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

I've run the software research group here at Jefferies. Thanks for joining us today. Hopefully, you guys like the environment here. We wanted to move it to a more casual engaged spa where you guys have good meaningful conversations and thanks for your support. And special thanks to both Nir and Lior for making the trip from Tel Aviv to come see you. So make sure you spend time with these guys. Thanks for making that trip. And Nir, CEO and President; Lior, CFO. If you have questions, you can raise your hand. I'll ask questions for you as well.

But maybe just to kick off, what's kind of on your minds right now and just in terms of topical areas that you think investors should be aware of that, that maybe they're not hearing as well as they should. You feel in the business that maybe we can't see it as investors? What would be the 1 or 2 things that you would focus on?

Well, I think, Lior, looking to jump in and supplement. But I think that there has been a lot -- obviously, there's a bit a ton of buzz generally in the world around Generative AI lately. And I think people are asking us directly, and we've got that to learnings. I think this is something that people want to talk to us more about is what does AI, I mean, towards, is it a challenge? Is it a risk? Or is it an opportunity? And I think that's a very fair question, which is something that we believe that is important to address. And for me, the way I think about it is the strategy of Wix, which we announced, we've been following for a long time, but we went into depths in it last year on our Analyst Day, sorry, around the partners business and the fact that we believe the self-creators business is extremely profitable and growing very nicely, it's very big. But the next big opportunity for Wix is the partners. I do believe that strategy has not changed or should be deterred because of AI. And in fact, actually, with AI, supplement it. We've been using AI in many places in the company for many years. We actually trial-based design in AI with ADI many years ago, and we kept on evolving adding more and more functionality to it. But granted, I think that today, there are even more exciting opportunities around it. And we not only believe we're actually executing on it that the capabilities that come with Generative AI are going to be something that drives both sides of the business. So it's going to be beneficial to the self-creators by creating a much easier conversion path and quicker site creation and content creation and just brings their business online faster in a more effective way, which also will be great for us, because obviously, they'll convert more. But it is going to also be extremely effective for the partners and agencies and designers because it's going to make their work much more effective just by shortening a lot of the processes.

Lior, what's on top of mind for you? What -- from your perspective, from the investment side, what do we need to know that maybe we're not grasping?

Well, I believe that, and it's in a way also connected to what Nir just mentioned about the different segments, about the product. We talk about the self-creators and the partners. And obviously, right now, we are in a very exciting period for us. We went through a very interesting evolution of the company. And we are going to see and we already started to see that the company becomes much more profitable. We are heading to the rule of 40 and even more than that by 2025. And it's not just because of growing the revenue, but it's also because of getting a lot of leverage from cost. We build the product. We build the partner business. We are now getting the fruits. And we can actually see that from the first quarter, how much free cash flow we are generating. And I can say that we truly believe that by 2025, we are going to get to the rule of 40, but not just because of revenue growth, but mostly because of leveraging our costs.

Just on, one of the questions we get is, is this going to be embedded as a default that helps people come to your service? Or will there be incremental features where customers can pay incremental add-ons for some of these AI features? How do you view the strategy for AI?

So eventually, I think both. I think there's going to be a very kind of an almost holistic basic layer where the AI acts as your assistant and helps you get through. The creation and also the thinking process, okay, what do I need to have in my website? If I'm a lawyer, what is recommended versus what is recommended if I'm an ice cream shop. But I do think that in deeper places around some certain business logic capabilities where the AI can create significantly extra value on the -- for transactions, for increasing sales, for more complex capabilities, then absolutely, that can also be an ad-on. So I think the first layer of contribution is going to be around the very obvious effective process of creation and then that translates to higher conversion. But later on, it will also be -- started to be supplemented by add-ons, which can also be a driver for ARPU.

And the goal of reaching 40 by 2025, can you talk about the path of growth versus margin? And how you get to that?

