Q2 2023 Squarespace Inc Earnings Call
[music].
Good morning, My name is Ellen and there'll be a conference operator today at this time I would like to welcome everyone to square faces second quarter 'twenty to 'twenty three earnings conference call.
All lines have been placed on mute to prevent any background noise. After the prepared remarks there'll 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 I would like to withdraw your question. Please press star followed by too on it I think he got it. Thank you.
I would now like I'm correct. That's your highest at square face that Perry. Please go ahead, what have you already.
Good morning, and thank you for joining square spaces second quarter 2023 earnings conference call.
This is Clare Parry head of Investor Relations I'm joined by Anthony Cocillana square spaces, founder and CEO and Nathan Good CFO .
After their prepared remarks, we will open the call to your questions earlier.
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 GAAP reporting.
We'll 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 four.
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 8th 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.
Hello, everyone I am pleased to announce another solid quarter of strong financial performance per square foot.
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 and an all time high.
We attribute this to a variety of factors, including the new square space 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 and classes and courses and for payments stay tuned for our square space refreshed 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 remains a critical part of web infrastructure and essential to an entrepreneur's online presence.
We are using this unprecedented opportunity to also invest in and relaunched square space domain, which we are operating as an independent domain Registrar square space is already leading and trusted domain registrar relied on by millions of domain customers. At this point, we've been protecting our domains offering now for nearly a decade.
As the Google domains customer myself I am personally committed to making sure. This transition is seamless for all of US some might wonder why was the Google domains customer and we had a domain offering and square space. The answer is that the domain offerings from square space was historically very website centric and I had many domains accumulated over the years that we're simply parked or used for E mail to square space domain.
Product that we are investing and we'll cater to these types of customers as well as the ones that have domain centered around a website.
Whether you scores based products or not we want to be the easiest and most straightforward way for you to manage your domains will be building on Google's infrastructure as a foundation for our square space domain service and customers can expect the same level of reliability as we move along with the migration of score space.
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 with Google workspace in the world and had 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 score space blueprint in five new languages with the introduction of course face blueprint earlier. This year, we integrated a modular design experience a customer onboarding.
Blueprint users cannot 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 square space.
During the quarter, we continued integrating generative AI technology into our CMS in areas, where customers are presented with tax they need to generate or edit this.
This new integration alongside our leading CMS and dominance in design helps our customers get setup faster than ever before.
<unk> further developments coming soon that will integrate copilot like experiences into our support interface, which already includes AI powered recommendation 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 important part of our product portfolio.
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 the Standalone channel as we grow acuity over the next few years and will 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 payments through square based payments on production infrastructure as part of our Alpha Test program. We are on track to deliver scores based payments to new customers in Q4, this year and I'm looking forward to sharing more when we finally launch.
We have an incredible set of releases lineup 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.
Thank you Anthony.
Good morning, everyone and thank you for joining us today.
Square spaces 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 topline 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.
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 gives us confidence for sustained top line growth in 2023 books.
Bookings kept pace with our topline 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.
Our 58% of the growth of this quarter.
This expansion includes additional revenue, resulting from attached subscriptions and talk another meaningful opportunity to drive growth.
Increasingly 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 streamline 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 present and commerce website subscriptions and was 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 1000 basis points higher than the same period last year.
Square space 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 mix shift is impacting <unk>, which grew above $219 at a growth rate of 7% on.
On a net basis, we continue to see gains in our unique subscriptions. Despite continued churn from lower value unfolds 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 <unk> customers.
<unk> Ah biocide 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 with the main drivers of growth in the quarter. We saw a reversal of GMB trends with positive growth during the quarter as <unk> reached over one 5 billion.
Softness in 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 tailwind 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 U S geographies to drive new customer adoption.
As a percentage of total revenue the mix of international and U S 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 web.
Higher growth products, such as talk acuity and other attach 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 was $69 3 million in the quarter or 23% of revenue.
This degree of expense was down sequentially from Q1 2023 and.
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 continue to ramp during the quarter, but at a slower rate than anticipated.
Finally, non-GAAP G&A expenses were $21 $1 million.
Eight 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 topline 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 borrowing.
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 domain 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 ended June 32022.
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% year over year and representing over 500 basis points of improvement at 22, 1% 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 million 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 million 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 and.
In 2023, we expect total revenue to be in the range of 987 to 995 billion.
Representing growth of 14% at the midpoint of the range up from our previous guidance of $969 million to $981 million.
Unlevered 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 million 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 square space.
As such we have not included any impact to our financial results and our Q3 and full year 2023 guidance, we expect to provide additional modeling points and impact of 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.
