Wix.Com Ltd (WIX) 2016 Q4 法說會逐字稿

Good morning.

My name is Scott and I will be your conference operator today.

At this time, I would like to welcome everyone to the Wix.com 2016 Fourth Quarter and Full Year Finance 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.

Ryan Gee, Wix Investor Relations, you may begin your conference.

Good morning.

Welcome to Wix's fourth 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 Form 20-F that could cause our actual results to differ materially from those forward-looking statements.

We undertake no obligation to update these forward-looking statements.

In addition, we will comment on non-GAAP financial results.

You can find all reconciliations between GAAP and non-GAAP results in our earnings materials on our Investor Relations page.

Shortly, our CFO, Avishai is going to say a couple of quick words about our quarter and our year, then we'll go straight to Q&A.

Also as a reminder, we'll be presenting at two upcoming investor conferences later this month.

The Cantor Fitzgerald Conference on February 23 in New York and the JMP Securities Conference on February 27 in San Francisco, both will be webcast on our IR site.

So with that, I'll now turn it over to our Co-Founder and CEO, Avishai Abrahami.

Thank you, Ryan, and good morning everyone.

I just wanted to say a few words and then will be happy to take your questions.

Let me start by saying that we had an outstanding fourth quarter that topped off a truly impressive year at Wix.

I'm happy to say that the fourth quarter was our first profitable quarter ever.

And I wanted to highlight some of the most amazing points about this quarter and the past year.

We've just added our 100 millionth registered users, that's 100 million registered users.

We have reached 2.5 million premium subscriptions.

In the fourth quarter, collection grew by 46% year over year, well above the top end of our guidance.

We have now exceeded our guidance 12 out of the 13 quarters we have been public.

For 2016, collections were $342 million, which was 42% increase over last year.

This growth was much faster than we have originally estimated for the year and is also faster growth than 2015.

We generated $18.8 million (sic - see press release, "$18.7 million") in free cash flow in Q4, $36.2 million for the full year.

The ability to create this type of cash flow while increasing growth is amazing and unique.

I believe that we are among very few companies that are doing this today.

I'm really proud of what we've accomplished this year.

We owe this success to our teams who aggressively drive innovation here at Wix and are focused on product and technology.

We also have a truly world-class marketing team.

Our first Super Bowl campaign was a huge success and our brand continues to grow and gain recognition on a global scale.

We are all very encouraged by the momentum that we have going into 2017 and believe that we have a great year ahead of us.

Again, thank you for your time today.

We'll now turn on to your questions.

(Operator Instructions) Samad Samana, Stephens, Inc.

Congrats on a great 2016.

The reacceleration in collections growth in the fourth quarter was really impressive.

Lior, maybe could you give us a sense of how much of the upside relative to your guidance was driven by the adoption of higher tier SKUs and the vertical applications versus the adoption and availability of two-year and three-year contracts?

Just trying to parse out the impact there.

Sure.

So without getting into the specific amounts, most of the upside that we've experienced in the fourth quarter actually came from better conversion of our customers.

And also -- to some extent also for better renewals of our previous cohorts and also for the continued improvement in our ARPU.

I think that in our update to our investors, you can see -- you can definitely see that the improvement has actually continued into the fourth quarter.

There was not a significant change in term of the two or the three years contract.

Compared to the previous quarter it's still less than 10% if I'm looking at the overall two and three years.

So as I mentioned before, most of the upside actually came from a better conversion, better ARPU and better renewals.

And Nir and Avishai, this might be for you, but the Company mentioned investing in horizontal services in the prepared remarks.

How should we think about that?

Does that mean merchant or payment services similar to what Shopify offers?

Maybe give us an idea of what the product roadmap or service roadmap there looks like and how you monetize it?

No, we are not in the habit of disclosing a roadmap going forward.

But I'd be happy to say that we're looking at management opportunities and most of it is about being similar to our ShoutOut product that will allow us to provide better (inaudible) application, we code name the wix1 allowing users to manage their website.

Anything from manage their blog, chat with their customers, to ecommerce and by utilizing all of that to create a better experience.

