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

All right. Good afternoon, everyone. I am Elizabeth Porter, I'm an analyst on the Morgan Stanley U.S. software equity research team. I'm really pleased to have with us today, Wix' CFO, Lior Shemesh. Lior, thank you so much for joining us.

Thank you for having us here.

Of course. So just to kick it off, for those that aren't as familiar with the story. Can you just give us a background to Wix, who you serve and the portfolio?

Yes. So I will try to give like 5 minutes background. So obviously, Wix started like about 12 season actually, a bit more than that as a platform for self-creators, meaning that if you wanted to build the do-it-yourself website for yourself, Wix was a perfect platform for you. Later on, we evolved, and we introduced some more features and products, which basically allow you to manage your business. We call it the operating system for small businesses, but it's allowed you to manage your business to do, for example, all kinds of marketing activities with your customers. In a way, look at it as kind of a CRM, ERP management system for small businesses. And we started to introduce more and more kind of professional solutions, like verticals, like hotel, restaurants, trainers, every kind of if you know about hospitality and so on. And obviously, online commerce, which include also bookings, include online stores. And very fast, we saw that there is a huge demand. By the way, we serve about 230 million users. We are growing by 2 million users every month. Most of them obviously are self-creators, people that creating the website for themselves. And we are kind of dominating the market. I mean, I remember that there was a lot of competition those days like, for example, Weebly, Web.com, Endurance and so on, they are all disappeared. The main competition over there is Squarespace for us, but we are much bigger with much more capabilities in terms of the platform. And a few years ago, we have decided and we make a very strategic decision, okay, how we take Wix from $1.5 billion, $2 billion of revenue to $10 billion of revenue. We obviously dominate the self-creator market, but we wanted to do the same for partners. And we're not talking about partners, I'm talking about people that building websites for others, like, for example, agencies, freelancers, mega agencies, web developers and so on. And we started to invest in building the right product that based on the platform that we have right now. But more kind of professional tools like Velo, like Editor X. Today, the partners business is about 25% of our revenue, just within 3 years, growing very fast. We are taking market share mostly from WordPress. We are building the community. And I believe that this is the main growth engine for us in the future, bringing Wix and trying to do the same thing that we already made, being dominant also in the market of partners.

Great. Yes, I definitely want to get into the partner's opportunity in just a minute. But before we go there, macro is obviously top of mind for investors. Wix, you saw this during COVID, everybody needed to get online quickly. So that was a tailwind, turned into a bit of a headwind, but those headwinds are fading. But now we have a risk that we're stepping into a softer macro. So can you kind of net some of the headwinds and tailwinds that you're seeing for us today?

Yes. I think that every time that I'm trying to explain, for example, my team, exactly what are the results of it, is like you have like a really kind of unusual 2 years, call it the pandemic years. And then the 2 years after 2023 and 2024, but in average, it's like nothing happened. Meaning that we managed to acquire a huge cohort during 2020 and 2021, obviously, some of it also in 2022, at least at the very beginning. And then everything becomes like kind of the opposite. Demand went down, obviously, because -- in a way, I try to look at it as people were kind of expediting their plans, building online presence ahead of time. And this is exactly what's happened. So there is also the pull-forward effect, where you see the people did it before, but not doing it again. I think that today, we are in a place that, obviously, the demand went down but still higher than the pre-corona, meaning that still higher than 2019, which is about, if I'm looking at the new cohorts, at the newcomers, it's 5% higher than the 2019, which is exactly the same quarter of prior to the corona and everything that's happened. And the effect of the macro mostly today is about what we call the pull-forward effect, which obviously has the impact of the huge cohort that we had before. Very important to mention, nothing's changed about the fundamental of our business, meaning that we see the same behavior, the same retention, the same conversion, the same churn. And what is very, very interesting is that simply the demand went back to what it was -- used to be before the corona. Another macro effect that we see is obviously about the GPV. The economy is shrinking, and it goes alongside with the GPV, people buying less online. It doesn't mean that it's something that will continue, I actually assume that once the economy is going to recover, people are going to buy more, and then we start to see, again, GPV is growing. I think that the same thing I've seen -- you can see with Shopify, Amazon and so on. To try to summarize it, I think that I believe that if you will take the 2 years of the pandemic plus the 2-year post pandemic and try to average it, it will be the same as it used to be before. And I think that this is the reality.

