Wix.Com Ltd (WIX) 2017 Q2 法說會逐字稿

Good afternoon, 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 2017 Second Quarter Financial Results Conference Call.

(Operator Instructions) Thank you.

Joe Pollaro, U.S. General Manager, you may begin your conference.

Good afternoon.

Welcome to Wix's Second Quarter 2017 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.

Also, we recently posted on our IR site the materials we normally post, to provide some additional detail on our results.

With that out of the way, I'll hand it over to our Co-Founder and CEO, Avishai Abrahami, who's going to say a couple of quick words about the quarter and about our Wix Code launch earlier this week and then we'll go straight into Q&A.

Avishai?

Thank you, Joe, and good morning, everyone.

I will quickly say a few words, and then we will be happy to take your questions.

We had another outstanding quarter.

Collection were $117.1 million, an increase of 44% over last year.

Revenue grew 51% over last year to $103.5 million.

Our cash flow generation increased again with over $70.4 million this quarter, an increase of 71% over last year.

We continue to produce cash flow and strong growth which show how well our business model is working.

We added over 5.5 million registered users and over 102,000 -- 192,000 premium subscriptions.

Additionally, more and more are from businesses, but more of our users are buying subscription with vertical applications and other business applications in touch, illustrating our continued shift to a platform beyond just a website builder.

The strong trend that began last quarter continued for Q2 which drove these strong results and we are excited about the second half of the year.

In addition, we're thrilled to introduce Wix Code earlier this week.

This is truly a game-changing product and is the result of many years of innovation and development here at Wix.

Wix Code represents another natural expansion of our platform enabling our more savvy users to do so much more on Wix.

However, and this is in my mind the most exciting thing, Wix Code opens a whole new market for us.

Users of Code can now develop web applications on top of their website or a standalone web application for use inside an enterprise or even complete new startups, all with tremendous acceleration with the speed of development, scalability and visual quality.

My belief is that this change is so fundamental, that by 2019, more web applications will be built on Wix Code than anywhere else on the Internet.

Again, thank you for your time today.

We will now turn to your questions.

(Operator Instructions) Your first question comes from the line of Ron Josey with JMP Securities.

The first question just with -- on overall guidance.

It implies a pretty big decel, which is what you all had guided earlier in the year.

I'm just wondering if there's any puts or takes around just the cadence of growth rates in collections as it relates to guidance.

And then, secondly just on Wix Code.

Can you talk a little more about the rollout strategy associated with Code?

So you talked about building community on Tuesday, how you do that, maybe any insights on pricing in terms of how you're thinking about it would be helpful.

Ron, this is Lior.

So with regards to the question, absolutely not.

I mean we don't see any deacceleration in our business.

Actually, it's quite the opposite.

Let's remember that with the Q3 guidance and for the overall year, we're actually confirming the annual guidance that we provided back in May, which basically indicate a 39% increase of growth on a year-over-year basis, which we think that it's incredible.

And we feel very comfortable with that, and this is exactly according to our expectations, again, from the beginning of the year.

We reported a very strong first quarter with more than 50% growth on a year-over-year basis, and we think that both the second quarter and the third quarter just continued this momentum.

And just tougher comps here in the back half for the most part particularly in 4Q?

Sorry, can you repeat that again?

So just tougher comps in the back half and the guidance is what it is.

So I think that makes sense, so I'll move on and just ask about the Code in terms of rollout strategy.

It's Nir.

In terms of Code, basically what we -- in terms of the rollout strategy, we've -- we're still in a closed beta application-only stage.

In fact, we've seen an amazing, it was very well received, a lot of people have asked to join.

We have more than 1,500 applications already, which we think is amazing.

And the aim again is to run through this beta, to see that -- make sure that, that product is stable and works well and get the feedback from our developers and our users to understand if we need to fix anything.

And probably, in the next few months, as that matures, to start opening it up for a wider demographic.

In terms of pricing, so naturally like everything else that we do, we're going to test, we're going to talk to our users, we're going to try to understand what's the best value we can give them and based on that, we'll figure out the pricing.