I think that there is more room for Veritas, but we want to go deeper and deeper into the [solutions layer] and providing a lot of those services that everybody needs and something which is going to be surprising.

Ron Josey, JMP Securities.

Thanks for taking the question.

One on product and one a follow-up for you, Lior.

Just on product on ADI, you mentioned some enhancements since launch and can you just talk about those specifically what's changed?

And I know you're not in the habit of talking out what's on the horizon, but perhaps what can continue to improve with this product given conversion rates are up and vertical adoptions increasing and then site creation time?

And then Lior as a follow-up, you talked about faster ARPU growth overall and this is annual contracting up over 70%.

Can you talk about what's driving this faster growth here and is growth in ARPU embedded in your guidance for 2017?

Thank you.

I will start with the second question and then Avishai will continue about -- talking about the ADI.

So, with regard to the ARPU there are actually two main reasons.

The first one is better adoption of our vertical solution.

We see that the more that we provide better features, better technology, better packaging to our customers, so we see that they are doing a great use, they're actually using that and this is what is so exciting about it.

And, obviously, they're moving more to the more expensive packages.

So, basically the combination between adopting those vertical solutions and moving to the more expensive packages, this is mainly what drove the ARPU up and in line with our expectations.

With regard to 2017, as I mentioned before when I provide the guidance for any specific quarter or for year I'm using like the KPIs that I know that exist today.

So basically I am not assuming any significant increase in ARPU for the 2017 guidance.

And regard to the ADI product, so I think that the question is not just like what else can we do, the question is, what cannot be, because there are so many opportunities.

It's a completely new way of allowing consumers to interact with the artificial intelligence.

The margin there is so big that there are so many things we are learning about how to do it.

This phase of a product we like to call it a series of small wins, meaning that, we're working on the funnel and we are tuning every part that we see in the fleet that we can improve.

For example we were training to learn and new set of professions.

So before that we didn't have the garages, now we have garages.

So the same thing will be for other ones.

So we try new product, we get it better with smooth UI, we understand when users get confused, their potential -- I believe, we just started to tap the potential and the results are already incredible.

Great quarter.

Thank you.

Mark Mahaney, RBC Capital Markets.

Two questions please.

Could you provide a little more detail on which verticals you think are powering some of the upside and then any color on which geographies could be powering some of the collections upside?

Thank you.

So with regard to the vertical that actually contributed more to the increased ARPU, so it's a combination of a few of them.

The first one is the Stores.

We continue to see really nice adoption of our Store solution, meaning the e-com solution.

We see more and more people who are actually using that.

We are adding more and more services capabilities to our customers.

So obviously we experience and they experience a better service and we see a better adoption of those solutions.

The other one is Bookings.

We see a better adoption of our Bookings solution.

And both of them mainly increased the ARPU.

Nat Schindler, Bank of America Merrill Lynch.

Thanks for taking my questions.

One, I was wondering if you could give us any color on, specifically on the ADI and how it's being used and is it the principal driver of the conversion rate improvement, certainly year over year?

I know you did say that the conversion rates improved quarter over quarter.

And I think I can't quite calculate that.

I think that's a rounding error difference.

But are you seeing any of that continue as you go forward?

Is it getting -- as you tweak the ADI and customers get more aware of it, is it having an improving effect over time?

I think that the contribution -- ADI of course is part of what we've been doing last year.

But it's part of it, it's not all of it.

There is a lot of improvement that we did in the WIX Editor, a lot of improvement that we did in the way people write the account and the content.

I think the set of everything together is what contributes mostly to the improvement in conversion, ADI being an important part of it.

And we believe with the huge potential going forward, same as we believe that the Editor and more applications and more verticals.

All right.

I think the magic of what we do is that, it's not just limited to one product, but it's a set of how everything works together and we are just getting better with that and we have more things that work together in a better way.

I think that's really what you have seen happening.

Okay.

Also, obviously, you saw a pretty stark acceleration in the US versus Q3.

Is there anything in the marketing that occurred or is it just as the businesses grow?

I think there two things are happening.

I think that -- one is our brand getting more and more recognized and I think that the more that the brand is being recognized, more people compare us to our competitors.