Got it. No, that's super helpful context, as we're kind of living through these ups and downs. So I wanted to touch on kind of free cash flow for a second. Back in May, you laid out a plan for 10% to 20% free cash flow margins over the next 3 years. And kind of when you gave that plan, you were also expecting 20%-plus revenue growth annually. Obviously, macro has changed for everybody. And just -- despite that revenue coming down, you have still committed to those free cash flow margins. So just, first, what underpins your confidence in being able to achieve that free cash flow margin? And second, kind of what are those actions more specifically that you're taking now to protect that free cash flow?

Yes. So when we presented the plan back in May, it was during the Analyst Day. By the way, you're all welcome to look at the -- at our website and can see the content. There is a lot of content, obviously, also breaking down the business into two, the self-creators and the partners. We had a few assumptions about the macro, about the business, but we said very clear that the assumption of growth is based on back to usual in terms of the economy, which obviously didn't happen. But I assume that going forward, if I'm trying to exclude, I'm trying to eliminate those macro effects, which we have no control, I assume that self-creator is a business that will continue to grow in about 15% to 20% in the future. Why? Because the Internet will continue to grow. I believe that everyone here in this room can share the same view with me that in the future, Internet will continue to grow. With that, we can see that CMS growing faster and the SaaS CMS growing faster than that because we see a lot of movement within the Internet, people that used to use CMS moving right now to SaaS CMS platform, like Shopify, Wix and Squarespace. And we also assume that partners will be growing more than 30% on a year-over-year basis, simply because we are taking more and more market share from WordPress. So obviously, that was not the case, meaning that we have this economy crisis ahead of us. And we've decided to control whatever we can control, and this is the cost. Because it's very important to mention, we are fully, 100% committed to the targets that we set in terms of free cash flow, meaning the 10% to 20%, 10% next year, 20% in 2025, and we are fully committed to that. If we see that the macro economy create a situation where there is a risk to meet it because obviously, let's assume that demand is not going to be the same, we will adjust the cost to make sure that we can meet those free cash flow targets. By the way, we said that in the fourth quarter of this year, we already provided the guidance and the forecast, we will generate about $50 million free cash flow, which kind of setting already the run rate for next year for the 10%.

d Great. No, that's super clear. And when we think about the margin expansion opportunities and you laid this out clearly at the analyst deck is that partner side. The self-creator side is extremely efficient. But it's the partner side -- and what I mean partners, I mean these professional design agencies, these B2B business partners like a VistaPrint or a LegalZoom. It's there that you've really had a lot of the investment. So how much of that investment is kind of behind us? And how quickly can we see leverage? And another point to this is, is it really just pulling back on cost to get leverage? Or how much of it is just higher revenue flowing through?

It's a great question because I think that it's also important to explain. Usually, when you build a new business or new markets, you do it when you're a private company, not public company, obviously. In the way we finance the establishment of this business when we took money from the self-creators and invested into partners. Why? Because, look, we realized that 8 out of 10 people, they are using professionals today, obviously, so it's a huge market. Now in the end of the day, we want to leverage the products that we already built in the past. Yes, we need to provide and build more capabilities and more professional tools but it's based on the same core platform that we have. So we make a decision to invest. The build-out of the business is already behind us, meaning that we build the infrastructure, we build the leading product, the core products, like Editor X, which enable you responsive design, Velo, which enable you to build any kind of web application using JavaScript and basically literally build everything that you want on top of Wix. We build the infrastructure to support it. Because when you are going after professionals, you need to have the right performance of the platform. So it's been in terms of hosting to enhance the level of performance. The other thing is also to increase the care organization to support that. So the buildout of the business is already there, is already behind us, meaning that from now on, we are going to see only the variable cost to support the increased growth in the partner's activity. And therefore, we are going to see a lot of leverage. And you're right, the self-creator is a super profitable business. I mean in term of -- the Rule of 40 is already there. It's kind of stupid rule, but I think that it's basically providing the kind of the conflict between growth and free cash flow. But I think that the most important thing is the combination between them. So the self-creator is already there, it's super profitable, and I believe that we can get more leverage, as it's scaling more -- even more up. The second is about the partners, when you have the fixed costs already invested, from now on, the marginal contribution is already super profitable. And in partners, you are going to see that much faster than self-creators, why? Because when you look at the core behavior of partners versus self-creators, this is really interesting. Self-creators is, okay, you have one user, you have one subscription. And you see that the quote is going up, after 1 year it's a bit going down and then flatten over time. Meaning that for self-creators, we are generating the same amount of revenue on a quote basis on a year-over-year basis. We actually have the 2010 quote which is generating the same amount of revenue every year. There's zero churn based on the quote. Now for partners, it's a completely different because it has a compounding effect. You see the quotes going up. Why? Because you're adding more agencies but also those agencies are adding more of their customers. So it's not just based on the Wix growth, but also on top of our partners' growth. So this is why it has this compounding effect, which is super profitable. So we are going to see more leverage coming from there because the variable costs, obviously, are all different.

