Wix.Com Ltd (WIX) 2018 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Wix.com 2018 Third Quarter Financial Results Conference Call.

(Operator Instructions)

I will now hand it over to Maggie O'Donnell, Director of Investor Relations.

Good afternoon, and welcome to Wix's Third Quarter 2018 Earnings Call.

Joining me today to discuss our results are Avishai Abrahami, CEO and Co-Founder; Nir Zohar, President and COO; and Lior Shemesh, CFO.

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 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.

You can find all reconciliations between our GAAP and non-GAAP results in our press release, presentation slides, shareholder update and our Interactive Analyst Center on the Investor Relations section of our website, investors.wix.com, which we recently rebuilt using Wix Code.

On the website, we also added a web -- help section using Wix Answers called the Investor Learning Center that we encourage you to check out.

Now I will hand it over to Avishai Abrahami, who is going to say a couple of quick words about the quarter.

Avishai?

Thank you, Maggie, and good afternoon, everyone.

Thank you for joining us today.

We had another fantastic quarter at Wix.

Both collection and revenue beat our expectation, and our profitability is increasing, reflecting a strong combination of growth and profitability.

Revenue increased 40% and collection increased 36% year-over-year.

Non-GAAP operating income grew to $16 million, an all-time high, and operating cash flow reached a record high of nearly $28 million, driving free cash flow to nearly $24 million.

We are increasing the monetization of our subscription as our ARPS was up 11% year-over-year.

This increase reflects our ability to develop and deliver valuable products to our users.

Wix is in the middle of a strong major product release cycle, and I'm very excited about our momentum.

We recently introduced Wix Payments, a complete payment platform that enables most businesses to manage their entire financial flow through Wix.

Wix Payment will work for not only e-commerce businesses, but any type of business that takes payment online.

This is a very exciting step in letting users manage and grow their business on Wix.

Wix Code continues to gain momentum in the professional designers and developers communities.

Users of Wix Code are purchasing multiple subscriptions at a rate of more than 4x non-Wix Code users.

This shows us that our strategy is working, as usage by professionals is increasing.

We are also seeing more complex and robust websites than we have ever seen on Wix.

We also introduced Wix Video Maker this quarter.

Creating engaging video content for advertisement is a challenge that small businesses often face.

We believe that the Wix Video Maker makes it easier for small businesses to create video content and compete with larger businesses online.

The new modern DeviantArt platform is currently being tested with our most active community members.

We are on track to launch it to all users in the coming months, which is in line with our initial schedule.

Finally, on December 11, we plan to announce a new product that will further help small businesses manage and grow online.

I'm very extremely happy with our projects -- with our progress to date and look forward to continuing this momentum into 2019.

With that, I'm going to hand it back to Maggie.

(Operator Instructions) Can we have the first question, please?

Yes, so the first question comes from the line of Deepak Mathivanan from Barclays.

Yes.

This is Aki on for Deepak.

So a question on your registered users and premium users.

In 3Q of last year, you had about 188 net new premium users from 5.2 incremental users.

And this time, your net premium users was down to 177 on a higher incremental registered user base.

So just trying to understand how do we parse that?

Is that churn?

Is that lower conversion?

If you could just give us what the drivers of that are?

It's Nir.

So if you remember, earlier this year we spoke to you guys about how we are focusing more on a more high-value market, such as the U.S. and then -- and U.K. And I have to say that this tactic we think has proved itself very well throughout the second half of the year.

We can see that in terms of our ability to bring higher ARPU customers and, I think, that this is also emphasized with the -- by the 11% increase in the ARPS year-over-year.

It's important to mention that we still maintain the same TROI, which is our target.

So we actually see this as a good trend, and we also expect that to continue going forward.

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

Just can you help us with a little bit more detail on Wix Payments?

You mentioned that it's 25% better than competitive offerings at process approval.

Can you help us out of what the competitor was?

I believe that was a test in Brazil.

And where you see this fitting in the landscape of different payment processing options that exist out there?

All right.

So Mat, this is -- Nat, sorry, this is Avishai.

I just want to say, so yes, we tested it in comparison to a local solution that we're in a market that we've tested it in.

And we saw dramatically better results.

25% is really high.

I don't believe that the difference will be this high in other -- in the U.S. or in most of Europe.

However, I do think that it's a really good solution, so it's probably still going to create some improvement even on the approval rate.

I think that's pretty much it.

And beyond that, it's the pretty much standard commission that we're going to take, standard commission.

Nat, it's Nir.

I'll just say that I think what's interesting from our perspective for the payment solution is that the way we think about it is our users, they go across -- through the whole flow of building a website, developing a business online.