And I think you could have seen, I think that last Super Bowl was a great example of why the difference between Wix and our competitors becoming more obvious.

Companies like Squarespace or GoDaddy that are mostly in our advertising domain selling or something less clear or hosting but not really positioned to sell so much anymore on Primetime Super Bowl, it's a website building platform right.

And I think that nobody else has been talking about managing your business.

That's kind of like disappeared, right.

And I think that that differentiation and where we establish our position as the dominant player in this market is the main key driver of growth in the US.

I just want to follow up with my question about, I think that I missed that about geography.

So, the fastest growing geographies that we've seen in the fourth quarter, so the first one obviously came from the US.

So the continuous growth in the US was actually amazing and exciting for us and we continue to see a very strong growth in the US, also in the fourth quarter.

Other places like, for example, Japan, very high growth in Japan, places in Latin America like Mexico and also West Europe.

So those were the main areas where we have experienced very high growth.

Sterling Auty, JPMorgan.

Looking at the guidance for 2017, can you walk us through why the collections growth and the revenue growth have diverged to this extent?

Sure.

So this is Lior, Sterling.

With regard to the revenue, as we know, the revenue takes time until catch up with collection, usually six to 12 months obviously because of revenue recognition.

The second half of 2016, we accelerated the growth in term of collections.

So we actually saw a much better growth, more than 40% during the second half of 2016.

So I think that when you look at revenue, it basically represents the growth of collection that we've seen in the previous year.

So obviously, if on 2016, the overall collection growth was 42%, so you should explain the revenue to catch up with that and to represent the same growth that we've seen in collection over the previous year.

So that basically explains to you why the growth in revenue actually accelerated and it's more than the growth of collection that we guide for 2017.

Got it.

And then my follow-up question is on the renewal rate, you mentioned that you were seeing some improvement.

Can you walk through what you think is driving the improvement and is there any quantification of that renewal improvement that you can give us?

Hi Sterling.

It's, Nir.

Actually we don't disclose the exact numbers there, but we definitely see that improvement over the -- it's low trend over the rest of the whole of the year.

Simply as the product improves, naturally people get the capabilities they are aiming for and they are more successful in running their business and they keep the rest for a longer time.

Aaron Kessler, Raymond James.

Congrats on the quarter.

Couple questions.

On the app growth I believe you called out roughly 50% growth this quarter, historically you really haven't called that out as much.

Has anything changed there and how material is app revenues at this point?

And also if you happen to have FX neutral growth for collection of revenues?

Thank you.

So with regard to the app, again, we are not disclosing the total revenue for the app.

I think that also the last strategy that we've been implementing, meaning we are packaging a different solution coming from the app market for the vertical and so on, so I think that the overall contribution of the app is basically divided into two.

The first one is the direct.

Obviously, we see more like -- more adoption of the app and more and more people are using the app market.

The second one is the indirect which impacts the overall improvement in conversion which is a greater impact on our top line.

So, on a direct basis, it's still less than 10% and this is why we disclose it.

But if you look at the overall impact of the app market it's quite big, again because it impacts the overall conversion of our customers using the app in all kinds of services and needs.

With regard to the constant currency, the reason why we do not provide it is because I think that I mentioned that in the past, it's tough to be significant.

There is a very small impact on this quarter of about a few hundred thousands of dollars, meaning that we should have been reporting on a higher collection on a constant dollar basis.

But since it's about $0.5 million, we didn't want to report it because again it's not so significant.

Unless we see another dramatic changes in the currencies in the future, so we will continue to do that.

Kerry Rice, Needham.

A couple of questions and maybe a housekeeping question.

We've talked a lot about conversions today.

I notice that seasonality may play a part here.

I know in Q4, it looks like conversion from prior cohorts ticks up.

Can you talk a little bit maybe why that is?

And then can you talk a little bit more maybe about profitability?

This is your first quarter that had pro forma profits maybe as it relates to continuing to gain leverage on your sales and marketing line.

And then finally, with your guidance on cash flow, can you talk a little bit about what you expect for CapEx in 2017?

Thanks.

Hey Kerry.

It's Nir.

I'll take the first question and then pass it on to Lior.

