Wix.Com Ltd (WIX) 2016 Q1 法說會逐字稿

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. (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 website.

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 8th in New York, and we'll 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 thank everyone for joining our call today. We've kicked 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 10 quarters we have reported earnings as a public company. We will also been raising our full year outlook.

Collection 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 subscription this quarter, the largest quarterly increase ever, to bring our total premium subscription to over 1.9 million at the end of the quarter. I'm also happy to say that we grew our premium subscription to over two million since the end of Q1.

In addition to these outstanding results, I'm even more encouraged by several compelling trends that all occurred together this quarter. Traffic was as high as it's 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 subscription. 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, this trend also mean we are returning our marketing dollars faster, which allow 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'm very excited about. I'll now hand it over to Nir and Lior.

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 subscription at higher rates 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 the initial results showed an increase in conversions of these 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 product we have recently launched.

As Avishai mentioned, with increasing conversion and higher collections per new subscription, we are 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 continued 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 benefits 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 from 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 have over 270,000 e-commerce subscriptions, which is an increase of 41% over Q1 of 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 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 products 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 this 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. Cash balance at the end of Q1 was $115 million, and our total employees at quarter-end totaled 1,186.

I'll now turn to our outlook for Q2 and update to our full-year guidance. As we said earlier, we now expect less of a headwind on year-over-year growth from changes in FX rate, 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 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 will move on to your questions.

(Operator instructions.) Deepak Mathivanan, Deutsche Bank.

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.

Hey, Deepak, this is Lior. So, the marketing in term of the overall expenses was in line with 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 the leverage that [we see], and this is in line with 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've seen Q1. Usually Q1 include all the Super Bowl cost, and this is what we've seen 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, what are the biggest changes with the new Editor? Is it the way you've packaged add-ons and some vertical-specific pricing into it? Can you give more color on the add-on attach rate for the new Editor compared with some of your older cohorts who come in under the -- who came in under the old Editor? How does the ARPU trends compare for new customers versus older cohorts? Thanks, guys.

Well, I believe that we do have some changes in the way that [we present] some of the [add-ins], but the contribution of that is part of the reason that we managed to grow ARPU this quarter.

And the most important thing that I think is that it's really dramatically simplified the way that you find and the thing 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 [it this year]. You can do so much more.

So, it adds contribution. We're not going to disclose the full details of the percentage, but we do see contribution coming from exactly that.

Sterling Auty, JPMorgan.

Yes, thanks. Hi, guys. 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?

Well, we believe that the main -- well, maybe we'll start with the easier part, which is the driver is a better product. I think that the bigger the gap between us and our competitor is it makes it that, even if you want to change your website, you always go back to Wix.

And so, that's what we're seeing. We've disclosed the flow of the cohort so you can actually [deduct] from that the actual changes in terms of numbers. But, overall, it's always our actual churn is pretty much zero, so we don't lose customers. And if you look at the [other's cohort], you can actually see that it started with (inaudible) access, exactly the same number now after six years. And so, we continue to see that, and we'll update when we have more details.

Okay. 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 costs 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 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 be -- and go after more customers globally.

And also, it's in large part, or in -- it's the ongoing investment we'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.

Mark Mahaney, RBC.

Thanks. Two questions, please. When you talk about the increased global awareness of 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 talk about these mobile sites, and 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 website, so you see a dramatic shift? Have you seen that over the last year or two in that people want to go mobile first, and so that's where you're putting more innovation in terms of the mobile website tools rather than desktop? Just any sort of broad commentary on that would be really appreciated. Thank you.

Hey, Mark, this is Nir. I'll take your first question and then hand it over to Avishai for the second.

So, globally -- 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 were 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 to 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 site, 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 have the concept of where it might not do that.

So, what we're working very hard on achieving is that you -- that our customer actually get this exact experience, meaning they build the website, and it just works everywhere, and smoothly, perfectly, and with great behavior. And when we do that, or if we have a [part] that prevent some of it to 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. It's just not necessarily coming in this approach. Our customer just think that naturally it should be there.

Okay. Thanks, Nir. Thanks, Avishai.

Kerry Rice, Needham.

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've 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.

Yes. 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, [of course] 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 he's basically celebrity that is known worldwide.

Much like last year, the way we think about it, and 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 (inaudible) 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, we not disclose the mix of our channels. 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 this 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, I mean, we've seen that in Q1. We've seen that also in previous years, where conversion improved, and it's mainly due to our new products and due to our technology. And certainly we see also the contribution of the app that kind of impacts the improvement in our conversion.

But, what I can say, that the overall apps and verticals that we have right now with 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 contribution also in terms of the ARPU, which just this quarter -- when I talk about ARPU, I mean 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.

Nat Schindler, Bank of America.

Hi, this is Jason Mitchell here for Nat Schindler. So, just a quick question on competition. Any thoughts on the domains products 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, we wish them a lot of luck with that. And as a Company, our strategy is less going after commodity services, and domain, I believe, fall 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 continue to develop our software stock, 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.

Tim Klasell, Northland Securities.

Yes, sort of jumping 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, and -- so first of all, yes, the new Editor, and (inaudible) a lot of the new functionality there help a lot more people complete websites that they are very proud of. And when they do that, of course, they are 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, and we'll update you guys, as you know. If you look at the slide nine, you actually can see the actual slope of the 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 nonexistent.

Okay, good. Second question on the marketing spend, obviously the Super Bowl has been more brand marketing. It looks like you've got 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 the marketing is that brand contributes to acquisition, acquisition contributes to brand. And even 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 for, again, is to see us continue to adjust, continue to change, continue to take (inaudible) opportunities that we see in both categories. And as always, our target's going to be to have the time to return marketing investment aim at seven to eight months.

Aaron Kessler, Raymond James.

Yes. Hi, guys, a couple 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.

Hey, Aaron, it's Nir. So, in terms of promotions, actually renewal so far has been of the -- kind of the regular seasonal campaigns we ran 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're still 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 for what we have seen so far in term 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. Well, so restaurant is still a new product, but we're very happy to see the preliminary results from that. And we are very excited, and 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's 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 their complete online presence.

Jason Helfstein, Oppenheimer.

Thanks. Apologize if this was already asked already, doing multiple calls. But, can you help us understand the drivers of ARPU in a little more detail? In the deck you've shown how ARPU I think would have about 2% ex-currency and net from quarterly to annual. Can you help us understand the impact on promotional prices? For example, what was the ARPU growth, for example, for the first quarter 2014 cohort, right, so a group of subs you've had for a while?

And then, secondly, as you move to positive free cash flow meaningfully 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. So, with regard to the ARPU, what you see in the deck is actually the ARPU based on revenue. And what's happened that, 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.

And with regard to the second question about the cash, so obviously with regard to the M&A, I cannot comment. Obviously we are 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.

Ron Josey, JMP Securities.

Great. Thanks for taking the question. Wanted to ask about the registered users, 5.3 million registered users were added, a pretty good number. Just 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 insight on April trends would be appreciated.

And then lastly, the 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.

Oh, absolutely. So, 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 a 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 the 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 truly across the board, internationally, and we're super-excited about it. There's nothing better than to get this feedback from users, right, that your brand actually has significant value, 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 timeframe, but when we're actually going to get to a certain top line, which 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 than the EBITDA, it's going to be at around 30% or 30%-plus.

Sterling Auty, JPMorgan.

Yes, 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 and 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 a pretty linear, and I really believe that the majority of the change that we see, the 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 that's why we get the increase.

But, 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.