Thank you we will now enter all Q&A session. As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad. If you change your mind I would like to make your question. Please press star followed by chain.
On preparing to ask a question. Please ensure that your devices Amit lately.
Our first question comes from.
<unk> from Citigroup.
Your line is now open. Please go ahead.
Hey, good morning, guys.
I wanted to focus on that.
That last point.
Future growth drivers.
And then you talked about square Smith's refreshing key product improvements in the letter you talked about new technologies coming through.
You are.
Accelerated real nicely here into the mid teens, but you also quantify the impact from the price increases so.
So far in the quarter and I guess kind of translate all the guidance <unk>. It implies a little bit of a step down I guess as we're lapping some of those pricing increases so as we kind of work our way through this in 2024 and the new products coming out.
Hoping you can kind of like paint the picture of that transition and whatever you are willing to share ahead of square states refresh on products and roadmap and how youre thinking about some of the things to come.
Thanks.
Hey, yes sure. Thanks for the question.
Yes, just refresh us and glad you're pointing the refreshed this refresh is going to be.
Our big ones for us because we have so much coming out over the next frankly 45 days into into Q4.
Just a couple of highlights there.
One we've got product.
Remember a large product releases with respect to products for classic southern 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 SaaS fee.
Increases as we sell.
Certain plans related to those products as well as moving a lot of GSV onto the platform that wasn't previously being processed through us.
In addition.
Huge amount of investment in square space domains, which is taking out.
<unk>.
It's something we have an increased interest in.
Making really really.
Work as we.
If we look to close the.
The acquisition of the Google domains assets. So a lot will be updated there are a lot of visuals will show up during refresh we accepted our first payment on this course based payments platforms in our production infrastructure now that is an alpha. So it is not yet in front of a wide variety of people, but nevertheless, a positive milestone there we anticipate.
Having customers onboard it not in alpha or beta in production in Q4 and.
We are launching a refresh of the acuity graph, which youll see happen over the next 30 days and there'll be more on that and refresh. So that's just five areas. All of those are pretty substantial in terms of just the amount of effort, we put on things and the scale. We think we can get out of.
Out of those updates.
Top of anything we're launching in terms of.
Releases related to generative AI being integrated or co pilot like experiences, we think will just accelerate.
Hopefully accelerate across.
All of those product initiatives, so probably one of the best refreshes, we're going to we're going to we're going to have up to this point and a lot of product changes a lot of product updates coming out.
So we're looking forward to that.
Thanks, that's helpful and just a quick follow up on that Nathan mentioned customers.
Customers choosing higher priced packages on average kind of moving up there.
In the past you've talked about.
Repackaging the product.
Next.
<unk> an opportunity to move our blues up does that is that already happening.
Strategy evolving just update us on your thoughts around that thanks, Tim.
Sure Yeah, we're always.
Running.
Some kind of price test.
Every other month basically.
I think that as we look towards the future I think.
Looking at usage based pricing and using at looking at ways to make the product.
We used 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 a heavy user of the product you'll see this in our classes and courses release, where.
On the low end. If you are just getting started with the product you are paying less of SaaS fee and we're having more of a <unk> take rate. If you can kind of really successful on the platform or ideas you paying more of a SaaS fee and we're taking much less of a <unk> take rate I think a lot of customers and businesses like that don't want to feel.
They are being penalized for their success and so there isn't one.
Big Mega change thats going to happen, but.
US rolling some of these subscription plans into our core introducing new ones in niche environments like classes and courses and kind of taking it from there.
Thank you.
Thank you. Our next question comes from Matt Pfau from William Blair.
Your line is now like proceed with your question.
Great. Thanks for taking my questions and great results wanted to ask on the record Trier trial volume that Youre seeing.
Perhaps you can just give us a little bit more detail on what's driving that specifically and then the follow up there is within those record trials.
How has conversion been trending relative to historical levels. Thanks.
Hey, there.
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 of things are contributing to the trial volume being up again that trial volume is.
It is a it is an all time high for Q2, including any pandemic quarter and we saw a reversal for the first time in seasonal trends from Q1 to Q2 and in the core product normally Q1 is the stronger.
Volume month, and then Q2, it decelerates a bit and it goes back up in Q3, 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're calling attribution to play now and then as we move forward through Q.
For Q1, we were.
Retraining that model and launching attribution to wine et cetera et cetera.
What that does is allowing us to deploy our cash more intelligently and so we're just seeing more effectiveness.
In terms of the core funnel, so more optimize landings more trials coming from those landings and conversion remaining strong while all of those factors are up.