Obviously, there are a lot of questions that this raises because if Wix goes -- ends up being used for building application and being used by big enterprises, then that's something we'll need to take into account and understand how we price it.

Our next question comes from the line of Nat Schindler with Bank of America Merrill Lynch.

Two quick questions: one, on the Code comment about the most web applications built on your platform versus any other.

Can you help us define what you mean on the platform?

And what's the comparable platform that you're comparing it to in that statement?

The other question I had was a little bit on the growth rates.

You're actually growing fastest in your biggest market, the U.S. Barely, but still the fastest.

Could this be attributed to the ADI being in English?

Or is there something else going on in how well your marketing efficiency is in the U.S. versus other -- anywhere else?

Right.

So let's start with the first one.

Good.

I think that when we look at the history of software development and we can look over the history over the last, I would say about since the '80s, right?

And we can see that similar product that created this kind of fundamental shift is phenomena of massive attraction of developers, right?

The first one was probably dBase.

After that, came Lotus with Notes.

The next one was Visual Basic, and then Microsoft Access.

And we see that when you dramatically moved the house rules and simplify the ability to create code and products, there's a massive shift of developers.

And more interesting thing, right, is that if you remember, somewhere in the '90s, more lines of codes were written inside of spreadsheets than anywhere else on the planet.

And I believe that Wix Code is actually a greater fundamental shift than any of those products in the past because not only it allows you to create applications easily, it also makes them look great, which never happened to any of those other products and they are fully Web-enabled, fully Internet-enabled with central servers so they can scale and serve multiple people.

This is a major shift in how things are done today.

I think that my comment is that, if you compare any other platform of web development, I believe that 2019, Wix Code will actually be bigger than that.

And there are, of course, many, many of those.

It's Nir.

In relation to the growth in the U.S. So certainly, we're seeing very fast growth in the U.S. and naturally it means that we're gaining market share.

It's still -- it is -- for sure, it's a combination of the very efficient marketing that we run and -- as well as the ongoing increase in our brand recognition globally and specifically in the U.S. And the other part of it is always, is the fact that our product keeps on being better and better, answering the needs of more and more people.

Naturally, ADI plays a part of it and the fact that it's in English definitely makes that contribution stronger in the U.S. But it's also other functionalities, other verticals, the stores, bookings, video, which is shown on a tremendous growth in a very short amount of time, and all that product improvement drives conversion and therefore, drives growth.

Your next question comes from the line of Jason Helfstein with Oppenheimer.

So in light of the Wix Code announcement, can you discuss, was this the main reason that you bought DeviantArt as this clearly is weighing on your near-term financial results?

And how do you -- how does DeviantArt play into Wix Code?

And also, if you can tell us, did you hit the internal expectations for DeviantArt?

Or was that kind of kind of weaker than you thought it was going to be in the quarter?

So this is Avishai.

I'll take this one.

I think that the connection between DeviantArt and Code is not really that big.

I think the reason that we went out to buy DeviantArt is because we think it's the largest community on this planet for web -- for designers.

A lot of them are younger and some of them are more savvy.

And a lot of them will become web designers, if they give them right tools.

And for us, web designers are the most important kind of users.

So that was the goal and thinking behind the DeviantArt and as we've mentioned before, we don't believe that you can see -- we will see anything substantial coming from DeviantArt before 2018.

But when we look at what was done today, we are very, very happy, and I think that we are well on schedule.

Jason, this is Lior.

With regards to the DeviantArt result, it's quite in line with what we actually provided when we made the acquisition.

We said that collection is going to be approximately $9 million for the year, and we are in line with that.

Revenue is going to be about $8 million for the year, and we are in line with that as well.

And we also said that we are going to invest approximately $8 million, which will be reflected in our free cash flow and it's also part of our guidance, specifically in acquisition-related expenses and also investments in the product.

So actually, we are in line with all those metrics that we provided.

And then, Avishai mentioned, we don't expect to see the DeviantArt results or upside this year.

It would take time until we integrate the product and we invest more in the product, but we do believe that the potential of DeviantArt is huge to our business.

