Q3 2023 Squarespace Inc Earnings Call
Good morning, everyone. My name is Seth and I'll be your conference operator today.
At this time I would like to welcome everyone to squash basis third quarter 2023 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star followed by two thank you I will now hand, the call over to your house, that's quest ice clad Perry.
Please go ahead.
Good morning, and thank you for joining square spaces third quarter 2023 earnings Conference call. This is Clare Parry head of Investor Relations I'm joined by Anthony Couse, Elena square spaces, founder and CEO and Nathan Good CFO. After their prepared remarks, we will open the call.
Paul to your questions.
Earlier today, we posted a press release and shareholder letter to the Investor Relations section of our website.
On today's call, we will 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 will make forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of $19 95, which include but are not limited to statements related to our future financial performance, our strategy and our ability to integrate new technology into our core platform.
These forward looking statements are subject to risks and uncertainties that could cause our actual results to differ materially. These.
These results are further defined in our most recent filings with the security and Exchange Commission any forward looking statements that we make on this call are based on assumptions as of this day November 7th 2023.
We undertake no obligation to update these statements as a result of new information or future events, except where required by law. Please.
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.
Good morning, everyone I'm delighted to review <unk> third quarter 2023 results with you today.
Our strong financials were driven by the strength of our core business and reflects our ongoing mission to build products that help entrepreneurs stand out and succeed.
In the quarter, we delivered 18% revenue growth expanded our unlevered free cash flow margin of 21% and have crossed 1 billion in annual run rate revenue for the first time in.
In September we closed our acquisition of Google domains, which further contributed to our bookings growing 18% this quarter.
On top of our financial performance, we delivered over multiple major releases, which we summarize it square space refresh in October.
These include scores based payments, which were onboarding, new customers to know as well as improvements to our classes and courses products more tools for service sellers, including invoicing and continued major improvements to our domain offering as we prepare for the Google domains migration.
Our ultimate goal is to provide entrepreneurs with a single online hub for other web based needs. We are continuing to invest in our portfolio of brands, including squared space acuity talk unfold and bio sites that help our customers publishing transact online no matter, where they might start their journey.
This quarter acuity scheduling new branding and rollout of enhanced features as an example of our progress in this direction.
Available on a standalone basis or attached to a website acuity exemplifies our efforts to create new entry points for customers, allowing them to adopt our products in line with their needs are.
Our commitment to online presence is further strengthened by the relaunch of scores based domains. The next evolution of our domain offering we have transformed squares based demand to our products for domain first customers now offering some of the most comprehensive domain registration tools in the industry all embedded within our integrated platform.
This investment follows our acquisition of Google demands, which we closed in September squares.
Square space in Google remained focused on ensuring a seamless migration for our customers.
It is still early in terms of the impact to our business, but we remain excited about the transformative deal. We will begin migrating domains from Google shortly that we're already processing, all new registrations from customers coming from that platform on.
On the product release front, we have also started introducing scores based payments and new customers in the U S and that rollout will continue throughout the end of the year and into 2024.
We are thrilled to be able to offer a completely integrated payments platform with square space and we're looking forward to introducing this functionality across all of our product lines scores based payments has been a significant investment for us and it was great to have our customers using it.
Squared space refresh also previewed capabilities scores based AI a website building experience. This powered end to end by generative AI, we've been using machine learning models to support parts of our platform for the better part of a decade and are more than ready to integrate the evolution of these technologies.
We are continuing to be thoughtful regarding what we work on and are first focusing on integrations that solve customer pain points and streamline the website building process.
Additionally, we're working to add square space AI <unk> blueprint focusing on visual elements. In addition, and taxed scarcity as blueprint as our template free onboarding experience through websites, where we guide customers through setup, helping them come online more quickly with a personalized web site.
We continue to push the boundaries of our platform by placing more powerful and dynamic tools in the hands of the entrepreneurs worldwide.
We now offer customers 22 currency options and are working to increase our supported languages as we prepare to onboard Google domains International customer base International.
Expansion remains a key growth opportunity for our business and we saw positive gains in key markets this quarter.
In summary, I'm thrilled with both our in quarter performance and the opportunities we have in front of us, especially considering the product releases. We have just recently put in the market. Thank you to our employees for making this possible and our customers are choosing us. We're looking forward to help you with Johnson <unk> journey no matter how it may start.
