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

Let's get started the 3:00 show. So I'm Brad Erickson. I cover Internet here at RBC. [ Tim Carmen ] in the house. Thank you, sir. The peanut gallery, as we affectionately know him has. So very pleased today to be joined by the General Manager of North America business for Wix, Joe Pollaro. We always appreciate Joe being here. Unfortunately, Lior, CFO of Wix, came down with COVID on Friday and was not able to make the flight, so in case anybody was wondering. So yes, Joe, thanks for being here. Nice to see you.

Thanks. Good to be here.

So laundry list of questions, as always. By the way, audience participation, encouraged. So raise your hand, we'll get that elevated. I wanted to hit 2 questions upfront. You guys reported last week, [ gotten ] several inbound. I think -- so we'll hit them upfront and then we can be done with the dirty business. So number one, I think there were some comments made around sort of reiterating long-term free cash flow margin targets, but then there was also some sort of caveats, we'll call it, around like, look, the economy is tough right now, excluding that, waiting for a rebound, those sorts of things. What -- maybe can we just clarify or crystallize the messaging around long-term targets relative to what you're doing this year, next year, et cetera?

Yes. So I'll back up and put a little context around it. So in May, as you recall, we held an Analyst Day. We shared a 3-year financial plan in that day. And look, May was 6 months ago. The economy was a bit better than today. But we were -- we had some growth projections in there that at the time, probably were optimistic and certainly now would seem very optimistic. We realize now that we're unlikely to see growth like that in 2023. So with that uncertainty, we kind of took a step back and decided to relook at our profitability plans, and that led to the cost reduction program that we went through this summer. And the idea behind that was we wanted to make sure that regardless of growth in 2023 or frankly, even beyond 2023, we could achieve the profitability margins that we outlined in the plan. Yes. So our commitment is to achieve the margins in the plan in 2023. And as we said on the earnings call last week, we intend to do that even with growth being probably less than what we had penciled out back in May.

Yes. Got it. Okay. That's clear. And then one other one, just on the -- you mentioned the $150 million of cost cuts which you announced last quarter, and it sounds like those are fully in the model. I think in the letter and some comments, you talked about $150 million of additional benefit next year. Can you just square that up? Is that the ones you were talking about? Is it more? Is it part of it? Just clarify.

Yes, no. They're one and the same.

One and the same. Okay.

It's the -- again, the plan that we had implemented was to achieve what we needed to do to get to that margin in '23, and that led to the $150 million in savings.

Got it. Okay. We can move on. Let's talk about just from like a demand trend top line standpoint. You talked about -- I think pipelines were kind of called out as maybe the softer spot. What's -- what is that? Is that -- there's new businesses, there's existing businesses where you're maybe displacing a vendor or working with a new agency. What is underpinning [indiscernible].

You're talking about the agency -- on the agency side?

Correct. Yes. Yes.

So I think what we're -- we have a partners business that we've been growing and investing a lot in over the last several years essentially in an effort to move upmarket, move beyond just self-creators, but into professionals that build websites on Wix for clients or others. These are larger websites. Typically, much more technically designed. They're going to be oftentimes higher priced for Wix and for the clients. Many times, they come commerce related, so maybe a storebookings, events, which generates payment volume for us. So what we're seeing is that partners who we call agencies, they're still coming to Wix at a good pace, a similar pace than what we've been seeing, but their pipelines are slowing a bit. I mean I think they're going through a lot of the same pains we are on the demand side. And so what that means for us is a little slower on the GPV side. Maybe the websites that are being built or the client sites being built are less sophisticated, less frequent. It's a very similar dynamic to what we see on the self-creator side. But it's really a pipeline issue. It's not as much -- it's not -- has anything to do with partners coming to Wix and starting to use.

Sure, sure. But more just [ they're ] end users, essentially. And so to that -- yes, so the question I was kind of asking, and I don't think I framed it quite right, was are those -- are those more new businesses that would come to them? Or are those existing businesses where they're looking to sort of expand or displace an existing situation?

Both, I mean they get -- their -- they might have new businesses that start up [indiscernible], they also might have businesses that maybe they had a self-created site and they wanted to really upgrade it. And in either of those cases, I think we're seeing just businesses take a bit of a pause on that additional investment into maybe a big upgrade or starting something online that's much bigger.

