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

Good day and thank you for standing by. Welcome to the Wix Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Rona Davis, Head of PR and Communications. Please go ahead.

Thanks and good morning, everyone. Welcome to Wix' First Quarter 2023 Earnings Call. Joining me today to discuss the results are Avishai Abrahami, CEO and Co-Founder; Nir Zohar, our President and COO; and Lior Shemesh, our CFO. During this call, we may make forward-looking statements and these statements are based on current expectations and assumptions. Please consider the risk factors included in our press release and most recent Form 20-F that could cause our actual results to differ materially from these forward-looking statements. We do not undertake any obligation to update these forward-looking statements. In addition, we will comment on non-GAAP financial results and key operating metrics. You can find all reconciliations between our GAAP and non-GAAP results in the earnings materials and in the Interactive Analyst Center on the Investor Relations section of our website, investors.wix.com. With that, I'll turn the call over to Avishai.

Thanks, Rona and good morning, everyone. We have had a fantastic start to 2023. And I'm pleased to say that we exceeded our expectation across many areas of our business. The drivers of our results this quarter were broad-based across our business, both on the top line and on the profitability. Revenues in Q1 grew to $374 million, above our guidance. We generated $44 million of free cash flow, excluding onetime charges and also ahead of our expectation. This great results are a testament to the strong execution of our strategy to provide the best platform of innovative product for our users while increasing operational efficiency and discipline. Much of the growth this quarter was also driven by our partners' business. This year, scaling our business with partners, including designers, freelances and enterprise partnerships remain a key strategic focus. Partners' revenue growth accelerated this quarter, up 27% year-over-year. We recently announced some exciting product for partners, including Wix Headless and have many more incredible product announcements and marketing plans for later this year. The outperformance of this first quarter is very encouraging. So we are raising our revenues and free cash flow outlook for the full year as well as pulling forward many of our profitable targets for 2023. Our profitability outperformance bolstered our confidence in achieving the Rule of 40 in 2025. I will let Nir and Lior share more detail about this quarter and then I will close with my thoughts on AI. Nir?

Thank you, Avishai and thank you, everyone, for joining us today. I'll share a bit more details about our performance this quarter as it relates to our user cohorts. Some color on our marketing investments in the quarter following the recently announced strategy shift and then updates on our focus on operational efficiency. Let's start with user cohort performance. Our Q1 '23 new user cohorts performed exceptionally well with 5.4 million new users collectively generating more than $30 million in bookings in this first quarter, easily the highest same quarter bookings in a non-COVID cohort. and on a base of a significantly smaller size cohort. This clearly indicates the inherent improvements in the fundamentals of our business including subscription conversion and average collections per subscription as well as stable retention. Diving deeper into these fundamentals shows the returns from our focus on bringing higher-intent, self-creator users and partners, which convert at higher rates. It is also the result of higher monetization driven by users choosing higher-priced subscription, strong adoption of business solutions applications, more transaction revenue as a result of higher GPV and increased take rate and continued contribution from our B2B partnerships. We expect these trends to continue in the coming quarters this year. Lastly, this performance is a testament to the strength and scale of our global brands as reflected in the success of our marketing strategy shift implemented last year. As a reminder, based on tests we started last summer, we determined that we could keep new cohort bookings stable even if we reduced acquisition marketing spend by half. We continued this marketing strategy this quarter and decreased acquisition marketing spend by approximately 47% year-over-year, while still increasing new cohort bookings. After more than 8 months of expanding and perfecting this new strategy, we are confident in the results and therefore, expect investments in acquisition marketing to remain at reduced levels throughout the rest of the year and beyond. In addition to the strong fundamentals and the significant increase in marketing effectiveness, we've also intensified our focus on driving operating efficiency across our business. We successfully implemented the cost savings outlined last quarter, as well as realized additional hosting optimization opportunities and continue to decrease head count. We ended Q1 with 5,006 employees, down 18% year-over-year from early 6,100 employees in Q1 2022. With that, I will now hand it over to Lior to walk through more details on our financials. Lior?