So in terms of the Q4 traffic and conversion, you can see on slide 11 in the deck that we provided, it's actually -- it's another thing that we expect and see in each Q4.

It's actually the exact same number, I think, as Q4 of 2015.

And it's a natural thing, people go on vacations, the traffic decreases somewhat and also there is a little bit of shift in its mix and therefore it's a little bit less of a strain so to speak within in the course of the same quarter.

We know that it bounces back and we expect it to happen on a yearly basis due to seasonality.

To your question about profitability, to be more specific about the operating profit, operating income on a non-GAAP basis, I think that you know overall, obviously we never try to guide for this specific line item on the P&L because the nature of our model, yes.

I mean, we were profitable this year, this quarter, and probably also the next year.

But it's very important to mention from our point of view, the most important profitability measure is actually the cash, how much cash we are generating and so on.

The operating profit is more impacted by the fact that from one hand we see a better leverage on our operating expenses, on the other end, the ability of the revenue to catch up with collection, meaning that revenue obviously impacts the operating income.

As I mentioned many time before, hypothetically, if in a certain quarter, we were able to increase our collection, just for the example, by $10 million, it drives more marketing on the amount of $4 million to $5 million because obviously with our logic in terms of the TROI.

Since we recognize the entire cost, but only out of the $10 million of the same example that I'm using, we recognize only $2.5 million of revenue, you actually from one end, see a better cash but actually lower number in term of operating profit because of the model.

This is why we don't provide the guidance for the operating income because I think that it's not the best measurement for our model.

On the other end, we are providing the free cash flow, which is very similar to the adjusted EBITDA that we stopped using because of the new SEC rules.

Now, the free cash flow is very similar to adjusted EBITDA except of the CapEx, meaning that you should assume that free cash flow is approximately adjusted EBITDA minus CapEx.

To answer your question, I think that on our investor update you will see a very detailed -- on page number 12 -- a very detailed explanation about the model and about the numbers.

We also indicated over there that we assume that CapEx is going to be around $6 million to $7 million on 2017.

Jason Helfstein, Oppenheimer.

A few questions.

Just a bit more on ADI.

Number one, has it now been deployed in every country you operate in and if not how far along the way?

Number two, you talked about learning more disciplines.

Is there a way to think about how deep you've already gotten into so we can understand the pace of this.

And then on, it's clear the Company is heading towards obviously very healthy margins and as you think about how far you're willing to let margins go, call it, in the medium term in the next call it two years relative to reinvesting in marketing and R&D, can you help us understand how your plan is to balance that because if we run this out, you probably hit your target margin sooner than most of us have modeled and I understand that balance between growth versus margin.

Thanks.

This is Nir.

So let me start, are we deployed in all countries, no, we are only deployed in English-speaking countries.

This time a lot of what ADI does is aimed at the United States because of the relevance of the specific disciplines we've discussed that are more US and England tailored than other places in the world.

So, in regards to your next question about how many disciplines and what is the level, so we've added about 1,500 in the last quarter if I remember correctly.

But there is a lot more to it and it's a process.

It requires a lot of training, a lot of information gathering.

So it's a process but the value of that process is very clear.

So we really look at it as a great thing to do.

Jason, with regard to your question about the target model, so let me explain exactly what, to try to summarize, what happened in the last six months or so and how it impacted the target model.

So obviously in the last six months, actually starting from the second half of the year, we've experienced a very high growth in accelerating the growth of our topline and premium subscription and so on.

And you're right about the fact that because of this growth, we might end up sooner coming to basically the number that we put as the target when we get to our target model.

But we need to remember one thing.

The way that we look at it and I think that you can also see that from the guidance that we provided to 2017, we tried to provide a very detailed guidance in order to explain the model.

We do anticipate that also in 2017 we're going to see more leverage coming from marketing, meaning go down to approximately 40% to 41% from the 44% of 2016.

So, year over year we see more and more leverage coming in marketing, simply because of the fact that all those historical cohorts keep on generating more and more revenue for us and since the marketing is aimed to acquire the new cohorts, so obviously we see a very nice leverage in terms of the cost over there and I think that it will continue.