Yes. Yes. Got it. And then just looking forward, like in about the top line trends you laid out at the Analyst Day. Obviously, new business formation is a driver for you. But I think you guys always also talk about share gains. Where are those coming from? And like how -- because there's a lot of companies in -- not necessarily in your space, specifically, but in the adjacencies around -- certainly around domains and those sorts of things. And the growth is it's fine. It's a little bit ahead of GDP, but not much because the web is, of course, well mature now. How do you guys look at the share gains? What's driving those? Where are those coming from? At whose expense?

Yes. I mean so just our new business formation, it's a driver. Certainly, I wouldn't put it as a primary driver or the primary driver. I mean I think it's one to look at among many. Just as an example, 50% of subscriptions -- new subscriptions on Wix already have a domain name when they come to Wix, they're transferring it from somewhere else. So that could -- maybe as a new business formation, but most likely, they had a site somewhere else that they're moving over to Wix. And so that gets into the share gains a little bit. A lot of -- look, a lot of it is coming from WordPress -- WordPress.org. And part of that is because they're the largest kind of platform out there. But I think a bigger reason is because designers, developers they are looking for more of a cloud-based solution today. WordPress.org is an open source platform. It comes with a lot of flexibility, but that comes with a lot of problems, too, vulnerabilities on the security side, vulnerabilities on reliability, plug-ins, and it's harder to manage and takes more time. And I think as designers and developers have more demands on their time, they need something that's much more out of the box. And so -- and maybe even where a developer isn't needed. You can have a design agency that if you have a cloud-based solution like Wix, you don't need to go out and hire a developer to contribute because everything is already there for you back end and the infrastructure and even some of the coding is -- can be done in a no-code environment. So these are a lot of the reasons why we're seeing the share gain [ from ] the WordPress.

Interesting. How do you balance that? Because we've talked to agencies before when we do our channel work on it, and some of them are a little averse to using a solution like an out-of-the-box solution because that all-in-one aspect at some level is their margin, right, because they get paid a retainer sometimes to run a bespoke bunch of modules separately, but they are the secret sauce of maintaining it all versus you guys. How are -- so how do you navigate that with developers and creatives and marketing agencies that you would partner with?

I think what our kind of pitches is you're going to save time, you're going to -- it's going to make you and your team and your agency more efficient. You don't have to spend. Designers and developers, they want to spend their time designing and developing. They don't want to be spending their time monitoring and updating and having to manage. That's time consuming. So what we're -- the value prop we're giving is that, hey, take -- we'll take the management side. We'll take the updating side. You don't have to worry about that. Spend your time doing where your real value add is, and that makes you more efficient. And then the way that means you can do more projects and make up maybe whatever potentially margin they're not.

Yes. Yes. Got it. In the -- and maybe one more on the creator side, like we've seen so much activity in mix shift, frankly, in social media, right, short-form video. I think that was a big explosion during the pandemic. How much -- is that -- I imagine that's a tailwind to your business. Is it meaningful? Or is that kind of -- are we getting -- is that kind of are we getting -- is that sort of too granular, hung up on the detail?

Are you -- is it an advertising channel that you're [ talking about ]?

No. So creators that are creating web presences on social media channels but also need their own like direct site type of things, setting up a business, for example. I don't know, are you seeing activity around that at all? Or I was just curious.

I don't think anything meaningful.

Nothing too meaningful. All right. I had to ask. Okay. Cool. And then just on the partner business. One of the questions we get there is the gross margin levels are obviously -- your subscription gross margins are amazingly high. On the partner business, we're still ramping there. What are the sort of the factors that are holding that back? And what's kind of a reasonable time frame to see that leverage come through?