Thanks, Nir. This quarter was marked by fantastic profitability improvements that allowed us to achieve our 2023 profitability targets much earlier than anticipated. Even more importantly, these steps firmly put us on the path to achieving Rule of 40 in 2025 with significant expansion of our margins. In Q1, we grew gross margins by nearly 500 basis points, driven by hosting optimization and headcount efficiencies, among other cost savings. We further drove operating leverage by executing on our new marketing strategy, reducing head count and implementing savings across our entire operating cost structure. Non-GAAP operating expenses as a percentage of revenue declined significantly from 77% in Q1 2022 to just under 54% in Q1 2023, resulting in the highest non-GAAP operating income in our history. These efforts drove free cash flow generation to finish higher than anticipated. Looking past this year, we expect to continue this quarter's momentum by advancing our commitment to operational efficiencies across all aspects of our organization. Continued cost management, mostly across operating expenses, will enable us to drive further leverage and expand our cash flow margin significantly. In addition to our continued profitability improvements, I'm also very excited about the execution of our strategic initiatives, particularly our focus on the partners' business that will enable us to continue to deliver growth in the coming years. Now on to the details of the quarter. The fundamentals of our business remained strong this quarter which led us to exceed the top end of our guidance range for revenue. Total revenue was $374 million this quarter, up 10% year-over-year. Total bookings were $415 million in Q1, up 6% year-over-year. Remember that we signed our partnership with LegalZoom in Q1 2022, creating a difficult comparison this quarter, removing this amount from bookings in Q1 of last year, our FX neutral year-over-year bookings growth was 13%, a better indication of our growth compared to the prior year quarter. We saw an acceleration in transaction revenue growth this quarter, up 16% year-over-year to $42.3 million. This growth was driven by higher GPV of $2.7 billion, up 6% year-over-year, as well as higher overall take rate as merchant adoption of Wix Payments continue to increase. As Avishai mentioned, Partners is a major area of focus and growth for us this year. Partners revenue grew to $103.9 million, up 27% year-over-year. This is an acceleration in growth compared to the prior couple of quarters as more agencies and developers build projects on Wix and we increase our monetization of professionals, particularly as they increasingly generate more GPV. This quarter, we also began to see some early but still very minimal revenue contribution from the B2B partnerships we signed over the past couple of years. More impressively, this quarter, we intensified our focus on driving operational efficiencies across the business. These actions allow us to achieve the profitability milestones planned for later in the year, much earlier in Q1. By implementing the cost-savings strategy introduced last quarter as well as additional hosting optimization and headcount efficiencies, non-GAAP gross margin increased to 67% in Q1 making it the highest quarterly gross margin since 2020. Growth in the creative subscription revenue, along with cost discipline, drove non-GAAP gross margin for creative subscriptions to above 80% in Q1, an increase of 450 basis points year-over-year. Both of these gross margin targets were originally anticipated for later in the year. Our continued implementation of our new marketing strategy that Nir spoke about earlier, along with additional savings across our operating cost structure, this quarter resulted in the highest quarterly non-GAAP operating income in our history of $48.5 million or 13% of revenue. As we mentioned last quarter, we did take a onetime charge of $25.3 million related to the headcount reduction we announced in February and impairment charges related to operating leases as we align our footprint with our current needs. As a result of higher growth and a focus on operational efficiency, we generated $44 million of free cash flow or 12% of revenue. This excludes CapEx related to the build-out of our headquarters as well as the cash portion of the onetime severance charges, I just discussed, which was about $2.1 million in Q1. Free cash flow performed better than expected and give us more confidence in our ability to achieve the Rule of 40 in 2025. Now let me finish with our outlook for Q2 and 2023. We expect total revenue in Q2 to be $380 million to $385 million, representing approximately 10% to 12% year-over-year growth. For the full year, we're increasing our outlook. We now expect total revenue to be approximately $1.52 billion to $1.54 billion, representing approximately 10% to 11% year-over-year growth. This is an increase from our prior expectation of $1.51 billion to $1.53 billion or 9% to 11% growth. We are also updating our profitability expectations for the full year as we continue to drive efficiencies across our operating cost structure. We now expect non-GAAP gross margin to increase to 67% for the year, up from the 66% previously expected. Creative subscription non-GAAP gross margin is now expected to be 81%, up from 80% previously expected. Non-GAAP operating expenses in 2023 are now expected to be down year-over-year to 58% to 59% of revenue compared to 59% to 60% of revenue, as previously expected, driven by lower sales and marketing expenses and general incremental operational efficiencies. As a result, we are increasing our outlook for free cash flow for 2023 to $172 million to $180 million or 11% to 12% of revenue, exiting the year with a free cash flow of more than 13%. This compares to our previous expectation of $152 million to $162 million or 10% to 11% of revenue and an exit margin of 12% to 13%. Note that our free cash flow outlook excludes our headquarters build-out costs as well as approximately $4.5 million of cash restructuring costs. Finally, stock-based compensation is expected to decrease to 14% to -- 14% to 15% of revenue in 2023, down from our previous expectation of 15% and down from 17% of revenue in 2022 as headcount across the organization declines more than originally anticipated. I'm very happy with our results this quarter and our revised outlook for the remainder of the year. I'll now turn it back to Avishai.

