Wix.com Ltd. (WIX) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Wix.com 2016 first quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Joe Pollaro, VP of US Operations and Investor Relations, you may begin your conference.

Good morning. Welcome to Wix’s first quarter 2016 earnings call. 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 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 you can find all reconciliations between GAAP and these non-GAAP results in our press release and presentation slides on the Investor Relations page of our Web site. Earlier this morning, we posted, on our IR site, supporting materials regarding this quarter’s results. The team will go ahead and run through some brief comments on the quarter now and then we will take questions. Finally, before we start, I also want to mention that we will be holding an Investor and Analyst Day on June 8 in New York and will also webcast it live on our IR site. We’ll share more details as we approach the event. With that, I will now turn it over to our Co-founder and CEO, Avishai Abrahami.

Thanks, Joe, and thanks everyone for joining our call today. We have kicked off 2016 on a very strong note, beating the top end of our guidance once again. We have now exceeded the top end of our collection and EBITDA guidance range nine out of ten quarters we have reported earnings as a public company. We will also be raising our full-year outlook. Collections in Q1 grew 35% over last year on a reported basis and 39% on a constant currency basis. Revenue grew 38% year-over-year and 41% on a constant currency basis. We also generated positive adjusted EBITDA for the fourth straight quarter. We added a total of 170,000 net premium subscriptions this quarter – our largest quarterly increase ever – to bring our total premium subscriptions to over 1.9 million at the end of the quarter. I’m also happy to say that we grew our premium subscriptions to over 2 million since the end of Q1. In addition to these outstanding results, I am even more encouraged by several compelling trends that all occurred together this quarter. Traffic was as high as it has ever been, increasing by 5.3 million registered users. We increased our conversion of free users to premium subscriptions. We increased our retention of subscription and we increased our collection per new subscription. The combination of higher traffic, higher conversion and increasing collection per subscription is very unique and illustrates very strong trends in our business model at Wix. More often than not, an increase in traffic for a subscription business is followed by flatter or even slightly lower conversion to paid subscriptions. We actually improved our conversion in a meaningful way during this quarter. Our brand and marketing efficiency is improving and our investment in innovation and product development is producing positive results. Most importantly, these trends also mean we are returning our marketing dollars faster, which allows us to invest more in growth, while staying within our TROI targets. To summarize, we had a fantastic beat and raise quarter and have opened up the year with great momentum, which I am very excited about. I’ll now hand it over to Nir and Lior, who will provide more details on our results this quarter.

Thanks, Avishai. As Avishai said, we have started the year on a very strong note. A few data points on our subscription additions this quarter. Of our new subscriptions in Q1, 77% were annual packages, in line with the last several quarters. Overall, 84% of our total subscriptions are annual with the remainder being monthly. 60% of our new subscriptions this quarter came from registered users who signed up in prior quarters, while 40% came from registered users who signed up this quarter. Both of these metrics are in line with past quarters. I also would like to provide some more detail on the positive trends Avishai mentioned on the quarter. We added nearly 5.3 million registered users in Q1, which is the most we have ever added in a quarter, and 15% more than we added last year in Q1. A large part of this growth is due to our success in building our brand. Our Super Bowl campaign was a great success and we expanded our brand marketing into other areas during the quarter as well. During Q1, we converted new and existing registered users into premium subscriptions at a higher rate than ever. You can see this improvement in conversion in the cohort chart on page nine of our earnings slide deck. In the Q1 2016 user cohort, we added nearly 127,000 premium subscriptions, which was 23% more than we added in Q1 of 2015. This compares to our registered user additions of 5.3 million in the quarter, which, as I mentioned, was 15% more than Q1 last year. After the launch of our new Wix Editor last year, we mentioned that initial results showed an increase in conversion of new registered users to premium subscriptions of 15% to 20%. The conversion improvements in Q1, which exceeded this 15% to 20% range in some geographies, are the result of the new Editor as well as several other products we have recently launched. As Avishai mentioned, with increasing conversion and higher collections per new subscription, we’re able to return marketing dollars faster and invest more in the business, while remaining within our TROI target range. Our marketing spend in Q1 included all of our Super Bowl expense as well as other new branding activities we launched. We continue to generate strong returns on this spend as our TROI remains within our target range of seven to nine months. This is testament to the increasing efficiency of our direct response advertising effort and the benefit we are receiving from increased brand awareness. On the product side, we continue to see increased adoption of our software application that help businesses run their operations online. Our users have saved over 290 million contacts on Wix as of Q1, nearly 3x as many contacts as a year ago. More and more, businesses are using Wix to manage their customer data. As of the end of Q1, we had over 270,000 e-commerce subscriptions, which is an increase of 41% over Q1 last year. And while we just introduced Wix Bookings in January, we already have close to 10,000 subscriptions to this product. This start is the most successful vertical product launch we have ever had. These, along with the other applications we have released, demonstrate how we are executing on our vision. We are building a comprehensive software platform that allows small businesses and organizations to move online and to do it themselves, without the need to hire expensive developers. Our products are completely integrated, giving owners the ability to manage and grow their businesses online all from a single platform. This is something no other company offers today. We are focused on driving innovation in product and technology, and this quarter is evidence of our leadership in this area and our success to date. Before I wrap up, I also want to quickly update you on the progress we are making with the two new products we mentioned last quarter. We are on schedule with both and we plan to make an announcement about one of them during our Analyst Day in June. With that, I will hand it over to Lior.

