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

Good afternoon, everyone. Thank you for joining us, the Morgan Stanley TMT Conference. My name is Eliza Porter, I'm an analyst on the U.S. software team. And I am very pleased today to have with us the Wix team, Wix's CFO, Lior Shemesh; and President, Nir Zohar. We are taking audience Q&A. So, the mikes will go around at the end. And for important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. And with that, thank you guys for joining us today.

So, before we dive into the business, it'd be great to get your macro perspective on the demand backdrop. On the Q4 earnings call, you introduced bookings guidance and you noted some things like improved visibility and heightened level of confidence in the business with some positive trending macro, really encouraging to hear after so many companies have been to this environment of an uncertain macro environment. So, can you just kind of walk through what you're seeing in terms of demand from existing customer spend and new customer spend that drives your confidence?

So, yes, I mean, for the first time, we are actually introducing the guidance for bookings from our point of view it's really exciting. And, yes, just to be careful with that. It's so excited. I think that the reason of that is a combination of many things but we do see some kind of, let's call it, modest improvement and stability in the overall macro, which is really good. We do see some kind of increase in, for example, in a business transaction in GPV and so on and I think that it provides us with the kind of the certainty that we needed in order to provide the guidance for bookings again after a few years. So, that with the combination of the new products, that with a combination of where we are as a company, in my mind is like the best ever position that we have had. So, in terms of new products, when we talk about the Studio, the new AI Site Builder, but all of that provide us with the certainty about the business, especially about the 2024, combined with the stability of the macro.

And then, I want to get first a little bit into the partner channel because that's been a really big focus of you guys, you've been adding agencies and freelancers and developed more towards the platform kind of going beyond the traditional self-creator customer. If partners now contribute around 30% of the total revenue, it's really impressive that's up about 10 points just over the last 2 years. So, why, kind of from your voice this segment, is so important and where could it go over time? And how quickly could partners actually become the majority of the business?

Well, I think and Lior can complement if he wishes. In terms of how we think about partners, it's very clear and it's been very clear for a long time that the opportunity is very significant. It's a very big TAM. It is probably the vast majority of how websites are being built online is by agency, designers, what we call partners and not by the self-creator. So, obviously, the opportunity there is massive and in order to capture it, I think the main thing we needed was not a proof that it's the right way to go but having the right products in place. And with the release and the very significant success of Studio this past year and going into 2024, we do believe that we have everything in place in order to keep on going after that opportunity and sustaining those kind of growth levels. Naturally, if we do and because of the size of the opportunity, it does make sense that sometime within the horizon of, I don't know, '24 to '26-ish, we can get to the point where partners are as big as self-creators. Again, I don't know what's exactly going to be the timeline for it, and from our standpoint we'll do anything we can in order to accelerate it, not by decreasing or harming self-creators, just by driving more revenue and value throughout the partners business. The key thing I think that we have going for that is the behavior of the cohorts of the partners which has a compounding value that comes from more and more websites and projects being deployed by any agency over time and also a much higher adoption of business solutions, contributing more GPV, et cetera. So, we have a good reason to believe that, that growth is very much sustainable in the years to come.

I think that also, a very interesting kind of provide you with us up to the future that, yes, partners is about 1/3 of the revenue but almost 50% of the Wix's GPV. And I think that it's basically kind of provide us with the understanding of where we are going to be in the near future, as Nir mentioned.

So, the other side of the business is the self-creators, are those individuals that are typically just making one website for themselves? And after seeing the benefit from COVID as everyone just needed to build an online presence when physical doors were closed, growth slowed there a bit from kind of the 20%-plus range that you saw in 2020 and 2021 down to 5% range in 2022 and 2023. So, the question is, is it mid-single-digit revenue growth, the new run rate for the business? What's the risk that COVID accelerated the maturity of just the web building market? And if not, kind of what drives the market to reaccelerate?

So, from our standpoint, we do believe there's still more acceleration to be had. Again, I don't think it should go back to the COVID rates because those were unnatural in a different way and unless there's a new pandemic, God forbid, they shouldn't go there. But it should accelerate from the levels that they are now, which is still, I think, underperforming in terms of potential. And generally, there are 3 key things, I think, that are going to drive the growth of revenue for the self-creators. One, which is, not in our control, is the macro environment, Lior mentioned that at the beginning and we do think that it still have room to improve, at least to get back to pre-COVID rates, which it hasn't returned to yet. But that's not in our control, and I can't foresee when that's going to happen. The other 2 things which are in our control is, increase in the ARPU or ARPS, which is driven by adoption of higher tiered packages and business solutions and extra functionality. This is something which is in our control because it's our control to both create the values that can be adopted as well as help these small businesses understand that they should adopt it and how and walk them through it. And then, the last thing which is extremely important is the product itself, and it's the conversion path and our innovation on the creation process, which helps them get to the results they were aiming for, faster, easier and being more successful. Obviously, AI plays a really big part in that especially on the self-creator side. We've already started seeing that, we announced today the release of the Wix's AI Website Builder, and that's going to be another key factor in driving growth for the self-created in the future.