And 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.
Our solid Q3 2023 results were driven by the strength of our core business, we grew revenue and Unlevered free cash flow this quarter.
Metrics, surpassing the high end of our guidance. These strong results allow us to raise our outlook today to over $1 billion in total revenue at an unlevered free cash flow margin of 23% at the midpoint of our 2023 range.
We believe this growth which follows record website trials during the first half of the year demonstrates that our powerful product suite continues to attract and resonate with customers worldwide.
Total revenue this quarter was $257 million growing 18% as reported and 16% in constant currency.
The fundamental drivers across our business remains strong against this backdrop of growth. We remained focused on the bottom line as well.
Our adjusted EBITDA, 52% to $66 million at a margin of 26% and representing over 500 basis points of improvement.
On September seven 2023, we closed our acquisition of Google domains note that all discussion of unique subscriptions and average revenue per unique subscription do not account for single domain subscriptions originally sold by Google as part of the acquisition.
We collectively refer to these acquired domains as acquired domain assets.
Q3, 2023 revenue contribution from acquired domain assets was immaterial as a reminder, we recognize subscription revenue ratably over the period and impact will first appear in total bookings.
During the quarter, we achieved $267 million in total bookings, an increase of $42 million growing at 18% and 16% in constant currency unique.
Unique subscriptions were the primary driver of growth both the retention of existing and the addition of new the acquired domain assets was the second largest driver of bookings growth during the quarter.
Which we began realizing following the close of our Google domains acquisition on September 7th representing a period of 23 days the impact of legacy price increases from our customers to our total bookings waned during the quarter as we fully lap. The 12 month period. Since we began rolling price increases out last year.
Q3, 2023 revenue growth of 18% represented an increase of approximately $39 million.
The primary driver was the growth of unique subscriptions, both the retention of existing and contributions from new.
Unique subscriptions contributed $17 5 million or 44% of the growth this quarter as a reminder, unique subscriptions and <unk> do not include our acquired domain assets.
As of September 32023, we had over $4 4 million unique subscriptions on our platform an increase of 225000 or 5% growth.
We continued to see strength in our higher value website plans, helping drive our <unk> to over $226 in this quarter and representing growth of 10%.
The largest drivers of <unk> in the quarter, where our price increases across several of our subscription plans and the revenue mix shift towards higher value subscription plans.
We lapped the one year anniversary of our legacy price increases, which we started rolling out in August 2022 to USD customers the.
The impact of price increases across our subscription offerings with the second largest contributor to our total revenue growth during the quarter and represented approximately $13 million across both presence and commerce website subscriptions and accounted for approximately 32% of the growth in Q3.
Rice increases had an outsized impact on our presence revenue representing $12 million of growth.
At the end of this 12 month period, I am delighted to see strong retention, which demonstrates the stickiness of our products and the value we deliver to our customers. We believe we still have room to bring existing customer prices closer to list price.
Both contributions from pricing and the growth of unique subscriptions contributed to strong rates of total cash retention exceeding the same period last year.
<unk> benefits from a diversified commerce portfolio, which supports our customers' varied e-commerce needs, including physical goods service sellers and hospitality customers.
Commerce revenue grew to $78 million or 15% as reported and 13% in constant currency during the third quarter, representing 30% of total revenue.
The increase in Commerce revenue was primarily the result of growth of unique subscriptions, which contributed approximately $7 million to total revenue. We saw a second consecutive quarter of accelerating gross merchandize value with growth of 6% to approximately $1 5 billion and GMB. We're excited.
The year over year GMB growth across all of our commerce products with momentum building and online stores.
As Anthony mentioned with square space refresh, we launched exciting improvements in our commerce tools that aimed to help our customers sell more effectively new features include fulfillment options customize byproduct shop pages optimized for mobile and improvements in the checkout experience to offer and the customers a consistent brand experience.
<unk>.
Annual run rate revenue surpassed $1 billion, an increase of over $152 million growing 18%.
Stable subscription retention continued acquisitions and price increases drove strength in the quarter.
We believe that annual run rate revenue exceeding $1 billion is a testament to the strength of our business and the power of our platform.
We continue to see growth in international markets with international revenue at $73 million growing 21% as reported and 13% in constant currency. Despite typical seasonal slowness.
