Wix.com Ltd. (NASDAQ:WIX) Q1 2023 Earnings Call Transcript May 17, 2023
Wix.com Ltd. misses on earnings expectations. Reported EPS is $-1.61 EPS, expectations were $0.14.
Operator: Good day and thank you for standing by. Welcome to the Wix Q1 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Rona Davis, Head PR & Communications. Please go ahead.
Rona Davis: Thanks, and good morning everyone. Welcome to Wix’s first quarter 2023 earnings call. Joining me today to discuss our results are Avishai Abrahami, CEO and Co-Founder; Nir Zohar, our President and COO; and Lior Shemesh, our 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 and key operating metrics. You can find all reconciliations between our GAAP and non-GAAP results in the earnings materials and in our Interactive Analyst on the Investor Relations section of our website, investors.wix.com. With that, I’ll turn the call over to Avishai.
Avishai Abrahami: Thanks, Rona, and good morning, everyone. We have had a fantastic start to 2023. And I’m pleased to say that we exceeded our expectation across many areas of our business. The drivers of our results this quarter were broad based across our business, both on the top line and on the profitability. Revenues in Q1 grew to $374 million, above our guidance. We generated $44 million of free cash flow, excluding one-time charges and [Technical Difficulty] also ahead of our expectation. These great results are a testament to the strong execution of our strategy to provide the best platform of innovative product for our users while increasing operational efficiency and discipline. Much of the growth this quarter was also driven by our Partners business.
This year, scaling our business with Partners, including designers, freelancers and enterprise partnerships, the main key strategic focus. Partners revenue growth accelerated this quarter, up 27% year-over-year. We recently announced some exciting product for Partners, including Wix Headless and have many more incredible product announcements and marketing plans for later this year. The outperformance of this first quarter is very encouraging. So, we are raising our revenues and free cash flow outlook for the full-year, as well as pulling forward many of our profitable targets for 2023. Our profitability at the firm, boosted our confidence in achieving the Rule of 40, 2025. I will let Nir and Lior share more detail about this quarter and then I will close with my thoughts on AI.
Nir?
Nir Zohar: Thank you, Avishai and thank you, everyone, for joining us today. I’ll share a bit more details about our performance this quarter. As it relates to our user cohorts, some color on our marketing investment in the quarter following the recently announced strategy shift and an update on our focus on operational efficiency. Let’s start with user cohort performance. Our Q1 2023 new user cohort performed exceptionally well with 5.4 million new user collectively generating more than $30 million in bookings in this first quarter. Easily the highest same quarter booking in a non-COVID cohort. And on the base of a significantly smaller size cohort. This clearly indicates the inherent improvement in the fundamentals of our business, including subscription conversion and average collections per subscription, as well as stable retention.
Diving deeper into these fundamentals shows the returns from our focus on bringing higher intense sales creative users and partners, which convert at higher rates. It is also the result of higher monetization driven by users choosing higher price subscription, strong adoption of business solutions applications, more transaction revenue as a result of higher GPV and increased take rates, and continued contribution from our B2B partnerships. We expect these trends to continue in the coming quarters this year. Lastly, this performance is a testament to the strength and scale of our global brand as reflected in the success of our marketing strategy shift implemented last year. As a reminder, based on tests we started last summer, we determined that we could keep new cohort bookings stable even if we will reduce acquisition marketing spend by half.
We continued this marketing strategy this quarter and decreased acquisition marketing spend by approximately 47% year-over-year, while still increasing new cohort bookings. After more than 8 months of expanding and perfecting this new strategy, we are confident in the results and therefore expect investment in acquisition marketing to remain at reduced levels throughout the rest of the year and beyond. In addition to the strong fundamentals and the significant increase in marketing effectiveness, we also intensified our focus on driving operating efficiency across our business. We successfully implemented the cost savings outlined last quarter, as well as realized additional hosting optimization opportunities and continued to decrease headcounts.
We added Q1 with 5,006 employees, down 18% year-over-year for nearly 6,100 employees in Q1 2022. With that, I will now hand it over to Lior to walk through more details on our financials. Lior?
