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

Good afternoon. Thank you, everyone, for joining us. My name is Elizabeth Elliott, and I'm an analyst on the Morgan Stanley software equity research team. I'm very pleased to have with us today at the NASDAQ conference Wix's CFO, Lior Shemesh; and General Manager of U.S. Operations and Head of Investor Relations, Joe Pollaro. Thank you so much for joining us, and we're really looking forward to your insights today. Just as a reminder, we are taking audience Q&A. And questions can be submitted on the box on the webcast screen. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that, thank you, guys, again for joining us today.

I think a good place to start for investors that are not as familiar with the Wix story would be to spend a few minutes just describing your business, the product portfolio, end customer and geographic perspective.

Okay. So first of all, thank you for having us today, and thank you, everyone for joining us. I will try to be very quick about the introduction of Wix. Wix is -- the core of Wix is a -- is the web presence creation. So basically, people are coming to Wix every time that they want to create what we call their dream online. They want to create their business. They want to create their identity online. And they are using a few options in order to do that, meaning that the core solution of Wix is actually, we have a few of them. It starts with the ADI for people that actually don't have like myself, don't have like the best designs capability, so they can use the ADI and literally can create a website -- a professional website within a few minutes. People that want to start from a clean canvas or use templates that can use the Wix Editor, which obviously gives them much more freedom in order to create their online business. And then it goes to the Editor X, which is kind of more professional for people, mostly for people that build websites for others. So in a way, you can think about that it's a platform, it's a creation platform that is serving the entire spectrum of the people, from people that really don't have a lot of understanding or knowledge about design and what does it mean in terms of creating content to the people that are really professional, want to get a very professional tools for their customers. We are serving more than 215 million users. It's a huge ecosystem, meaning that every time that people want to build the website, most likely, they end up with Wix. Actually, the search for Wix is much higher than the search for website builder. It just can provide you the understanding of how strong the brand is. On top of it, it's very important to mention that it's not just a website creation. It's a more professional tool for what we call an operating system. So it's enable you actually to build your business over Wix, but to manage your business and communicate with your customers. And in order to do that, we are providing lots of specific professional vertical tools in order to help people do that. For example, tools that help you to build your online store, restaurants, hotels, for musicians, people that actually doing some kind of clubs or training, fitness. So it's many, many verticals that can provide -- we provide them actually with the best solution. And whenever they actually come to Wix and build the website and manage their business over Wix, obviously, they are very satisfied from doing that. And what is important to mention is that the evolution of Wix in the last few years came to a point where our business evolver would bring much more businesses. Today, about 36% percent of our collection coming from commerce. And this is something that we evolved in the last, let's say, mostly 2 years when we introduced all those vertical solutions like the online commerce and stores. And it's keep on improving, meaning that we see more and more quarter after quarter. We see more businesses coming to Wix and build the business over Wix. And it also makes our KPIs look much different than how it used to be 2 or 3 years ago. For example, the ARPU went up, conversion is much better. All the basics, all the fundamental KPIs are actually improved also in the last few quarters. So again, in order to summarize it, Wix provide you with the ability of an operating system for you to manage everything that you want.

Awesome. And yes, that point on building, not just the website but managing a business is really important, just as the majority of the number of businesses out there are these small businesses with literally -- with little to no IT support. So having that all built in is really, really important for that customer base. When we think about the competitive landscape, we hear other companies, Squarespace, GoDaddy, who do you compete with? And when does an end customer decide they want to use Wix versus another provider? What is your competitive differentiation?