And in many cases -- and by the way, not only in the cases of selling of e-commerce.

Also, if they are restaurants and they want to do takeaway, they are musicians and they want to sell their music, if they're running event and they want to sell tickets, if they're booking because they're a yoga or a spa.

All of these people, they need ability to have some flow of payments into their business.

And our idea is that we're trying to just streamline that process and make it super, super easy for them.

Just a little -- quick follow-up.

The users of this product, what are the e-commerce users of your platform, your e-commerce customers using currently?

And do you envision this actually going more downstream to guys, again, like garage bands, who are selling CDs, who probably couldn't do CDs and run anything because they had no payment capability prior.

Now they can.

So are you just opening up the large group that are the non-e-commerce users of your site currently?

Sure, I think, first of all, to answer your first part of your question, these solutions will also be available, of course, to our e-commerce users.

But they -- and today, they have a variety.

They can use anything from PayPal, Square and then tons of other payment providers.

Beyond that, yes, we do believe that there is a big need for something that is easier to provision and provides really strong, high-quality results, and we see that sometime actually also with the top of the market, but mostly in the lower part of it.

However, we intend this payment solution to be the default for all Wix users going forward.

We're not going to force users that have an established relationship with another provider to change, but we do believe that this is probably going to be the recommended payment solution.

Just finally, and I believe this is -- should be clear.

But isn't it -- this will have a negative effect on your gross profit margin going forward as it adds incremental revenue at a low take rate?

Is that how we should think of modeling it?

Nat, this is Lior.

You're probably right.

I don't know exactly what will be the overall impact.

Obviously, it will start next year.

But I don't think that it will be significant yet.

Long term, you're probably right.

The next question comes from the line of Ron Josey from JMP Securities.

Great.

I wanted to revisit, maybe Avishai and Nir, the comment earlier to the question around subscription net additions and the trade-off with ARPU and the focus on the U.S. and U.K. And so specifically, could you all provide maybe a little more detail on the 5.5 million net registered users.

I'm assuming, therefore, they're more overseas as U.S., maybe, growth slows?

And then on the other side of that from an ARPU increase, can you talk about maybe the drivers there other than product adoption?

Or perhaps like the new bundling that occurred intra-quarter, if that led to the 11% increase?

We don't see a decrease in the U.S. growth, right?

No.

So it is a -- pretty much, it's very similar.

And mix, we actually see that it's going up.

So a lot of it is actually coming from more English-speaking countries, so that's regarding to your first part of your question.

You want Nir...

This is Lior.

I think that with regard to the net subscription, obviously, as you can see, we manage to beat on collection.

So obviously, there was no effect in collection.

Actually, most of the beat on collection was because of higher ARPU.

Higher ARPU was resulted from those changes that Nir spoke about before and some of it got to do with the changes that we've made for example, with the pricing page.

So the focus was on lifetime value of cohort, and those changes actually drove it up.

With regard to your second question about the ARPU, which was 11% up on a year-over-year basis.

So obviously, we also provided in the document the adoption of the vertical.

As you can see it has been tripled in the last 2.5 years, which is kind of amazing, to approximately 44% of new users adopting vertical solution.

So obviously, that has a positive impact on the ARPU because those people are paying a premium to the regular packages.

In addition to that, we have a new pricing layout, as I mentioned before, and that was launched a few months ago, which drove ARPU up.

The third one is higher ARPU as a result from changing some of the renewal prices of -- and matching it to the level of services that we'll provide to our users.

And obviously, the last one was the removal of the lowest pricing tier, which has a positive impact on ARPU, but a bit of a negative impact on net premiums, and that also answer your first question.

The next question comes from the line of Brent Thill from Jefferies.

My question is around Code.

I think, back in February, you mentioned, over 100,000 users.

Now you're saying over 550,000 users, which is up obviously very nicely.

I'm curious if you could just talk a little more about the economics.

And what you're seeing there?

And how you're thinking about the layering in on the pricing?

And also, I just want to clarify you're still in beta.

When's your expectation for GA or have you hit GA yet?

So of course.

So we have about 500,000 users that they've been using Code to some level, and about 100,000 that really went deep into Code.

I think those 2 groups are very different in who they are.

And the second group is mostly professional developers, so that'll be professional developers of websites.

They are designers in some cases and just really developers like software developers.

So we see that -- we're very happy with the numbers.

I think, for me, the 0.5 million is really surprising because I would not have expect most of the users to go so deep into the product, but you can see that it does happen.