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Lior Shemesh: Sure. Thanks, Nir. This quarter was marked by fantastic profitability improvements that allowed us to achieve our 2023 profitability targets much earlier than anticipated. Even more importantly, these steps firmly put us on a path to achieving Rule 40 in 2025 with significant expansion of our margins. In Q1, we grew gross margins by nearly 500 basis points, driven by hosting optimization and headcount efficiencies among other cost savings. We further drove operating leverage by executing on our new marketing strategy, reducing headcount, and implementing savings across our entire operating cost structure. Non-GAAP operating expenses as a percentage of revenue declined significantly from 77% in Q1 2022 to just under 54% in Q1 2023, resulting in the highest non-GAAP operating income in our history.
This effort drove free cash flow generation to finish higher than anticipated. Looking past this year, we expect to continue this quarter’s momentum by advancing our commitment to operational efficiencies across all aspects of our organization, continued cost management, mostly across operating expenses will enable us to drive further leverage and expand our cash flow margin significantly. In addition to our continued profitability improvements, I’m also very excited about the execution of our strategic initiatives, particularly our focus on the Partners business that will enable us to continue to deliver growth in the coming years. Now, on to the details of the quarter. The fundamentals of our business remained strong this quarter, which led us to exceed the top-end of our guidance range for revenue.
Total revenue was 374 million this quarter up 10% year-over-year. Total bookings were 415 million in Q1, up 6% year-over-year. Remember that we signed our partnership with LegalZoom in Q1 2022, creating a difficult comparison this quarter, removing this amount from bookings in Q1 of last year, our FX neutral year-over-year bookings growth was 13%, a better indication of our growth compared to the prior year quarter. We saw an acceleration in transaction revenue growth this quarter up 16% year-over-year to 42.3 million. This growth was driven by higher GPV of 2.7 billion, up 6% year-over-year, as well as high overall tech rate as merchant adoption of Wix Payments continue to increase. As Avishai mentioned, Partners is a major area of focus and growth for us this year.
Partners revenue grew to 103.9 million, up 27% year-over-year. This is an acceleration in growth compared to the prior couple of quarters as more agencies and developers build projects on Wix and we increase our monetization of professionals, particularly as they increasingly generate more GPV. This quarter, we also began to see some early, but still very minimal revenue contribution from the B2B partnership we signed over the past couple of years. More impressively this quarter, we intensified our focus on driving operational efficiencies across the business. These actions allow us to achieve the profitability milestones planned for later in the year, much earlier in Q1. By implementing the cost saving strategy introduced last quarter, as well as additional hosting optimization and headcount efficiencies, non-GAAP gross margin increased to 67% in Q1, making it the highest quarterly gross margin since 2020.
Growth in the creative subscription revenue along with cost discipline drove non-GAAP gross margin for creative subscriptions to above 80% in Q1, an increase of 450 basis points year-over-year, both of these gross margin targets were originally anticipated for later in the year. Our continued implementation of our new marketing strategy that Nir spoke about earlier, along with additional savings across our operating cost structure this quarter resulted in the highest quarterly non-GAAP operating income in our history of 48.5 million or 13% of revenue. As we mentioned last quarter, we did take a one-time charge of $25.3 million related to the headcount reduction we announced in February and impairment charges related to operating releases as we align our footprint with our account needs.
As a result of higher growth and a focus on operational efficiency, we generated $44 million of free cash flow of 12% of revenue. This excludes CapEx related to the build-out of our headquarters, as well as the cash portion of the one-time severance charges I just discussed, which was about 2.1 million in Q1. Free cash flow performed better than expected and give us more confidence in our ability to achieve the Rule of 40 in 2025. Now, let me finish with our outlook for Q3 – for Q2 and 2023. We expect total revenue in Q2 to be 380 million to 385 million, representing approximately 10% to 12% year-over-year growth. For the full-year, we’re increasing our outlook. We now expect total revenue to be approximately $1.52 billion to $1.54 billion, representing approximately 10% to 11% year-over-year growth.
This is an increase from our prior expectation of $1.51 billion to $1.53 billion or 9% to 11% growth. We are also updating our profitability expectations for the full-year as we continue to drive efficiencies across our operating cost structure. We now expect non-GAAP gross margin to increase to 67% for the year, up from the 66% previously expected. Creative subscription non-GAAP gross margin is now expected to be 81% up from 80% previously expected. Non-GAAP operating expenses in 2023 are now expected to be down year-over-year to 58% to 59% of revenue, compared to 59% to 60% of revenue as previously expected, driven by lower sales and marketing expenses and general incremental operational efficiencies. As a result, we are increasing our outlook for free cash flow 2023 to 172 million to 180 million or 11% to 12% of revenue exiting the year with a free cash flow of more than 13%.