Thanks, Lior. I have been getting a lot of questions about AI lately. So I want to share my thoughts to close out our time today. My own background prior to Wix was in the development of advanced computing algorithms, including AI, which is why I find the recent AI breakthrough, so exciting. In fact, the Data and AI groups here at Wix, report directly to me. Over the past decade, we've been unlocking more and more opportunities based on AI breakthrough while also collaborating with the best teams on the planet at OpenAI, Google X, IBM and others. My thoughts on AI can be summarized in 3 key points. First, our goal at Wix is to remove friction. The easier it is for our user to build website, the better Wix is. We have proven this many times before through the development of software and products, including AI, as we make it easier for our users to achieve their goals, their satisfaction goes up, conversion goes up, user retention goes up, monetization goes up and the value of Wix grows. In 2016, we launched Wix ADI, an AI-based site creation platform. In fact, it's equivalent to using a [indiscernible] to build a site. The user enters some basic information about their business. And the AI recommend the pages, images and text that make sense and then generates the site personalized to the business. Obviously, the text generation ability in 2006 were a bit naive compared to the recent GenAI tools of today. That said, due to our long-established team and institutional knowledge of AI, it was easy for us to replace that initial text generation tool with OpenAI ChatGPT for out text -- AI text creation, which we introduced earlier this year. Today, new emerging AI technologies creates an even bigger opportunity to reduce friction in some areas that were almost impossible to solve a few years ago. When we embed this technologies into our platform, it increased value for our customers. We believe this opportunity will result in an increased addressable market and many more satisfied users. We have over 200 AI and GenAI model deployed on our platform, both to simplify complex technology for our users and to improve our internal workflows and development efficiencies. This model power many processes and innovation of ours, including full site creation, text creation, image manipulation and enhancement, site design, user support, user sentiment analysis, site classification, recommendation engines, semantic search, forecasting and many more. In the coming months, we will introduce even more AI tools to be fully powered by [indiscernible] to -- and proprietary algorithms, which will, of course, include full site creation that not only generate content but also the design and the layout. It will also integrate with everything you need to run a business such as e-commerce, scheduling, SEO and more. The second important point is that there is a huge amount of complexity in software, even with websites and it's growing. The question today is not when AI will be able to create the content for the website. That already -- and has been possible for many years, which ADI fully demonstrated that. The big question today is, what happen when AI can generate all together the content and the code of the software needed to run a fully functional website? For example, even if AI could code a fully functional e-commerce website, which I believe we are still very far from, there is still a need for the site to be deployed to a server, to run the code, to make sure the code continues to work, to manage and maintain the database for -- when someone wants to buy something, to manage security, to ship products, to partner with payment gateways and many more things. So even if you have something that can build pages and content and code, you still need much more. That gets to my third and final point. And that is even in the far future, if AI is able to automate all of those layers, it will have to disrupt a lot of software industry. You will no longer need a database management, even server management and cloud computing. I believe we are very far from that. And then before that, there will be many more opportunities for Wix to leverage AI and create value for our users. To add to that, the value of what we do today is allowing the user to capture their story and bring it to the web, it is not the text that ChatGPT generate. It's helping the user use ChatGPT to create their version of that text to tell their story. It's not about Midjourney, using Midjourney to create images for your business. For example, like, you have -- it's a yoga studio or an amusement park, you need an image of your yoga studio and your amusement park. For your e-commerce site, you need images of your products that are being sold. The images have to be real and the story needs to be real and the value of turning that story online and how to do it well, is a big part of what we do here at Wix. As you can tell, I'm tremendously excited about the power of AI and the power that AI is bringing and the many opportunities it will create for our users and our business. Thank you again for joining and we will now take your questions.

[Operator Instructions] And our first question will come from Ygal Arounian of Citigroup.