And on that AI site generator, as you noted, it was finally released GSA so, go check it out if you haven't already. So, you have the site generator on one and you've also highlighted that the majority of your new customers are actually adopting at least one AI tool. So, how do you see the benefits of AI unfolding for Wix just in terms of this conversion, monetization, retention? Is this an embedded in guidance or is this something that investors should look at as a potential upside driver?

So, I'll leave the guidance question to Lior, obviously, but I do want to say that the way we perceive AI and the value it can deliver to our customers is, we don't look at it as one specific product, but rather as a technology stack that can deliver lots of value in different areas and our goal is to put that in the hands of our customers. By the way, that is always what we've done. We've taken complex technological problems and simplified them to put them in the hands of the small business owner and I think AI is such an opportunity but on steroids. So, obviously, throughout the creation funnel, helping you understand what you're trying to build, what are the right functionalities that you may want to use, helping you with different design aspects or different design opportunities, different layouts that might feature website and getting you to a result which you're happy with and can also deliver value, is a key thing. But if you remember what we presented last summer and we showed a whole stack of different AI capabilities that are all kind of slowly being pushed out there and it's also about helping the small business manage their business in a more effective way. It's also about giving them an AI prompt to talk to their own customers so they can kind of complement themselves when they're not around in terms of getting leases, selling and just generally giving good customer service to their own clients. And I think there's so much more still to be had and none of these tiny businesses are going to develop their own AI agents to help them out, right? So, it's our job to put it in their hands and it will lead also to much very success for them which will have, obviously, great leverage for us on the revenue side.

Look, with regard to the guidance, we always provide the guidance based on the KPIs as we see them in the minutes or during the time that we actually do the calculation in order to provide the guidance. So, yes, it can be an upside but remember that we are talking about a subscription-based model. So, any upside to the business has a very little impact as opposed, for example, to a studio where it's all incremental, meaning that we are going to see some contribution, we certainly hope, but it will be mostly, I believe, next year or towards the second half of this year.

And going back to Wix Studio, you just referenced, historically, it takes time for products to build momentum, impact the model but you've highlighted Wix Studio as already being one of the highest performing products in your history. So, what do you think that's different with Wix Studio and what's the possibility that revenue impact could be kind of more meaningful and sooner relative to some of your historical product releases?

Well, I think that the success of this release is very much based on all these things we learned from working with our partners in the past almost 3 years since we released Editor X, and a lot of the efforts we've done around kind of cultivating in the relationships and understanding what the agencies and partners need. I think we've really managed to incorporate a massive amount of that feedback and understanding the different aspects of how we can give them value to get what is pretty much the most successful product release we've ever had. In terms of how it's contributing, I think, well, the Partners business, I think on absolute dollar value, in 2021 it was roughly $250, $270 million in terms of our revenue growing to $350 million and then $470 million last year, which is the 30% you mentioned before. In order to maintain such hefty growth as numbers go up and that's at losing the percentage growth to higher numbers, you have to innovate and make sure that you deliver the right value. So, from my standpoint, our ability to maintain the growth rate is based on the success we're seeing with Studio. And, in fact, I think a hefty chunk of the acceleration that Lior mentioned in the second half of the year for the bookings, is based on the success of Studio.

And with the partner changes, you've made some additional changes to your pre-partner relationships recently where you're kind of increasing the revenue agreement that you have with them. And with partners already kind of doing so well kind of right now, what was the philosophy about expanding this agreement kind of why now? And what does it present kind of longer term in terms of your opportunity to take share?

Okay. I believe that I was talking with many agencies in the last couple of years to try to understand their business model. In most of the cases, their fees is a onetime fee. And I believe that for the first time, Wix is providing them with the combination of really the best product and the best platform but also with a business model that allowed them to move and to actually be kind of a fast company, right? And to really to enjoy from the fruits of their work, I think that the fact that they are going to get as the last time, a part of our success, like, for example, the GPV, Google Workspace, the different packages, I believe that it just will allow them to grow their business and as a result of that, to make us to be more successful. The way that I'm kind of looking at it is like marketing investment, where I believe that it's going to be a win-win situation enough both for Wix and our partners and this is one of the things that I considered as a growth driver for us in the future as well as for them.