Yes. So for that DIY creator, you have one business, you're building your one website, but for a web developer, you're building multiple websites every year and that just starts to layer in. And...

Yes. I mean we have some partners that already build hundreds of websites on top of Wix, kind of amazing.

Yes. And in addition to that, partners are often building a little bit more sophisticated websites and sophisticated websites, they are higher-priced subscriptions and also usually doing something like payments.

Yes.

And as more and more customers are selecting Wix payments over third-party providers and as you expand into more geos, the take rate overall should be expanding. So one, just where are we on kind of that expansion curve within take rates? How much more room is there for improvement?

By the way, I think that what you mentioned before is it's very true. I think that the mix is different for partners. We see more businesses. Actually, while partners is about 25% of our revenue, the share in GPV is about 40%. And I think that the decision to start to build the payments or the transaction business was very simple. We already have the customer. You need to use payment solution. So why not to provide you with a Wix solution, right? So we first try to -- we started to build it 2 years ago. It's already about 10% of our revenue. It's about $150 million with a $10 billion of GPV. And you're right, the take rate keep on increasing, as payments become much more dominant for those people that are eligible to use the Wix payments. So for example, we are introducing payments in more and more countries. We are making the software better. Today, about 80% of newcomers that can find payments in the region actually choosing Wix payments. And of course, moving people from offline to online using our own POS. I'm not sure if you know about the Wix POS, it's an omnichannel. The only company together with Shopify, by the way, that provide an omnichannel solution would basically combine the offline and online together. So the ability to provide POS to our partners, to sell to their customers or directly to our customers is actually moving from offline to online. By doing that, we actually increase the take rate. In terms of the margin, look, payments is -- if we charge, for example, 3% of GPV, about 2/3 of it go to the credit card company, unfortunately, but this is reality. So you are left with about 30% to 35% of growth -- gross margin. On top of it, you obviously -- you don't have the headcount to support it, like the R&D, you are making the [indiscernible] and so on. And this is all fixed cost. The only variable part is the one that we are paying to the credit card companies. So it means that from now on, we are going to see also a lot of leverage also about this transaction revenue, which will bring eventually the overall profit over there to approximately 70%. So this is kind of the plan that we have. And we see that payments continue to grow quite nicely. Within 2 years, it's already $150 million.

Yes. I'm going to ask another question and then turn it over to audience Q&A. So Wix announced a price range -- raise as did many of the other competitors in the market as well. And -- so I wanted to ask, first, just what is the timing and kind of magnitude that you expect from kind of these price increases? And then second, when there are price increases, oftentimes that comes with churn. So what are you seeing as it relates to churn and how that compares back in 2019 when you last raised prices?