Really positive too.
We talk about square states blueprint, which is our way of Onboarding people to the product and letting them quote unquote bypass the template store and getting 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.
Contributing to more people are finding the product easier to use product is easier to use things like fluid ends and we're redesigning your 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 us very nicely.
It's not just one magic thing we're doing it.
Years and years of accurate and results and tweaking and tuning.
It's a very encouraging number for us because again that is the core that is right now the core product representing the majority of revenues.
Very helpful. I appreciate you taking my questions.
Thank you. Our next question comes from city Pentagon from Mizuho.
Your line is now open. Please go ahead.
Great. Thank you congrats on a good quarter.
And also good to see this quest for payment now and Alpha. So my question is could you.
Talk about more about like just close with payment offering.
You said a launch in Q4, you're going to like migrate all your customer maybe they currently using stripe to that or whats your.
Target when you launch it in Q4.
The targeting 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 has been.
Very successful seller is moving them over on day, one certainly we're also releasing it and it will be released in beta to our circle community before a more general release, and so hopefully we'll be able to work through.
Sure.
Some of the early days in that platform with that community and with people were really really close to.
So that's the main plan and then as we move into next year, and we get a lot of confidence in.
Confidence in the platform.
We will provide incentives and we will be working with existing customers, who have higher volume and move over.
Seem to be an incentive based.
Process.
Great and then a follow up.
Equity business I know Q1 was weak.
A week, but you talked about some of the improvement Youre doing how should we think about it when do you think.
Equity business could bounce back and what are the things you are doing to help it.
Well, we are super excited to announce the brand relaunch it looks fantastic and I think it just shows this.
Commitment to a dual pronged approach and the acuity acquisition was very successful for us in terms of there is a significant funnel coming from people attaching a 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 a DIY website builder, but they have a robust.
Business that relies on appointment 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.
The COVID-19 testing sort of businesses that were on the big drivers of acuity GMB those are more.
I have come to pass at this point and so I think we'll be able to.
Predict acuity at a more normalized way moving forward with.
Absence of those.
Sort of.
Emily type sellers, so again highest.
More head count growth in acuity than than in other parts of the business right now is the inverse.
And that both Standalone and attached story, together, which is something that wasn't front and center, let's call. It two years ago.
Great Congrats again for another good quarter.
Thank you. Thank you.
Our next question comes from Trevor Young from Barclays. Trevor Your line is now open. Please proceed.
Great. Thanks, Anthony you mentioned ramping investments in acuity heavy investments in domains, plus baldy initiatives with payments and the whole new refresh realize youre not guiding to 2004, 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 <unk>.
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 .
For sure.
So in terms of thinking about margins moving forward a lot of that is baked in.
It is 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 as well.
A lot of what you mentioned, we already have the investment there and you had the investment in acuity and domains.
In payments so what we can do after making that initial investment is just make sure we're disciplined about how we ramp.
More head count also those products vis vis <unk>.
How much revenue that bringing it so I think we have a good handle on all of that so again, just see free cash flow margin continuing to tick up into next year.
Nathan Yes, I'll just add on there I'm Trevor I think that we as a company to 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 and others. 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.
And your second question was around sort of international markets, both English speaking in 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 internationalize. So when we do things like rollout square phase II blueprint in five additional languages, we do see that impacting.
Growth rates in those markets. So it's not it's never just one thing.
With international it's all the things that wants to pay methods languages blueprint product innovation. So.
Yes, I think we're seeing we're seeing positive results worldwide, yes, we're going to hit.
Turning to see double digit growth in all of our key international markets and Trevor.
Yes.
Great. Thank you both.
Thank you. Our next question comes from Vikram cassava from that okay.
Your line is now open. Please go ahead.
Yes. 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 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 the experience is impacting your broader philosophy around pricing and specifically do you think you can raise prices more frequently going forward.
Our plans are for fiscal 'twenty four at this point.
Yeah, Thanks, Mike I'll take the first one the free cash flow.
I think overall, we're very excited to raise the high end of the guidance by $18 million for the year to reach 22, 3% margin and what this reflects if you look at the whole year, it's really seasonality because we do see an uptick in Q3, Q4, specifically around marketing and advertising.
Cash outlay and so.
So for the.
I would not cash as I said in 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 at Atlantic for the full year.
Yes, I'll comment regarding pricing and pricing leverage.
We had been so conservative for so long about any kind of price increases we still don't even have.
All of our customers across all of our plans at or even current list price and.
We havent made a plan yet.
<unk> when we wanted to begin to begin that second wave again, just increasing them to lift prices 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 how high can we make all the pricing clients I don't think so.