And, additionally, kind of you have the revenue share agreement on one side that you're doing with partners. You've also kind of increased prices with some of your own kind of customers as you have been introducing just a lot more value to the product and a lot more features, so kind of inching up that pricing to be more reflective of what you're delivering. So, I wanted to ask a couple on this. And in Q4 earnings, you announced that this price rollout just started to happen both on the new and renewal subscriptions. So, can you take a step back in time, kind of what was the impact when you last had price increases? What was that impact in just new customer demand, any sort of churn? And then, how does the most recent price increase compare with some of the historical ones in terms of magnitude? And could we expect similar customer behavior?

So, I'll start from the end. We definitely expect similar customer behavior. Otherwise, we won't do it, okay? When we look at price increase on one end, obviously, you want to assess what is the sale price which is related to what's happening in terms of macro economy and inflation and what are the other offerings in the market compared to your competitors. You don't want to be the cheapest, I don't necessarily want to be more expensive, it doesn't matter, but you want to understand the lay of the land in one end. The other side of it is you want to understand the impact on your customers. And naturally, when you increase prices, you are willing to accept the fact that some people who are more susceptible or more sensitive to price may decide that this is not for them and they want to discontinue, or decide not to buy, but whether it's the newcomers or existing subscriptions. And the balance for it to make financial sense has to be that the uplift in revenue is more than what you're losing in terms of the people who decided that they want to discontinue. I can say that in the past when we've done this, we've seen some lower conversion or less people who were buying on the initials and a very small increase in cancellations for the existing user base. We're now seeing similar trends and this is also why we feel comfortable going down this path. And from my standpoint, after you do this for 2 or 3 times and you see similar results, I feel comfortable thinking that in the future as well as we add more value and more capabilities, we'll be able to continue going through this exercise and seeing similar results. Naturally, if you don't add value, you won't be able to do that but I think with everything we're putting in the hands of our customers on a regular basis, I think having a cadence of raising prices every few years will probably make sense.

And on the pricing increases, so you've had your recent price increases and when we look about what asset average revenue per subscription customer in 2023, you actually grew that 10% year-over-year, which is an acceleration from the fiscal '22, where you did about 4%. And you're kind of entering back in line with some of what you had during the COVID period, which was around 11% in fiscal '20 and 2021. So, kind of coming out of 2023, how durable do you expect this growth rate to be within ARPU? And as we go into 2024, facing some tougher comps, but that you do have those tailwinds around pricing and new customer attach, kind of talk through the efforts it takes about how durable you think that growth rate is?

I think that 2023 is a great example for a place that we actually were really innovated in terms of new products on business solutions. It actually increased the ARPU, not just that, but we saw also a different mix in terms of our customers picking more like expensive packages but also using more business solution services which allow us to increase the overall ARPU. I think that whatever is going on right now, and I gave the example about partners, that the fact that about 50% of our GPV goes to partners, we see more and more customers, more complex websites built on Wix. And it means that they are using more services and obviously choosing more expensive packages. So, I believe that it will continue to happen also in 2024 and 2025, meaning that we do expect ARPU to continue to increase in the next few years as a result of that.

And the other side of the equation is going to be the subscriber count, which has been kind of more in the low single digits in 2022 and 2023. Is this kind of the new normal that we should expect, especially as you're focusing more on the ARPU opportunity? Just help us level set guide around the number of subscriptions.

Well, to be honest with you, it's not the way that we're actually looking at the business in terms of the number of net subscription additions. I think that you know probably the best way to look at Wix and to assess Wix is about the contribution of the court. What is the increase of the overall collection based on a certain growth. Nir spoke about before about the price increases. So, obviously, it's not contributed to the number of net subscriptions. On the other end, we are going to see more and more subscription as a result of Studio, for example. So, we are not necessarily looking at the number of net subscription, but rather looking at the overall added value of our courts, so, it's hard for me to tell you what to expect in 2024. The only thing that I can tell that, yes, I mean, we will continue to increase the number of subscription for Wix, if it's going to be at the same level or higher or less than that, it's hard for me to tell.

And looking for kind of the bookings acceleration into 2024, that puts you in a great opportunity to accelerate the revenue side in 2025. So, what kind of gives you the confidence to be guiding to kind of that acceleration further out? How much of it is dependent on more of the macro view, which you've noted getting a little bit easier versus these new exciting products starting to really impact the model?

