Wix.com Ltd. (WIX) Earnings Call Transcript & Summary

All right. We're going to get started. Good morning, everyone. Thanks for joining us today. For those of you who don't know me, my name is Deepak Mathivanan. I head the Global Internet Research Group here at Wolfe Research. We're super excited today to have Joe Pollaro, GM of U.S. at Wix join us. So we have about 30 minutes. But at any time, if you guys have any questions, feel free to shoot them through the Q&A option, and I'll get to that question. So Joe, thanks for joining us today.

You bet. Thanks for having us.

Great. So lots to cover today, and I'm going to throw a few curve ball questions at you today. But to start off at a high level, what do you think is driving the variability in the core business this year? I mean last year was a phenomenal year, but what is driving the top-of-the-funnel trends this year? And how should we think about what this means for 2022?

Yes, absolutely. So as we kind of talked about on our earnings call, I think we're in a period right now where there is a lot of uncertainty. I don't think any of us can really predict with a lot of conviction what the world and the economy is going to look like 3, 6, 9 months from now. I think that partly is due to certainly, the Delta variant; the rate of vaccination being different in different areas of the U.S., but also different countries of the world; government responses and regulations around the coronavirus, I think all of these things are playing into that uncertainty. I also -- we also think that a lot of people are just kind of taking a breather as we kind of are -- frankly, have gone through a summer that we missed last year and people want to get out. They don't want to be behind their computer all day. So I think all these things contributed to what we saw happen in Q2. And that really was 2 things that were unexpected to us. One was that certainly new user additions came in below what we thought they would in Q2. We always see a bit of a seasonal decline from Q1 to Q2, but this year, the decline was much more significant, I think, due to this uncertainty that I referred to. And that drove down just new subscriptions from that new cohort that we brought in. And then two was that in existing cohorts or users that joined Wix before Q2, maybe years or quarters before Q2, the conversion of those users into subscriptions also slowed more than what we have predicted. And we believe that some of that is just a little bit of a pull-forward effect that we kind of experienced, obviously, last year in 2020 in the second half, especially conversion was very high, very rapid among a flood of new users that came in, and our cohorts are very, very predictable. We know the pattern of conversion over the life of a cohort. And clearly, that one went a little bit off pattern to the good side. And now we're seeing, I think, kind of the effect on the downside as well a little bit. Again, we thought this was coming, but it was more than what we had predicted in the quarter. Now the good news is that our business fundamentally is still very strong. Within the funnel, new users that did come in converted at rates that we've seen in the past here in Q2's. So conversion was actually still very strong. Collections per sub on the new cohort were very strong and adoption of products payments, payment volume, all of these things actually came in a bit better than what we thought they would. And renewal activity actually came in a bit better than what we thought they would as well. So the business, frankly, is still very strong fundamentally. It's just I think we are experiencing a little bit of this slowdown from a lot of this uncertainty on the new side.

No, that makes a lot of sense. But tell us about what you're seeing maybe mid-funnel, right? I mean it was a materially large cohort in terms of new users and new subscribers last year. So as they kind of mature, if they follow, let's say, trend, which is even better than historical trends, is that mathematically a headwind due to a large number of customers churning during this year. Even if the churn rate is better, we have seen many other companies kind of call out this as a momentary headwind, but maybe talk about how the cohorts that you acquired last year are maturing this year.

Yes. So as I mentioned, renewal rates of the cohorts that came on last year were -- we anniversaried here in Q2, the first real large kind of coronavirus cohorts. If you want to think about that, from Q2 of '20, we anniversaried that here this quarter. Our renewal rates were actually stronger than what we had thought they would be. And I think a lot of that has to do with the fact that, as we have said, we're bringing in kind of a higher-value user than we had in the past, mainly driven a lot by our commerce offerings and also driven by agencies and professional builders bringing in higher-quality businesses and users to Wix. So I think all these things are strengthening our renewal rates as we thought they would, and it actually came in a bit better than what we imagined. Now clearly, the absolute number of cancellations is higher because it's a percentage of a higher gross additions number from Q2 of '20. And that's certainly something, again, that we had expected and not a surprise to us, but the overall number was better than what we thought. So again, fundamentally, it shows that our business is still very strong. We're still bringing in high-quality users, and they're still seeing the value to renew at the same rates.

Got it. Maybe one more question in terms of the customer funnel. What's happening on the customer acquisition cost side? CAC inflation across various advertising channels, something that we've heard from many different companies. Is that something that's impacting your business as well? What is happening currently on CAC?

