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Wix.com Ltd. (NASDAQ:WIX)

Q1 2014 Earnings Conference Call

May 13, 2014 08:30 a.m. ET

Executives

Joe Pollaro – IR

Avishai Abrahami – Co-Founder, CEO and Chairman

Nir Zohar – President and COO

Lior Shemesh – CFO

Analysts

Nat Schindler – Bank of America

Sterling Auty – JP Morgan

Mark Mahaney – RBC Capital Markets

Kerry Rice – Needham & Company

Jason Helfstein – Oppenheimer

Operator

Good day ladies and gentlemen, and welcome to the Wix.com 2014 First Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder this conference call is being recorded.

I will now introduce your host for today’s conference, Joe Pollaro, you may begin.

Joe Pollaro

Good morning. I’d like to welcome everyone to today’s call to discuss Wix’s first quarter 2014 financial results. Joining us from management are Avishai Abrahami, Co-Founder and CEO; Nir Zohar, President and COO; and Lior Shemesh, CFO. After management’s prepared remarks, we’ll open the call up to questions.

Before we begin, I would like to remind everyone that during the course of this conference call management may make forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from our current expectations. A detailed discussion of such risks and uncertainties is contained in our annual report on Form 20-F for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 20, 2014. Forward-looking statements made during this conference call speak only as of today’s date and the company undertakes no obligation to update them to reflect subsequent events or circumstances.

I would like to remind you that during the course of this conference call we will discuss some non-GAAP measures in talking about the company’s performance. Reconciliations to the most comparable GAAP financial measures are provided in the tables in our press release. Unless noted otherwise, all comparisons are versus the prior year period. This conference call is also being broadcast on the Internet and is available through the Investor Relations section of Wix’s website.

Additionally, we have posted to our investor relations site a supplemental data sheet containing additional financial information for comparison purposes to prior periods along with a slide presentation reviewing first quarter results as well as the company’s financial outlook.

So with these formalities out of the way, I’d now like to turn the call over to our Co-Founder, CEO and Chairman, Avishai Abrahami.

Avishai Abrahami

Thanks Joe, and thanks to everyone for joining us today to discuss our 2014 first quarter results. We had a strong quarter, and I’m happy to be joined by Nir and Lior to review it with you. I will give a brief review of some highlights from the quarter and then turn it over to Nir to provide more details. Lior will wrap it up with financials before we take your questions. So let’s begin.

Starting off with the financial highlights from the quarter, we built upon the momentum from the fourth quarter as we grew collections, revenues and subscriptions ahead of our previous guidance. Collections in the first quarter grew 91% year-over-year to $37.5 million.

Revenue in the first quarter grew 86% from the same period last year to $28.8 million. We added a record number of net premium subscriptions during the quarter, over 118,000, bringing our total subscriptions to 908,000 at the end of the period, an increase of 65% over the prior year. This increase is nearly 50% over our net subscription ads in the first quarter of 2013, which is outstanding. Our average revenue per subscription also rose by approximately $1 during the first quarter to go along with our subscription growth.

Overall registered users increased to 46.2 million as we added over 4 million users in the quarter, our best quarterly performance to date. We accomplished this growth while increasing our overall marketing expense and with high efficiency. Our marketing focus continues to be on user acquisition, but we have increased our branding activities in key markets as well. We continued to invest in our R&D capabilities to improve our current products and accelerate the development of new products that will keep Wix at the forefront of code-free web development.

I am extremely pleased with the results for the quarter, which illustrates the strength of our technology and products and the value they provide to our users worldwide. We founded Wix to simplify the web creation process for everyone from complete beginners to web professionals, so they can take their vision online and create and maintain a high quality and professional digital presence at an affordable price.

Our core technology is drag-and-drop software for editing HTML5 and creating a cross-platform online presence in a professional and fully customizable way. We take all of the complexity out of the equation so our users can focus on taking their unique vision and build it into the internet. We remove all of the back-end challenges that go into developing an online presence.

As a software technology company, engineers and developers represent approximately 50% of our total headcount, which allow us to continually innovate, develop better products and deploy them faster than anyone in the market.

Let me now walk you through some operational highlights as well as some new products we are launching, each of which contributes to extending our technological leadership and global presence and advancing our vision of an internet where everyone can create and contribute.

During the quarter, we celebrated the two year anniversary of HTML5 Editor. This technology is a core strength and key differentiator giving our users the freedom to develop a customized, professional-looking website in a code-free environment. To continue our global expansion, we launched three partnerships that will drive user subscription growth, payments partnerships with Yandex.Money in Russia and MercadoPago in Latin America, which will eliminate friction for users who want to purchase subscription packages.

We also signed a distribution partnership with REG.RU, the largest domain name registrar in Russia, which will help grow our user base. Nir will provide more details on these shortly.

Finally, this quarter we completed our first acquisition as a public company, Appixia. Appixia is an Israeli company that developed a technology that enables users to build native mobile apps for Android and iOS without the need to code. This technology will allow us to take the next natural step, going beyond mobile website building and expanding into the creation of mobile apps. Our users will enjoy both a professional website as well as an amazing, customized mobile app, all fully integrated within the Wix platform.