So on the Partners business, we made -- talking about the gross margin most specifically, we made significant investments in the last several years into infrastructure, into support because we knew that the professionals need a much higher level of service. They want -- they need faster, higher-performing sites. They need a lot more security of reliability. These are really high importance to them. And quite frankly, our platform was designed originally for self-creators where, of course, they want their thing to be secured and they want it fast. But the demands on those -- on that infrastructure is great. If you're a professional building, a very high-end website, the demands on infrastructure are much greater. So we really invested a lot into building that infrastructure, and much of that was one -- kind of think about it as a onetime investment that we had to make early on. And we made those throughout 2021 and even the early parts of '22. We're there now. And so now we don't have to make that level of investment year after year after year. Now it's more of a, obviously, investment as it grows, but the onetime big upfront costs are gone. And so now we'll start to see improvements in margins, gross margin specifically. It's going to take a few years. I think we outlined it in our plan, but we do believe it will get up to where the self-creator business is.

Yes. Great. And then just on the partner business, just a follow-up. Growth rate is obviously very elevated relative to the core subscription business. How much of that is organic, like same-store sales versus just adding new partners? I don't know if you can parse that out at all.

I don't want to share percentages, but they're -- they're not [indiscernible] -- they're not too far off. I mean we -- like I said, we still are getting a lot of new projects coming in, a lot of new agencies coming in, and at the same time, existing agencies are continuing to use.

Yes, yes. But there is -- I mean, assuming solid growth on the organic side.

Absolutely. Absolutely.

Yes. Yes. Okay. And then on the B2B side, obviously, that one has been a little tough, very difficult to forecast clearly.

Yes.

How big is this pipeline, right? We talk about this theoretical pipeline. It's very strong. It's really strong, whatever. Is this like 12 Vistaprints? Or is this like 2,000 organizations? So just any sense for how vast this is because I don't think anybody really knows.

Yes. So I'll take a step back and just to make sure we're talking about the same things so everyone else knows, too. Like these B2B partnerships is where we have essentially partnered with, in your example, Vistaprint. We've also done it with LegalZoom, with Yelp Group in the U.K., where they are a provider of some type of service that they're already leading with. And then the website building was kind of a supplemental offering that they had. And Vistaprint, which had a website building offering, decided to shut that down and essentially outsource it to us. And so now if you go to the Vistaprint site, and you want to obviously design whatever marketing materials you have, there's also an area to build a website, and you will then be taken to Wix to do that. It's a rev share agreement with us. LegalZoom didn't have something -- didn't have a website building, but now they've added that to their funnel where you're starting a business, maybe you need a website, and here's Wix and you can use that. So this is something that we've built up over the last few years. It's difficult to predict because the contracts we signed with these companies are typically longer term and larger. So for example, with Vistaprint, which we signed a year ago in Q3, it was $40-plus million over a multiyear period commitment. And that entire amount gets booked as bookings, not total the contract value. The annual amount is much more predictable. I mean it's a subscription business. So once we see the subscriptions coming in, that's much more predictable. But when the contracts are signed, is a timing thing really. And look, as far as numbers, there aren't hundreds of Vistaprint sizes contracts out there, right? There are a few. Even LegalZoom, which was about half the size of Vistaprint, there are some of those, but not thousands, not hundreds. So, now are there hundreds of very small ones? Absolutely. And we have a lot of those in the pipeline. But the bigger ones are going to be infrequent.

Yes. Okay. Does the macro change conversion on that at all or?

Well, what the macro has changed on it is the level that these businesses are willing to commit to. So like I said earlier, Vistaprint, LegalZoom, they committed to a multiyear agreement. Now we're hearing from partners -- from these partners, "hey, we want to do this. We want to have Wix as part of our funnel, but we're not willing to sign up for 3 years because we don't know what the next 3 years look like, but let's start with 1 year." So for us, on the bookings side, that's all we -- Revenue-wise, it's not going to change.

Got it. Okay. Pause for a second. Any questions? No one? I haven't gotten many takers on questions. All right. Price increases. You guys are raising prices.

We did.

In a tough economy. Great. Can you -- we've actually gotten a lot of questions on this timing magnitude. Can you just help us out just to level set?

