Wix.Com Ltd (WIX) 2016 Q2 法說會逐字稿

Good afternoon. My name is Dan and I will be your conference operator today. At this time, I would like to welcome everyone to the Wix.com 2016 second-quarter financial results conference call. (Operator Instructions)

Joe Pollaro, Senior Vice President of Investor Relations, you may begin your conference.

Good morning, everyone. Welcome to our second-quarter 2016 earnings call. During this call, we may make forward-looking statements in the statements are based on current expectations and assumptions. Please consider the risk factors included in our press release and most recent Form 20-F that could cause our actual results to differ materially from these forward-looking statements.

We do not undertake any obligation to update these forward-looking statements.

In addition, we will comment on non-GAAP financial results and you can find all the reconciliations between GAAP and non-GAAP results in our press release and presentation slides on the investor relations page of our website.

Today, we are going to try a new format for our call. Avishai is going to say a few quick words about the quarter and then we are going to go straight into the Q&A.

Earlier this morning, in addition to all the materials we normally post for quarterly earnings release, we posted in the shareholder update. This provides some color on our results and replaces our management team's prepared remarks. We will not be reading this on the call.

So with that, I will now turn it over to our cofounder and CEO, Avishai Abrahami.

Good morning, everyone. I just want to say that we had another fantastic [bid and raise] quarter. We had a record amount of new premium subscriptions. We accelerated our growth and had a record amount of collections. And we generate over $10 million in free cash flow, also a record. I'm very happy with our results in the first half of the year, and I am looking forward to a great second half. We are really excited about the preliminary results of the Wix ADI, which we've been testing, and we are launching the full product globally later this quarter.

On this call we are trying a new format and I think all of you will like it. Which is pretty much that I am going to stop talking now, and we are going straight to your questions. Thank you.

Operator, we will go ahead and have the first question.

(Operator Instructions) Sterling Auty, JPMorgan.

I like the new format. Just my vote for that. But to start off, I'm curious. Traditionally, the naming business has always seen the strongest uptake of subscriptions and names, etc. in the March quarter. But last year and now this year, with the results looking at the premium subscription addition, June has suddenly become an even stronger quarter then March.

I'm curious what it is about the marketing programs or other things that you are doing that has changed the seasonality as compared to the traditional industry.

This is Lior. So yes, I mean you are right about it. Usually the first quarter is stronger than the second quarter. This year the second quarter was a record quarter for us. I think that it is worth mentioning that there are actually a few reasons. It's not one good reason why it's happened.

But essentially, we are talking about all those new products that we've launched a few months ago. Specifically, you know the new [versatile], the new [editor], the e-commerce and so on. So everything actually contributed to a really exciting conversion. So we have the -- we actually [have been increasing conversion].

We mentioned before that our brand is much stronger globally than it has ever been. So obviously, everything together through collections, took our topline up, the [same holds true] for EBITDA and certainly for the number of premiums -- that we have seen.

All right, great. And then as a follow-up, looking at the uptick in monthly subscriptions, is there something that we should read into it? Do you think this is customers that are coming in looking at the Wix ADI and wanting to go monthly, just to kind of test it and kick the tires? Or is there something else that striving the mix to the monthly?

Sterling, it's Nir. So generally, the uptick in monthly is I think -- is through some marketing initiatives we've been running in the past quarter which kind of (inaudible) users that are basically just more price sensitive. And that is why you see that uptick.

In fact, if you look at the absolute numbers of [description] we haven't had a decrease in the nine-month lease. And those monthlies are actually incremental in terms of a new kind of users who are slightly more sensitive to price, and want to try it out and as you said, kick the tires.

Obviously for us, we are always very happy when we find new ways to bring (technical difficulty) that we can convert. I wouldn't be too quick to call exactly how it will behave going forward as this is relatively new. But we will definitely come back to it and report more next quarter when we know more about it.

Jason Helfstein, Oppenheimer.

This is Bo asking for Jason. So in your slide, you imply that pricing is that 9% year-over-year. Can you just talk about the shift we have seen in the features or services that is driving this trend? And so is the average new subscriber adding features that is causing them to choose a higher plan, higher-priced plan? Or have you moved up on pricing for all plans as you add more features?