Your next question comes from the line of Samad Samana from Stephens Inc.

So Lior, I think what we're trying to reconcile is that the absolute growth for the company as a whole is great, but if you think about the momentum of the business, the guidance for collections for the third quarter, that will be one of the smallest sequential increases that you've posted in a long time.

I guess we're trying to understand if there's anything that's a change in the momentum that's maybe driving that smaller change from 2Q to 3Q than normal.

Just maybe help us understand the mechanics of that back-half guidance for collections.

Sure.

So first of all, it's very important to understand that when we provide guidance, it's a very strong KPI and expectation as of the date of the guidance.

The second quarter and the third quarter, our guidance is exactly according to our expectations.

We don't see any weakness in our business.

It's actually the opposite.

We see that the amazing momentum that we had in the first quarter actually continued.

Also, we need to remember that the first half of the year, this internal seasonality is stronger and also in terms of the growth, than the second half of the year.

It has always been like that.

So I think that again the entire year represent a 39% increase on a year-over-year basis, which I think that it's amazing.

But in any case, we don't see any weakness in our business and again, we are exactly in line with our expectation from the beginning of the year for May.

That's helpful color and then maybe a product-based follow-up.

I think Wix has a pretty great history of putting out a platform-wide product and usually some additional SKUs as well.

Maybe as we think about the rest of 2017 and into 2018, thoughts on additional product releases or SKUs that we might expect?

So I think -- when I'm just trying to find a way to phrase it.

So we do have a -- at least 1 more major product that will come.

And Joe specifically told me to say "in the next decade" and not to give any more exact timeframe.

But we are working on a couple really, really interesting things.

And I think some of them are as big as ADI, which is good.

But you really have to be very patient until you've seen it.

Your next question comes from the line of Deepak Mathivanan with Barclays.

Two questions for me.

So first, given that you're lapping the launch of ADI in the back half, should we expect conversion improvements that you've seen over the last few quarters to start on moderate or do you think there's more opportunity there?

Overall, what do you think is the long term that conversion can reach as a percentage of free users?

And then, second question, specifically with respect to the adoption of vertical offerings during the quarter.

It looks like collections per sub was flat sequentially.

What was driving the moderation there?

Did promotions have an impact on it at all during the quarter?

Or is it just the adoption of vertical offerings has maxed?

Deepak, this is Lior.

Just to make sure that I understand the question.

The first one was with regards to the ADI and growth of the ADI?

No.

You've seen some good conversion improvements in paid sub shares as a percentage of free since the launch of ADI last year, specifically in the back half.

I was wondering if there's going to be any comp issues as we hit the back half.

Or do you expect like kind of continuous trend on that to continue?

Deepak, so it's Nir.

I think I'll take the first question and then Lior -- can speak back to Lior about the ARPU.

So generally, our aim is to keep on improving the product all the time, ADI being obviously a key player there.

But -- so the way we think about it is that we need to keep on improving the product, and therefore, we need to keep on improving conversion all the time.

I think that we're very happy to say that in the past few years that has definitely been the case, and you can see that over time.

In fact, our internal numbers today show that conversion is at an all-time high and we're very, very happy about it.

Definitely, as we keep on expanding and improving ADI, that's going to be a key factor in improving that conversion going forward.

But also, the maturity and the maturing of other products that we've already released, such as the Bookings, the Store, the Video, all the other verticals, as well as other things that are kind of in the oven will definitely keep on contributing to the increase of conversion going forward.

Yes.

With regard to the ARPU being flat on a quarter-over-quarter.

So actually the second quarter as in any other previous year, we had some promotion due to the holiday.

I'm talking specifically about Easter, which obviously impacted the ARPU.

But besides that, we do believe that because of the adoption of the new vertical, like the Video for example, which is the latest one, we do believe that ARPU will continue to increase in the very near future.

Your next question comes from the line of Sterling Auty with JPMorgan.

I'm going to ask the conversion rate question a different way.

So if we look back over the last couple of quarters, the number of premium subscriptions that you've added relative to what people were expecting were really big upside surprises.

This quarter, it was more in line with where people were expecting.