Currency was a tailwind for us this quarter, adding $4 $5 million as we continue to see support from foreign exchange rates relative to the same period last year.
As of quarter end International revenue represented 28% of total revenue in Q3 2023 note that our international business is primarily driven from the websites and we still have opportunity with acuity scheduling and talk which are still nascent in international markets.
Our marketing attribution model has been efficiently directing the mix of spend to marketing channels, helping us drive customer growth. This year during the third quarter, we continue to lean into direct response channels.
We closely monitor the return on investment from our spend to inform our marketing strategy as we look to scale into new markets.
Turning to our margin profile.
Our non-GAAP gross margin was 82% in Q3, a decline of over 200 basis points increased customer operation costs and domain registration fees associated with our acquired domain assets impacted our margin during the quarter note that domain registry fees, our expense upfront upon sell not ratably over.
The period like revenue.
Moving to operational expenses, our non-GAAP marketing and sales expense was $72 million in the quarter or 28% of revenue.
And represents over 350 basis points of improvement, we offset slight increases in advertising expense with savings and head count and organizational structure relative to the same period last year.
non-GAAP R&D expense was $45 million during the quarter and represented 17% of total revenue as we saw savings from increased capitalization of payroll.
Additionally, we saw broader savings related to hiring ensuring we are intentional and disciplined when evaluating head count finally, non-GAAP G&A expenses were 10% of revenue or $26 million.
Our G&A margin improved by approximately 170 basis points as we generally kept expenses flat relative to an increasing revenue base overall I am pleased with the efficiency that we've achieved across each of the operating expense areas.
In the third quarter, our adjusted EBITDA increased to $66 million or 26% of total revenue growing 52%.
Our adjusted EBITDA margin improved by nearly 600 basis points when compared to the same period last year.
The increase of our total revenue coupled with our operational discipline drove efficiencies to our bottom line. We are pleased to see this sustained leverage.
We maintained a healthy balance sheet with cash and cash equivalents of $216 million and approximately $18 million of available borrowing.
Total debt was approximately $581 million at the end of the quarter of which $49 million is current and reflects the upsides of our credit facility by $100 million to partially fund our acquisition of Google domains, we utilized approximately $80 million of cash on hand for the remainder of the purchase.
I remain comfortable with our leverage ratio is today with net debt to our trailing 12 month adjusted EBITDA at one six times as of quarter end.
Turning now to our cash flow.
We delivered strong cash flow in the quarter, surpassing our guidance our cash flow from operating activities grew 29% to $53 million for the trailing three months ended September 32023, primarily due to the strength in bookings and offset by an increase in cash based payroll.
And associated benefits as well as the timing of payments.
Related to payments during the quarter, we prepaid domain registry fees in conjunction with our acquisition of Google domains in Q3, our Unlevered free cash flow was $54 million growing 29% and representing a 21% margin over 170 basis points of year over year improvement.
The beauty of this business is that we generate a lot of cash.
Our share repurchase program continues to be active.
There are no repurchases in the third quarter as of quarter end, we still had approximately $54 million available for repurchase under our current authorization.
Since initiating the program in May 2022, we have returned approximately $146 million to shareholders.
Turning to our guidance for Q4 and full year 2023.
In the fourth quarter of 2023, we are targeting total revenue in the range of $261 million to $264 million.
The midpoint of the range represents approximately 15% growth, we expect unlevered free cash flow during the fourth quarter to be in the range of $56 million to $60 million, which implies an unlevered free cash flow margin of 22, 1% at the midpoint of the range.
The strength that we saw in Q3 gives us confidence to raise our full year guidance today and 2023, we expect total revenue to be in the range of $1.002 billion to $1.006 billion.
Representing growth of approximately 16% at the midpoint of the range up from our previous guidance of $987 million to $995 million.
Unlevered free cash flow is expected to reach between 232 and $236 million.
And implies a margin of 23, 3% at the midpoint of the range. This is up from previous guidance of $217 million to $225 million.
I would like to outline some modeling points for Q4 and the remainder of this year.
First.
These ranges assume minimal contributions from our acquired domain assets Gen.
Generally domain subscriptions are annual paid upfront and we recognize associated revenue ratably over the course of 12 months.