And secondly, are you seeing any changes in terms of the percentage of customers who also request a domain? So, I remember you probably talked about this previously around 15%.

Can you just like remind me this number, please? Thank you.

First of all, with regard to the ARPU, again it's important to mention. But what we try to show over there is the pure increase in ARPU that we've experienced, and this is taking from -- in terms of collection coming from new users. So I think that it would be the best indication for us in terms of the ARPU.

And as you mentioned, most of it is actually coming from the fact that people adopt more and more vertical solution. It also increased the stickiness of our customers. It increased the conversion as we saw in terms of number of premiums. But it also increased the ARPU. Meaning that people are taking more of our features, more expensive packages based on their specific verticals.

On top of that, we see more people actually taking and adopting our e-commerce solution, and the third thing we see more than ever, more people actually taking more and more application and upgrade, and I think that you know for us, it's a really, really good indication for the fact that people are actually doing a really good use of the overall platform that we provide for small business.

So, the percentage of customers selecting domain it hasn't been changed. It really remains the same as actually the last two (technical difficulty) last couple of years.

Helpful, thank you.

Nat Schindler, Bank of America Merrill Lynch.

Another great quarter, but I wanted to focus in on one number. You mentioned the 290,000 e-commerce subscriptions. Can you, one, just tell us how fast this group is growing, how fast are you growing this quarter? And is there any way, if you compare it to probably your most similar comps in this area, something like Shopify? You have a similar number of subscribers in that area.

Can you talk a little bit about what are the differences to in your product? And Shopify release is at least some of the GMV that moves through their platform. Do you have a way to track that? And do you know how much? And is that a number you could release in the future?

This is Avishai. Let me see if I understand all the questions. First of all the growth in e-commerce is actually a bit faster than the growth on the overall Wix.com. So, I'm not going to give the exact number, but it's a bit faster. And so that's to answer your first question. Right?

Yes.

The second question is about the differences between the product. So, I think that there is a lot. Okay? And Shopify we think is a great product and we think that the Wix platform is a fantastic product, and we think that each one of them is benefiting a different kind of customer in some cases, or fit a similar customer so in some places they do need to compete.

We do notice that Shopify, many times, aim for a midsize level companies and one of the examples is [Angeburg] which is actually like a well-established company, and sold a lot of merchandise. So we do have some -- and so -- and part of that is the reason that they [published] GMV, because also in many cases, they are taking the percentage of the GMV. On Wix we don't take a percentage of the GMV, and another big difference between [ask to] Shopify will be that we have a wider international coverage.

So Shopify is really well focused on Canada and the United States. We have a lot of storage in Canada and the United States, but also a lot globally, and I think that's another major advantage we have, which is that our platform is a bit better when it comes to support and international commerce.

We do know the number of GMV, but we don't disclose it at this time.

Great, thank you.

Aaron Kessler, Raymond James.

Good quarter, a couple of questions. First, do you have the normalized ARPU growth in the quarter? I did not see that disclosed, you may have given it. On the accounting change for [27], did you receive any specific feedback from the SEC? Or is this just getting in advance of potential changes they may make or their language as well? And thirdly, just any changes you are seeing in the competitive environment, maybe specifically with regards to advertising from some of the competitors. Thank you.

I will start with the normalized ARPU growth. So basically, as I mentioned before, we provided the pure ARPU growth, which I think that is the most interesting data points, in order to understand better our business.

But if you look at the normalized ARPU growth, meaning that if you look at it in terms of revenue, so the outcome -- there are a lot of noises over there, because we kind of take time for the revenue to catch up with the collection. We also have -- you know, all the currency effects still in terms of revenue, we see a slight increase in terms of the ARPU for the -- when you calculate it, based on revenue. When you exclude the currency, you obviously see a higher increase in ARPU, based on the revenue.

But as I mentioned before, I think the most interesting part is about the ARPU coming from collection.

With regard to the SEC change, so yes, there are specific new rules came out from the SEC with regard to the disclosure of non-GAAP metrics. So basically, there is one rule about EBITDA and the fact that EBITDA is meant for earnings.