And to the second -- toward the second group, I can say, well, our strategy with Code was to enable Wix to become a place where we expand our time into people that needed a lot more, right, that needed to develop things that, before, that you couldn't do on Wix, in many ways, moving to the more professional market, and I think we are seeing clear signs of that now.

As we rolled and I said on the call before, the fact that we have 4x the subscriptions on average, right, from this group, they are 4x more likely to have an additional premium.

We see that the traffic to the website is 5x higher, right.

So we see all the signs there.

I believe that in regards to when we're going to see massive returns from Wix Code, it's going to be in 2019, which was from the beginning what we assumed.

The product is really good, but I think it's going to be incredible early in 2019.

I think that's going to make another massive shift.

And of course, we are allocating a marketing budget toward Wix Code going forward.

So if I look at it, right, and this is something very unique when a company just goes -- and every company's line of sight when it approaches a new market and it's starting to grow into that, we are at that place, and I think the results now are super promising.

(Operator Instructions) And your next question comes from the line of Naved Khan from SunTrust.

I just wanted to get a little bit clarity on this 4x kind of subscription level for the highly engaged users of Code.

If you're counting the premium subscribers, are you counting the Code users once?

Or is that somebody who's -- will get counted twice or sorry, 4x just because they're buying roughly 4x or more subscriptions?

And then I had a follow-up.

We're looking at people that have more than one premium, right.

So if you have one premium, you will not -- you will count as regular user.

Most of our users will have one premium.

And because they buy -- building a website for themselves, and in this case, we see people that have 2 or more premium, right, accounts -- subscription activated under one account, which tells us that they're most likely building it for somebody else or they're building a bigger project.

And so it's very easy for us statistically to differentiate between more professional users to people that actually makes money out of the project to people that are building websites for themselves.

Right.

So a Code user who's buying maybe 4x the number of subscriptions, is he getting counted 4x?

Or is it just one subscriber, one premium subscriber?

4x more likely to buy more than one premium.

But we haven't made any change in the methodology of how we count users itself, is that what you're asking.

So currently, there is no change in how you should think about it.

Okay.

That's helpful.

And then quickly maybe FX related, currencies have been pretty volatile.

Has there been any impact from that on your outlook?

Yes, so with regard to Q3, the impact to us itself was not so significant since the time -- since July time where we provided the guidance.

It was approximately $0.5 million.

Most of the impact is on our guidance for the fourth quarter, and the impact is approximately $2 million.

It means that if having stayed with the constant dollar of the July guidance, we should have increased the guidance for the full year by $2 million.

So that was the result.

On the other end, on the operating expenses, as you know, most of the salary are in Israeli shekels, and there we have a benefit.

So this is why there was no negative impact on the overall cash flow.

Got it.

And then just to clarify, the $2 million impact was in collections or revenue?

Collection for the fourth quarter, correct.

So the next question comes from Jason Helfstein from Oppenheimer.

So just first on the Payments.

Was that, I guess, you consider the big product that I guess, we've been asking about, that you hadn't been willing to talk about?

So is that kind of the big product you've been working on?

And not just...

Well, we look at it as a very important product and a super exciting product.

But the one we discussed earlier on in this year, is the one we're going to reveal next month.

December 11.

And that's a different product.

That is a different product.

And then, to the extent that premium subs, albeit healthy, continues to slow, while I wouldn't expect you to give guidance for next year, how are you thinking about premium subs relative to growing total collections?

And obviously, you're successfully moving ARPU due to a number of factors that you've outlined.

How are you thinking about kind of what we should be thinking about over the next 12 to 18 months, with respect to kind of premium subs and overall growing collection?

So obviously, I cannot provide the guidance right now for the number of premiums, but I can tell you that on the '18 regular premiums, meaning the same businesses we have right now, obviously, there will be an impact on the number of net premiums mainly due to the fact that we removed the lower package, the connect domain package, because of many reasons.

The first one, obviously, it's for branding purposes.

The second one, we understood that by doing that, we increased the lifetime value of our Code.

So it's going to have an impact on net premiums.

On the other end, we are talking about many new products that we are going to launch and already launched, like the Wix Code and what Avishai spoke about, about people creating more website for others, and that's going to have a positive impact on the overall number of net premiums.

In the end of the day, we do measure everything based on the TROI, as you know.

And this is what lead us in taking the decision.

So there are basically 2 impacts.

One is, we'll take it a bit down.

The other one, we'll take it up.

At this stage, it is hard for me to tell you exactly what to put on the model and what it is going to beat.

So the next question comes from Ygal Arounian from Wedbush Securities.

A couple.

So first on Payments.

