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

All right. So welcome back to the RBC TIMT Conference 2021. I'm Brad Erickson. I cover Internet here at RBC. Very pleased to have the management team from Wix this morning live from Israel, I imagine. CFO, Lior Shemesh; and COO, Nir Zohar. So Nir, Lior. Good to see you. How are things?

Fantastic. Thank you.

Thank you.

Excellent. Excellent. So obviously, we'll go through sort of a list of questions. Lots to talk about, both near term and long term. I always like to get right to sort of the heart of the controversy, if there is any. And obviously, it's been an interesting last few months as we start to sort of transition through the rebound of COVID. I think it's now well familiar, there was definitely sort of a summertime slowdown maybe on the SMB front, that sort of impacted your business for a period of time. But then when you reported numbers last week, you guys actually beat expectations and then we're able to raise the guidance for the year. Can you just kind of walk us through maybe a bit more of the mechanics of what happened this summer and then sort of what's improved here lately, just to start.

Yes, sure. I can start and Lior can jump in after. But essentially the summer -- this summer, we just -- things did not behave as they used to in previous summers, nor do they behaved in the same manner that they did -- back in 2020 and kind of the height of when COVID hit. It was a combination of extended COVID practices where countries were going in and out of lockdowns, et cetera, but I think also some sense in many places where people felt as if it's behind them, and they were starting to go on vacation much earlier than they usually do. And I think that in general, things did not behave as we're familiar with. So I think that being said, you've seen a massive rise in productivity. And we thought that the responsible thing to do was to share that and explain that to our shareholders and to the market. And if you remember, we spoke about kind of these 3 different scenarios where it just keeps on going kind of numbers and traffic keeps on going down or they bounce back or somewhere in the middle. And I think we ended up kind of in between in the middle and the more optimistic scenario, somewhat there, which also explains, I think, explains our bit. and how we ended up above expectations because we truly thought that we give the range and we're going to be somewhere within that range. We also kept a wide range because of it and explain that this is what we expect for now. But taking a step back for a second for me and for us as management, the fact that our business is so resilient that in cases where there is an opportunity and potential to be taken, like we saw in 2020, we can gain a massive boost and grow. But on the flip side of it, when there's volatility we also can handle it extremely well. This is something that as management, we are very, very happy about.

Got it. And then just in terms of -- when we look at pieces of the business that sort of drove that increase back to the mechanics a little bit, what were those pieces and specifically just what drove that?

Well, to some extent, there was also some B2B partnership things, which I'm sure you guys are going to ask us about. But it was as it was basically everything. We saw better conversion, higher our collection per sub. All of pretty much, not all of the verticals, there were some fluctuation, but most of the verticals were performing better than we expected. So it was pretty much across the board.

Got it. Got it. Okay. And then let's touch on commerce because I think, obviously, that's the -- probably the fastest-growing piece of the business still continued growing, I think, nearly 50% last quarter. Just again, what are sort of the underlying drivers as investors evaluate that part of the business?

So again, I think one of the key things that drive our strengths and the resilience of our business is the diversity of it. Whereas in most cases, when you think about e-commerce, you're thinking about retail or selling products online. For us, the commerce business is much more diversified. In fact, we moved from about 40% being services and 60% being good to almost a 50-50 split, meaning both ends are growing, but actually the services part is growing even faster. So on Wix, commerce can also be classes, and it can be appointments and it can be events and ticketing for events, and it can be our reservations and orders from restaurants, and it can be reservations in hotels. And I think that wide variety also gives us some more resilience that when one is going up -- sorry, when 1 is going down and 2 others are going up, eventually, we see growth. We don't see a slowdown. And that's something we've been investing tons into in the past year -- in the past few years, and we will continue just because it's such a strong facet of our business.

Yes. Yes. And then I guess along those lines, you mentioned the diversification. We have heard from several other players in the market, varying degrees of some GMV softness just related to all the global supply chain issues going on. You mentioned that you're seeing faster growth out of services than products. I imagine that has something -- you guys haven't really called out weakness there per se. I mean some of it is from that services commentary, but are you seeing supply chain headwinds on the product side? Just curious.