Look, first of all, I'm happy to say that, and this I believe, that after a few years that we are not really dependent on the macro at this point of time. Yes, there can be an impact of macro but I don't think that it's going to be significant and as we mentioned before, we see the stability. What gives us the certainty about the acceleration of bookings in the second half of the year? Well, it's something that happens to a company usually in most of the cases where you actually introduce new TAM, where you bring, especially when you are a SaaS-based model, it's really hard to impact on a significant way on the short term on top line. But what we see is a new TAM, and when you're talking about, for example, about Studio and you spoke about it, about partners in general, I think that most of it is actually gaining market share and most of it is incremental to our business. And this is why when we introduced our Studio, we started to see the numbers, we started to see the results. It gives us a very high certainty of the fact that we are going to see acceleration of booking in the second half of the year, certainly in 2025. So, for us, it's really amazing and exciting, which we actually see the fruits of everything that we've invested in the last few years and it's truly happening.

And with Studio, you mentioned you're starting to take share being all kind of incremental. Where are you guys taking share from? Is it a lot of the world press community? How is the competitive environment within Studio changed?

Well, I think that more than anything, it's the word press community. What was those are in kind of the older kind of CMS crowd that I think for many years, one perceived us as more less of products for professionals, which I think this is something that the perspective as being really changed with the release of Studio and also the marketing dollars we're putting into building the brand of Wix Studio as a professional brand. And the second part is, I think when they had to weigh the advantages of having a SaaS CMS like Wix that gives you all the comfort of the security and the deployment environment and deliverability and high performance against flexibility. In many cases, they have to have the flexibility because this is the first thing that you sell to your clients before you can sell all the other things. And that's another big gap, which I think we closed almost completely or most of it with Studio, which is giving them the flexibility to create very complex and unique websites. Which I think, this is why now we are in a much better suited to go after that market to gain the market share that Lior talked about and which is also demonstrated by the fantastic growth we've seen with adoption of Wix Studio within only 6 months.

And you mentioned doing more marketing kind of towards this segment of customers, but overall, your marketing dollars have come down and you guys have been able to get a lot of leverage, really impressive, around 16 points of operating margin expansion over the last year. So, can you just talk to what you're seeing from kind of new customers coming in? Are you still able to attract kind of that same kind of base of customers despite spending so fewer marketing dollars when this is still really a market that's driven by kind of eyeballs, especially at the self-creator side of the business?

So, I think from the self-creator side of the business, the answer is absolutely, yes. This is not something new. We introduced this almost 2 years ago and we got quite a few questions about our certainty to maintain this. I think enough time has passed by now for us to be able to say with certainty, yes, and also to demonstrate that it's there and it's very effective, and it's actually even improving slightly over time as the team finds more and more ways to leverage it. And going forward, marketing from the self-created standpoint, we expect to run at similar levels. Most of our incremental increase and investment into marketing now is going to be into the partner side of the business. Building the brand of Wix Studio as well as acquiring new and bringing in those new agencies under the fold, and this is also what models kind of into the year in terms of the increase of marketing, it all goes to the side of the partners.

We are going to open up to audience Q&A. But before we do, I'll ask another question or 2. I wanted to get an update on kind of the growth, the GPV amounts. We're becoming an incrementally more important piece of the model you're bringing in the partners that are contributing about 50% of that, when you look through kind of the Wix payments strategy of you guys have been to increasing that take rate that you have, so can you just give us an update on kind of where you are on take rates today and where you see further opportunity to expand, kind of how far along are we?

Well, I think we've progressed a lot, but the good news is that there is still more room to grow. For Wix, one of the key things always been one of the advantages we had is that very early on we became a global platform and were dependent only on one market or only one continent. A lot of our business is coming from outside of the U.S. and North America and we're widely popular and expanded into Europe, into Asia, very strong in Japan, et cetera. And I think that with Wix payments, part of the additional expansion to be had is, to do a better job in a lot of those markets. Now, in this case, we're mostly dependent on partners because we need the underlying infrastructure for payments to either exist in a country or to have someone like [ Adeno ] who has tried to penetrate those geographies, but we're working very closely with them, but there's still more room to grow, which I think is a great outcome.

Just to add to that. One of the examples that we've made in the last couple of years is like also moving more from offline to online like, for example, with the POS that we introduced, right? We have a full omni-solution that actually provide offline and online and that is one of the ways that we can actually see that we can move from offline to online and by doing that, we're actually increasing the take rate.