As you know and as many know, the way that we manage our marketing expense is by an ROI metric or TROI. And what we strive to do is return our marketing dollars in terms of collections, return those marketing dollars within a set period of time over a period of months. And we stick by that. And as we bring in cohorts of users, we can obviously see the path of value that they create over time. And as long as they're on that path to return within that set period of time, we will continue to invest. Now in a period like we saw in Q2 here, we have lower number of gross additions at the top of the funnel, and that obviously will lower the amount of collections that we're bringing in by that new cohort. And so consequently, we're going to lower our marketing spend or our marketing investment because we don't feel like we should be investing, overinvesting, going out and acquiring customers that -- or cohorts of users that the lifetime value is not going to return within that set time frame. So now, is cost of acquisition part of that? Of course, it is, but it's always been part of that. As we have moved and as we have expanded into bringing in a higher-quality user, a commerce user, a professional user that's building site for others, we should expect to have to pay more for those. They return the same amount in terms of percentage-wise, but the dollar amount is higher. And so you need to obviously pay for a user that's going to pay you more. And that's something that we've been dealing with now and accepting and actually electing to do for many, many quarters. So while cost of acquisition may be going up, as long as we're increasing the collections per sub, which we are then we are willing to spend that, we don't just look at cost of acquisition and say, "Okay, it's reached x point, so we're not longer going to spend." Because if we're going to bring users that are generating higher collections, then we will pay more to acquire them. And that's what we continue to see, and that was no different in Q2.

Got it. Okay. So maybe to wrap up this discussion, so you're almost seeing like a double whammy or even a triple whammy of variables moving against you this year. Maybe you want to take a stab at how we should think about some of these things will reverse out next year in 2022 because mathematically, some of these headwinds are likely to moderate? Maybe you can share a little bit color on how we should think about that next year.

Well, I want to -- obviously can't share a lot because we still need to see what happens here in the last quarter of the year. I think there's still a lot of uncertainty that we -- as we talked about for our -- for the second half guide here, we offer to guide up that, that obviously has a much wider range than what we typically provide because the uncertainty is still there. So I think it's a bit too early to talk about where we'll be in '22. But I think we believe that what we're seeing now is temporary. This is not an indicative of a systematic change in product saturation or any type of maturation or any type of kind of just that the market is starting to dry up, not at all. I mean we still believe that long-term businesses need to be online. Building on online presence is of critical importance. And it's something that we are going to continue to invest in, and nothing about what's going on is changing our long-term view and our long-term investment. And I think I know we're going to talk about the Vistaprint agreement here shortly, but I think that's a great example and a great validation of the fact that long term, this market is still very, very large and growing at a very high rate. And we're still in a position to capture a significant portion of it over the next several years, and we're not varying from that goal.

Got it. Okay. Now that since you mentioned it, let's get right to it. So to the B2B partnership business, I mean, you've done a few deals so far, including with a few telecom operators. Vistaprint, obviously, was a very sizable one. But what is the overall strategy behind these B2B efforts? What type of partners are you generally looking with this strategy?

So I think there's a lot of different types of partners. And we've highlighted some in the past, NTT in Japan, Türk Telekom in Turkey, Vodafone in the U.K., Yell group, also in the U.K. This is a very international global effort that we have. And I think it's borne out of the fact that these service providers, whether they're providing a service for a telecom service or a marketing service, they are hearing from their customers and their users that having an online presence is very important. And they need that, and they're looking for that. And if you are one of these service providers, you obviously want to try to offer as much as you can to increase the stickiness of that customer and also help that customer succeed in their business. Because if they succeed, then you as the service provider succeeds. So -- but at the same time, a lot of these service providers, and I'm going to put Vistaprint in this category, too, they're not technology-driven companies. They're not companies that are able to invest lots of R&D money into building a fully functioning website, into building a fully functioning online presence that includes the ability to take payments and market online and transact online and communicate with online. This market, as we have shown, has evolved rapidly in the last 5 to 10 years. And I think the service providers, and Vistaprint included, they know that they just cannot keep up with us and the market by doing it on their own. If they want to really provide their customers with the value that they need in an online presence, they're going to have to partner with someone. They're going to have to bring in a third party to provide that really technical software-driven capability. That is a very high quality today, but can continue to innovate and continue to evolve over the next 5 to 10 years because we all know that online is going to continue to evolve. And so Vistaprint, these others, that Vistaprint turn to us, we know them, have a long-term kind of relationship with them at the CEO level. And they said, they have a website building capability already. They bought a company 10 years ago, and they operate that today. But they said, we can't keep up with the investing in the R&D that's required to provide our users with a really high-quality capability for an online presence, and so we're going to just partner with Wix. And so that's really what's driving these types of partnerships. And we think it's a big opportunity. There's not hundreds of Vistaprints out there. There's tens or dozens of them, and we're talking to others and there will be more. But there are hundreds of service providers of other types out there that we're also talking to, and we think that this will be a business that will continue to grow for us.