Right way to remain competitive is what what niche is do we serve where a higher priced plan would be more 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 Pete.
Who are really at scale at volume, we can translate that into higher SaaS fees. What can we what can we do there if youre incredibly successful business on square space and you don't want to pay percentage of <unk>.
Back as any kind of tax on top of the main processing fees.
It does a 200 $300 SaaS fee sounds like a really cheap product to run a multimillion dollar business I think we think it does.
We see similar dynamics in the top business, where the SaaS fees can be much higher and.
Yes, it's more of an emphasis on making sure the GMP take rates lower.
Okay.
Okay. Thank you.
Thank you. Our next question comes from Deepak <unk> from Wolfe Research.
Your line is now open. Please go ahead.
Great Hey, guys. Thanks for taking the question Anthony can you elaborate on the new AI technologies. You're building you noted launching copilot type experiences is that all built on top of sort of open AI.
Or are you also thinking about other llm's kind of more broadly I guess, how do you think about the extensibility waste is 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 subscriber additions between gross adds conversion and churn. It seems like overall macro is getting a little bit better, but what is the path for net adds to kind of get back to you.
Pre COVID-19, our sort of like the historical levels. Thanks, so much.
Yes, I can comment on the.
On the AI question, so right now.
A lot of what we're building is based on models and API API set are.
Widely available, which is frankly why in the industry do you see everyone sort of magically coming up with the same demos at the same time.
Yes.
It's good in a way because it means that our investment actually end.
Doing the harder ml stuff is.
Equal to or lower than it was five years ago with.
Much more quote unquote magical results. If you will so we've already integrated generative AI stop in the platform.
And the basic areas, where you would expect at a blank tax field. How do we help you added that how do we improve that in the future so that youre editing tax in that field.
It's better you can look at image generation and things like that co pilot 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 know al mentioned two ways I'm a little confused by it one is.
Right now if you are a source of these customer and you want to write into live chat you will be given.
Results that.
What is returning based on our training on our knowledge base and if those results don't work you are routed to a world class customer support team that we've invested in for two decades that will help you get to the result.
You need and it's going to be great to also integrate copilot like experiences 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 I need more help with it so that's kind of where we're integrating it versus saying Oh actually it is this completely separate thing.
I'm going to type like make my tax bolder and it gets older which is not really where we're seeing a lot of people like need to need the most help.
So excited about continuing to integrate it excited about the fact that the cost for us to integrate its lower than ever.
And yes, we think it will continue to make onboarding into the platform easier that being said of course, a blueprint is a visual onboarding system and we found that that was what people that set of steps in that process was something closer to what people actually wanted when onboarding to the platform.
We have yet to encounter customers that want to take a couple of paragraphs and have it make a website and type more paragraphs and have changed the website I think theres still a lot of value to visual systems for design, even though all of these technologies are incredibly exciting and will keep reducing costs and SaaS fee.
We think there is as mentioned before we think it is a tailwind.
You're seeing it on the platform. So we're going to keep we're going to keep integrating it.
Yes, alternative and Nathan for the second half.
Okay.
Deepak on your unique subs question, we don't give that breakdown.
The different components of it but what I will say is that as we saw in Q1 and then we saw again in Q2.
Strong acceleration of our core business and strong retention.
And stable churn, which caused us to increase our overall guidance for the year. So we're very pleased with where we are 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 as we look forward.
Core business acceleration causes increased guidance and we feel confident of where that that is going.
Got it thank you so much.
Thank you. Our next question comes from Brad Erickson from RBC capital markets that Jon and Thanks go ahead.
Yeah. Thanks, So first of all Nathan I guess, given the price increases you've had gone now for a few quarters.
Margin flow through there has been really high obviously for these kind of the right contribution profit levels to think about longer term 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.
Yeah.
And how that works at moment say when youre not raising price that's the first one.
And then second for Anthony just adding on to that last comment.
Around generative AI as you roll these tools out maybe just would be curious for you to.
Speak to your views kind of the industry is the ability to monetize those tools versus just versus just being kind of competitive table Stakes here, where everyone built that into their cost base.
Yes, Brian Thanks for the question.
So speaking on the operating margin.
As I said earlier I think that we have shown strong disciplined here.
From both a operating efficiency standpoint, and still drive the top line and so I think we will continue that practice.
And are very focused on making sure that we're making the right investments that it's going to continue to drive the top line, but continue to see improvement.
Both our operating margin and our cash flow. So we feel very confident in the raise that we did for guidance.
Everything the company is running from a growth perspective kind of layering on what Anthony said earlier.