Yes. So let's go through it. So in April, we kind of initiated a price increase. We began in the U.S. We rolled it out gradually throughout May and into the early summer through Europe and the rest of the world. Nearly every geography got some type of increase. Average is where it's kind of teens to 20% area, depending on package, type and geography, et cetera. How it works is anyone who is new, who comes in, gets the new price. And that's whenever the price is implemented. And then anyone who renews sees the new price upon renewal. So we don't raise prices across the entire subscription base all in one day. If your renewal is coming up this month, when you renew, you will renew at a higher price. So it will take a year and actually a bit longer because we do have 2- and 3-year subscriptions. It will take a time to ripple through the entire subscription base. We're halfway-ish right now. And into '23, we will realize -- [ see ] almost all of it.

Got it. And remind me, Q4 is kind of your disproportionate renewal quarter?

Correct.

So theoretically, you'd see that show up in collections?

Bookings, we'll see it more pronounced. I mean, you saw this quarter in Q3. Now FX is playing a role here. FX in Europe and GB has almost entirely canceled the price increase unfortunately. But on an FX-neutral basis, bookings was up 12% quarter-over-quarter, if you remove the B2B noise. So that reflects a bit of benefit from price increase if you look at the same [indiscernible] and as we move through next year as well.

Okay. So we'll be -- and effectively close -- I realize for the 2- to 3-year deals, which are probably small, but you're probably talking 3/4 of the base, 80% of the base by Q4 has been moved somewhere in that ballpark?

Yes, I would say close to 3/4.

Yes. Got it. Okay. And for those who haven't followed you for that long, like you've done this before. You did this, what, 3, 4 years ago or something?

We did this before. Yes. We did this in 2019.

Yes. Like is this similar magnitude? And I guess, what are you seeing, churn wise, related to it versus last time? Just to give us a sense.

Yes. It's behaving very similar. So there's kind of 2 things that -- 2 things that are notable that we focused on. One is conversion and two is churn. So conversion, you expect to take a little bit of a hit. And we did, not surprisingly. But what you focus on is the dollar. So you might convert less number of subscriptions, but the ones you do are paying a higher amount. And as long as the dollars -- the lifetime value of the cohort in dollar's terms is positive and accretive over time, you view that as a good sign. So that is the case here. The conversion kind of reduction we saw was not significant. It was very similar to 2019, right in line with what we thought it would be. On the retention side, you do see a little bit of additional churn on the renewals, not huge. And again, it was right in line with what we saw in '19 and what we expected.

Got it. Okay. And then let's shift over to -- actually one more question on that. Is that -- is the price increase entirely related to creative subscription? Or is there any piece of it that hits in business services?

No. It was only creative subscription. We didn't raise price on anything else.

Yes, yes, yes, I just want to check.

Nothing on G Suite, we can't. I mean they -- Google and [indiscernible] our other products, they all stayed.

Got it. Okay. So shifting to the payments, obviously, this is something people have been focused on for a while and certainly allows you to participate in the growth of your customers as opposed to just being limited to this subscriber base or the subscription fee. What's the right -- now that we've sort of normalized post-COVID, what's the right growth rate there? And I know you get asked this question, but I have to ask it or I'm not doing my job. Gross margins. Like how -- where can they go? How quickly? Because I think that's been -- it's been a tough one. For people that liked your story for the 80% gross margins on subscription, this was a new world to assimilate to. How do you guys see that going forward?

Yes. We still have a lot of optimism about it. It has been beneficial to our business and to our subscription business. I mean we have -- we know the data that a commerce user with Wix Payments is more likely to stay. Like they're stickier. So the cohort behavior on a commerce user with payments is just so much better than any other type of subscription. So longer term, this makes a ton of sense for us. It does have an impact on the gross margin, obviously. But I think that we're improving that in 2 ways. One, our take rate is improving. So we're getting more people on to Wix Payments which is, again, a good thing for the cohort behavior. But two, we're just improving the business as scaling, and that will help gross margin naturally. And the gross margins are improving. It's a bit of a slow margin unfortunately. We're seeing some slowdown in online purchasing right now. GPV was flat this quarter. Obviously, we hope it recovers next year. But the business is operating well. The gross margins are improving.

Got it. Okay. And as you -- just product-wise in that category in commerce, given that you guys are kind of like a walled garden to some degree with the code base, have you -- is there any exploration product-wise of maybe like creating a single module that would allow you to go out and win a piece of an e-commerce vendors business and then sort of layer on over time. Is that -- is that something you guys think about or...?