Wix Mobile site development continues to be one of our most utilized products. Over 2.8 million mobile sites have been built with Wix to date, with nearly 1.3 million during the last quarter alone. As far as we know, Wix is by far the fastest growing platform for mobile website building, adding nearly 400,000 new sites per month.

What is unique about Wix Mobile is that users only need to build their site once and our platform automatically optimizes it for mobile. Once built, Wix users are free to modify the mobile site at any time without altering the desktop version. Another exciting mobile development is our Sonic Mobile technology that will allow Wix mobile sites to load super-fast. When compared to websites of top brands, Wix mobile sites with Sonic Mobile technology opened 25% faster. That means a local bicycle rental business can have a mobile site that loads much faster than the large company’s mobile site. We believe that’s pretty fantastic.

I am also proud to announce a new product release that is a key part of our vision, Wix Hive. Today, Wix is primarily a platform for businesses, professionals and organizations to create their online presence, now we are beginning to extend our platform further to allow them to manage and grow their business all from the Wix Cloud. This new technology will allow apps from our App Market to integrate data with one another and enable users to synchronize actions across applications. I am very excited about this new product that is totally unique to Wix.

Let me explain in more detail what this solution is and what it means for our users.

Today, users are able to choose from 200 apps in our App Market to integrate into their site with just a few clicks. These apps, which are developed by Wix and by 3rd party developers include tools that enable e-mail marketing, SEO, couponing, e-commerce, social integration, invoicing, payment processing and many more functions that are critical to running a business.

Once the applications are installed, they look like they are part of the website. But the data is stuck within each application and can’t be shared. Each application basically works in its own universe. This is true for all website plug-ins’ architectures that we know of. Today, Wix is changing this by allowing independent web apps to be connected and share data.

For apps built with our Wix Hive API, we collect lots of data such as contact information, clicks, messages, purchases, bookings and more that can be leveraged by users and used by our users and accessed by other apps. To illustrate this technology, consider a user who has created an e-commerce site on the Wix platform. Using Wix Hive, an e-commerce app will save all the transactions from this site, including the visitor’s contact information, search and purchase history and payment information, into a shared database.

So if the site owner wants to use a separate e-mail marketing app from our App Market to send a promotion to everybody who has made a purchase in the last six months, he does not need to export the data into a separate file and import it into another – he can simply click on the e-mail marketing app and use the stored contact data from the e-commerce app. This is a very simple example that illustrates how Wix users will be able to automate complete business processes using independent apps and data collected from their sites.

We expect this innovative new product to have a dramatic effect on making the Wix platform a complete solution for managing a business online.

Further, this technology has a huge benefit for the app developers. By using our API and sharing activities, the applications themselves become far more powerful than they could ever be on their own. Several apps in our App Market have already been built with Wix Hive and are collecting data, and we are working with our developer partners on integrating even more. To date, just a few months after we started to test this new technology, Wix users are already managing over 8 million contacts in our database. We are very excited about this technology as it is a key element to our vision of creating a true operating system for the web.

I’d now like to turn it over to Nir to provide a more detailed review of how we are executing on our strategic priorities. Nir?

Nir Zohar

Thank you Avishai, and let me also welcome everyone to the call. I’d like to spend a few minutes discussing the progress we made during the quarter in growing our user base, our premium subscriptions, and in expanding our partner ecosystem.

First, our users and subscriptions. Our products are offered through a freemium model. Users can build websites for free, and as their needs grow, they may decide to subscribe to one of our services on a monthly or annual term. This model provides us with a large base of users, many of which will become paid subscribers, sometimes several months or even years after our first interaction with them. Our users also serve as one of our best marketing channels and they share their successes on Wix with others. We model our business based on cohorts of registered users that have joined the platform in any given quarter.

On Slide 10 in the presentation posted on our IR site, we show cohort behavior for the first quarters of 2010 to 2014. On the left side of the graph you can see how many registered users are in each cohort. The line on the graph shows how many active subscriptions we had at the end of each following quarter, originating from the same registered users.

You can see for example for Q1 of 2010, which is the cohort for which we have the longest history, that the amount of live, revenue-generating, subscriptions today is still higher than it was in the first period of the cohort creation. The sustainable and stable behavior of our cohorts provides us with great visibility into our model and a high level of prediction.

We have noticed over time that cohorts generally behave in a very similar manner. We also know that by initiating product and marketing optimizations, we drive a better conversion trend from registered users to paid subscriptions. This is especially noticeable in our Q1 2014 cohort, where you can see a favorable trend to that effect. This improved behavior in Q1 2014 can be attributed to two things.

The first is enhancements to our product and user experience. Each product improvement we make, no matter how small, contributes to the overall user experience, driving conversion from registered to paid and increasing the retention of our paid users. This user experience is a key differentiator for us and why we continue to invest in our technology platform.

The second is efficient marketing and improved channel mix, meaning we spent our marketing dollars in channels where users are more likely to buy paid subscriptions.

