What happened
Shares of website-creation company Squarespace (SQSP) were up on Tuesday after the company's financial performance in the fourth quarter of 2022 far surpassed expectations. As of 3 p.m. ET, Squarespace stock was up 15% -- very notable, considering the S&P 500 was down about 1.5%.
So what
In Q4, Squarespace generated revenue of $229 million, which was up 10% year over year and ahead of the high end of management's Q4 guidance of $224 million.
On the bottom line, Squarespace had a massive Q4 net loss of $234 million, which exceeded revenue. But before you fall out of your seat, $225 million of this was due to goodwill impairment. The company acquired Tock in 2021, and the short story is that it overpaid for this acquisition. In Q4, it reassessed the value of Tock and found it needed to lower it, which is what a goodwill impairment is. But the good news is that this is a noncash charge.
Looking at free cash flow, Squarespace's profitability was far better. Management expected Q4 free cash flow of $24.6 million to $29.6 million. But it blew this out of the water with Q4 free cash flow of $41.5 million, boosted by strong bookings growth of 15% to end the year.
Bookings are a strong signal of future revenue. And that's why the Squarespace stock was up today.
Now what
In 2023, Squarespace management expects up to $970 million in revenue, which would reflect 12% year-over-year growth. And it expects free cash flow to improve to up to $198 million compared to full-year free cash flow of $166 million in 2022.
Looking at 2022 results and 2023 guidance, I'd say Squarespace is performing well, but it might not be good enough to get overly excited about right now. With today's gain, the stock trades at roughly 20 times its future free cash flow, which seems fair for a company hoping to grow revenue about 12%.