It will continue in 2018 and 2019 until we get to the target model.

The same goes for the R&D.

We've seen that the R&D has gone down again by two points from 2016 to the guidance that we are providing in 2017 and the same thing also from 2015 to 2016.

Also it was down by two points.

I think that it will continue in the next two to three years.

Now with regard to the top line, because of this acceleration in growth in topline I just feel that the timeframe of the growth model -- of the target model is not going to be changed.

The only difference is going to be that it will be on a higher topline which obviously when we get to the target model, we're actually going to generate more cash than what we had in our original plan when we talked about it a year or two years ago.

So I think that, yes, this kind of a hyper growth of this Company continues.

The good news is that, in 2016 we managed to close in a much better growth than we anticipated.

Actually, the growth in 2016 was accelerated and was more than the year-over-year growth in 2015, which is in our eyes, kind of very exciting and amazing.

So the bottom line is that nothing happened to the target model in term of the timeframe, but definitely as a result of the growth we are going to generate much more cash when we get there.

Tim Klasell, Northland Securities.

And my congratulations on some great results.

First question has to do with tying a couple of points made earlier.

ADI was rolled out obviously in the English-speaking languages first and then into the broader markets.

How much of the growth in the US, which outperformed, this is according to our thoughts, was because ADI got rolled out in North America first?

And is there a tight correlation to the ADI rollout to the geographic performances?

I think the answer to the second part of your question is kind of simple which is that we don't know because we haven't rolled out ADI yet in other geographies.

We do see that in the US, we do see ADI, of course, contributing, but as I said it's not the only thing we did and I think we see that from marketing to Editor improvement to other verticals, all contribute.

And it's been the reason that we managed to improve on all of our most important KPIs within one quarter, which is new registration, conversion and ARPU.

And in fact, I think Lior mentioned that we are also seeing lower churn as a result of the total effort by all of those different elements that we as a Company need to do.

And I think that this quarter is really by far the best way to say that testimony to the quality of the teams that we have here working and that every part of it was super successful.

And just to be clear, ADI is a contributor and we're really proud of what it's doing but it's just one part of many.

Okay good.

And then my follow-up question has to do with the Super Bowl spend.

Obviously, you continue to invest into advertising there.

What indicators are you showing that maybe we and the investor community can see that this is generating a positive return or is it more I don't know, call it, softer numbers?

Hey, Tim.

It's Nir.

I think first and foremost we are super happy with this year's campaign.

It was -- there are very clear indications that we garnered the most views of that campaign actually prior to even the spot being live on game night.

And I think that's amazing by the way because if you look at all the other brands that were kind of playing in this playing field, it's amazing to be number one.

But when we look at it in a multi-year progress of our brand and the brand recognition, we definitely see an uplift.

And in fact about two months ago we had a report from Google that showed us that through 2016 our brand recognition globally grew by 29%, which is amazing.

By the way, the group that they compared it to is other companies in our space, the average there was 2%.

So that is definitely part of the ongoing investment we do into the brand in which Super Bowl is -- it's a big part, but it's just one part out of a whole activity.

Lloyd Walmsley, Deutsche Bank.

Thanks, a couple if I can.

The first is the shareholder update does note a specific new product plan for users in the developer community.

Can you give us any update on the timing of that product and whether there's any contribution in guidance from that product?

And then just the second one, when we look at your guidance, the top line looks nicely ahead of where we have been forecasting it and yet the sales and marketing guidance implies only about 22% growth.

So just wondering if you can comment on what exactly is behind the efficiency gains there and then philosophically why not invest more heavily into the success you're seeing in conversion rates and just new product uptake, anything you can share there would be helpful.

I think that's a question that is going to be split between me and Lior I think.

So, I'll try and answer the first part.

We believe that the new product we are about to release will be summer to spring this year.

And we are super proud of what it is.

I think it's a big surprise and we are just seeing it being tested here at Wix and I think most of the people were shocked that this actually can work and it does what it does.

But we're not going to give more details at this stage.

It's a new product and going to be slowly rolled out during the year over territories because we believe we have to not just release it into other languages, we actually have to be able to really support it well with everything translated and built correctly and preparing all the infrastructure that we need to do for that.