Most likely, when the customer wants to build a great website to manage his business, Wix is the best solution for it. Well, you know that the do-it-yourself, and I want to relate to 2 different segments. The first one is everything about the do-it-yourself. Clearly, we are the leading platform. I mean we mentioned before that we are serving more than 250 million. So people -- when people want to build the website by themselves for their business and to manage their business, we're clearly coming -- they're clearly coming to Wix. I think that if we look at the last few years in terms of our growth, clearly, we're also taking market share from all the other players. But when we talk about the do-it-yourself, one of the few players over there is Squarespace. I think that if you look at their numbers and our numbers, it is really -- it is very clear that we are growing much faster in a much, much bigger numbers. We also mentioned a few times that we kind of expanded our TAM significantly because many, many people still when they want to build their online presence, they go to professionals. Clearly, WordPress was the leading platform for doing that. After introducing the Editor X and all the other solutions and we provide them the ability, the capability to build websites for others, we see, for sure, that we are taking the also market share from the entire WordPress ecosystem. And this is something that is really interesting because when I think about the next 2 or 3 years, definitely, I see that this segment continue to grow. And we mentioned also in the last earnings, a few numbers like the numbers, the increased number of agencies that are actually working on top of Wix. And this is something that we are very excited and happy about. Now when it comes to the vertical solution, you might claim that, okay, for example, on the -- with DIY stores, we might compete with Shopify or some segment of those customers. They have, when it comes to fitness, we are competing with other players like Mindbody. But remember, those solutions are mostly designated for the Wix type of customers. For our type of customers, we provide them with the best solution. So it's not really competing with them. I don't see us actually also competing with GoDaddy because remember that people come to GoDaddy to look -- to buy a domain, not necessarily to buy or to create a website. So we are not competing with those type of customers. Actually, many of them end up with Wix later on.

Okay. And you mentioned a little bit that you've expanded the portfolio. You really branched out for new channels for the go-to-market. What is your growth strategy for the next few years? And do you have the pieces in place today to execute on that strategy?

Absolutely. Like I said, I am within this company for over 9 years now. I don't remember a period of time when I saw so much opportunity for growth even with those numbers. And let me try to elaborate. We are growing. We are still growing with the do-it-yourself segment. And the way that we do it is, it's simple. It's simple for us, but it's the same as what we've done in the last 10 years, just providing a much better solution. And let me give you some -- a few examples. When we first came out with the ADI, we increased the conversion quite significantly, meaning that for the same amount of users, we are getting much more subscription just by the fact that conversion is getting better. Once the conversion is getting better, we can invest more in marketing with the same return on investment simply because we are getting a much better dollars for every user that we are bringing. So the way that we are actually looking at it, and obviously, we cannot reveal the plans in terms of the new product that we are going to launch. But clearly, we see that every time that we do that, every time that we introduce our major capabilities for our platform, conversion goes up. And we think that this is something that is going to continue for the next 2, 3 years at least from what I think in terms of the new capabilities that we are going to introduce. The same goes for the vertical approach. We are investing a lot of some of the verticals like online stores, like booking, fitness, in some of the places where actually the biggest player over there in terms of those kind of services, and we intend to continue with that investment. And the result of it is getting a much better conversion because think about fitness trainer. He gets an amazing native application. He can run everything. He can schedule the meetings. He can collect money. He can manage his customers over Wix, right? So it means that he is getting the best solution he cannot find in any other place. So obviously, it's increased conversion, and we believe that this is something that is going to continue. All this vertical approach has actually led us to a place where we see that quarter-over-quarter, also the ARPU is going up. So when you think about, and I mentioned before, for the same amount of users, you are getting more subscription. But at the same time, those subscriptions are paying more because they're getting more professional solutions. So we are getting more better conversion, better ARPU, it's delivered growth. The next thing is obviously about what you mentioned about agencies or professionals building websites for others. We just started it. It's growing very fast. We mentioned some of the numbers, more than 90% on a year-over-year basis. And we believe that every -- and each of those agencies have the capabilities to build hundreds and even thousands of websites over Wix. So this is something that introduced a very big potential for us in terms of growth.

Great. It sounds like kind of the vertical approach and the agencies and other segments are really kind of the big drivers of forward growth momentum. If we take a step back, one of the big debates has been around COVID. Many businesses had to close their doors and build a website to connect with their customers, which showed really strong demand. And more recently, there has been some variability in the core business and just some concerns of a pull forward. So can you walk us through the dynamics of the slowdown that we saw over the summer? Importantly, also what has improved more recently?

