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

Good afternoon. Thank you for joining us at the Morgan Stanley TMT Conference. My name is Elizabeth Porter. I'm an analyst on the U.S. Software Equity Research Team, and I am very pleased to have with us today, Wix's CFO, Lior; and Head of Strategic Finance, Joe. We are taking audience Q&A. So at the end, so mics will go around. And lastly, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And with that, Lior, Joe, thank you so much for being with us today.

Thank you for having us.

Awesome. So before we dive into the business, it would be great just to get your macro perspective on the demand backdrop. On one hand, you are -- on the positive side, kind of getting through this digestion of the COVID pull forward. But on the other side, the macro environment isn't as great as is, we don't want it to be. So what is demand for new and existing customers between those 2 cross wins? And what's your outlook for 2023?

Yes. Well, we can actually talk about just about this question for 1 hour, right?

Yes.

I think that, first of all, we see stability, meaning that it's not getting worse, but it's also not getting better. Meaning we saw the softness in terms of the demand for the overall Internet, which has an effect also on GPV, but also in terms of the overall traffic over the Internet. So this is from one end. We see the stability. And for the guidance, we actually assume that, that would be the case, it just continue as it is. I -- it's very difficult to try to predict and we don't want even to start to do that, to start to predict what will be the macro effect over the business. But I think that something that is really important to mention, that from one hand, we see the stability on the other hand, if you look at the 2 separate segments of our business, from one hand, we have the search portals, which obviously, you know, is affected by the overall macro environment. But on the other hand, we have the partners business. And even in 2022, the growth was 29%. So it means that from one hand, we see the macro effect, but on the other hand, we are taking much more market share for the partners business, it's already almost 30% of our overall revenue. And I believe that this is something that will continue in the next few years, regardless of the macro effect. And this is what's so nice about it when you have those 2 segments, you have the partners, it's growing really fast, hypergrowth business and mostly because we are taking a lot of market share. And we also changed them in terms of the mix of our customer. We see more kind of complicated website with more complicated businesses to build overall width. So we see also increase in ARPU even in this period. So those are kind of the things that we see, which obviously has an impact on the overall guidance that we provided.

Great. And while the macro is top to control -- or can't control. You are driving initiatives around the things that are in your power, which is really around cost and protecting the profitability. And that can may -- you outlined a 10% to 20% free cash flow CAGR against 20% plus revenue growth. And obviously, macro had a big impact on that topline piece. But despite the topline coming in lower, you are still committed to that free cash flow guidance. So can you just talk to us about what underpins kind of your confidence in being able to control -- to hit that target? And what are some of the actions that you've taken to protect that free cash flow?

Yes. So remember that when we provided the KPIs, also made the Rule of 40 by 2025, it was back in May. We assumed that market was going to recover, obviously we were wrong about it, right? But we said that we're committed to those KPIs. We are committed as a company, we are committed as a management. This is the target that we set, back on -- during the May of last year. And yes, we said we saw the weakness in the overall macro and we had to react. And we actually -- the -- if you remember, we initiated the $150 million of cost reduction. And obviously, when we saw that there is no improvement, it actually was getting worse, since the last time that we initiated the $150 million, we initiated another cost reduction right now to get us the same KPIs. But actually, bringing us to a much better place in terms of profitability. And I want to spend a couple of minutes over it. When we assume on a lower growth scenario, still meeting the 2025 KPI of the Rule of 40, it means that we had to increase profitability. How we did it? So we did it in terms of getting a much more efficient of how we run the business, implementing a lot of technological improvements, for example, in care, how we approach care, a lot of AI that agents understand before they actually spoke with the customer, what is the problem, for example. So we did a lot of improvements, a lot of efficiency, and we cut the cost and part of it was also because of flow of demand. You have less demand, you need less marketing, you need less care. We did a lot of improvements in terms of the hosting capabilities, again, taking down hosting expenses by tens of millions of dollars. I think that the benefit of doing that, it's actually when macro become better, hopefully, in the next couple of years, the company is much more efficient and we increased profitability quite a bit into a point where 2025, it's not just meeting the Rule of 40, but also the company, I think, it was not even in part of -- in the initial plan, become profitable on a GAAP basis. We are already profitable this year on a non-GAAP basis. So we expanded the margins quite a bit. A great example for that is the gross margin for Creative Subscriptions, getting to 80% already this year, as planned to be in 2025. So yes, we can control what we can control and basically taking the costs down in order to meet the new demand and also to meet the macro environment.