Avishai, I want to -- a lot of good color on the AI and I just want to focus on that maybe a little bit more, specifically on that last point, where you talk about more opportunities to leverage AI and add value for users, even kind of further into the future as all this evolves. I guess I want to maybe expand on that point a little bit. And as we talked to investors over the past couple of weeks, this question has come up more. I think the biggest fear is that all the stuff happens and then folks start to go to some of the larger players in AI where you can build websites and do some of these things and as they develop their AI capabilities, they start to develop some of the stuff more. So maybe just talk about how you envision that? And why has -- as the AI capabilities improve, you expect users to continue to come to Wix.

Of course. Well, the first thing I want to say is that -- the first part of your question, Ygal, is about what kind of opportunities to leverage AI, do we get, right? And I think it's about a few things. I'll start with the first one. It's about how many of the people that try to build a website on Wix actually finished with the website that they are very happy with, right? And the more we increase that ratio, the better is the customer experience, the longer those customers will stay with us and, of course, the better monetization. And we've proven, right, with ADI in 2016 that by just generating a lot of the [indiscernible] for the users. So the text, which we did and the images and the layouts, we increased conversion. I think the current technology will allow us to do it even further. So I look at it as a way to -- and website is a combination of many things, it's not just the text. So ChatGPT help us some of it but you still have to have the right structure, they like visuals, the right layout, right design and way to use the user images. So there's a lot of work there. And the -- so I think this is the first part, right, creation of the website. The next part is how do you edit and modify and use the website. There it's a bit harder to use any of the current standard models because you wanted to place an image, you don't want to write -- I am going to - I wanted to place the third image in the fifth column, can you please change it to something -- actually it's easier to go and click and point on it. And you don't want to generate all the text from the beginning. You just want to do the specific part. So this requires a lot of complex UI. But I think -- and I think ADI proved that you can do it and when you do it well, it works very well. So I think this is the first part, where we're going to see better, happier users and faster site activation and more sites being finished to the user satisfaction. The second part is, when you start to -- things like copilot and wait for the AI to help you understand, what you need to do next and how to add things, you can actually use more of our software capabilities, right? Because today, you kind of have to know yourself, why you want to do and then find how to do it. But if we can guide you with AI and Microsoft is demonstrating a lot of really cool things with copilot on Excel, for example, then we can actually take it to another level. So we actually have the ability to take users that use Wix in a certain way and make them use better and more Wix. And I think that also creates the next part, which is the more that you have stronger AI tools, the more important is the power of the platform itself and not just how quickly you can type content because if we now have a way for you to finish everything and now utilize more of the platform, then the fact that you have a deeper software layer actually become a lot more valuable. And so I think -- we are very optimistic that this will actually enable us to give more power for our users, make their sites more successful. And as a result, make us -- put us in a better place as a company. I think your second part was about why -- what is the chance of people moving to the AI companies to build the websites, if I understood correctly or I misunderstood it.

Yes. That's essentially -- they leverage their capabilities and build, create website builders and replicate what you're doing and use some of the -- so why people stay on Wix?

Yes. So -- okay, so -- but if you look at what you can do today with AI , there are actually 2 things that have changed dramatically. The first one is the creation of text, right, which has changed dramatically. And images, which you can invent images and do that. But as I said, we've been doing it for a very long time. And of course, not in the same line -- text generation, not nearly as good as ChatGPT. But this is a very small part of what we do, right? Because how do you use that to create e-commerce, right? How do you use that to make a scheduling engine, just think about all the way that you need to sign contracts, repayment processes to run that. How do you edit things, okay, on top of it? So pretty much 9% -- 8% of what we work on and develop, right, is not covered by that. You need your site to be running well. You need it to be managed well, you need to have SEO, you need to have security. And then you need the ability to update content, you need to have the ability to do slideshow and scheduling e-commerce transaction, collect leads, all of those are not covered. So what you can do essentially is create and with all those tools and the basic level is create simple landing pages, right, which is kind of like a very static page. But you could always do that already with Microsoft Word. You can just go and type the text and publish it as a HTML and put it in some hosting company. So -- and those guys have never been our competitors, the ones that do that, okay? They do those very basic simple [indiscernible] In fact, you can do those in weeks. And it is very small portion of our business. So if you look at the majority of our business, I think there is a very -- still very -- quite a few years and probably more than just quite a few years until we see that AI is starting to cover that kind of software.