I think, again, I think probably, yes, to some extent. But as we said before, because we have that diversity, we're not experiencing a general slowdown. There's a very good chance, there is no slowdown in maybe the split between good and services would have been different, and we would have seen a higher percentage of the products being sold because there was no slowdown. And everything on overall would have grown even faster. Again, I can say for sure, but I think it's a relatively safe bet.

Got it. Got it. And then maybe a question for Lior. -- sorry, a super near-term question. But just curious, like -- When you think about how payment tracking payment volumes are tracking quarter-to-date, I think there's the sense out there that because of those supply chain shortages, maybe people are buying a little bit earlier on in the season. And I'm just curious if you think that's sort of the way the quarter is tracking in terms of linearity? Or do you not really see that at this point?

We not really see that at this point because it's still a -- and you mentioned the diversity of what we are offering in terms of online commerce. So we continue to see a very strong adoption of the weak payment, but -- and it's still growing quite fast. We need to understand that it's actually growing because of mainly 2 reasons. The first one, our customers are evolving and growing as well. The overall -- our GDP continue to grow and our take rate is also continued to improve.

Got it. Great. And then just as we shift to the agency side of the business, I think you mentioned on the call a few times that, that I believe the number of agents -- correct me if I'm wrong, the number of agencies grew almost 100%, I want to say 92%. A, can we just confirm that -- was that the number of agencies when you said that, that was the growth?

Yes. Those are the -- this is the number of agencies.

Got it. Okay. And then sort of what is going on or what is driving that? And as those new agencies come on, talk about their sort of relative contributions in terms of bringing on new do-it-for-me type accounts versus your prior cohorts there.

So look, I think that in the end of the day, you know what drives the growth is obviously, the first thing is the product with Editor X -- and not just that, everything that we've done lately with regard to the product, the performance, I mean, we've seen that the Wix platform is the fastest. And this is something that is really important for them. Sale thing is about the go-to-market. We are seeing that we are doing the right thing in order to approach them, in order to help them. So when you take the combination of everything, it certainly contribute quite a lot. And we also already established our brand there. I mean there's still a lot to do there, but I think that people understand, agencies understand about how Wix is professional and what they can do. And actually, they can make more money using Wix. And I think that overall, I mean, we see that in the numbers, it goes very well.

Got it. And then just on that point with Agency's business or your broader subscription business. When you think about the subscription adds, the new customers you're bringing on for subscription product at Wix, what portion of those maybe are like brand-new businesses? And like, obviously, I talked about getting 50% of those sort of new entrants to the market versus, call it, existing businesses that are either putting their presence online for the first time or transitioning it more meaningfully online. What's the split between those 2 categories of new subscribers we see with you?

I think it's hard to exactly quantify it because you don't never necessarily always know whether -- It's easier to say it was an existing business or not. And I think there it's -- or existing business online, not existing business per se, right? And there, I think it's roughly changes and varies, but it's around the 50-50 split and kind of moves back and forth a little bit. To say the business -- what level of essence it had before it moved online. Again, in some cases, it's easier, right? Because if you're building a website for restaurants, then you usually already have a restaurant to build a website for. That's easy to quantify. But on services and e-commerce and such, it's usually -- it can be, in many cases, much harder to quantify and break down.

Got it, okay. And then, yes, you mentioned it earlier, let's talk B2B because that's been a really nice infusion to the business over the last year. I guess just first off, when you talk about sort of the sales cycles on these businesses, I think everyone is trying to get their head wrapped around sort of how to forecast those, obviously, how to get it into our models appropriately as we look out 1, 2, 3 years. Maybe one for Lior, sort of when you're thinking about conversion rates and formulating your own estimates and of course, rolling up to the guidance, just talk us through the process that you've implemented there as you speak to investors.