This compares to our previous expectation of $152 million to 162 million or 10% to 11% of revenue and an exit margin of 12% to 13%. Note that our free cash flow outlook exclude our headquarters build-out costs, as well as approximately 4.5 million of cash restructuring costs. Finally, stock based compensation is expected to decrease to 14% to 14% to 15% of revenue 2023, down from our previous expectation of 15% and down from 17% of revenue in 2022. As headcount across the organization declines more than originally anticipated. I’m very happy with our results this quarter and our revised outlook for the remainder of the year. And now I’ll turn it back to Avishai.
Avishai Abrahami: Thanks, Lior. I’ve been getting a lot of questions about AI lately. So, I want to share my thoughts to close out our time today. [Our background] [ph] prior to Wix was in the development of advanced computing algorithm, including AI, which is why I find the recent AI breakthrough so exciting. In fact, the data and AI groups here at Wix report directly to me. Over the past decade, we’ve been unlocking more and more opportunities based on AI, breakthrough, while also collaborating with the best teams on the planet at OpenAI, Google X, IBM, and others. My thoughts on AI can be summarized in three key points. First, our goal at Wix is to remove friction. The easier it is for our user to build website, the better Wix is.
We have proven this many times before for the development of software and products including AI as we make it easier for our users to achieve their goals. Their satisfaction goes up, conversion goes up, user retention goes up, monetization goes up, and the value of Wix grows. In 2016, we launched Wix ADI, an AI based [titration platform] [ph]. In fact, it’s equivalent to using a prompt to build a site. The user enters some basic information about their business and they recommend the pages images and text that makes sense and then generate the site personalized to the business. Obviously, the tech generation ability in 2006 were a bit naive compared to the recent [gen AI tools] [ph] of today. That said, due to our long established team, and institutional knowledge of AI, it was easy for us to replace that initial text generation tool with open AI, ChatGPT for our text – AI text creation, which we introduced earlier this year.
Today, new emerging AI technology is creating even bigger opportunity to reduce friction in some areas that were almost impossible to solve a few years ago. When we embed these technologies into our platform, it increased value for our customers. We believe this opportunity will result in an increased addressable market and many more satisfied users. We have over 200 AI and Gen AI model deployed on our platform, both to simplify complex technology for our users and to improve internal workflows and development efficiencies. This model power many processes and innovation of ours, including full site creation, text creation, manipulation, and enhancement, site design, user support, user sentiment analysis, site classification, recommendation engines, semantic search, forecasting and many more.
In the coming months, we will introduce even more AI tools to be fully powered by [LLM] [ph] and proprietary algorithms, which will, of course, include full site creation that not only generate content, but also the design and the layout. It will also integrate with everything you need to run a business such as e-commerce, scheduling, SEO, and more. The second important point is that there is a huge amount of complexity in software, even with websites, and it’s growing. The question today is not when AI will be able to create the content for our website. That already has been possible for many years. Wix ADI fully demonstrated that. The big question today is what happened when AI can generate order content and the code of the software needed to run a fully functional website?
For example, even if AI could quote a fully functional e-commerce website, which I believe we are still very far from, there is still a need for the site to be deployed to a server to run the code, to make sure the code continues to work, to manage and maintain the database for when someone wants to buy something, to manage security, to ship products, to partner with payment gateways and many more things. So, even if you have something that can build pages and content and code, you still need much more. That gets to my third and final point. And that is, even in the far future, if AI is able to automate all of those less, it will have to disrupt a lot of software industry. You will no longer need a database management in server management and cloud computing.
I believe we are very far from that. And that before then, there will be many more opportunities for Wix to leverage AI and create value for our users. To add to that, [indiscernible] what we do today is aligning our user to capture their story and bring it to the web. It is not a text that ChatGPT generate. It’s helping the user use ChatGPT to create their version of that text to tell their story. It’s not about [mid-journey] [ph], using [mid-journey] [ph] to create images for your business. For example, like yoga studio or an amusement park, you need an image of your yoga studio and your amusement park. For your e-commerce site, you need images of your products that are being sold. The images have to be real and the story needs to be real and the value of turning that story online and how to do it well, is a big part of what we do here at Wix.
As you can tell, I’m tremendously excited about the power of AI and the power that AI is bringing and the major opportunities it will create for our users and our business. Thank you again for joining, and we will now take your questions.
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