Maybe you can help us try to understand the total opportunity for you guys?

And I don't know how much you could share, but first of all, what's adoption been like so far in Brazil?

Maybe that'll help us understand a little bit.

And then we've seen Payments be a big opportunity for a lot of companies that have launched it.

Any way to help us frame like the level of GMV across -- that comes across your platforms?

I understand that you're not going to force people to use it or -- but in terms of how we think about pricing and if you'll price it in a way that's super competitive that will kind of force people to be on it or otherwise they're paying a lot more if they're not.

And then I have a follow-up question.

Sure.

So to answer the first part, in Brazil, we saw massive adoption.

The company was the dominant payment gateway that we have.

And so we are feeling really good about it.

In the other countries, it's been very competitive in terms of price.

So I believe we're going to have a lot of people that are actually using it.

We're not going to force anybody to move to it.

And so basically, you should look at it at -- on the day we open it, the GMV on it will be 0, right.

And then very quickly in the rest of the world, right, the GMV will be very low.

And very quickly, it will start to ramp up, and so probably in the second half of '19, it will already be significant.

Okay.

And then, maybe a quick one on Code.

So I know that you're saying some meaningful uptake, especially with professionals.

Help us understand -- you did a little bit, but can you help us understand a little bit more the kind of pros that are using it?

What kind of sites are they building?

Is it mostly -- is it like internal developers, digital agencies, e-commerce agencies?

And are you seeing maybe Code plus stores as well some of the verticals driving Wix Code to be maybe a replacement or competitive relative to some of the higher-end e-commerce platforms?

Yes.

So actually, I'll be happy to do that.

And we actually provided some examples, right, in the written materials.

So you can take a look at them, which I think, illustrate things you can only do with Wix and Code, okay.

So I don't think you can do it any other place unless you reroute -- you rebuild the site almost 0. So if you go through the first one, there is a skateboard selling company, it's called Eye Symmetry, surfboards -- sorry, surfboards.

And you can see there that what it did is that basically, it's a common site for surfboards, but you have the ability to design the look the way you want.

And to do that, you needed a way that they can program the visual editing on the web.

But beyond that, they have databases.

They have -- or they're using Wix store.

They combine everything together.

So this is a great example of one of the classic scenarios that you see.

I want to take you to another example.

It should be the next one, which is the Broadway Tribune, right.

So this is less of e-commerce, right.

They don't offer a lot of information, and they needed to create a way to present that information in unique ways: advanced filtering, again, a lot of dynamic pages and databases.

So those are just samples, okay.

However, from 100,000 users that are deeply using Wix Code, I consider that we can see pretty much everything that we were thinking about.

We do see internal applications inside organization happening, which I think is amazing, because this is really crossing the line, which is not just who makes the websites, right.

Or who makes -- is it somebody making the website for themself or a professional making website.

This is something completely different, developer making something internally for organization.

In many ways, it's not a website.

It's an application.

So we are seeing all of that, and it's super exciting.

So the next question comes from the line of Lloyd Walmsley from Deutsche Bank.

This is Seth on for Lloyd.

Just a question about the older vintage renewals.

In the shareholder letter, you talked about raising the prices, and I was just curious when in the quarter did you do that?

And what kind of impact should we expect to ARPU in 4Q and beyond from that price hike?

And then when you look at the broader base of subs, is there a larger opportunity for price hikes than what you've put into effect?

And could that move higher over the next maybe year or so?

So yes, the impact has already happened in the third quarter.

And I think that it will continue to increase the ARPU also in the coming few quarters and, obviously, next year.

I think that the way that I'm looking at it is more than a price increase.

It's actually matching the price with the level of services that those guys are getting from all the products that we've launched and so on.

And the result of that was there was literally no increase to cancellation.

So I think that, that just proves the fact that those guys are really happy with the product and so on, and we felt that it's the right time to do that.

The next question comes from the line of Sterling Auty from JPMorgan.

This is actually Ugam Kamat on for Sterling.

So if I look at the number of -- or I would say, customer cohort, which is paying you for annual versus monthly, we are seeing that kind of flatten around at 82%.

Any particular thoughts that you have that like that you might use in the future to convert customers towards more annual versus monthly?

So I think, we definitely always see people who are over time just not sure and move from month subscriptions to annuals.

But that being said, I think that the rate we are at now is a reasonable one, and I don't think it's going to change dramatically.

And the reason for that is that there's lot of businesses and lots of use cases that actually require the monthly subscription.

There's lots of designers who will just build and then start with monthly, only then move to annuals.

People who run events, they want a shorter-term subscription.