Thanks, Nir. And good morning, everyone. Collections in Q1 were up 39% year-over-year on a constant currency basis to $77.5 million, which exceeded the high end of our prior guidance of $75 million to $76 million. On a reported basis, collections were up 35% year-over-year to $75.7 million, which also exceeded the high end of our guidance range of $73 million to $74 million. In total, foreign currencies impacted our collections by only about $1.8 million in Q1. Revenue in Q1 grew 38% year-over-year to $61.6 million on a reported basis, exceeding our prior guidance, and $62.7 million, or 41% growth over last year on a constant currency basis. In Q1, we also saw an increase in the average collections from new annual subscriptions. In Q1, collections from new annual subscriptions increased approximately 7% over Q4. Since the beginning of the year, we have seen increased adoption of our vertical applications. As these products mature, we expect this growth to continue. Marketing expense, on a non-GAAP basis, in Q1, was $39.4 million or 52% of collections, in line with what we’ve guided last quarter and an improvement over Q1 2015 when it was 56% of collections. While we grew our marketing expense by more than 25% over last year Q1, we actually realized incremental margin benefits on a year-over-year basis. This further illustrates the improving efficiency in our investments in marketing. We expect further leverage in marketing and still anticipate it to be in the range of 43% to 45% of collections for the full year of 2016. R&D expense in the quarter, on a non-GAAP basis, was $20 million or 26% of collections compared to 28% in Q1 last year. As we increased conversion and exceeded our top line expectations in the quarter, we generated positive incremental leverage on our R&D expense. Adjusted EBITDA in Q1 was $2.7 million, again, exceeding the top end of our guidance range and was an improvement over a year ago when we were just short of breakeven. Our cash balance at the end of Q1 was $115 million and our total employees at quarter-end totaled to 1,186. I’ll now turn to our outlook for Q2 and update to our full year guidance. As I said earlier, we now expect less of a headwind on year-over-year growth from changes in FX rates as rates have remained much more stable over the last few quarters. Therefore, we may refrain from providing guidance on a constant currency basis in going forward. Of course, if rates fluctuate materially again, we will clarify the impact on our financial performance. For Q2, we expect collections of $77 million to $78 million. Assuming constant exchange rates from Q2 2015, our guidance would be higher by approximately $2 million or $79 million to $80 million. Revenue in the range of $66 million to $67 million and adjusted EBITDA of $6.5 million to $7.5 million. Our outperformance in Q1 is also reflected in our revised 2016 full year guidance, which we are raising on all three financial metrics. For 2016, we now expect collection in the range of $320 million to $324 million. Assuming FX rates remain the same from 2015 to 2016, our collections guidance would be approximately $4 million higher or $324 million to $328 million. Note that this $4 million impact is less than the $6 million we anticipated when we provided full-year guidance a quarter ago as several currencies have strengthened against the dollar over the last few months. We expect revenue in the range of $274 million to $277 million and adjusted EBITDA for the full year in the range of $30 million to $32 million. To sum up, we had an outstanding Q1 and are entering Q2 and the remainder of the year with strong momentum. We look forward to updating you throughout the year. With that, we’ll move on to your questions.