I don't want to obviously share anything that's in the works or not in the works. But look, I think we're focused on opening up the platform more. I mean we released -- we had our first developer conference in September. And we revealed a new e-commerce platform, which is meant for not exactly what you're talking about, but giving an e-commerce developer a lot more flexibility and a lot more openness into what they can build on Wix, and how it can be used across multiple different sites.

Could use like other vendors, for example, or other like cloud vendors or...?

Yes. This is all -- it's been announced, it's not [ yet live ].

Yes. No, I know. Yes. Just to clarify.

Wix Blocks is another product that we announced at the dev con that -- again, is not as much around -- not specific for commerce, but it's more around building applications and components in a no code or low code environment, and being able to then use those components on any site. And so this openness and this focus on developers is something that is front of mind for us. And this is what's going to help us grow this partners business because agencies, enterprises, teams, this is what they need and want. They want that flexibility and openness.

Yes. Okay. I guess last couple. Just one thing we didn't hit was customer care. COVID hit, you guys were crushed on demand. You had to hire a bunch of people. Obviously, you've trimmed costs there in the business, which helps. Is that any sort of a revenue headwind though? Because I know you guys were getting some cross-selling, upselling related to that, maybe net out the puts and takes of that change here, if you can?

It hasn't been a headwind to revenue. I mean it's really -- we did make some cost cuts there just because kind of what you said. We had really hired aggressively throughout 2020 and in 2021 to build up the support just because the demand was so high. And now that demand is lower, we just don't need as many people anymore. So we've been able to rightsize that and align with demand without hurting revenue. We've gotten a lot more efficient. We've implemented some new tools internally that we've developed to help with being more efficient on that side. So hurting revenue, hurting cohort value is something that we obviously are always, always focused on not doing. We wouldn't make any reductions like that if we thought that would jeopardize.

Yes. Yes. Got it. Okay. Any last minute questions? Peanut Gallery.

If you were to start an e-comerce website [indiscernible] [ found ] the right partner. [indiscernible] GoDaddy, Squarespace and Wix, how would you characterize the difference between those 3 companies?

So I think the difference between -- yes. So a few things. I think where I think we will have the advantages and where it would be more appealing to you is, first of all, I think the design capability on Wix is far greater than I would argue both of those companies, certainly more than one. And that comes both with our classic Wix editor, but also Editor X, which is the higher end. So if you're a designer that has much more advanced capabilities, Editor X is something that you're going to be able to design a far better looking operation -- operating website on Wix than elsewhere. I think two, on the commerce side, we have, obviously, shopping cart, which I think is kind of what you're referring to selling goods, but we have all sorts of different types of commerce. So you might be a store that sells goods, but you also might have a part of your business where you have workshops in your store that you want to have scheduling for, and you can operate that. Maybe you want to have a community online of your customers or potential customers that talk about the products or whatever it is you're doing as a store owner, and you can have that as part of your site builds on Wix natively. Obviously, the marketing tools and obviously, Wix Payments. So I think where we really are going to differentiate from the competitors on that front is, again, higher end design, much better flexibility in what you're building, and then just a much broader set of products that you can use to build whatever you want to build online. You don't have to go and rely on a third party or not have something on your site because where you're building it just has -- doesn't have that there.

Any other? All right. One last one. I think there's an investor out there who's put out some public information around aspirations for maybe even bigger cost cuts than you've talked about. Clearly, you've laid out the plan. We all sort of know what that is. Are there additional levers to cut costs here? I realize, look, under a draconian macro scenario where we don't even know what next year looks like, I imagine there are. But maybe just give people a sense. Are there levers? What are they? If and when?

Yes. Look, we're -- like I said earlier, in the kind of start, I mean the commitment we have is to the margins -- the cash flow margin that we laid out in the Analyst Day. And obviously, there is an assumption on some growth in 2023. And if they're -- if growth is much slower than what we would look at as a minimum, then maybe there has to be something more done to get to that cash flow margin. That's not the plan now. And our plan is to get to the margins with what we've already done.

Got it. All right. We'll leave it there. Thanks, Joe. Appreciate it.

All right. Thank you.