No, that's helpful. That makes a lot of sense. So I mean it is a little bit of a unique strategy for you guys because historically, you've relied a lot on marketing. And then with -- as Editor X and some of these products scale, you rely on agency partnerships, building a team around that. So where does this opportunities sit currently? I mean what is your go-to-market strategy? Do you feel like do you have the right teams in place? Or do we need to kind of build out any additional competencies on the go-to-market to try to attack this business opportunity?

Yes. I mean we, I think, made very clear, I think, 2 or 3 years ago that we want to expand our market. Obviously, we built a very large business, and we still have a very large business on the direct acquisition marking that you could think of it, the DIY business, where we bring in users who want to build something themselves. And that's still a very large business and going to be a very large business for us and growing. But we also knew and identified years ago that there were going to be other opportunities out there that users come to other areas to build websites. Going to professionals is 1 area where they go to a professional agency or a professional designer to build for them because they don't want to take the time. They don't want to -- they want to run their business. They want to outsource or kind of rely on someone who's an expert in this to build for them. And so we've expanded into agencies and professional designers and freelance designers as well and channel partners. B2B partnerships is another flavor of that. If you think about it, Vistaprint is kind of like a very large marketing agency. They -- you code a Vistaprint to create marketing materials, to create brand marketing affinity. And online has to be a part of a small business' marketing strategy. And so I think what Vistaprint is trying to do is they want to be a very large agency for small businesses around the world. And the online piece of it, they're saying, "We're going to let Wix handle that for us, but it's going to be part of a very large marketing -- holistic marketing and brand packaging that we're going to offer small businesses around the world." And agencies, small agencies in the U.S. or in the U.K. or in Europe do the same thing. They're offering maybe a special service to small businesses, but they're working on a marketing strategy, a brand strategy, an online strategy. And they're saying, "You know what? We want to use the technology that Wix provides to run the online side." So all of this is kind of in a very large category of going to finding users and finding businesses out there in other methods other than directly acquiring them ourselves. And we think that's really the way that we can continue to grow and become the majority of new websites being created online.

No, that's helpful. So maybe to round out this discussion, let's talk about unit economics. Obviously, your DIY business is a well-oiled machine. You've been perfecting the TROI formula for years and years. But as we think about this opportunity, maybe give us some color on how the deals are structured, what type of unit economics or how do they compare with your traditional business? And then how we should think about this business reaching scale over the next, say, 4 to 5 years? Can this become like 40%, 50% of your business in the next 4, 5 years? Maybe anything you can share there?

Yes. I think it's a little too early to share anything like that. But certainly, we think this business can become much, much bigger. But from a profitability standpoint, we design these agreements and we set out with this initiative, aiming for and wanting users that come in through these channels to be as profitable, if not more, than users we bring in on our own. Now the big piece here is the marketing side. We do not have to spend marketing dollars to bring in those users. There's obviously a rev share that we're doing with these partners, and they take the marketing side of it, but the margin on the user is no worse and in fact, a bit better than if we acquire them ourselves. There's not really any material incremental R&D we need to spend, really no incremental infrastructure or tier we need to build, certainly not at this point. I think if we end up having to do that, that's a great problem to have in the future, but it's not something we have to do today. So from a margin standpoint, these users are just as good as the ones we're bringing in today. The way that these deals are typically structured, our partnerships are typically structured is the partner will agree with us for a multiyear period that they will essentially pay a minimum amount for a number of subscriptions over that period of over a multiyear period of time. That minimum amount is what we recognize as, today, collections. We're going to change that term to bookings starting in next year to more accurately reflect this type of business. But that's what we expect as a minimum over the life of the contract. Everything over that is then, obviously, will be recognized as collections beyond the minimum. And the minimums are set to be reached and exceeded. We're not setting minimums that can't be met. No one wants that. So that's really how these are structured. We recognize revenue as subscriptions are activated. So the collections that we're going to recognize here in Q3 from the Vistaprint deal and other partnerships will not have revenue associated with them probably until the first half of '22. And then the revenue will obviously grow as subscriptions are layered on, as renewals are layered on over time.

Got it. No, that makes sense. Yes, it's definitely going to make it a little more complex to kind of think about the collections flow-through into revenue piece over the next few quarters. Okay. Maybe switching gears to the e-commerce side. Clearly, I mean, that's been a huge driver for you for the past couple of years. You have improved the product. You've rolled out the payments offerings. You're seeing nice adoption. But if you take a step back, this is a competitive space, and there are larger players out there who have pretty strong brand. But as you think about your competitive position, what would you say are the unique aspects that kind of makes your competitive position strong in this space?