[Operator Instructions] Your first question comes from Deepak Mathivanan from Deutsche Bank. Your line is open.

Thanks, guys. Two questions. First on marketing, the leverage that you saw this quarter was slightly lower than the levels that we saw throughout last year. Was it largely due to the comping from big leverage of last year? Has there been any incremental investments? I know the 1Q level is tracking below your full-year goals, and is there any seasonality patterns there? I assume there is, but is there anything else there? And then I have a follow-up.

Hi, Deepak. This is Lior. So the marketing in term of the expenses – overall expenses – was in line of what we provided last time, which is about 52% out of collection. So this is exactly how we end up the quarter. So, obviously, let’s bear in mind that the leverage that we see – and this is in line of what we said before – will continue throughout the year, meaning ending up the year with 44% to 46% in term of the overall marketing out of collection. And then you will see the leverage in a more dramatic way than what we see in Q1. Usually, Q1 include all the Super Bowl costs, and this is what we see in this quarter. And, therefore, you still don't see the entire effect, the full effect of the leverage which you will see in the next few quarters.

Okay, got it. That’s helpful. And then, secondly, on the new Editor, one of the biggest changes with the new Editor is the way you’ve packaged add-ons and some vertical-specific pricing into it. Can you give more color on the add-on attach rates for the new Editor compared with some of your older cohorts who came in under the old Editor? How does the ARPU trends compare for new customers versus older cohorts? Thanks, guys.

I believe that we do have some changes in the way that we present some of the add-ons. But the contribution of that is part of the reason that we managed to grow our ARPU this quarter. And the most important thing there, I think, is that it’s really dramatically simplified the way that you find the things that you need in order to complete the traditional businesses to a fully managed solution online because it's easier to access every element and to understand [indiscernible]. You can do so much more. So it has contribution. We’re not going to disclose the full details of the percentage, but we do see contribution coming from exactly that.

Your next question comes from Sterling Auty from J. P. Morgan. Your line is open.

Yes, thanks. Hi, guys. In terms of – one of the comments that you made is that you’re starting to see also an improvement in retention. Is there any additional color you can give in terms of – obviously, we have the slide nine to give us a visual. But is there any more color you can give us in terms of where in the cohorts you're seeing that improved retention, any feedback that you're getting from the customer base as to what's driving that improved retention?

We believe that the main – well, maybe we’ll start with the easier part, which is – the driver is a better product. If we get a guy between us and our competitor, it makes it that even if you want to change your Web site, you always go back to Wix. And so, that's what we’re seeing. We’ve disclosed the flow of the cohorts, so you can actually deduct from the actual changes in terms of numbers. But, overall, it’s always our actual churn is pretty much zero, all right? So we don’t lose customers. And if you look at all this cohort, you can actually see that it started with one number and actually it’s exactly the same number now after six years. So we continue to see that. And we’ll update when we have more details.

And then in terms of the leverage in sales and marketing that you're referring to, that you’re seeing, can you give us a sense, where are you seeing maybe the improvement in customer acquisition cost by geography? Is it the more developed markets or is it across the board? Any further color would be helpful.

So, Sterling, this is Nir. Basically, we’re actually very happy to say that that kind of improvement we see all across the board, the US and globally, which is, we deem that as being great news. And it's definitely – the improvement of the product itself, that allows us to be more – to spend more and go after more customers globally. And also, it's in large part – it’s the ongoing investment you’re doing to branding, which definitely contributes to that as well. We've actually seen an improvement in organic traffic, again, in the US and globally. And even specifically, people who go online and search for the word Wix, which basically means that they’ve heard about us and they want to find us and start using the product.