So we didn't credit any special contribution for that this year.

As part of should we invest or not, well we are always investing in building new products and improving marketing and our number one focus is to make sure that marketing maintain the target TROI, meaning return on investment that we believe in.

And as long when we find good opportunities, we're going to go ahead and do that.

And Lior you want to take the rest of the question?

Yes, I think that with regard to the marketing, it is very important to mention that the fact that we see leverage coming from the marketing is not because we control in a way to try to fit the marketing to the target model, meaning that the reduction that we see in the percentage of marketing as of the total topline is simply because of the fact that we see those -- all the cohorts generate more and more revenue.

So actually the portion of the new cohort is basically declining in topline.

So it means that we see embedded leverage in our model coming from the marketing.

We will continue to invest in marketing based on the seven to nine months of TROI.

So in other words, if we hypothetically manage to find a new channel that can generate more premiums to us in the same rate of seven to nine months returns we will definitely do that and continue the growth.

So, again, the decrease in marketing as a percentage of collection mainly coming from the model, and it's embedded as part of our model, not because we trying to control it.

Naved Khan, Cantor Fitzgerald.

Thank you very much.

Just a couple of questions.

So, on the ARPU side you've highlighted the increase in the US collections per new subscriber.

Can you talk about what kind of -- if you're able to see any increases when you get customers to renew, are they renewing at a higher ARPU rate?

And then I have a follow-up.

So, you're talking about the ARPU of those guys that are renewing.

That was the question?

Yes.

So, I think your press release talked about how the new subscribers are coming in at a higher collection rate.

Can you talk about the renewals?

So people that renew, obviously we see less dramatic impact on the ARPU, meaning that the ARPU is mainly coming up or increasing from -- coming from new users.

The ones that are usually renewed are people that already build their website, build their business, they are happy with it.

To some extent we see more people using like more premium services that we provide and obviously end up with paying a bit more.

But I don't think that it's significant and it's not so dramatic.

So again, most of the ARPU increase is coming from the adoption of our solutions by new users that start their business, building the website and managing their business online.

Okay, that's helpful.

And then quickly on this acquisition, flok, how should we think about it in terms of its contribution to the topline and collections in 2017?

How big of a business was it when you acquired it?

So, first of all, we are very happy and excited about this acquisition because I think that it's really interesting both in terms of talent and technology.

Right now, the numbers are not so big, meaning that it's not so significant even worth mentioning that.

It's part of the 2017 guidance but again it's not so significant, it's a very small amount.

But, we are very excited because we think that in the future it might create an upside for us.

But 2017 does not assume that.

Samad Samana, Stephens, Inc.

I just had a couple of follow-ups.

First on the Super Bowl spend, could you give us an idea of how the dollar spend grew or changed year over year?

Your 1Q sales and marketing guidance is a little bit below what we were expecting in terms of expense?

Just maybe help us understand what the cost for this year versus last year for the Super Bowl.

Sure.

This is Lior.

We do not disclose the overall dollars amount that we've invested in the Super Bowl campaign.

The only thing that I can tell you, first of all that it's split between the fourth quarter and the first quarter of 2017, meaning that most of their production and some of the talents is actually recognized in the fourth quarter.

And on the first quarter of 2017, it is mainly the spot and all the online campaign that we do.

When I compare it to the last year's Super Bowl, so obviously, because we don't have in this time, we do not partner with anyone.

Obviously, the cost was higher, mainly because of talent and production, but it was all provided during the guidance that we provided both for the fourth quarter and for the 2017, meaning that it was part of the overall plan.

And then final question for me, you mentioned that 15% of new subscriptions in the quarter came from e-commerce.

Could you give us an idea of what that looked like on a full-year basis for 2016 and maybe compare that to 2015 as well?

Thanks, guys.

So we did see an increase in our e-comm solution compared to 2015, meaning that 2016 was higher.

I think that you know the increase was quite in line of what we predicted, but we look for the exact numbers to tell you in term of percentage, but overall, it was about 80,000 net subscription increase during the year.

There are no further questions at this time.

This concludes today's conference call.

You may now disconnect.