And, Lior, during the Q4 earnings call, you guided to significantly exceeding kind of the rule of 40 by 2025, which was ahead of the previous signaling just kind of meet the Rule of 40 target. How dependent is the target on accelerating revenue growth versus improving profitability where you guys have really done a lot so far? And if the macro kind of proves kind of less resilient, where do you see the biggest opportunities to be nimble and reduce that and drive that free cash flow?

So, let me start with the first part of the question. I think that we are well ahead of what we previously provided, I think that we are back in August in both growth and profitability. We actually saw that we can increase top line without actually increasing some of the variable costs, even the variable cost. I'm not talking about the fixed cost, we've kind of remained fixed for the entire period. I believe that we can maintain more growth by actually not increasing the overall cost structure of the company. So, it means that we are more efficient in terms of the way that we are operating the company but on top of it, we are actually able to generate more incremental revenue while most of the dollars actually go down to the bottom line. For example, for Studio, what we've seen in the last couple of quarters that almost 80% of the top line actually go down to the bottom line because we can support this acceleration in growth without actually increasing and changing the cost structure of the company. And, for us, I believe that it's amazing, I believe that it will continue. So, to answer your question, it's actually both and this is why we felt very comfortable about saying that we will be well ahead significantly, well ahead the KPIs that we introduced before, specifically about the rule of 40. And, look, with regard to the macro we obviously cannot control the macro. And if something gets worse, so I think that we show in the past that we can respond very quickly.

But you also have to remember that most of the growth and how we account for the growth going forward is not based on the macro, so if things doesn't work out you know how to respond to them but we're not counting on something that's out of our control to drive our success.

Yes, definitely. I want to turn it over to audience Q&A, if we have any in the audience. So, I want to hit on the buybacks because you guys have a unique kind of structure that you sit in with having to get approvals. So, actually you just did the initial $300 million buyback plan, you actually introduced an additional $225 million. So, one, can you just remind us like what is unique about the process you guys have in the first place? Does that $225 million already have approval? And, is there anything that you see going out in the future that could improve the kind of the process that is in place today?

Yes, absolutely. So, first of all, we're not that special, it's not even unique to us. It's unique to Israel company. And in Israel, essentially, in Delaware companies or in U.S. companies, you can take the excess cash flow and use it for buybacks and it's dependent only on board decision, where in Israel, there is a very complex process where you need to get an outside opinion and then go with it to the Israeli court and the Israeli court needs to discuss it. And even before whether they say yes or no, you're just dependent on their schedule and when do they schedule the hearing, things like that. It's very clunky, it doesn't make sense, it's really hard to run a business like that. We got the approval to $300 million through that process, and we executed all of it. The really good news, I think that I'm finally willing to share here and I didn't share before because it's, again, not in my control, but we've been with deep discussions with parliament and the law-makers in Israel about simplifying the process. There was a vote in the relevant committee this past Sunday to approve a new process, which is much more streamlined. It hasn't been signed into effect by the right minister but it should happen in the next few days, and hopefully, within a week, 2 weeks. The old process is going to be a thing of the past when we have the new process. The new process basically takes away the court out of the equation. I'm not going to bore you with the details, there's still going to be a process but it's going to be very streamlined and is very much in the control of the company. So, our hope is that, the next batch, the $225 million that the Board approved is we're going to be able to run throughout the new process and have much better control of it. And also that any future buybacks we decide to do, we're also going to be much easier to execute.

With the -- any last question?

I guess you've been hearing a lot about AI being used internally for efficiencies, and how will that impact? I know you've done great, being more efficient in the last 2, 3 years but is there a road forward where you become even more efficient both on the marketing side as well as on the cost control side so your margins can improve by using AI internally?

So, the answer is absolutely, yes. I think it goes to marketing. It will also go into research and development, but there's also efficiencies that can be heard there, and obviously, customer care. Will that end up by reducing costs or allow us to remain at the kind cost structure for a much longer period of time? Probably a balance between both.

Sorry. So, more growth and better margins?

Yes. Essentially, yes, I do believe so because I think that more than anything, it allows us to run at least some of the processes in a more effective way.

Now I need to show it.

What?

Better margins.

But I didn't say window. But I do believe, listen, I think, take our customer care, for example. Without the introduction of technology that a lot of it is also AI based in the past 18 months, we would have had a very hard time reducing the headcount and maintaining the level of customer service. And the goal is not to reduce headcount that have really allowed the customer service, then maybe you're just hitting a new bump that you have to pay for down the line, right? But that's only one example. And I think there's more to be heard, both on the customer care but also in those other areas in the company.

With that, we're almost up on time. Lior and Nir thank you so much for joining us today.

Thank you for having us.