Is there anything, in terms of geography or other elements that you can describe why the in-line performance versus the very strong upside the last couple of quarters?

Sterling, it's Nir.

So I think that generally, in fact, it's still -- if you look at kind of the track record of the additions of premiums, it's actually the -- other than I think Q1 or maybe one other area or one more, it's the second highest ever.

So -- and it's also in line with kind of seasonalities that we see around the registered users in Q2, which still was the second highest ever.

So we actually feel that, in that aspect, that was a great quarter and a great Q2.

And in fact, if we kind of look at the underlying conversion trend going past and forward in terms of their cohorts, it's -- as I said before, conversion is actually at an all-time high.

Got it.

And can you maybe give us an update in terms of what you guys are experiencing on churn?

So both the subscription churn and the user churn.

It's been some time since you really disclosed and I have to imagine given the offerings have gotten better that those churn statistics have probably improved.

Where are you at, at this point?

I would say that generally, we haven't seen any dramatic change on churn neither here nor there.

There is an ongoing kind of higher retention as you can imagine around specific verticals where people actually get what they're looking for.

And that's in line with kind of the general flow improvements that we see over the year.

But I wouldn't say that there's a significant change to any direction.

Your next question comes from the line of Mark Kelley with Citigroup.

First of all, just -- is there any way to quantify the impact you're seeing from ADI in your conversion rate?

And then, just on Code, I know you have some time before you go to market, after you see what beta looks like and after you get some feedback.

But what's the right way for us to size the offline application market?

And is there a target customer -- groups of customers that you had in mind at the outset?

So I'm not sure about the -- all right.

I'll start with the part I understand and then I'll go to the part (inaudible).

So ADI is a product that we're constantly improving and I think that it's still, the impact is mostly limited to the fact that it's aimed at English-speaking American customers.

Code, we are focusing now on improving it, and then we'll scale it to other languages and other countries.

It's a product that's learns a lot, right?

The AI learns a lot about a specific market so it can make better websites.

And American English and English, which are actually different and the names of the professions are different and how we're presenting it is different.

So all of this is something that is important for us to work on and do it and improve ADI.

But I'll say, in terms of the results in the markets we currently aim for, I think they're really good and they're getting even better, much quicker than we had anticipated.

And so we are very excited.

Now your second question was about the offline.

What is the size of -- can you explain better what you meant in the second question?

About Code, I think I (inaudible).

All right.

So let me try and explain about (inaudible) and see if I understand it correctly.

You asked about the size of markets for Code, that is not websites.

So I think that the first thing is that, looking at the -- at things like the college application process, right.

And that's -- it's a great example because it shows you something that almost every business has a need to do.

One of the great examples done by one of our beta testers is a guards' management system, right?

So there's guards in a company and they needed to know when a guard arrives the place and actually let him check in to say that I'm here.

But apparently, they were afraid that guards will check in even if they're late and just check in from wherever they are.

So he used Code to build this database, but when you click on the check-in button, it checks the GPS on your phone.

So you can only check in when you arrive.

This is an application, right, for a guard company.

And it's very unique because there's specific needs.

Guards' company will need others.

If you look at larger companies, internal applications, we all know it's a huge market, all right?

So I'd say that it's probably, in terms of estimating the size of the market, it's probably as at least as big as the website market if not bigger.

The other thing that this thing brings in is the ability to create great start-ups.

You can really build complete startups on top of that, okay?

And of course, we didn't discuss pricing and we don't intend to discuss pricing for Code but I think that, that also allows us to go to a much more expensive price target because we provide a value that you can really build a startup in a couple of days instead of a couple of months or years.

And I think that, that is essentially why we're so excited about it.

It can get to a much higher customer base, different kinds, different needs, different usage, most of our customers are -- it's relevant to them because they can do things in Wix that are now available with Wix Code.

So the demand is worth it but we need to do other things.

It's really a super exciting product.

Next question comes from the line of Mark Mahaney with RBC Capital Markets.

This is Dylan Haber on behalf of Mark.

Just a few questions.

First, on DeviantArt can you provide some more commentary on how that acquisition has gone so far?