And, obviously, we cannot use deferred revenue when we calculate EBITDA, because it's based on earnings, meaning based on revenue.

So I think that those new rules, overall they are good rules because they kind of set the [fan] base for many companies, and as a result of that, we decided in 2017 to move and report on operating profit, non-GAAP operating profit. And at the same time, also to provide a number which would now put the free cash flow, because essentially adjusted EBITDA is more than anything a liquidity measure which is very, very similar to the free cash flow. And as you notice, for example this quarter. So we are going to adopt the change and start to (inaudible) starting 2017.

It's Nir, Aaron. In regards to the third part of the question about changes in advertising, no, we have not seen any significant change around advertising in terms of our space and competitors.

Great, thank you and good quarter.

Ron Josey, JMP Securities.

I wanted to actually ask about the Wix ADI. I know you said the global launch is coming this quarter, but I wanted to get a little more details maybe on your launch plans here. And then, in areas where ADI has been launched or is being tested, are there any verticals that are adopting faster than the new product -- it travels like travel or e-commerce, and are you seeing a greater and faster adoption of paid modules for those users who are testing the platform? Thanks.

So -- well, we plan to release ADI more globally at the end of second quarter. And this time -- sorry, the end of this quarter.

This time what we've seen is that we released it to a small subset of our users, so pretty much randomly a selection of a small percentage and the few things that we notice like, is that when we did that we saw a really great results. We are very excited about it. And the effect that we get from users, where they are now -- most of them are pretty -- they are just shocked to find out that their incredible website built for them in another (inaudible) and then they can just modify it. And using other ADI platforms, almost [new territory]. We are very excited about it and we think we have tremendous effect. Currently the ADI only supports certain verticals. Commerce being one of them, consulting is another one, and I don't believe that we have seen any significant difference between them.

It's pretty much when it comes to the quality of the conventional, the quality of website that we get is pretty much identical. Of course commerce is a bit more -- harder to do, because you have a dependent gateway which is something that for any business takes a while, because you have to approach somebody and then open a merchant account.

Now beyond that, we did not see anything significant. So -- and we believe that this is a great sign, the power of the platform being equal in every place that you think the need -- that there is a need for it.

Thank you. And then are you still on track to release another undisclosed product later this year? And that's it for me. Thank you.

Absolutely.

Deepak Mathivanan, Deutsche Bank.

Congrats on the solid quarter. Two questions for me; first, can you discuss about the type of customers we are seeing for the two-year subscription packages? Maybe with respect to categories or the business profile, we notice the small discounting on the pricing your offering for a two-year subscriptions. What other initiatives are you currently doing to drive the two-year packages?

And, the second question, if you see over the last few quarters, you have seen users convert into paid earlier in the lifespan, partly due to new editor and the launch of several vertical offerings. It's also evident in your 1Q 2016 cohort data.

Do you think there is some kind of a pull forward effect with conversion into paid subs, or are you also seeing conversions higher over the lifetime, or maybe over next several quarters? Thanks.

The two-year subscription is applying that we've added because we will -- (inaudible) we use as we feel that a lot of them wanted that. They knew that they are going to stay for a while and we look at it mostly, it's a very strong signal for customers' loyalty. We don't push it. We didn't intend to push it. Of course it's on a major -- it's not a significant amount of users. And we look at it again, it's another benefit that we can give to our most loyal users.

So that's currently the status with that, and I will ask Nir to take the second part of your question.

So in terms of the improved conversion there, [from] so analysis of huge amount of data that we have, it is very clear to us that products drive conversion. The biggest part of improving this conversion is always being driven by product. And such equivalent conversion of comps from products is an actual improvement.

So, not -- it doesn't pull the conversion forward, but it actually improved the conversion all across the cohort. And I think that actually if you look at the core clients, you see that, over time, each cohort is better than the one before that and they stay better over time.

So it doesn't just -- drops out there two or three quarters. So and definitely we know that throughout the last summer and the fall, when we started really seeing the editor and started seeing that improvement in conversion, that has been ongoing throughout the first half of this year, and we kept on improving our products all across the board.