As legacy Google domains customers renew their subscriptions impact will first be seen in total bookings.
Keeping in mind the revenue recognition pattern, we anticipate continued impact to our gross profit margin in Q4.
This change will not be representative of our long term margins once our legacy Google domains customers.
Domains have been a part of our offering for nearly a decade and even with millions of customers from our acquired domain assets, we expect our domain business to run in a similar manner as with our current business, we expect new customers to join and attach websites and other services.
Additionally, there is always an element of churn.
We are still early to realize the benefits of this transformative acquisition and we remain incredibly excited about what is to come.
As Anthony mentioned square space payments is now available to limited customers in the U S. We expect to recognize this revenue net and we do not anticipate a material contribution to our revenue in Q4.
To summarize.
We had a great Q3, we executed well with strong top line growth profitability and cash flow.
Our core business continues to grow with existing and new customers as we make solid progress on our strategic priorities seeding investments to drive our long term growth I am pleased with the traction we are seeing today at square space.
Finally, I would like to express my gratitude to our employees for their commitment to our customers' success with.
With that operator, please open the line for the Q&A portion of the call.
Thank you if you would like to ask a question on todays call. Please press star one on your telephone keypad. If you would like to withdraw your question. Please press star two.
In the interest of time and fairness to all participants please limit yourselves to one question at a time you May then re queue for further questions.
Our first question on todays call comes from Trevor Young at Barclays. Please go ahead.
Great. Thanks.
Now that you've lapped the pricing increase that started last fall can you just remind us of what proportion of <unk>.
Rate card and is there any specific products, where there's like a greater or lesser proportion of customers that are below rate card and relatedly do you intend to take price again on renewal for some of those products that are maybe customers are still well below rate card.
Sure you broke up a little bit on the early part of that question, but I think you're asking what.
Portion of our customers are below rate card right now on the primary products I don't think we have that broken out.
How to characterize it.
If you look at the history of that product over the past 10 years. There are currently more people on.
Presence subscription e-commerce subscriptions overall, even though we get more money from the Congress subscriptions and so.
<unk>.
There is a significant portion of our below rate card and.
What we're planning on doing is after a certain period of time elapses, we didn't want to do it within a year, maybe within 18 months 24 months kind of revisit these and start to.
Kick them up again.
Very similar ways to what we did in the.
First pricing renewal so to say.
Hey.
Will either raise it by a $1 or $2 at a max of 10 or 15% to those customers.
Still room to move.
Yes.
In terms of <unk>.
Removing these cohorts up and I'd say that group is.
Non trivial amount.
Okay, great. So it sounds like maybe some time in 2000 and for potentially revisit that.
That's right.
Great. Thank you.
Sure.
Our next question comes from Egalet Vernon from Citi. Please go ahead.
Hey, good morning, everyone.
So you're coming off.
First the first half of record trials.
Maybe just some commentary on what Youre seeing in terms of conversion of those trials flowing through what that cohort looks like and.
<unk>.
Understandably you can't have a record quarter every quarter, but just maybe an update in the macro.
Can you give us a little bit talk to hear what youre seeing from the top of funnel, what youre seeing some guys SMB customers.
I have a follow up from that.
Sure in terms of trials in the primary product it was.
Another record quarter.
Although.
By a very a little bit I mean it was.
Call it more in line, even though.
The number is technically higher last quarter. So we were pleased to see that they continue to have strong conversion.
Yeah again, our primary product like the website product subscriptions to trials I'm talking about is really at the top of its game I mean, if you take a look at the update you refresh, which we put online a month ago. The express ability within this question based product and ease of use what we're doing with onboarding.
The idea is around integrating AI all of this.
A really formidable product right now so that combined with all of the commerce initiatives, we have around it.
It's the best product ever been so it's like the reverse of accurate.
Amazing so yes macro demand very positive for us in the product in a very positive place again I point people to refresh its a great visual update of a lot of what happened this year and also a lot in refresh.
And stuff that got released in Q3 so.
It's a very.
Up to date view of what's going on I would add to that.
Both for bookings and revenue I think that the.
Primary driver being the retention of our existing and the acquisition of new is evidence of the core business acceleration of that top of the funnel impact that we've seen in the first half of the year and as Anthony said another retro trial in Q3.
Okay Awesome, that's really helpful and then.