And just the integration and any color around that?

And then next, just on your marketing strategy.

Where are you allocating dollars right now?

Has there been any shift in strategy?

Just a little bit more color there.

And then, the last question.

I know you're rolling out a product later this year and obviously, you're not going to comment on it.

But if you had to say there were some verticals, industry or otherwise, that Wix hasn't tackled enough yet, what would those be?

Okay.

So it's 3 different questions, right?

And I'm going to -- so with the acquisition of DeviantArt is not -- was not meant to integrate it into Wix.

We want to integrate Wix into DeviantArt and to create the unified offering that is better.

This requires massive changes on the current DeviantArt infrastructure to handle that and upgrading a lot of what they do and this is the phase we're in now.

It's something that we started development on and I think that if you look at the -- for me at least the biggest risk was, will the teams find that the targets understand the chemistry of our division will be good enough and I got to say that this has, by far, exceeded my expectations.

I think it's really natural for both sides.

And beyond that, as we said before, until 2018 we don't expect and should not expect to see results from the acquisition.

And I think that this is in line with what we see today.

And in regards to marketing channels, we are pretty much doing what we did before with this shift from television and that was a big shift for us.

And -- but it pretty much moved to more budget to the regular channels that we have, so it's nothing unique really on that.

I think that it's a very interesting new test that we want to check, and then understand better how much more we can scale there.

And -- but it's not something that we're that committed to and now, this is one of the ongoing tests of that we're doing in marketing.

Overall, I feel like it's pretty much steady.

We're very happy with it, and we think we still have a lot of room to grow.

And so this is pretty awesome.

I think another impact that we're seeing now is that the brand -- the brand value is better than ever.

Wix is by far -- now people searching for Wix is by far more popular than people searching for "build a website" or "create a website." I think both of them combined don't even come close, which is unbelievable, right?

In terms of verticals that we have not yet addressed, well I think that most of our competition would love to hear this information as well.

So I'm not going to say the name.

But I think we have 3 or 4 that's still major that we need to address.

And I would say even more than that, 2 that are parts of our current verticals that we should be able to do better.

So we have some verticals that actually we extend the functionality, we can do more on that.

So there's still a lot of opportunities there.

We are just -- and I say that, we can probably add at least 50% to 60% more on the usage of verticals through 2018.

Our next question comes from the line of Kerry Rice with Needham.

Most of my questions have been answered, so maybe a couple of clarifications.

I think it may have been Lior that said, or Nir that said about the seasonality of net adds.

And usually, Q1 is kind of the top quarter with adds and then it kind of trails from there.

If that is the case, can you talk a little bit maybe about what happened at Q2 of last year?

Was that just the strength of Kung Fu Panda?

Was there something else that you'd call out of why you saw an uptick from Q1 to Q2 last year in net adds?

So that's the first question.

And the second one is, did you say the -- I think again, Nir or Lior, that you did the same amount of promotions in Q2 that you always have done?

Or you did a little more?

You did a little less?

And then, the third piece, Avishai, you mentioned that you had shifted from television, more budget to digital channels.

When did that shift occur, if you can provide some more color around that?

Kerry, it's Nir.

So in terms of seasonality, I think that there's a few things that you can kind of distinguish between the Q1 and Q2 of this year to last year.

One of them is the fact that this current, this '17 Q1 was extremely strong, okay?

So when you compare the Q2, obviously, we have a very high starting point you might look at this as the biggest difference.

The other thing is -- well, just in terms of seasonality.

Seasonality is driven a lot, from holidays and Easter.

Last year happened as it moves around within months, it was in March, whereas in this year, it was in April.

So it moved basically from Q1 to Q2.

So that's also part of kind of the deviation between Q1 and Q2 of this year versus the last.

And the last one is that we've -- and we told you this about a year ago.

We started testing in Q2 of last year some changes in traffic and functionality that are both are incremental monthly subscription.

Again, those were -- went into Q2 of last year and kind of pushed it upwards.

And that's pretty much for that.

In terms of the promotions in Q2, it wasn't anything different than what we've done in the past.