And on some of those costs, so you highlighted around care, doing some greater efficiency in hosting, but I wanted to double-click on marketing because that was an area where I think the pullback was even more outsized. You highlighted the marketing shift and a reduction in acquisition marketing spend by about 50%. And the one building space is pretty competitive and does get impacted by marketing spend. So what's the risk that lower marketing spend could negatively impact kind of the top of funnel?

So look, we were testing it for a few quarters now. It's not something that we did in one day. And it's kind of remarkable story because I think that it's not just it surprised us, but it just showed the benefit or the strength of our brand. And let me take you back to -- before COVID. Before COVID, we were growing. We are investing money in marketing, we're investing money in our brand. But during COVID, it was exploded, huge demand. We also -- as a reaction to that, we also invested a lot in marketing in order to answer the demand. What happened is that during the COVID, the strength of the brand become amazingly increased. I mean think about -- think randomly 10 people asking them about Wix before COVID and after COVID. Meaning that we are getting a much more audience that traditionally they wouldn't know who was Wix. So during the COVID, the brand has -- the strength of the brand increased significantly compared to the -- prior to that. And during the spring, when the post-pandemic, obviously, the period started, and it was back on April, May, we started testing it, to try to understand, okay, we ran through the COVID, but what is the effect on the brand? Do we still need to invest the same amount of acquisition because the brand -- we understood that the brand is much, much better. And we started to lower acquisition. We see that there is no significant impact on the core value. And I think that the answer is, great, we did an amazing job of creating the best brand in the world for creating a website. When people actually want to build the website, they are looking for Wix. But this is why it allows you to take down marketing, while getting the benefit of a great brand, and you see more traffic coming from organic sources. And it was already started back on the third quarter when we lowered the marketing expenses. In the fourth quarter, we understood, this is something that it's going to last, we believe, for a very long term because we didn't see an effect for testing it for approximately 6 months. So we believe that it's something that it's sustainable, it's going to last. And I do believe that it's also part of the guidance. We have a lot of -- we feel very comfortable about the new approach. And because when you strengthen the brand, and when you have a very strong brand, it's not something that is going to disappear, the day after. It doesn't mean that we need to stop investing in our brand, obviously. So this is the one, which we got with the care, again, it's not something that we did in day 1. We simply make the overall care process much more efficient. And we did test it. We implemented a lot of changes in terms of the processes and our people and our agents are dealing with customers. We didn't see any change in terms of customer satisfaction. So we believe that it's something that is still sustainable and will continue also for the next few years.

Great. And then on the B2B side, now that, that's been a newer channel for you guys, does that do anything structurally to allow you to not have to do as much acquisition marketing spend, now that you have a new kind of pipeline from your B2B partnerships. And second, what does the overall pipeline for B2B look like?

So let's start with the first part. So yes, this is exactly the -- where you see that partners is growing. And this is why I always said before that the partners business is much more -- will be much more profitable from the self creators because it has its compounding effect. When you have a partner that is part of the funnel, it's keep on building websites for its customers. You don't need to acquire all the time a new one and a new one because you already have a partner that keep on building for its customers. So it has its compounding effect, where I believe that it will continue. But you're right. I mean if you take B2B partnerships like LegalZoom and Vistaprint and NTT, I believe that we will see them in Yell in the U.K., which is doing amazingly well. So I believe that it will continue. And in terms of the pipeline, look, I cannot obviously disclose the size of the pipeline, but we see a lot of -- think about and go back to the brand again. Everyone that is providing any kind of service to small businesses. You can be an online, you can be -- online to our service provider, you can be a gateway, you can be a bank, you can be a carrier. The fact is that when you're dealing with small business, in the past, you used to provide those kind of services like website builder from a very -- let me be gentle about it, not that good platform. But what happens when you do that, you are creating a customer that is really not happy. And then you see churn because the customer is not happy, you are not going to see a lot of business for him. So today, the service providers, they are proud to say we are providing you with Wix, this is part of the strength of the brand. And we see a lot of -- in terms of the funnel and the pipeline that we have, many kinds of potential big B2B partnerships that we are working on. And I believe that this is here, this is one of the places where we believe that it's going to be one of our growth drivers.

And so the B2B partnerships are going to be able to bring more people into Wix via their own kind of platforms if there was Vistaprint or LegalZoom and then you also have your core kind of traditional DIY creator. And...

And partners, which is not just the B2B, I think that the bigger part of the partners is not actually the B2B. It's actually those partners like web designers, the professionals, the agencies that used Wix to build websites for others. Most of the growth in 2022 actually was because of that.

Got you. And actually, going back to that 2022 growth, when we just look at the premium subscription side, it grew about 2% relative to a CAGR of about 15% over the last 2 years. So how much was impacted by just churn versus the lower top of funnel? And how should we think about a normalized rate as just the macro environment begins to recover?