Got it, that's helpful. Thanks and congrats, guys.

Kerry Rice, Needham.

You talked earlier about the uptick in monthly subscriptions. Can you talk a little bit about sustainability of that or anything you are doing to convert those into annual subscriptions?

And maybe on a follow-on to that, were there any unique channels of marketing that you focused on in Q2 that maybe you had not focused on before and that led to any of the improvement record net adds? And then finally, any -- can you disclose what percentage revenue related to apps was in the quarter? Thanks.

This is Nir. I will take the first two questions and Lior will handle the third.

In terms of the monthly subs, yes, we do believe that it is sustainable as this is a change that started happening throughout the quarter itself, we probably will need a few more months in order to understand the full extent of the sustainability. And we will then start understanding whether we help these guys move on to plan whether that actually happens organically, these are things that we will test an experiment with.

Naturally we love the annuals, but it's very clear from looking at what websites we think we will build and what they are doing that these are real business [wins], real websites, real people who need [this data].

That's in terms of the monthly subs.

And in terms of your second question, I can say that as always, we are working with as many different initiatives around marketing and many different experiments and optimization. Since this is very much (technical difficulty) I cannot elaborate more than that. But definitely, we always are trying to optimize there.

With regard to the aftermarket, we still cannot disclose the overall upmarket out of the revenue.

There are a few reasons for that. You still see that most of the impact from the upmarket is actually -- comes in the way of better conversion. So the indirect effect is still very high.

But what I can tell you that in terms of the upmarket, if we look for examples in the last six months, the overall (technical difficulty) -- sorry, the overall revenue from the upmarket has almost doubled, meaning that the increase in the upmarket is much, much larger than the increase that we see in the other business, and again, this is due to the fact that we kind of package it in a different way. People find exactly what they are looking for.

They are using it more and more, and more than ever, is actually contributes more to the overall conversion of the stickiness of our customers.

All right, thank you.

Mark Mahaney, RBC Capital Markets.

You talked about seeing rising brand awareness on a global basis. Is there any way you could quantify that? And then could you also relay that into how you think about your marketing spend? It looks like for your guidance you are going to be looking to spend $150 million, $140 million, something like that on marketing this year.

Do you think that the results that you've seen in the first half of the year make you want to increase that marketing spend as a percentage of collections in the future? Is that something you want to accelerate, given the results? How do you just think about that marketing spend, your brand awareness, and the P&L results you have seen as a package going forward? It seems like it has worked well for you. Is it something that you will just sustain for the next couple of years? Just any thoughts on that? Thank you.

It's Nir. I will kick it off by saying that is the last thing that is worth revisiting the [charts] we saw -- we showed you guys in the analyst day of the data regard (technical difficulty) about the rules of our brand globally. You can see that in our [states] we are the fastest growing brand in the US, and outside of the US. As I think it is a great (technical difficulty) investing and quantified by somebody from the outside, especially from such an amazing clarity and transparency into what's going on in the world like Google.

And I think that the way we think about that marketing spend is -- and we think about it as a mix, so it's a combination of the effect that we can generate between the appliance of the branding money and the performance marketing together. And the way that we keep on measuring that, we built this the right way, is that we stick to our seven to nine months ROI. And you can see that even as we went into a much more -- invested into branding, we managed to (technical difficulty) [receive] that over the course of time.

With regard to the other question about investing in [volume] marketing, so I just want to remind exactly how we run it. Basically we have two sets of buckets for advertising. The first one obviously will be like the direct acquisition. Everything that we do in marketing, which is our bread and butter, and that is something that we don't budget it in a way that we want to make targets in terms of our P&L.

Meaning that we maintain our seven to nine months of [TROI]. If we can invest more in marketing in order to generate a better growth, while staying with the same KPI of 7 to 9 months of TROI, we will do that. Because the returns on our investment is so quick, so it's kind of no-brainer not to do that.

And as you see during 2016 compared to 2015, we actually increased dramatically in dollars the investment in marketing while maintaining the same TROI I think it's a good indication of what Nir described before about the fact that our branding a strong and still keeping the same TROI while investing more in marketing. And we will continue to do that also in the future if we recognize that we can invest more in a specific channel or a new channel and generate more growth while keeping the same TROI, we are definitely going to do that.