Your next question comes from Mark Mahaney from RBC Capital Markets. Your line is open.

Thanks. Two questions please. When you talk about the increased global awareness in the Wix brand, how do you measure that? Can you quantify that? How easy is it to track something like that? And then secondly, you talked about these mobile sites. I think it was 15.7 million mobile sites. Can you just give us a big picture of you on how increasingly important mobile sites are? Like, when you see requests for customers for Web sites, do you see a dramatic shift? Have you seen that over the last year or two and that people want to go mobile first and so that's where you’re putting more innovation in terms of the mobile Web site tools rather than desktop, just any sort of broad commentary on that would be really appreciated.

Hey, Mark. This is Nir. I’ll take your first question and then hand you over to Avishai for the second. So, generally, in terms of how we measure that kind of effect, and I started to allude to that before, it’s by measuring the organic traffic sources and people who are coming basically not through acquisition-oriented sources that we pay hard dollars for. And those would be people who either look for the word Wix online, through people who will just type Wix.com in the URL, and we’ve definitely seen the effect of the branding and the brand awareness deliver on those numbers.

Hi, Mark. This is Avishai. Regarding question about mobile sites, so I think that you had a couple of questions, but I’ll start maybe with the first, more interesting fact. We don't see growth in terms of people actually actively looking for mobile first. In fact, it’s hardly anything that people actually search for. But the way we think about it is that most of our customers don’t think in those words. They don’t think in those terms. They would actually go and think, I want a website and I expect my website to work on a mobile phone, on a tablet, and on a desktop. And they don’t come – they don’t have the concept of, well, it might not do that. So what we’re working very hard on achieving is that our customer actually get this exact experience, meaning they build a Web site and it just works everywhere, and smoothly, perfectly, with great behavior. And when we do that, always we have a bug that prevents some of it work well, we actually see a lot of reaction from our customers. So I would say – something that was not as common three years ago or two years ago. So I would say that, yes, there is a lot of demand for mobile sites, just not necessarily coming in this approach. Our customers just think that naturally it should be there.

Okay. Thanks, Nir. Thanks, Avishai.

Your next question comes from Kerry Rice from Needham. Your line is open.

Thanks a lot. I know you are getting a great tailwind from the Super Bowl ads that you ran. How do we think about that as far as lasting into maybe Q2? I don’t know if you have any metrics from last year and how long that tail kind of lasts. And then second, on marketing, I know you guys typically do a lot of marketing on social and television. Has there been any new channels that you found that is driving a lot of traffic that may also explain or be a factor in all the upside in the registered users? And then one follow-up on apps. Any commentary around what percentage of revenue the apps are providing? Thanks.

Hey, Kerry. This is Nir. I’ll try and hit them one by one. First of all, in terms of your first question about the Super Bowl, so this Super Bowl – our second Super Bowl campaign, it was extremely successful and we’re very happy with it. It actually had the benefit that the previous campaign didn’t have, which is the ability to go global with it simply because of the content of joining hands with DreamWorks and the Kung Fu Panda, which is basically a celebrity that is known worldwide. Much like last year, the way we think about it when we think about the Super Bowl is a big anchor branding campaign that actually lasts all through the year. And it will be supported with ongoing different branding activities. And as we plan ahead, we don't think about it as a quarterly activity or even as an annual activity, but actually as a multi-year plan that we are working towards. As for your second question, which is around marketing, we can say that – we don't disclose the – for clear competitive reasons, do not disclose the mix of our channel. But we can say that there hasn't been any significant change in terms of the mix itself or any significant new channel in it. As for the third question, revenues from apps, I will actually hand it over to Lior.