Just on demand for for a little bit.
Yes.
Nathan you talked about the revenue gain.
Being immaterial in Q3.
Any insight as to what the revenue contribution should be and <unk> as we think about what's embedded in guidance and then.
Anthony you also mentioned the Google domains migration will be starting soon can you talk about that a little bit more expand on what that might look like and how we can think about the impact from that.
Yeah.
Yes.
I'll address that.
The revenue portion first so as I said in my opening remarks.
See the initial impact is bookings because as those flow through the revenue impact was immaterial in Q3, because it's ratably recognized over the 12 months.
In Q4 will not be a material impact to either so it will take time for that on the revenue contribution to build upwards the material impact.
And back to our total revenue, but very excited I will say.
From what we had modeled from a retention standpoint, we're continuing to exceed that.
As the legacy domains renewed so excited about that business.
And more on that yes, and I remain really excited about domains from two angles one.
That it just represents this.
Notion that we've been working on that you should be able to start with square space. Even if you don't have a web site with us and it should be a fully featured experience we have that with acuity with bioscience with unfold with talk and now with domains, where there's just multiple entry points into our ecosystem.
Also emphasize that we continue to staff and buildup the domains grew.
At a really rapid clip we launched new features in demand all the time every month.
And we have a ton of updates planned there to the interface into the ability to very lightly cross sell into our products. So I think I'm encouraged by the early results and things will only get better as we continue to rollout those improvements we just hired a general manager of that group.
The presence of general managers here is kind of new as of this time last year and it's been very positive any other areas and I expect it to be positive and demand.
Thanks, guys.
Okay.
Our next question is from Ken Wong from Oppenheimer. Please go ahead.
Great Fantastic. Thanks for taking my question I wanted to circle up on payments you guys just initiated the U S rollout.
Any early feedback from customers in terms of what Youre seeing there and how we should think about any potential changes to kpis of financial metrics.
All this out broader across your business.
Yes, it's really early days they are still although it is an amazing milestone for us to be actually processing, yes, having customers in the wild sign up for it and have a full fledged experience right.
Right now it is.
Single digit percentage of customers in the United States has it available and those are all new not really existing and so.
And your impact is going to be very good.
The reason for that is this is a new area for us it carries risk with it and.
We want to monitor things really closely and make sure that experience is positive for people to make sure. We've got yes, theres other aspects of this business like fraud et cetera under control.
So.
In terms of changes to Kpis.
In the long run because we're recognizing that it's not it just means a higher take rate on our <unk> and so as the <unk> continues to climb and we have these multiple ways of Sal and people are selling courses and sending invoices using the platform et cetera et cetera. The more of that is flowing through this the more that it's just going to generate.
More cash for US and also of course the reason for doing it is it is a better customer experience people are in one place as a unified platform one place for customer support et cetera et cetera. So that's the state of payments, but really big milestone for us to actually have that in a while that would be kind of turning the dial on letting more people into it versus just talking about when that releases coming.
Our next question comes from Matt Pfau from William Blair. Please go ahead.
Hey, great.
Great to see the improvement in GNP growth. So just wanted to ask how you're sort of thinking about that longer term, how should we think about <unk> growing in relation to overall revenue do you think it can get in line with that or perhaps even above would just be great to hear your perspective on that thanks.
Well, it's certainly a major focus for us and we've got.
A combination of things that contribute to our GPC right. Obviously physical products is a big one and remains important to us and we continue to work on features for larger sellers to ensure that they can process using square space services based commerce is of course, where we've been focusing a little bit more of our product efforts.
As of late we side refreshed course isn't products for classes and of course, that's rolling out.
Yes.
Services for a project based salaries starting in the form of invoicing.
And then talk and acuity both have a <unk> component as well talk a take rate on the <unk>.
The prepaid bookings and then acuity, having a take rate on more staff related to the appointment booking and the processing.
The payment for the appointment in person or over at <unk> and so we are just so many things flowing into that GPP number and we're very early right like the classes of course invoicing Scott This is <unk>.
Two months old it will take some time before that can actually affect that number like the like the <unk>.
Remember, we're showing a $1 5 billion in the quarter. So.
We expect some of that start to pick up again.