With regard to the second bucket, which is more of a brand-wise investment, so this is something that we overall operate under a budget -- a certain budget. And based on that, we choose to do what makes sense for us in terms of the returns, in terms of the TROI, and in terms of the overall budget that we set for it.

Mitch Bartlett, Craig-Hallum.

I have a couple of questions, one on incremental margin and the other on ARPU. So, you have said at the very beginning of the year that you are going to spend in incremental $5 million on two new products, and I just wondered, based on what might have been spent in Q2, so we can kind of look -- what I calculate as the 30% incremental margin in the quarter. And that is after the burden of this one off incremental spending on these products, and what might be spent in Q3 as well, if you could break that out.

And the second question on ARPU, which is your revenue per new subs has been growing very nicely and part of the explanation is the move towards the vertical strategy and the vertical products that you are bundling at this point. What happens when the ADI rolls out to that -- to the customer finding those vertical solutions? And that path toward subscription? Does it affect or should it have an effect on ARPU?

I want to believe that the -- if I understand the question, is [while] the results of the ADI impact on verticals?

Yes (multiple speakers) the ADI impact on ARPU, yes, or new subs.

I think the -- the way we look at it, ADI is -- to help you understand better, how to help you set up your website faster. That is the first thing. And then help you understand better what additional functionality you have that you can use. So, some of our users would probably find that the functionality they always needed and didn't know weeks actually offered is now available. But the majority of our customers and in verticals already able to find it. So we don't know if that's going to be significant or not, but even if it will, everybody knows about all the functionality if I could probably be not that dramatic, but we will have to see.

Let me just say that we are very excited about the fact that now a photographer has come to Wix. In a couple of clicks, they built this amazing website with photographers functionality. To launch him I think if you look at the branding value in the quality of products that the user is -- build the website that they build, the effect is very, very dramatic.

So just to clarify (multiple speakers)

With regard to the first question, (multiple speakers) -- sorry, again?

Just to clarify on that, it might not lower the ARPU when ADI comes out, and it might actually raise it because people find a vertical solution faster.

Yes, absolutely. At least not that we see today or that we can think of a reason that -- why it should lower the output. All the reasons that we can think about our exactly other equal or the opposite, meaning other similar output of today are higher.

Very good.

With regard to the first question about the incremental investments in R&D, we mentioned at the beginning of the year that we will invest incremental $5 million in R&D in order to expedite the launch of those new products.

I think that the best way to look at it, last year the overall R&D out of collection were about 28%. This year we are down to 26%. And basically you know, we chose to leverage that we have in our operating expenses. But if you exclude those $5 million, so we should have been approximately 24%, so it should have been a higher leverage.

Obviously you know this investment will generate in incremental growth, obviously -- hopefully in the future. But I think that this is the right way to look at it. Those $5 million were equally spread throughout the year and those are more incremental people that we hire at the beginning of the year in order to make sure that we meet our plans.

Great, thank you.

(Operator Instructions) Tim Klassel, Northland.

Just a quick question getting back to the apps. You talk about conversion, but how about retention? I know it's fairly early on with the whole application releases and what have you, but what are you guys seeing preliminarily around retention of -- on application customers versus your typical customer? Thank you.

This is Nir and it's a fair question. As you said, it's relatively early, but generally what we see as you can expect is that as customers deal with better service and manage to get the functionality they are looking for, then they have a higher chance of converting as well as a better chance of returning the websites for [a longer time].

Okay, and is there any correlation between customers who may be interested in a two-year subscription and the applications, just sort of saying, hey, if they've gone with the applications [are] much more likely to want a longer subscription.

I think that with the two years, it's just too early to say that. I think the number is still too small in order to give a fair analysis and statistics on it. But it is definitely something that we are going to keep on tracking in the next few quarters in order to better understand.

And there are no further questions in the queue at this time. I turn the call back over to the presenters.

Thanks a lot for spending time with us and this concludes our call. This concludes today's conference call. You may now disconnect.