So first of all, yes, the sales cycle is obviously -- by the way, is very similar to any other B2B business, right? So when you think about it, in average, it's about 6 months. Some of the time, it can take 1 month. In some of other cases, it can take even a year. I would say that in average, it's about 6 months, which is very similar to other B2B businesses when you sell to enterprises This is what usually happens. Look, I think that for sure, at the very beginning, when you start this kind of business, it is quite lumpy, right? Because usually, when you deal with B2B, you have a certain funnel. Some of it might happen, some of it obviously won't happen. So at the average, you can give some kind of probability. And then the average probability this is what we put in the forecast, something happened and some stuff other stuff surprise. But in the end of that, when you talk about big numbers, you're more or less at where you actually fit in terms of the guidance. And we just started this business like a couple of years ago. Although we always had those B2B partnership, but they were smaller. So I guess that this kind of lumpiness is going to take, I don't know, a couple of years more. And yes, it will be harder to predict. But what I can tell you that when I'm looking at the growth of this business, I do see a year-over-year growth. The question is, in some of the cases, we might use a different range for doing that. But I think that within 1 to 2 years, we already decided to build such a funnel that staff things are going to compensate for each other. Someone something is falling, there will be something that will compensate for that. This is the purpose when you start to deal with B2B. So definitely, I think that we have a very interesting pipeline already that we can count on to tell you that I know that I assume that next year, we are going still to see a year-over-year growth in this business.

Can I jump in, Brad. I think naturally, we need to help you guys understand how to predict this, how to model it, how to think about it. longer term, and we need to do a better job there. There's no question about it. But I think that if we zoom out for a second, this is something we kind of tried to do on the earnings call. This business is not really new to us. Its size increased to a proportion where we thought that it makes sense to break it apart and expand it and also created more of that lumpiness because when it was much smaller numbers with 1 or 2 deals, then the impact on -- not only on the annual level, also on the quarter level, it was pretty much insignificant and you wouldn't feel if it moved 1 quarter forward or backwards. Happily, it kept on growing and expanding in the past 2 years. And certainly, it's something that we feel we should educate The Street about because it's becoming a more significant portion of our business. But at the end of the day, it's the same business. We're selling subscriptions. It's just a different go to market with the same product to do basically to sell the exact same thing, which is also why we love it because we don't have to do any additional effort to make it happen, just have people who can do the sales and closing the deals, which is not a huge organization.

Yes, yes, yes. I hear you when you start doing $65 million deals...

We have to try to explain that. it's kind of weird.

Exactly. Lior, I wanted to go back to 1 thing you just mentioned. You said there'll definitely be year-over-year growth. Just to understand you correctly, I think as we think about maybe like a Vista deal, obviously being the big 1 recently, I imagine that 1 gets started and then you sort of expect to see ramping adoption over time. And so is that -- you're kind of saying on a year-over-year basis, say, over the next 1, 2, 3 years, you expect that organic growth to result. Is that kind of what you're saying? Or were you talking like future deals and collections growing as well. I just wanted to understand that.

There are 2 things that when I look at next year, obviously, going to have an impact, an expansion of those partners that we already sold right? I mean I think that we also described one of our partners that we signed kind of a couple of years ago, it's already 9x. So I think that one of the things is like any other subscription model, you first said then you expand and then you have the renewal. So when I'm looking at the partners that we already saw to and how they are going to expand based on some experience that we already have and from knowing this kind because remember that in the end of the day, behind those partners that are like users, the one that we're actually serving today. So we know exactly how to behave. And to add on top of that, new partnerships that obviously we are going to bring. Some of them can be also really big. So I think that the combination of that plus the expansion and renewal of partnership that we already signed in the last couple of fields, bring me to the conclusion that I do believe that these businesses continue to grow on a year-over-year basis.

And I want to say one thing to Brad think about it. So I think an example, we had this -- one of the first major deals we did in which in '19, which -- or the first year -- the first year they acquired an x amount of subscriptions, and it was a do-it-for-me deals, so they build the websites themselves for the clients. The second year, because it was successful, they bought 125% more than the first year. So obviously, we got -- we have the older subscription still transacting and it's being renewed. And in fact, we're getting more in the second year. It's actually growing. So to that effect, by the way, is very much like a cohort, but it's encapsulated in a different way.