So we started to raise prices, I believe, it was in May this year, and it will be fully completed by May next year. Remember that the effect on revenue takes more time because then you recognize it over time. But in terms of booking, I believe that by next May, it will be fully completed. And this is something that we always assume that we don't know what should be the price. What is so great about having so many customers in such a software working in so many countries is the ability to A/B test it. I mean we never assume that we know. By the way, at every point of time, and every minute, there are hundreds of A/B testing that we are doing, not just about pricing, but about features, about product, about everything that we offer to our customers, and it's done based on country. And yes, sometimes when you build a lot of features and more and more content, people are willing to pay more. Because they're getting much better services, much better care organizations and so on. And then we are A/B testing it, based on a specific country. And this is how we decide what should be -- what should be the new price. To answer your question, obviously, there is a very little effect on existing customers. Someone that's already built his website is not going to shut it down because of a few dollars increase in pricing. Obviously, it has an effect on conversion of newcomers, and this is why we do the A/B testing to make sure that we are not also penalizing ourselves in terms of future growth. So this is exactly the -- what we are trying to consider, existing versus new and to make sure that we are still building profitable growth in the future, not losing customers. But again, it means that we will continue to do A/B testing for pricing. And if it makes sense for us in the future to do the same thing, we would do that based on the level of service and quality that we provide to our customers and the ability to charge more if the A/B testing will show us that it makes sense in terms of the overall value of the quote.

Great. Any audience questions?

Thanks for telling us about the rise in the margin on the partnership deals. But in terms of timing, can you really get that rise coming through during the current quarter? Or is it something that gradually phases in over several quarters and as the economy picks up out of this slump?

Well, you will see the improvement on a quarter-over-quarter, year-over-year basis. As long as partners revenue go up, you only have the variable cost, the fixed cost is already there. And then you can see the leverage. Obviously, if the growth is going to be faster and economy is going to recover, which going to help our partners, you're going to see our leverage much faster. That said, the $150 million plan of cost reduction that we implemented is going already to affect quite a bit the partners expediting the plan for profitability also for partners, much sooner than expected.

So when you talk about partners revenue going up, you mean the partners revenue based on Wix? So Vista -- for example, Vistaprint might have its revenue going down, but it's revenue based on Wix going up and then you get that leverage?

Exactly. Vistaprint is one of our partners. By the way, it's kind of interesting. Because partners, it means people that provide -- companies provide online services like Vistaprint, but it can also be agencies and freelancers and web developers. Vistaprint is one of the examples. When you think about the top of the funnel, how people start a business. Some of them try to look for a website builder, they end up with Wix. Some of them looking for printing solution, they end up with Wix as well because of Vistaprint. Some of them looking about formation of a business, LegalZoom, again, end up with Wix. But in -- except of domain -- basically, we also, by the way, selling domain, but we are not bringing traffic to domain. But in this case, when you think about it, most of the top of the funnel today is kind of controlled by Wix today, at least about some that trying to establish a new business.

It's a very, very simple question. Apologies if it's actually irrelevant, but how would you compare your offering with GoDaddy?

Well, there is a reason why I didn't mention GoDaddy, I mentioned Squarespace, I mentioned WordPress because we don't see them really as a real competition. GoDaddy, it's mostly a service company. When you buy a domain, you can measure 5 minutes to get a phone call. They offer you a website builder, but it's so remote in terms of its capabilities. In terms of the capabilities, you cannot -- there's nothing to compare between the platform of GoDaddy to Wix, even not to compare to Squarespace. It doesn't have the same capability, the same features and product capabilities. And we actually see many people that start with GoDaddy and actually move 2 weeks later on. And still, they are very small. So this is why when I try to compare someone that is competing with me, it needs to be at least very close to the level that I provide in terms of the technology and the services. It's simply nothing to compare with.

I'd love to ask about stock-based comp. Now it's really been a lot more of a focus for investors. And you guys did target at the Analyst Day for a stock-based comp to go down by 2 points a year going from kind of the mid to high teens it is now to 6% over time. Is that still on track? And does the cost savings plan that you guys introduced, does that help accelerate that at all?

Yes, it actually will accelerate it. And it will be somewhere between 3% to 4% on a year-over-year basis. Look, I think that it's not a secret. We invested millions of dollars to build the partners business. We kind of doubled the headcount during that period to make sure that we support it. I think that it makes sense because we have really a unique opportunity to take over this market as well. And because of the cost reduction that we've made, we are going to see more leverage. Obviously, headcount actually went down, and we are not going to hire as much as we hired in the past. So it has also kind of leverage also on the stock-based compensation expenses.

Yes. Great. So that brings us just about to our time now. Lior, thank you so much for joining us today and sharing your insights. We look forward to watching the story.

Thank you, guys.