We're going to have these macro seasonal events as well that will sometimes be tailwind to one category, sometimes be headwinds to some categories and it is a conglomeration of those debt remains important but growing that across these multiple ways to sell and with square states payments I think.
The compelling position to be in in terms of having a <unk> <unk> positive impact on the business, which we did see a nice turn this quarter, specifically on acuity reverting to double digit growth this quarter.
We have.
6% growth this year.
This quarter year over year is an acceleration from what we've seen in the past quarter. So as Anthony said I think as these come to fruition the investments that we're making these areas.
I would expect that this continue to tick up.
Okay.
Our next question comes from Deepak <unk> from Wolfe Research. Please go ahead.
Thanks. This is zach on for Deepak I, just wanted to I guess the first one on.
The kind of usage based pricing tests, just hoping you could provide kind of more color on kind of the early learnings from this initial test.
What are the mile markers that you would need to see before we can see a kind of more broad test or rollout of this kind of initiative.
Okay, what was at the beginning.
Space.
Usage based pricing, yes, so we really haven't executed on a usage based pricing test in a way that.
I kind of want to.
We did a minor test.
Trying to bundle some products together, but also do kind of.
The way we were doing the usage based testing was around grouping.
It was more like range based instead of like.
How I would like to scale true usage based pricing so I would consider a usage based pricing test.
Not executed at this point, but just given our current billing system. We wanted to see if there was something we could squeeze out with some repackaging and.
Turns out in the form of that test didn't didn't work, but yeah. That's fine I mean, we run.
I mean, countless tests and some of the markets and so.
We'll continue to see more from US we have a lot of ideas.
About more usage based pricing, especially in products outside the website product like acuity, where there's a very natural way to scale pricing based on usage that we haven't executed on yet so lots to come with that in 2024.
Some of those to be quite.
Quite impactful.
Great. Thanks, and then just the second one is just on the kind of marketing strategy I know youre not kind of guiding to next year formally yet.
Kind of with the revamped attribution model and the new products that you've announced in the refresh international expansion opportunities.
You see kind of opportunities to lean into marketing heading into next year or.
He kind of realizing the efficiencies and this can be a source of leverage kind of going forward.
Yeah. Good question I think it depends per market for me I think we're much more comfortable with some international Tim inefficiencies in international markets, while they build up and the U S.
Look if the models returning will keep leaning into it but otherwise it's about making the spend appropriate for the returns that we're seeing.
Great. Thank you.
Okay.
Our next question comes from Chris Zhang from UBS. Please go ahead.
Hi, good morning, Thanks for taking our question.
Unique subscription saw very strong growth in the third quarter as we added almost 100000 in the quarter.
And that's probably the highest increase in nine quarters.
Just a couple of things we noticed in the quarter.
Definitely a couple of new product areas and from the release, there seems to be a lack of <unk>.
Both headwinds that may be also played a role and also related.
Having lending to threat response channels.
And some of the partnership spent in terms of marketing. So maybe can you unpack some of the drivers of the strength in terms of football.
In the.
Subscriptions ads in terms of the different product areas or channels and maybe how should we think about your revenue and free cash flow guidance in the fourth quarter on the heels of a strong.
In the third quarter.
So we usually talked about unfolds and whatnot being the volatile thing within the quarter I would say that's a bit steady state right. Now he is an important thing to point out in the third quarter. So after we closed the Google domains.
Acquisition.
What happened on that day is that new registrations at Google demand were pointed to square space and so we had a steady state of the mainstay subscribed with that.
Three months and that took a significant step up after that registration funnel was pointed to us thats one of the biggest things youre seeing within that unique subscriptions number that is totally new and so that's awesome right.
We're successfully onboarding. Many many more people that we can potentially cross sell and up sell and also.
Manage on square space in energy to our products and the ecosystem that the seismic change and is a big contributor to that number I don't think there's much else to call out, but it's not I mean, well continue to see strong retention.
Of our existing core and the new acquisition that we talked about earlier on the call.
It continues to be one of the biggest drivers for our unique subs.
The softening.
<unk> is less impactful too right.
And that new registration funnel is.
Substantial.
Right.
Alright, Thank you Paul for all the color I appreciate it.
No problem.
Our next question comes from Gabriela Borges from Goldman Sachs. Please go ahead.
Alright. Thank you this is through what's on tap here now.