Sure. So obviously, we assume that we will continue to generate growth. Let's talk about the partners, for example. I mean you can see that in the last quarter, the growth was about 26%. I believe that it will continue to be a hyper-growth business. I mean we are taking the market share, clearly, and it looks really good because we see more and more agencies moving to Wix. The self-creators, it's also -- it's an amazing business for us. We are actually -- we are the leading brand, and obviously, we are going to see more and more of that in the future by releasing more features and so on, increasing the ARPU, including more services, complementary services like the Google ads and email marketing and payments that actually increasing the ARPU. That said, we are not dependent on getting the rule of 40 by getting a higher growth. It's mostly going to come from leveraging the cost. I mean, think about it this way, we are increasing revenue every quarter, every year, but at the same time, the costs remain very solid, very stable. So this is the way that we are planning it. And obviously, if the growth is going to improve, we might be in a situation where we are going to be in a rule of 40 plus. So this is exactly how we plan it. And we have a very, very strict plan for the next 3 years until the end of 2025, and we are very positive about that.

Do you -- longer term, do you think this is a 10%-plus growth story? Do you think it's a 15%? How do you think about the longer term on where your aspirations are?

So again, so let me divide the answer into 2. The first thing is about the partners. Definitely, the partners is a hyper-growth business because we are getting a lot of market share. We just started. We just started, we intend to increase the awareness of partners business to the different agencies, and we see more and more agencies moving to Wix. Now the self-creators, the self-creators is a business that definitely we believe that will continue with its growth. Why? Because we are definitely the leading brand. We are adding more and more capabilities. For example, AI, we spoke about AI. AI is a perfect way. And we also saw that from the last release that we had about content creators, increasing the ARPU all the time, increasing conversion all the time. And the third leg is about the Business Solutions. Business Solutions have all the complementary services like payments, like application, and we are keep on adding more and more increasing the ARPU. Those 3 segments are going to generate more growth. Obviously, partner is going to generate much higher growth than self-creators. So to your question, I believe that putting aside all the macro and everything, I believe that we will be able to generate even higher growth than what we see right now. And we truly believe that it will happen.

In the margin upside, where do you -- what are the biggest sources of opportunity to bring margins higher?

Well, in a way, we see that it already happened. The first thing, obviously, is about headcount, having a very steady headcount, stable headcount, not increasing headcount. And so from one hand, we are getting more revenue, but the headcount has been kind of fixed, right? So we are getting a lot of leverage out of it. And it's all over. It's in the R&D. We gave an example about sales and marketing, how we manage to generate much better result by lowering marketing, especially about acquisition, right? Because we have a very, very strong brand. And we believe that this is something that it is consistent. So we are going to see the leverage all over the P&L, cost of goods sold. About 50% of the leverage that we serve this quarter was from the cost of goods sold. We managed to lower headcount in care organization, by the way, mostly by implementing a lot of AI capabilities. We managed to decrease the hosting by increasing more technology features that help us to do that. So we had a lot of leverage coming from the cost of goods sold, and I believe that it will continue. And as I mentioned before, also about headcount, headcount stable, revenue continue to grow, generating a lot of leverage.

And I would also add that as we had more complex functionality or higher added value solutions, Business Solutions for our customers, they come as add-ons on top. So essentially without any significant further investment, we increase the ARPU, which also contributes.

The -- I haven't been yet, but I hear you have this beautiful new building in this consolidation. I think you were in 20-plus different buildings in Tel Aviv. Now you're going to go to -- are you going down to 1 or...

We're going down to 1. So it's -- a lot has changed because we went through this -- the whole thing pre-COVID. And back then, we were spread at around 20 different locations in Tel Aviv with 40 different offices because even in one certain location, you could have different pieces. It's extremely hard to manage, both on the hard to meet the people and for teams to work together and collaborate, but also it's a big operational mess to try to get the same kind of service to all of the employees when it's all spread out. So we did the first move -- first phase move to our new campus in this last October. So it's amazing. It's such a different experience suddenly. We were in very shabby offices around town. And now in October, we're going to be moving the other two pieces that are still not in to the campus, and everyone is going to be in the same headquarters. I think it's going to actually be another great improvement to our efficiency. We also got everyone back to the offices, working together again. So not remotely. I think it all -- all of that is also a great contribution.

And to add to that, I think that's long term, it's going to serve us cash. When you're spreaded over 20 different buildings like in the center of Tel Aviv, the cost is very high. We actually are getting the campus in about half of the price per square meter, allowing us to get more space and having everyone in the same place. So long term, definitely, it's also going to save us in term of the operating expenses.

And the word is that the Jefferies Conference in Tel Aviv in September are going to come and get us and see the campus.