Yes, right. No, no, that makes sense. And I guess just one final one on the B2B stuff just around the -- so when we see these -- I know the accounting is a little funky. But essentially, when we get the initial collections, right? It seems like that's an initial view of sort of the minimum contract value. What is -- what seems to be determining that minimum contract value relative to some lifetime value. What's your sense there? I know it's probably ultimately up to the customer to some degree, but how are you instructing them on that? How should we think about that?

So it's actually very simple. It really depends on, obviously, the nature of the partnership. So for example, if this is a partner that we need to do all kinds of staff integration, for example, and start to work with him and require some investment from our point of view, we also require some kind of commitment. We are not going to do that without some kind of a minimum commitment from the partner. In some of the cases, it is out of the box or out of the shelf is basically the required in those kind of cases, we are not insisting on commits. So basically, it really depends on the nature of the transaction, the nature of the partnership. And in any case, usually don't commitments that we get, they are not really reflecting the overall potential value of the agreement meaning that you can get a commitment for $1 million. And the end of the day, the true value of the business, it's actually $10 million. It's not $1 million. So the commitment reflecting the staff that we as a company need to invest in terms of integration and so on. Rather, it's not actually reflecting the overall potential of the business. As Nir explained before, with the partner that we signed a couple of years ago and what's happened since then.

Got it. That's helpful. And then I guess just one more. I know I keep sneaking these in on the B2B stuff. In terms of the mix, and I wanted to clarify something because you said on the earnings call that these are effectively the same types of subscriptions you've always sold. So same relative profitability, it would almost seem like they could maybe be better profitability wise, but certainly equal. Maybe just a quick clarification on that. And then the second 1 is, what's the mix between sort of e-commerce versus the DIY, do-it-for-me type of channel as you think about these B2B partnerships? Is it different from your existing book of business?

Okay. So 2 questions. The first one is in some of the cases, it really depends with the partner. Meaning that if the partner is someone like Vistaprint, which provides online services mainly to businesses. So in this case, I assume that most of the customers actually will be our business-type customers, which kind of very interesting, right, because they are going to use all kind of online commerce services. If the partner is, for example, a carrier, so it obviously, the type of the customers is essentially are different. But in most of the cases, we see businesses because remember that this is the same also for agencies even when you look at the agencies, the build website for other, it's many businesses. So I think that in most of the cases, it will be mostly businesses. So this is one. Second, we already have some kind of understanding because some of those online service providers, some of their customers already use Wix today. So we know more or less exactly what they are looking for, where they are coming -- And based on that also to provide some kind of analysis about the potential of it. And the third question, remind me.

Just in terms of -- when you look at the -- I mean, you kind of already spoke to it, but just the mix of customers that it's attracting, it sounds like it's probably -- it sounds like it's potentially maybe a little bit versus the e-commerce side than your book of business, but you're saying it depending...

Yes, many of that. And you also talk about the profitability. I think that was your first question. Look, the each of them get a certain discount. It's not a reg share. It's a discount based on how much they actually committed to, obviously, or how much the overall potential of the deal. In some of the cases, it's not something that it's given in day 1. Again, it's very different from 1 partner to the other. But in the end of the day, what we need to remember that we don't invest in marketing. They invest in marketing, we get the traffic. So based on that, basically, when you look at the overall, even with the discount in terms of the dollar value that we actually get, it's pretty much the same in some of the cases, as you mentioned, it's even higher. So this is why we think that it's really, really interesting.

Got it. Got it. Great. And then just moving to a couple profitability questions. Just first on the sales and marketing. I think you mentioned in the quarter, you sort of played a little more conservative, and that's where you saw some of the flow through. But moving forward, you're leaning in on the marketing a bit more. Just talk about specifically why that is? Is that partially around the B2B effort? Or is that more just on the core business growth?