Maybe just one on international electric equal opportunity for you in terms of the number of marquee wins have been broad and strong coffee opportunity could you maybe business guys glad that's all good business growth.
<unk> strategy on Bill, where do you see that having a mixed maybe trending medium to longer term.
You talked about some excellent.
Great.
Could you repeat the question.
Alright, so just on the international markets, maybe you could describe where you see this fitting into your growth strategy.
The revenue mix trending.
Until then I'm trying to listen that fund.
Yeah got it so your international component has always been a huge part of our growth strategy I mean, we've been in.
Many markets for the better part of a decade now I forget how many how many currencies that we went after Google 22 ish.
And then we keep international I think the main product that became very additionally.
Additionally, important to us after Google domains, because thats it.
More international mix than we're used to.
But it remains.
I forget how many how many currencies that we went after Google 22 ish.
And then we keep international I think the main product that became very additionally, important to us after Google domains, because that's a yes.
More international mix than we're used to.
But it remains it remains very important.
We have outside investment in international growth.
In those markets.
And in a previous question.
We're more comfortable with taking some losses not having his title if you compare our international revenue mix to certain peers, we clearly.
Versus domestic U S for us versus going in the other direction.
Turning to your question on longer term.
We're not talking about the 2024 today, but hopefully Q3 results and Q4 guidance gives you a good indication of how we're thinking about the business and the progress we're making I would say as Anthony laid out earlier, our platform has never been stronger and with all the goodness from square Phase III. We are very excited about where we can take those both domestic and international.
Okay got it that's.
Helpful color. Thank you.
Yeah.
Mhm.
Our next question is from <unk> <unk> from Mizuho. Please go ahead.
Thanks for taking my question I wanted to dig a little bit into the gross margin impact that you talked about impact from domain cost at this time.
That's quite a bit sequentially. If you look at it almost like 280 bps.
So help us understand a little bit is it is it for the cost for the new domain that you.
Thank you Sir.
How does the revenue recognition and the cost usually walk for demand or is it for that 10 million domains that Google has.
And then the.
Quick follow up on to that is do you have any sense of what percentage of that 10 million domain.
Do you have in customer mix.
I know they all overlap with your customer base on that $10 million on it.
Yes, Andy Thanks for the question so.
We have historically operated on 80 plus percent margins very healthy margins, we have been in the domains business for over a decade and so the dip that we see here.
Not a surprise, we certainly expected it.
With Onboarding new domains, we do recognize the cost of the registry cost upfront so thats fully burdened in our.
Cost of goods sold whereas revenue is recognized ratably over the 12 months so.
Because of that discrepancy you do see a greater impact to gross profit margin, but over the long term I would say, we expect to see the margins normalize.
Anthony talked about earlier on the call as well.
The exciting part and transformative part of this deal is that cross sell opportunity and as we bring these customers on opening them up to the ecosystem of square space in attach products did.
Did you want to say anything more Anthony.
No I mean that covers it for me.
Thanks, Dave.
How about the overlap between that $10 million.
The overlap I'm sorry.
Yeah.
Say the substantial amount of $10 million is not overlap I mean, if you just looked at that.
Unique subs that we had before and the fact that a lot of them the demand attach was from us.
A substantial portion or not not overlap even just if you look at just the raw numbers.
Divided our previously an excepted half and said, okay, well, what's the Max impact could be.
Yeah. Thank overlap.
No problem.
Our next question is from Alexia <unk> from JP Morgan. Please go ahead.
Good morning, everyone Anthony.
In your prepared remarks.
You have introduced.
Biggest advancements in e-commerce products.
And.
And various other releases during the refresh earlier this year could you elaborate.
How your customers are choosing higher price point packages post those new releases.
So yeah. So this is emphasize that within the quarter, we have payments being introduced to a single digit percentage of U S. Customer. So we're rolling that out and then we had improvements to our cost and of course this product in our invoicing products as well as multiple improvements to our existing service based selling products.
And acuity.
All in it's the most improvements we've ever delivered in a year I think that we have a lot of ideas about the go to market and the packaging and the pricing of those products that have yet to be realized I think we're a little bit ahead of ourselves in terms of I think we have functionality that is sort of like undiscovered and so in 2024, there's a lot we wanted to do with the brands around there.