So let's start a few months, a few quarters back. What's happened in 2020? We actually saw a huge increase. People understood that they need to have an online presence. This has not been changed. I mean 2020 was a huge, huge year for us in terms of growth. In many ways, it also has an impact on 2021 because many people kind of are expediting their plans in terms of their business on the account of 2021. And what's happened in the beginning of 2021, we thought about all the scenarios. We didn't take into account what's happening with all kind of, let's call it, a new COVID like the Delta. And people got to a point where there is some kind of uncertainty. And let me give you an example. I have 2 friends over here in Israel that wanted to open a restaurant. And then they decided to say, okay, should I invest right now or perhaps I need to wait a little bit more until everything is going to be clear? Should I invest or should I wait? I'm not sure what the government is going to do. Look at the recent example of what's happening in Africa. So obviously, it has an impact. But we believe that this is something that was very temporary in terms of the uncertainty. We already started to see Q3 improving because this is something that cannot last forever. The most fundamental understanding of people, I think that they understand that they need to have an online presence. It's very interesting. Today, I read an article in the first page of the Wall Street Journal, talking about workers quitting jobs to become their own bosses. And this is something that is really interesting because it's introduced an amazing, obviously, opportunity for us. People change. People change the way that they think about where they want to be, how they want to be and how to do that. Not just about the online presence, but they want to have more flexible capabilities. They want to be their own bosses. So this is something that obviously is going to impact us positively. And the next 2 years is actually going to show that.

And Elizabeth, if I -- can I just add one other thing to what Lior mentioned?

Of course.

So I think -- one thing that I think shouldn't be lost is that -- as Lior said, that there are a lot of tailwinds to our business that I think 2020 kind of shined a spotlight on for many, many people. And while certainly, there was a slower period here this summer that we didn't predict as well, our business still grew very, very well over a more normalized year 2019. If you look at our 2-year growth stack in Q3, it was 69%, and I mean, that's on collections. And if you look at revenue, which is kind of removes the noise from some of the B2B partnerships that helped collections this year, the 2-year gross stack was 55% over 2019. So we're still seeing very, very strong growth over a more normalized year in 2019. And I think that goes to the tailwinds that Lior talked about, and we expect those to continue.

Great. And then kind of digging in, into one of those tailwinds a little bit more specifically, just wanted to dive in on commerce. That was up 47% year-over-year. Can you talk about the drivers of that business and how you've expanded the portfolio to meet that demand? And I think investors typically think about e-commerce as being a pretty crowded landscape. So where does Wix kind of stand out among that?

Okay. I think that commerce is indeed crowded. But remember, we are getting millions of users every month, many of them are looking to build a business. And this goes back to what I mentioned about the article. Let's take, for example, the last Black Friday, the growth was more than double over 2019. And there's a few reasons of that. We see that transactions are actually much higher than what we used to have in the past, meaning that we are growing with our customers. Our customers are growing. We are able actually to bring more large businesses that run more GPV on our platform. And the way to do it is very simple, simply because of providing them with a much better product. If we look at the last 12 months in terms of the new features that we launched, in terms of online commerce, it was really huge, providing them so many capabilities. Payments is actually helping: capabilities, drop-shipping capabilities, POS. So I think that they have right now a very good solution, and working with Wix is actually providing them with the ability to do and to run their business over Wix, and it's contributed to the fact that we see that online commerce is growing. By the way, you talked about the tailwind, talked about the last quarter, 2 quarters. Even with -- though that we saw less top of the funnel, less traffic coming because of what's happening, which is not just unique to Wix, also happened to Amazon and other great companies, we saw that the most fundamental KPIs are actually growing, meaning that GPV is still growing, ARPU is still growing, conversion is getting better. And this is just because of simply you know a much better product that provides much better capabilities to our customers.

Got it. And then the third -- another pillar that you mentioned is the designers and agencies as a really important channel. Q3, the -- just the number of partners was up about 92% year-over-year. Why is Wix kind of best positioned to win the business of designers and agencies versus peers? And how should investors think about the contribution of this channel to the model?

Joe, do you want to take that?

Sure, absolutely. So as you said, we're continuing to see agencies, professional designers come to Wix. This was really something that we initiated about 3 years ago when we launched what was then called Wix Code, now called Velo. A year ago, we launched Editor X. And these are professional-level products. And what we are aiming to do here is expand our reach beyond just do-it-yourself users. For a decade prior, that's all we did was focus on users building for themselves. And expanding into a new market is obviously not something that happens quickly, but we've made huge strides very quickly because our brand is strong and because these new products are so strong. I think that what that 92% growth shows is that professionals and agencies are giving Wix a chance. They're giving us a try, and that's what we are looking to do. The incumbent here is very large, and we don't have to take all of their share or even half of their share to make this become a very large business for us. We compete very, very well with WordPress, which is kind of the largest player here. We are taking a different approach. We're a cloud-based platform as opposed to being open source. And that means that all of the hosting and infrastructure, including security, is all handled by Wix, and that makes it a much more productive, much more efficient process for agencies and professionals to build and manage what they need to build. And Editor X and Velo, as I said, are creating very strong funnel for us. And we think that in the future, I don't want to make a prediction on when. But in the future, we believe that this part of our business will be larger than the do-it-yourself part of our business, just because most of the websites in the world today are built by professionals, are built by agencies, and we are heading in that direction.