So as we mentioned before, with regard to the apps and for the overall apps and vertical strategy, so it’s very important to understand that the most important thing is about the contribution to the conversion. So this is something that – we’ve seen that in Q1. We’ve seen that also in previous years where conversion improved and it's mainly due to new product, due to technology, and certainly we see also the contribution of the app that kind of impacts the improvement in conversion. But what I can say that the overall apps and verticals that we have right now at Wix is actually kind of 20% to 25% out of the total top line, and this is something that is trending up and we feel very excited about it and we definitely see the contradiction also in term of the ARPU, which just this quarter – when I talk about ARPU, I mean the – based on collection, the average collection per subscription that we got this quarter. It was actually a record of 7% increase in ARPU over the last quarter. So, again, the main contribution to that is this vertical approach.

Your next question comes from Nat Schindler from Bank of America. Your line is open.

Hi. This is Jason Mitchell here for Nat Schindler. So just a quick question on competition. Any thoughts on the Domains product announced by Squarespace recently. It looks like they're becoming more of a domain register. How does this impact Wix? And is this an area you would consider pursuing?

Well, first of all, wish them a lot of luck with that. As a company, our strategy is less going after commodity services – and Domains, I believe, falls into such category – and more working on delivering product innovation and new technologies. So we’re going to continue to stay focused on what we do really well, which is continuing to develop our software stack to enable small businesses to move completely all of their operation online and a lot less thinking about how we can better sell something that we view as a commodity.

Okay, great. Thanks.

Your next question comes from Tim Klasell from Northland Securities. Your line is open.

Yeah. Sort of stepping back on the new Editor, I know that’s helping to drive conversion up. But how about on retention? Have you noticed any change on retention with users of the new Editor?

Well, yes. So first of all, yes. The new Editor and a lot of the new functionality there can help a lot of more people complete Web sites that they are very proud of. And when they do that, of course, they're less likely to churn. I just want to address the fact, again, our actual churn, historically, is practically zero. We do see some small sign that it actually might go above that, meaning we’re going to get negative churn. But we’ll have to wait and see more about that. Then we’ll update you guys, as you know. If you look at the slide nine, you actually can see the actual slope of churn over time on Wix. And as you can see, there’s not a lot to say about churn beyond the fact that it’s pretty much non-existent.

Okay, good. Second question, on the marketing spend, obviously, the Super Bowl has been more brand marketing. Looks like you've got the City Football relationship you’ve announced. That also seems to be more like brand. Should we expect that more and more of your – or at least with an increasing percentage of your marketing spend will be going more towards brand rather than product marketing?

So this is Avishai. And I just want to say, the way we think about marketing is that brand contributes to acquisition, acquisition contributes to brand. And given that we report them and we talked about them differently, the mix is what drives our customers into the gate and the mix is something that allow us to be so effective. I think that what you should look forward, again, is to see us continue to adjust, continue to change, continue to get opportunities that we see in both categories. And as always, our target is going to be to have the time to return marketing investment, aim at seven to eight months.

Your next question comes from Aaron Kessler from Raymond James. Your line is open.

Yes. Hi, guys. A couple of questions. First, on the promotions that you were running last year, can you give us a sense kind of how those have renewed thus far this year and the type of pricing you're seeing? Second, just any updates on kind of the restaurant and hotel products. How are those performing in the market? Thank you.

Hi, Aaron. It’s Nir. So in terms of promotions, actually renewals so far have been of the – kind of the regular seasonal campaigns that we run every year and have been aligned with what we know. In terms of the testing that we started last year, it’s actually started in Q2. So we are in the process of waiting to see how they renew. But our assumption based on all the data we collected so far that it should not be significantly different from what we have seen so far in terms of annual renewals. Can you repeat – is Aaron still on the line? So we’ll answer the question regardless. Your second question was about hotels and restaurants. So restaurant is still a new product, but we’re very happy to see the preliminary results from that. And we’re very excited. We believe that, like hotels or e-commerce and booking and everything else that we’re doing, it probably will have a significant influence on conversion and then some influence on ARPU as well. But in hotels, well, there is always an increase there. In last quarter, there was not anything major. But I think it continued to the general trend, combined with the new Editor that we actually have more and more hotels every quarter, using that to build a complete online presence.

Your next question comes from Jason Helfstein from Oppenheimer. Your line is open. Jason Helfstein, your line is open.