Yes. So I think, obviously, during COVID, we had huge growth in subscriptions, right? We had tons of traffic. Many people coming to Wix and subscribing very quickly. We had talked about a couple of quarters ago how we felt like demand kind of has reverted back to pre-COVID levels in 2019, and in fact in 2022, gross subscription additions were higher than 2019. So we are seeing exactly what we had suggested. Obviously, growth was a little bit slower as the year went on, just from kind of demand and top of funnel being weaker, but we still had good gross adds in '22. What really hurt the subscriptions growth and the net additions was this churn number from these COVID cohorts from years 2020 and 2021. And it wasn't the churn percentage that increased, in fact, the churn percentage has come down, but you're taking a percentage of a much bigger number. And so that really hurt the net additions to subscriptions in '22. I think that churn effect from those large cohorts is probably going to be with us again here in '23, though less, than it was in '22. And as these cohorts mature and start to flatten out, the effect of it will start to diminish. I think what's more important, though, is -- and what we focus on, far more than just looking at subscriptions is the cohort value and Lior has kind of referred to it, it's the combination of subscriptions and pricing and revenue per sub, right? And we have a lot of ways to drive revenue per sub, and we're seeing growth out of that. So we've seen revenue per sub in the last 3 years, rise 29%. Last year, it was a higher growth rate than the premium subscription number. And our cohort value was higher than the subscription numbers. So as long as we're continuing to improve the monetization of our subscriptions, which we are, we feel pretty comfortable with the direction that the subscriptions growth is headed.

And one of the ways to drive more revenue per subscription is getting them to do commerce than payments. And when I think about the gross payment volume through Wix's ecosystem, including Wix Payments and also some third-party providers, you grew about 7% year-over-year to just over $10 billion in 2022. But from the Wix Payments side, like that's actually growing faster as the blended take rate improved. So my question is where are we just in the expansion of take rates? And how much more room for improvement is there?

Yes. So we are seeing improvements in take rate, too. And this is another topic around looking at mix. We are getting adoption of Wix Payments increasing. About 80% of new commerce users that are choosing payments, where payments is available for them are choosing Wix. And so that's driving up take rate, overall, as we just layer in more Wix Payments, payment volume into the entire mix. The other thing we're doing is we're expanding the product. We announced today a new collaboration we have with Stripe around a tap-to-pay capability with an iPhone. So that just is another small example of the way we're improving the product and helps adoption. And we're expanding with payments through other countries so that, again, the eligible number of users can increase. So all these things are increasing. We've increased the take rate on Wix Payments 20 basis points over the last couple of years. And we certainly have more we can do to improve that, and we intend to. And obviously, hopefully, we see some recovery in commerce and GPV in the future as well. So we'll be positioned well to take advantage.

Great. And then I wanted to switch on a little bit more for the financials and the initial guidance for revenue growth in 2023 was about 10%, it implies a bit of an acceleration from the Q4 run rate of about 8% growth in constant currency. And just can you walk through some of the assumptions embedded in guidance. What are some of the puts and takes, do we need to assume an improvement in macro to get to that faster growth?

No, absolutely not. As I mentioned before, I've already learned my lesson. I do -- I described when I started. I assume that it will simply continue and be stable as we see in the first quarter. We didn't assume any improvement, but needed also the opposite. Meaning that if macro is going to become much, much worse, so obviously, it's going to have the impact, same goes for the FX. Revenue is very stable. I want to give you just an example. In the end of the day, we are a subscription business. So it's really easy to predict the revenue. What can be kind of volatile is the, for example, GPV for every $1 billion of GPV, we are getting about $30 million of revenue, right? And GPV is very sensitive to the macro environment. So obviously, we provided -- we took some assumptions over there, but it's kind of very consistent of what we see right now, no major improvement. On the other hand, remember that, the way that we do the -- provide the guidance, we internally build it for those 2 separate segments, the sales creators and the partners. For the partners, we do see that we are taking market share. So we assume that this is something that will continue, not necessarily be in a way much, much better, but continue as it is. Remember that even in 2022, the growth of partners was about 29% in terms of the revenue, taking much more market share. So we assume that it will still continue to feel very comfortable about it. So overall, I believe that the guidance is very consistent with what we see right now. Nothing more than that.

Yes. And then on the average revenue per subscription, you've spoken about that as being a big driver. Then the most recent year, grew about 4% year-over-year, and partially related to that GPV volatility that you spoke to. How should investors think about the trajectory of average revenue per subscription going forward. Can we get back to that double-digit growth? And what would be the main drivers?