It was all about the core business growth. meaning that -- look, I think that with marketing is very simple. Believe it or not, I don't have budget for all 9 advertising because we have a very specific KPI and it's the Tier I, the time return on investment. From my point of view, if they can spend $100 million every quarter with the same KPI by all means, let's do that, right? So this is the only KPI. If we see that we can actually -- within this KPI actually to increase marketing, we do it. And remember, why it's happened. Why? It's because before that decrease and then increase is very simple. The TRY is affected by many things. In the end of the day, it's affected by how much time it will take us to return the investment. And this is something that impacts by the ARPU, by the conversion in overall, by the intent, by the demand to Wix. In some of the places, when we actually see that the demand is actually increasing and the intent is better, we're actually getting the money faster. And then we can actually invest more in marketing while staying with the same TRY. Now this is the only thing that remains unchanged. And therefore, we saw that, and we saw that also in the results of the third quarter and the fact that we actually increased guidance that we saw that we have a better demand and we can increase marketing and still be with the same TRY. So it was a very easy decision.

Got it. Got it. And then I guess, lastly, just around the free cash flow, you brought the guidance down just a bit, I think, largely around the marketing spending. I guess talk about the -- just what are the -- remind us what the headquarter expectations, the headquarter build-out expectations are an impact on free cash flow over the next few years. And then also, just capital allocation. You completed the buyback. You mentioned there's a little bit of red tape to get through in Israel around declaring future buybacks. But what's the forward view there in terms of capital allocation?

So whenever we provide the free cash flow, we provided with and without, the new headquarter build-out. And it's very important because the way that I'm looking at it is something that is not going to repeat. When you do the CFO, you do other stuff about try to predict. So I think that in the end of the day, obviously, it's going to save some rent money for us in the future. We are building something that is going -- we are going to use for many, many, many years. So this is one. How much we expect most of the investment is actually -- is going to be during the next couple of years. It's in 2022 and 2023, this is when most of the investment is going to happen, where we are going to get the headquarter in 2 phases. The first one is in next summer and the other one is a year later. The overall investment [indiscernible] provide the overall I think that was about $80 million. This is what we said before about the overall investment that we are going to do with regard to the headquarter. And again, it's going to be in the next -- it's already started at most of it next year and the year after. With regard to the buyback, look, in the end of the day is how you manage your capital, right? It means that we might decide to continue or not, it really depends on our board to agree or to come with some kind of recommendation based on how we manage the capital. We might do it again. Obviously, I don't have a clear answer. It might be, might not. It's something that we're obviously going to update once it's going to happen. And again, it's -- and as you know, we need also to get the approval of the Israeli court in order to do that. So this is something that we keep on working on to have the ability to do that whenever we choose.

Got it. Got it. And then one last one, if I could just slip it in, and I think we're just about out of time here. I know you made a quick comment on the earnings call, I believe about this. But just on the Apple software changes and privacy, et cetera, I know you guys don't necessarily have exposure, but I always love asking folks in the digital ad world. What was your impression of what happened there, just quickly? And what's -- and what are we seeing at the moment with -- on top of that?

Well, I need to put a marketing expert to answer that in detail. But I think for us, we've seen some fluctuation around how to display and how to invest marketing dollars. And I think the team adjusted almost overnight in that aspect. So we didn't experience any change or any impact that is related to that. I've been asked about it on the call itself and I made the same comment. I think the marketing or the online advertising ecosystem is something that is so -- it's all liquid. It changes so much so very often. So these are just 1 more changes changing many that we've seen in the past. I think one of the great advantages we have as a company, and this is actually something that I think it's been a while since we spoke about in detail is that because our marketing is so robust, it's all in-house, and we have the ability to move extremely fast and adapt and change and working on different traffic sources in different countries, different demographics, different languages. It means that the team really knows how to be agile and adjust to those kind of changes, which is, I think, also why for us, this is something that was really went under the radar because it was seamlessly moved on and adapted.

Got it. That's great. Well, I think we're out of time. But Lior, Nir, thank you both for being here. Good to chat. To catch you up soon.

Thank you.

Thank you for having us. Bye-bye.

All right. Thanks, guys. Bye-bye.