're just for gifting free shares from day one. There's got to be a little bit of appreciation here yeah and their typical comp uh for management was solid uh what was it i mean they're giving some of their other executives pretty good bonuses just because i think they're trying to give them some ownership but casalina was not uh just giving himself you know kind of uh the bobby kodak at activision buzzard giving yourself 200 million dollars a year yeah we i mean we give some hesitation to the ownership but i liked casalina um and it seemed

like he has built a culture there where the employees like it. Um, and he has taken care, I guess, of his, uh, take care of his stakeholders. Yeah, yeah, for sure. All right. More or less interested, uh, Ian, what do you think on Squarespace? I'm a little less interested on Squarespace. I think I'm more interested in this space. No pun intended, but, um, that I I'm a Shopify shareholder. I think I'm going to take a hard look at Wix, but at these level like if all else equal i'd rather own wix than squarespace and i suspect that the valuation is going to come in somewhere um around the same multiple and perhaps even squarespace get a higher multiple in which case i'd be much more interested in wix i believe

yeah it feels like the again i mentioned this earlier it feels like the bumble match group dynamic where match group is kind of old ish old relative to bumble and they're like oh new kid on the block we gotta we gotta invest in bumble uh ryan what do you think more or less interested uh i'm i'm more interested in the company uh i think the shift to no code could be sort of that rising tide that lifts all boats um but i would have to be at a much cheaper multiple than wix because wix is going uh as fast i think faster i think they're planning for 32 bookings growth next year um yeah i think that's and they're bigger um and they have sort of those benefits of scale that we talked about uh squarespace at the right price though uh they still have a good

business and the economics of the business are pretty good yeah economics are definitely good cheaper multiple than shopify it's got to be right cheaper than 50 or 45 times i was i sorry sorry ian yes i would consider shopify multiple hey ian's probably had fantastic returns of shopify Yeah, I've held it for a while now, so no complaints from me. Yeah, definitely no complaints there. I'll go slightly more interested just because I like the business model. But again, I agree with all you guys. You know, it seems like they're not the best in class solution.

But, you know, you got to weigh like what's their valuation going to be at. Definitely, I think they deserve less of a premium than some of the other competitors. But we'll see. We'll see how it shakes out. Definitely something I'll be tracking. to kind of see how they perform for sure. But yeah, that's the thing that's going to do it. Ian, what is the stock for next week?

I think you guys may have talked about this like right after the IPO or somewhere around the IPO two years ago, but I think we should go with Jumia next week. We'll continue the e-commerce trend and go with Jumia. All right, all right, all right. That's exciting. Yeah, they're the Amazon of Africa.

So it's an automatic invest because of that, right? Yeah. Yeah, for sure. No, it should be a fun one. I think that will be the first African company. It's been a newsy one for sure. For sure. Yeah.

The volatility on that one is crazy. All right. That one, that's going to do it. Thank you all for listening. Make sure to, sorry, remember we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital and Arch Capital may hold, clients may hold securities discussed in this podcast.

Thank you all for listening or watching. We'll see you next week. don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.