Weddings, that usually require a shorter-term subscription.

So I think, again, it might still fluctuate with a few, like 1% or 2% upwards over time.

But I think, in our mind, the rate we are at now is a very reasonable one.

The next question comes from the line of Jonathan Kees from Summit Insights Group.

I actually have a question and a request for clarification.

My question is, I'm trying to understand a commentary and effort that you've done to take ADI, for example, and Wix Editor and do that in language, expand geographically into new country markets.

And yet, geographical revenues, sequential rates for the non-English-speaking regions decreased and declined, and even though that's been a focus area.

And then my clarification would be the commentary earlier about more websites being created on Code.

Does that mean that the users of those websites will become new additional premium subscribers?

So in that case then, that number will -- should go back up and -- or show growth in 2019.

I'll take the first part of the question.

In terms of the geographic penetration, you have to remember that what we show here is the full cake of the 100%.

And as we've seen a higher uptake in English-speaking countries and better conversion, then obviously, they're taking a larger part of the cake.

It doesn't mean that we're growing slower in other parts of the world.

Actually, we're seeing great growth in other countries.

We've expanded ADI this year to all of our major geographies and major languages with really great results.

So I think that, in fact, we're actually seeing an ongoing growth all across the board in almost every country on the globe.

Yes.

Just wanted something to add.

Obviously, what you see over the pie is about revenue.

When we expand the ADI to other places outside of the U.S., so most of the impact you can see on newcomers, which has an impact on collection, rather than revenue.

So I think that it will take some more time until you will see the impact, the positive impact on revenue, but we definitely see an improvement in conversion in those places where we launched the ADI.

And can you repeat the second part of the question?

I think we kind of missed it.

Oh, sure.

It's just a clarification.

I think it was -- Lior had earlier commentary about that with Code, you would get more -- create more websites.

And I guess, these will be customers of Wix.

And thus, it should trend for higher premium subs going forward, at least into -- starting around 2019 to support that.

I do believe that -- this is Avishai.

I do believe that in going into 2019, we're going to also introduce some more expensive subscription base, especially, for Code and for their more advanced functionalities we have.

So if everything will continue as good as it did until now, you will see more ARPU increase.

And in some cases, again, sacrificing a bit of the conversion of lower-paying customers, so yes.

We actually have a question from the portal that I'm going to read.

The question is, can you provide a general update on DeviantArt?

Yes, absolutely.

So as we said, we are rebuilding the site from pretty much 0, right.

So -- and we expect it to last until pretty much now, and we just opened it for new users.

So we are testing it now on users, so -- and we're now opening to the quality community.

That will be happening in the next month.

So we are really on schedule with where we want it to be.

And if you really want to see the difference, guys, go to DeviantArt.

If you're lucky enough to follow the A/B test, you'll be amazed.

It looks completely different.

It behaves completely different, and I think it really opens it to many new ways for us to monetize.

I'll just add that I think it's great for us because making such a change to a website that has been around for so many years is something that raises a lot of concerns.

And in fact, the feedback from the community so far that has been exposed to the new version is extremely positive.

Obviously, also fixing something, but very, very positive.

And we're going to complete the rollout by the end of the year and, obviously, going through more innovation in 2019.

We also believe that in 2019 will be the time when we could start going back to you guys and talk more about the financial impact of DeviantArt.

Operator, I think we have time for one more question.

So the next question comes from the line of Mark Zgutowicz from Rosenblatt Securities.

I have actually a more simplistic question on Wix Code.

Just in terms of the uptake, I'm curious what percentage is coming from your existing subscriber rate versus new subscribers?

And then, separately, if I'm tracking this right, it looks like your premium conversion ticked down a bit quarter-over-quarter and year-over-year.

It's been otherwise pretty steady over the last few quarters.

So I'm just curious what might have precipitated there?

So this is Avishai, and in regard to your question, at this time, we see that about half of the Wix Code core users or the group of the 100,000 is coming from existing Wix users, right.

And that, again, most of them were the professional users on Wix building sites for other people.

And half are new users that came to Wix because of Wix Code.

And for the second part of the question about the conversion, I'm not 100% sure why you came to that conclusion.

Actually, if you look at the -- if you look at the slide deck, it's Slide #9, which is the cohort graph, that we always supply and update, you can see that, in fact, the conversion is increasing.

It's at all-time high.

And this, I think, we are -- it's like obviously the result of the ongoing improvements that due to all of our products and product suites, and our aim is to keep on driving that provision upwards as the time progresses.

Great.

Thank you, everyone, for joining us today.

We appreciate your time, and we look forward to speaking with you again soon.