Thanks. Apologize if this is asked already. Doing multiple calls. But can you help us understand the drivers of ARPU in a little more detail? In the deck, you showed how ARPU, I think, was about 2% ex currency and mix from quarterly to annual. Can you help us understand the impact on promotional prices? So, for example, what was the ARPU growth, for example, for, like, the first quarter 2014 cohort, right? A group of subs you’ve had for a while. And then secondly, as you move to positive free cash flow, meaning for over the next two years, and CapEx, I think, only goes down to about 30% of operating cash flow this year and probably 18% next year, do you increase investment in marketing, R&D, M&A, consider buybacks? Help us understand what you do with the cash as kind of you move to that type of positive cash flow? Thanks.

Okay. With regard to the ARPU, what you see in the deck is actually the ARPU based on revenue. And what’s happened in the first quarter, the ARPU actually increased dramatically based on collection, again, 7%, which was a record for us, and mainly due to the vertical approach that we used during the first quarter. You still don’t see the effect of it on revenue and probably you should expect the ARPU based on revenue to increase throughout the year. But, first, we see the impact over the collection. With regard to the second question about the cash, so, obviously, with regard to the M&A, I cannot comment. Obviously, we’re checking from time to time opportunities and so on, but there is nothing concrete or nothing that we can report about it right now. We will continue to invest in R&D. We will continue to invest in marketing. And we will continue to invest in marketing basically based on the most important KPI for us which is the TROI. As long as the TROI is seven to nine months, we will continue to invest in marketing. But to your question, we will continue to increase the dollar invested both in marketing and R&D, but as a percentage of collection, it will continue to decrease and then you will start to see – or already started to see, but you will see further leverage on our model. What we plan to do with the money in the future, it’s a good question. But when we have something concrete, obviously, we will report about it.

Your next question comes from Ron Josey from JMP Securities. Your line is open.

Great, thanks for taking the question. I wanted to ask about the registered users, 5.3 million registered users were added, a pretty good number. Can you talk about the cadence of these additions, meaning were they more close to the Super Bowl given the ad campaigns or were they relatively even throughout the quarter? And if so, any insights on April trends would be appreciated. And then lastly, just a second one on EBITDA, still targeting the 30% margins. I think you’ve talked about in the past. And could that come sooner? Thank you.

Well, absolutely. I’ll take the first question which is about – this is Avishai – about the growth in terms of free users. So what is fascinating about that is that we see it all across the board, like every part of the mix has actually increased. And the way we analyze that is that, it’s actually the result of a significant upgrade in the brand value and recognition that people associate with us. And as we see that in the United States and outside of United States, we can see that every commercial we do is more effective and more organic searches are being done in order to find Wix and directly people that arrive to Wix. So we pretty much see it really across the board internationally. And we’re super excited about it. There is nothing better than to get this feedback from users, right, that branding – that your brand is actually a positive significant value.

With regard to the EBITDA, so, yes, we still plan to be at 30% plus EBITDA. The question, when it's going to happen, so I think that the question is mainly based on not when in term of the time frame, but when we’re actually going to get to a certain top line which will allow us to be at more than 30%. And, for sure, it also depends on the level of growth. So the more we accelerate the growth, the more that we launch new products and new technology, obviously, it will help us to get to this point of time where the top line, the collection is such high that the EBITDA, it’s going to be at around 30% or 30-plus-percent.

Our final question is a follow-up question from Sterling Auty from J. P. Morgan. Your line is open.

Just wanted to kind of follow on that linearity question, but more to the premium subscriptions. Given the March quarter is typically the strongest in the naming industry as a whole, I’m just kind of curious what you saw in terms of your premium subscriptions when they came online. So in other words, is it more linear through the entire quarter or more back-end loaded towards the month of March?

I think that we actually saw pretty linear and I really believe that the majority of the change that we see and majority of the growth is really because of this incredible thing, which is, people just know our brand a lot better than before. And I think that's why we get the increase. We didn't see any relative change, specifically in March.

Okay, thank you.

That concludes the Q&A portion of the call. Thank you for participating on today’s call. You may now disconnect.