Great. Yes, that's super helpful, especially as every one designer kind of you build -- come in, building 10-plus websites a year, if not more.

That's right.

Our channel's work has suggested that there is a preference for Wix just on your fast-based products rollout kind of giving us sort of a future-proofed product kind of when they go with your platform. Just as a reminder to everyone, we are taking audience Q&A. And any questions can be submitted via the box on the webcast screens. We'll start to read those and as they come through. I wanted to turn on to B2B partnerships. This is an initiative that you started in 2019, but it didn't really start to move the needle until 2021. And what is the overall strategy kind of behind these B2B efforts? And how should investors think about the contribution to collections going forward, just given that it is a lumpier business than what we've seen in the past?

Yes. So let me try to explain how we come with this strategy and what's happening. This is -- first of all, it's not something new. We always work with partners or B2B partners, but not in the same scale, obviously. And this is also part of the overall strategy that we have. And let me give you a few examples. The company in Japan NTT, which, I guess, all of you are familiar with started to use Wix a few years back. Today, NTT growth in terms of collection 9x in the second versus the first year. So how it's happened? So take into consideration that behind every B2B partner, there are users, the same users that we have, it's the same subscription model, meaning that they start to buy and then they renew and then they buy more and then they expand and they are buying other services like Ascend, like online commerce, like payments. Meaning that it's like the same basics of the same fundamentals as any other SaaS business, the same as our customers because at the end of the day, what stands behind it is the same customers. Vistaprint the same thing. First of all, Vistaprint is, I guess, a great proxy to the fact that they switched technology, moved into Wix. And it's amazing because it's a technology partnership. Now think about them as a huge agency. We spoke about the agency, but it's one agency, okay? Because at the end of the day, they serve as an agency. It's a one agency that is going to build hundreds, thousands of websites over Wix. So in a way, it's actually continuous strategy to go to the places where people are using Wix to build websites for their customers. And this goes the same for any -- almost any other partnership that we sign. I do believe that this is something that is one of our growth drivers. And it will continue to grow also next year because next year, we are going to have the expansion of those customers that we already signed. But on top of it, we are going to get a new one because we really built quite a large funnel. So yes, it's kind of lumpy in the very beginning because we just started it. But I think that over time, that would not -- is not going to be the case.

Great. And then just turning a little bit to more of the financials. The time to return on marketing investment is something that you guys track very closely. And the ratio has weakened a bit, but you are still within your target range. How does investment in some of these new channels like the B2B, commerce and the agencies impact that? And what drives your confidence to continue to increase the investment?

So first of all, it's something that we measure very strictly. In a way, I don't provide budget for marketing, meaning that from my point of view, they can invest whatever they want, but it's very important to keep in mind that the return going to be within our targets. Meaning that from my point of view, they can invest even $100 million every quarter as long as the return on the same -- because we don't want to leave those customers. And actually, this is what's happened. If you look over the years, and I did mention about the fact that ARPU is going up and conversion is going up. So what's happened from the same dollar that you invest, you get more. So it's allowed us to invest more in marketing, perhaps the cost per user is increasing, but the TROI remained the same because we're also getting much more from those customers. So I do believe that this is something that is going to continue. The B2B, for example, it's a bit of a different model because there, we are not investing in marketing. They are doing the marketing. They are bringing the customers, we'll provide the technology. The bottom line is actually a bit even more profitable because of that. But this is the way we measure. We measure everything. We measure every traffic. We measure every dollar that we invest and looking at the return if it makes sense to us until the point that it doesn't.

Great. Our time has actually run up much quicker than I even expected. And it sounds like there's a lot of really interesting things to be watching, whether that's the expansion into the partners and the agencies, kind of the B2B, and seeing how the top-of-the-funnel moves as we get into fiscal '22.

Absolutely.

Thank you so much for sharing your insights with us today. And thank you to everyone on the line. Please let me know if you want to get in touch with the company or discuss more. But thank you very much for your time, and have a great rest of the day.

Thank you. Thank you very much.

Thanks, Elizabeth.

Yes. Bye.

Bye-bye.