We will lap the.
The pricing increase that we did at the end of Q3 last year and.
Q4, this year, but I think that as I think that look we're only getting started on the pricing. This is the first time that we've ever increased price on our electric customers. Then we only increased by 10% to 15% by cohorts So theres still.
Sufficient room between that analyst 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 in new product innovation I am looking at using price as a growth driver.
And regarding the use of allo items and AI technology get.
Its a interesting benefit that we all kind of have access to these train models.
And so is it fair to protect generation and sort of at the same time at a low cost and if you think about it this.
This is why you have I don't know countless startups and countless companies with frankly the same demo.
Coming out that if you're reasonably sophisticated company you can integrate this near product really rapidly. We all have I think the thing that people are seeing now at least we're seeing maybe a little bit with yellow.
About a third of the population already had access to chat GPT and so it wasn't really like rocket science for them the right texting that box and dump it into square space same mid journey staying with the same with all of these other ways. They would generate these asset so we're able to provide it as a convenience when they are 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 the job too.
Human advisers, how to 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.
The experiences that people are asking for I guess blueprint is a very visual experience and we've seen conversion rate improvements there strength of that in international markets. So, yes, we'll keep integrating but.
That's sort of where more.
Product innovation is it stuff you need to what we do and what we do for our customers.
Got it thanks.
Thank you. Our next question comes from Ken Wong from Oppenheimer. Ken. Please go ahead.
Hi, This is Nancy on for Ken Thanks for taking our question first.
First question is on gross margins.
No trend payments layer and then do you expect further increases to the customer operations.
This can cause.
And then secondly could.
Could you clarify around the terms of the two year partnership with Google and if theres any opportunity to extend that partnership after three year, Mark and if it is conditional on performing the partnership or anything like that thank you.
Sure regarding the gross margins in the payments business, Yes, you will see that.
The gross margin change.
It will albeit net impact in a positive way to the cash flows of the business. This is not something that can erode margins makes sense cashless, we're going to be generating a better take rate off of payments all costs factored in after this is out versus before without otherwise we would have just never done it.
So we were going to be disciplined about the spend and as we move into.
Moving to this product.
The partnership with Google, Yes, there is an opportunity to extend it we've sort of we are in a process right now where we're waiting for the deal to close and.
Yes.
In terms of what.
As in there is sort of in our.
As in the releases related to that announcement.
Thank you. Our next question comes from Brian <unk> from D.
Davidson. Please go ahead.
Okay.
Okay, Kevin not getting any audio right.
I think the only from Telenet.
Frankly, though.
We'll move onto our next question from Andrew <unk> from Jpmorgan Securities. Andrew. Your line is now open. Please go ahead.
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 a weighted to the back half of the year to talk about pricing for non U S.
Subscriptions you guys just provide an update there thanks so much.
Yes.
Sure So just to contextualize the attribution model so.
<unk> operated to cash flow breakeven.
For the greater part of 15 years and it's been profitable.
For almost a decade now and Thats 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 of our spend and we have guideline sat around those Spanish debt.
That are always changing at the macro landscape changes and as our product changes.
Hopefully mean that we're spending efficiency efficiently and.
What was great about these recent updates.
That we did a major overhaul to our internal model that had been kind of in process.
In production for years and years and years and when we back up to the model we were able to find it Oh actually we were under spending in certain areas over spending 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 and do that on a more.
More continuous basis versus before we were just training it less frequently and so with 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 that people are highlighting on the call that you have the Q2 trials in the quarter.
Then Q1 and also higher than any pandemic quarter.
He's quite effect.
Everything from macro contributing to but we're certainly changing our activities as well so there's that and then as we move to international.
Seeing were seeing strength there is some of the product improvements take hold the foothill takes hold.
Your question was around pricing with regard to international.
Sure.
I don't.
Do we start increasing.
International in March in March.
As of March of this year, we started moving some of the international subscriptions up too.
So all of that is not fully baked in we've got a number.
Pricing projects started in international markets or even right now what you're looking at currencies, where we need to frankly decreased pricing to be competitive.
And so again the result of any of these tests will be a net positive, but we won't roll them forward, but yes.
We're in process there with international prices.
Thank you.
Thank you at this time I'll now hand back to Anthony for any closing remarks.
Everyone. Thank you so much for joining on the call thrilled with this quarter thrilled with what's coming up for square space refresh and thank you for the thoughtful questions and looking forward to hearing from some of your excellent. Thanks.
Thanks.
This concludes today's conference call. Thank you for joining you may now disconnect your lines have a great day.
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