As always, we do those based on what we've learned throughout the years, combined with a huge amount of data that we have on our users and what's the best time to run our promotion.

Lastly, in terms of the shifts of TV.

So again, that this is something all of our kind of marketing strategy and tactics is something we find very competitive and actually, we don't want to share too much, so I don't want to give too much detail.

I can say that it was, as always, it was an investment and a decision that is based on TROI and we'll keep on making those decisions moving backward and forward on different channels based on TROI.

Your next question comes from the line of Tim Klasell of Northland Securities.

First question, ARPU, as mentioned earlier, was a little bit flattish compared to prior quarters.

I know you do a lot of testing.

Are we beginning to sort of hit a level where ARPU improvements might be harder to come by and growth will be driven more by new subscribers?

Or do you still think there's headroom there for ARPU?

This is Lior.

So obviously, when we started to introduce the vertical, the changing up was quite drastic, going up from the 130s to the 150 that we see today.

We do see a strong adoption of our vertical.

As of to date, about 30% of our subscription are using any kind of a vertical, which is very, very strong.

When we started that, it was actually about 15%.

So we actually doubled the amount of subscription that's actually using the vertical.

This is -- obviously took the ARPU up, and we think that this will continue.

There's a lot of room as Avishai mentioned before, both in terms of adding more functionality to our vertical, also providing more vertical solution to our customers.

And also the continuing adoption of verticals that we already launched.

For example the Video, which now increasing quite dramatically.

So I do believe that ARPU will continue to increase, and I think that there is a lot of room for this increase also in the future.

Okay, great.

And then just a real quick one on Wix Code.

You're going after a different customer than you typically have.

Will we see a -- once it goes, comes out of beta, will we start seeing maybe an increase in marketing spend?

Or what have you as you build a brand inside of a new customer -- or target customer base, if you will?

So I think that if you will see -- I don't expect any dramatic change in marketing this year.

I think that a lot of what we're going to do with Code is a different kind of marketing, which fixes product better.

And then 2018, I think we'll have to wait to see the guidance for 2018.

And we'll be much more wise when we give it because we will see so much more results for the better, so we'll have the ability to know better what our users are doing and what's the right way to approach them.

But I do feel that and you look today, there's pretty much every kid learned in charter school how to do JavaScript.

And with 110 million users, a lot of our current users are potential users for Code and every month, we have about 2 million that the potential users for Code, so we can use a lot of that to enforce and to tell and to show people what Code can do and how they can use it.

So I expect that things would mostly be the same, but I'm going -- it's going to be very hard to commit at this stage.

Your next question comes from the line of Alyssa Johnson with KeyBanc.

Most of my questions on the growth side have been answered, so I will stick to margins.

How long do you guys think it will take to kind of absorb some of those G&A and cost of revenue related to the DeviantArt acquisition?

We said that the entire DeviantArt acquisition basically will be walking on the new -- on the product for approximately 18 months, so we're still in line with that.

I think that late 2018, we will start to see the leverage coming from the DeviantArt acquisition.

And then obviously, we'll see the results, which the G&A, the cost of goods sold will be part of it.

On the second note, some of the cost, for example like hosting, we think that we can improve that using the Wix model.

Basically, to be part of the Wix hosting capabilities, we think that we can get more leverage there.

So this is something that we've already started to do, and obviously will continue to be better and better in the next few months.

Okay.

And then on the sales and marketing side and kind of R&D as well.

I expect that to be kind of higher with this product launch.

Does that tail off fairly quickly throughout the year?

Or do you think that will stay a little bit elevated, particularly kind of on the R&D side?

The guidance that we provided for -- obviously, we're not providing guidance for R&D.

We are providing guidance for top line free cash flow.

But it's important to mention that all the numbers that we provided is already at the beginning of the year, and we just confirmed the same numbers for the rest of the year, already included any marketing activities or R&D with regard to the new product.

So we don't anticipate any change with that.

There are no further questions at this time.

I will turn the call back over to the presenters.

Thank you all for joining us today.

Appreciate it.

This concludes today's conference call.

You may now disconnect.