Look, I think, obviously, you mentioned GPV affected ARPS, I think once we can see improvements in commerce that will help. Obviously, we talked about the take rate improving that will help. FX was a headwind, especially in the last quarter and a half or so of the year on ARPS. And that sure didn't help. So I think as a lot of these things work themselves out, we'll continue to see improvements in ARPS. We do see really strong adoption of business solutions, and that's going to continue. And as we've said, we continue to see really good mix shift as partners grows, partners are higher ARPU, ARPS users. They are attaching business solutions. They use business solution more. Some of our business solutions offerings are more transaction-based. And so that will help. So I think as we just continue with the strategy around partners and improving take rate, we're going to continue to see ARPS growth.

And on the partner side, you mentioned that, that channel is going to be free-cash-flow-positive by mid-2024, which is a big improvement. One, how much of it is kind of -- you don't have to do as much investment in that channel, overall, versus are you seeing anything better than your initial expectations in the types of products that they're building in the more expensive subscription?

Well, it's both. When we started a few years ago to build the partners business, we invested a lot, and this is what I call the fixed cost. Building the infrastructure, the care organization, the hosting environment, the R&D, obviously, the product and so on. We are done with it. The product is -- look, it's a software. You always need to invest more in R&D, but not at the same rate, meaning that I don't assume that we will increase headcount in order to do that. We also kind of done with the buildout of the business, so from now on, you're only going to see more growth, and most of the growth is going to be reflected in the bottom line in terms of the variable cost. But we did even more than that. When we talk about the cost reductions that we've made, we also improved based on the technology that we implemented, like AI, for example, for care. So we took down also the fixed costs associated with partners, the same goes for the infrastructure for the hosting. And for the overall overhead of the company, which has an impact on partners. So definitely, in the future, we are going to see partners growing, continue to grow in a double-digit number. But also, we are not going to see increase -- the associated increase in cost. So this is why, we are going to see these businesses getting profitable much faster. In the long term, we're going to be more profitable than the self creators. Where we see that it's actually doing better. I think that getting to 29% in a year like 2022, I should talk -- just understand the differences because it means that in a regular year, the growth should have been much more than that, obviously, because part of that also are impacted by the macro environment. We see the shift and Joe referred to that in terms of the customers, we see customers and we see agencies, build to their customers, much more complicated website. We have started to see customers that are paying tens thousands of dollars and hundreds thousands of dollars per site. And this is a huge change for us. And I believe that this is something that will continue because as the product is actually evolving to be the best product in the market. And we're also investing in brand, building the brand and increasing the -- changing the perception about Wix. Wix is not just easy, it's not just do it yourself, but it's also super professional. And the fact that we see that we are taking a lot of market share from companies like WordPress, Drupal and Joomla and so on. So we feel very comfortable about what we've achieved. And the fact that it was already done. We don't need to invest a lot more except of -- and this is what I also mentioned in the second half of the year, investing more in the brand of partners. But beside of that, we are already there, and we are going to see most of the leverage coming actually from partners.

Great. We only have about 2 minutes left. So I want to make sure if there's any investor questions. We get a chance to address those. So I wanted to ask on price increases. Is that -- you rolled those out, but you never really got the benefit in the back half of 2022 because of the FX headwind. And -- but that should still be a tailwind for as we get to the first half of 2023. So how should investors think about either the magnitude of benefit? And then just more broadly, your approach to price increases. And how often this is a lever that you guys have the opportunity to use?

Look, we always test. Even as we talk, there's a few testing on pricing on Wix. It's actually thousands of A/B test every year for different products, for different capabilities, for different markets. So we will continue to test it. Remember that last price increase is what we did, let's assume that you're increasing the pricing by 15%. It doesn't mean that you're going to see the benefit of 15% because you're also losing a lower-interest customer. But the overall benefit of doing price increase is getting a higher value of the court. And this is exactly what we are doing. So we are going to see some of the value of it on 2023, which already build out into the guidance. But most of the increase in -- most of the growth is actually going to come from -- for the expansion of taking more market share on partners. But sure, in the future, we might see more price increases based on A/B testing that we are doing. And remember that we are providing much more content right now to our customers. Some of it is going to be in a place where you are not actually increasing pricing, but providing different packages, for example, with much more content and services. So this is also a case that we might see in the future that actually, because of the mix and the change of our customers and so on. So I believe that, that will be also a great way to increase the ARPU for the next coming years.

Great. So that actually brings us up on our time today. Thank you so much for sharing the insights.

Thank you.

Thank you.