Great. That's really helpful. [indiscernible] and quick follow-up on some -- a little bit more near term. A number of interesting product announcements this quarter. Maybe -- if you could just expand on the Google Labs, Lior, because you talked about that being a meaningful contributor to the growth in Business Solutions. And then -- in fact the news around the Headless products is really interesting and could potentially open up the opportunity with the partners a little bit more. So maybe if you could just hit on that as well.

Well, this is actually a good demo of what we are utilizing the power of advanced algorithm to bring and AI to bring more value for our users, right? It's a way for you to not understand anything about what you need to do in Google in order to create great advertisement and for us to fully create that and generate it for you. And by doing that, we reduce the friction for our users to have -- and running successful Google comparatively is a very -- well, it's a real skill that you need to learn, it takes time and we use advanced algorithms to do it for the users. And the result of that is that we have more -- the happy our users that their business is more successful. And of course, for us, it means more monetization opportunities. It is -- [indiscernible] it's also being used a lot by what we call partners' web agencies because even for them, it provides so much value and reduction of friction and labor that we see a lot of the professionals are using that product.

And our next question will come from Aaron Kessler of Raymond James.

Maybe just a couple of questions. Maybe just -- you commented a little bit on the macro in the letter, just maybe your updated thoughts there and kind of the environment we're seeing, especially with SMBs right now. And second, just the non-GAAP OpEx guide. I think you lowered that a little bit but still it's -- given the strong Q1 performance there, it looks relatively conservative to guide. Just any updates on that non-GAAP OpEx for the year as well.

Aaron, it's Nir. I'll take the first part and Lior can follow up on the second part in regards to the OpEx. So in terms of the macro environment, we've seen some modest improvements kind of across the board in terms of -- on the demand side, top of funnel, some -- I would say, some recovery in growth in GPV, a little bit in the transaction revenue as well as the subscription behavior of the -- both the existing cohorts and the new cohorts. That being said, it's still relatively early. The increase is modest. So we're being cautious not to call it a recovery but we do point out that we're seeing a little bit of it.

Aaron, this is Lior. With regard to the OpEx, I think that this is one of -- in my mind, one of the most amazing things that we will manage to achieve. OpEx, this year, the non-GAAP OpEx is going to be around 58% to 59%. And I believe that this trend of taking down OpEx as a percentage of revenue will continue into 2024 and 2025, which brings me the confidence in our ability to meet the target that we set for the Rule of 40. So you should expect it to continue decline as a percentage of revenue even in the next couple of years and it will be significant.

Got it. And just in terms of '23 though, I think you did 54% in Q1 in terms of the non-GAAP OpEx. I guess any reason it wouldn't be lower than that 58%, 59% for the full year.

Yes. Because as we mentioned last time, the second half of the year, we do plan to invest more in branding for the weeks, especially with regard to the partners that we have. And we said that we are going to do that in the second half of the year. So it reflects that.

And our next question will come from Mark Mahaney of Evercore ISI.

Two questions. Could you talk about the revenue growth outlook in order to get to that Rule of 40? I think for the full year, your guidance implies maybe the potential for very modest acceleration. Are there factors that could cause that revenue growth rate over the next 2 or 3 years to get back to the kind of that mid-teens levels? And if it does, what would be the 2 or 3 biggest drivers of that? And then secondly, just on Google Labs. Could you just talk through the mechanics of that or the materiality of that?

Okay. So for the first question, Mark, we obviously see a tremendous growth in terms of our partners business, approximately 30%, very much in line with what we said during the Analyst Day. But I must tell you that I didn't plan into my model growth or acceleration in growth in revenue in order to achieve the Rule of 40, meaning that the Rule of 40 will be mostly achieved by more efficiency and leverage coming from both of gross margin but mostly operating margins. With regard to the Google Labs, look, this is something that we started and it's a great -- as Avishai mentioned, it's a great monetization of our funnel, of our customers. It is millions of dollars. I don't want to provide the exact amount but this is one of the very exciting growth driver for our business solutions.

And our next question will come from Elizabeth Porter of Morgan Stanley.

Really helpful color on why kind of the current AI platforms, [indiscernible] replacement for Wix. But you also referenced emerging AI technologies, providing the opportunity to actually increase Wix' addressable market. So could you provide more color on who that incremental user type is that you expect to be able to address and how that's different than your core TAM today?