So I'll call out a few things. I think number one is we are building online commerce for any type of business. So whether you are a store selling a product, whether you're a service provider selling an appointment or a class, a restaurant selling a food order or a table reservation, a hotel selling a room, an event selling tickets, all of these things, a creator selling a subscription to some type of content of video or a weekly news layer or whatever, all of those types of businesses can be built on Wix. And by the way, a lot of businesses today are combinations of those businesses, right? You have -- we all go to -- we all see fitness studios maybe that we go to or yoga studios that are also selling merchandise, maybe branded merchandise. Maybe those same studios or fitness providers are holding community events for their community of people that are working out with them. And so businesses need a platform that can provide all of this all in one. And that's really what we're striving to do for any type of business. I think that's a key differentiator for us over many of our competitors that have maybe a few of those, but not all of those. I think the other area that we really differentiate is clearly, for small- and medium-sized businesses, we have an amazing product that's easy to use, that's at a price point that small businesses need and have all the capabilities that maybe a large business needs to have as well. So if you're a small business selling $2 million a year in products online, you probably are going to need the same types of things that the $10 million or $100 million businesses, obviously, the scale is smaller, but the needs are, in many cases, the same. And you are not able to spend the same amount of money on your provider as the $100 million businesses. And so this is really where, I think, a side of the market that we sell in over some of our competitors. And the final thing I'd say is that, again, with the Editor X, ADI, Velo and obviously, the Wix Editor, we're providing an environment to create absolutely anything with the design freedom that you need, whether if you're not a designer and you aren't able to really design anything, you can use ADI and you don't feel comfortable with anything beyond ADI, that's there for you. On the flip side, if you want to hire a designer to build a really high-end website for you, you can do that too on Wix because Editor X and Velo provide the ability for someone who's a much more professional user to build. So that's really what we talk about, any type of user, regardless of whether you're a novice, someone who's got very basic technical skills or someone who's very advanced, we cover the entire spectrum. So really, any type of user or any type of business is, I think, our key differentiator in commerce but overall, but especially in commerce.

No, that makes a lot of sense. So maybe give us some idea of how you would think about the product pipeline for this. Obviously, if you look at it specifically through the e-commerce lens, it's a little bit easier. You've got payments. You've got shipping. You've got logistics. Maybe you throw in another few other verticals. But given you encompass a wider range of commerce use cases, how should we think about how you guys think about what are the priorities in the product pipeline?

Yes. Well, obviously, I can't share what is our pipeline, but what I can tell you is that the way that we manage our product pipeline and really determine what is most important on our road map is by listening to our users, hearing what our users need and want. This is a huge benefit of having the larger customer care organization that we now have because we get so many more data points from users around what they're needing and wanting. That all filters back to the product teams. And that's really how we determine our pipeline. That's what's driven us to introduce a lot of the things that we've introduced or even, in some cases, we've acquired a few businesses in recent months to fill some of those product gaps well. So that's what dictates our pipeline.

Got it. No, that makes a lot of sense. Maybe talking specifically about one of those products, the payment side, is on track to generate $130 million in revenues this year. You guys have mentioned about like a 10 billion in volume. What do you need to do to kind of improve both the vectors in this business in terms of driving adoption of payments offerings into the millions of small businesses that you have who are, in a way, using other forms of payments across their business needs and also in terms of monetization, like the effective take rate growing close to what we see in some of the industry standards.

So we're seeing great growth in payments, as you mentioned. I think the guidance that we gave for the year is between $125 million to $130 million in revenue, $10 billion in GPV. This is really driven in 2 -- by 2 primary things. One is, obviously, just continued success of our users in generating revenue, and that's a big part of what we're doing to drive growth in payments is helping our users succeed online. That's, again, offering a lot of the products and capabilities that we talked about. You mentioned shipping. We obviously have added many other capabilities to commerce in recent years. We have Ascend and there will be other things coming in the future that help businesses succeed. And as they're succeeding, that will help them drive revenue and obviously help us generate some revenue on the payment side. The other area is just adoption. Payments was launched -- Wix Payments was launched a little over 2 years ago, about 2.5 years ago now. And we offered payments before that. It was through third parties, but this is now our own proprietary gateway. And we're seeing still about 80% of new eligible merchants who are taking payments, they're adopting Wix Payments. And as that continues to just roll through new users, we get 80% of all the new cohorts that are coming in over time. The mix of merchants using Wix Payments versus not using Wix Payments will continue to change and move more toward the Wix Payments side, and that alone will improve our take rate because all take rate is, is Wix Payments revenue divided by payment volume. And so as we have more payment volume going through Wix Payments, then that will increase our take rate over time. That's a lot of what's going to drive the increase this year, and we think there's a lot more room to go. And then there are other things that will drive take rate over time, releasing Wix Payments in other countries, something we continue to work on and expand into other countries in Europe and in Asia, and also partnering with other payment providers that might provide a specific type of service or capabilities. So these are also things that we'll -- we're working on to drive payment volume.

Great. I wanted to ask about margins, but I think we're out of time. Joe, thank you so much for joining us. Really appreciate it. And hopefully, we'll do this in person next year.

Hope so. Thanks, Deepak.

All right. You have a great day.

You, too. Take care.