These products and how we package them that I think will influence the plan choices people are making and simplified this whole experience for people.
Due to our how we are growing up there is a lot of different subscriptions inside square states right now and I think that if we get smarter about repackaging for essentially peoples.
Persona, if you will.
Yes, I'll give it a more clearly comment on how they are adopting our specialized vertical ice plans around this functionality.
Okay. Thank you.
And Nathan very quick follow up on your <unk> guidance.
FX impact are you incorporating into those forecasts.
Yeah.
I'm sorry, what was the question FX FX impact.
Our rates for FX are the as of the end of September and Q4.
Okay, so roughly two percentage points impact so constant currency wise.
The midpoint of your guidance is about 13% in constant currency.
We don't give constant currency.
Guidance.
Okay. Thank you.
Okay.
Our next question comes from Andrew Boone at JMP Securities. Please go ahead.
Good morning, and thanks for taking my question.
Anthony can you talk about the benefits that youre seeing from square space AI in terms of conversion or anything else you want to highlight and then how do we think about your AI Road map, we're moving into 2024. Thanks so much.
Sure. So we've done the common sense AI.
Integrations, thus far generative taxed inside of text fields, all of that I mean kind of the.
I'm going to say like the demo you've seen everyone give we've also incorporated into the product.
I think that.
What might surprise some people are not surprise people is that it really hasn't had much of an impact on conversion and why is that because everyone has access to chat CBD already and they know how to copy and paste and so yes. It.
It's not really that big of a deal that image.
Image field and it adds an image that came from Dolly or that youre in a tax field and they pasted and from chat GPT for you. So it's a convenience our customers like it they use it but it doesn't have any impact on conversion right now.
The roadmap and thinking about how we think about it in the future.
Very visual demos that are posted on the refresh site that will do a better job of kind of showing how we see it impacting multiple parts of the product.
<unk>.
Moving moving forward and I would definitely encourage people who have questions about what AI might look like for square space to go check those out there's a couple of minute long video there.
<unk> talked through.
The different parts of the product in specific where we think it applies in all of that but most of what we're doing here applies to setup and onboarding.
Dissipated, improving but just sort of I would keep in mind that.
A lot of the technologies that are being demoed like that or just API calls all of us our competitors, having we're integrating them at low cost and you have to just common sense good things to do.
Thank you.
Our last question comes from <unk> <unk> from B Riley. Please go ahead.
Yeah.
Yeah, Hi, Thanks, a lot just a couple please.
I think.
Last year, you guys had launched localization efforts and added some new markets and in new effort.
That direction or are you, adding Kumar PMO markets internationally, and then a related question on international It was just around <unk>.
Rising.
Again, I think you benefited this year from the campaign did Ignacio Anthony.
Is there any plan to sort of do another restaurant in terms of internationally that campaign.
Yes, so with USAA campaigns, we're always looking at which markets. We think can grow in adapting our campaigns to those local markets and testing those and figuring out where we needed to adapt one or where actually the same context behind the English campaign, we're totally fine.
On the platform right now during checkout again, we have like 22% or seven odd currencies that you can use to checkout.
Blanking on the number of languages, we added within the year I think three or four branch.
We have 11 total 11 total now I can get a better answer from that I'm sure. It's on the website.
Top of my head cant remember.
But yes, we continue that we continue that push and we will continue to add different geos were looking at <unk> right now and.
And just trying to.
Methodically go through these where we see the biggest opportunity and where we think our product is most applicable with the least amount of <unk>.
Translation of our other Africa.
Understood. Thank you.
Thank you.
This concludes the Q&A session I will now hand back to the cost base team to conclude.
All right everyone. Thank you for joining the call.
Fantastic quarter for Us just really.
Pleased with all the releases in the quarter refreshed with the strongest ever.
Roundup, they're really just.
I'm proud to be able to report a 400 basis point improvement year over year in margin.
While still delivering strong topline results and also with so many opportunities to grow I mean, we touched on classes and courses invoices payments domains cross sell I mean, there's just so many things we have in market right now so I'll be excited to move into 2024 and <unk>.
Fully be reporting back with how that stuff starts to materially change our business.
Thank you.
This concludes today's conference call. Thank you very much for joining you may now disconnect your lines.
Okay.
Yes.
Yes.
Yes.