We increased our branding activities during the quarter, expanding our TV and radio campaigns in the US, Canada, the UK, Australia, France and Russia. We also generated nearly 60% of our new premium subscriptions from registered users that come to us through free traffic sources.

You will notice on slide 11 of the presentation that we have already returned half of our marketing dollars we spent in Q1 of this year. As Avishai mentioned, our HTML5 Editor is our core technology and a key differentiator for us. It enables our users to incorporate very complex features into their sites easily and exactly how they want them.

Our development velocity keeps on accelerating. In the first 100 days of 2014 we released 100 features for our online Editor, an amazing accomplishment by our development teams. These features include animations to text and images, social media tools, 3D image galleries, e-commerce tools, apps in our App Market and more. Most of these features are completely unique to us and are not offered by anyone else.

Next, as Avishai mentioned, we launched three partnerships that will accelerate our growth geographically and reduce complexities for our users. Our partnership with Yandex.Money, the largest online payment service in Russia, will provide an online payment solution to Wix users there. Previously, our growth in Russia was limited, as users could only pay for a Wix subscription with international credit cards, which are not widely held in Russia. The ability to pay through an e-wallet and without a credit card eliminates a significant amount of friction for users in Russia and opens access to our premium packages to millions of users.

There are more than 16 million accounts on Yandex.Money today, with over 10,000 new registrations daily. This makes this partnership even more exciting as it will play a key role in accelerating our growth there.

We are also addressing payment challenges in Latin America, where there are multiple common payment methods, by partnering with MercadoPago, a subsidiary of MercadoLibre that has over 90 million registered users throughout Latin America. Here, MercadoPago will help us process local credit cards and debit cards through their system. We are scheduled to launch in Mexico by the end of the month and plan to roll it out through the rest of Latin America in the coming months.

We also entered into our first partnership with a domain registrar, REG.RU, the largest registrar and hosting company in Russia, managing over 2 million domains. Partnering with domain registrars is a new go-to-market strategy for us, and one we plan to grow globally. These partnerships will provide us with a user acquisition channel at a common starting point for building an online presence. It also provides the registrar with a best-in-class product for users to build their site.

Through such a partnership, users who purchase a domain with a registrar will be able to connect it to a Wix site with one click. Growing our user base and subscriptions globally is a key priority for us, and we will continue to search for additional markets to replicate these types of partnerships in the future.

And with that, I’d like to turn the call over to Lior to review the financials in more detail. Lior?

Lior Shemesh

Thank you Nir, and thanks to everyone for joining us. This was an outstanding quarter as we reported very strong results for collections, revenues and EBITDA. Today I will walk through our key metrics from the quarter, review our first quarter financial results and wrap up with our outlook for the second quarter and our improved outlook for 2014. So let’s begin.

Registered users as of the end of the first quarter totaled 46.2 million, an increase of over 4 million, our largest quarterly increase to date. This represented 10% sequential growth over the fourth quarter. We ended the quarter with just over 908,000 subscriptions, adding over 118,000 on a net basis during the period. This is a record number of net ads for us, representing a sequential increase of 15% over the fourth quarter, and is nearly 50% more than the number of net ads in the first quarter of 2013.

As Nir mentioned, we experienced an improvement in our overall conversion rate of free to premium subscriptions during the quarter, which helped drive this subscription growth.

Collections in the first quarter were $37.5 million, a 91% increase over the prior year period. Collections is announced in how we measure the growth of the business since we collect the full amount upfront for both annual and monthly subscriptions. Collections is different from revenue since we recognize revenue from our annual packages over 12 months.

Three items drove our collections growth this quarter that I would like to point out. First, the biggest driver was the increase in subscriptions in the quarter. The first quarter is typically our strongest quarter during the year in terms of net subscription additions as many use the beginning of the year to start a new business or build a new online presence. Second, we experienced an increase in average revenue per subscription by approximately $1 over the fourth quarter as users chose higher priced packages, most notably our e-commerce package. Growth in our App Market also contributed to this increase.

Finally, our collections growth was positively impacted by a one-time change to our billing system that we implemented during the quarter. In place of a third party we had been using to process about half of our collections, we brought our entire billing process in-house during the quarter. In addition to cost savings and eliminating our dependency on a third party, we now collect cash faster than we had in the past. This change resulted in a one-time increase of about $1.5 million in cash collections during the quarter.

Having reviewed our KPIs, I’ll now turn to our first quarter financial results. Please note that all of these figures are non-GAAP and exclude stock-based compensation expenses and one-time items, unless I note otherwise.

The drop in subscription and collection led to record revenue for us in the quarter. Revenue of the first quarter was 8.8 million an increase of 86% over the prior period. Because we recognize revenue over the lack of subscription, revenue was not impacted without dealing frequent change.

Gross margin in the first quarter was 82%, a slight increase over the prior period gross margin of 81% driven mainly by our increase in revenue.

R&D expenses in the first quarter was 10.7 million or 37% of revenue that is 5.3 million or 34% of revenue in the previous period. As Lior mentioned, we continue to have engineering client to support product development and plan to do so throughout the year.

sales and marketing expenses 21.6 million in the first quarter compared to 10.5 million in the prior period. (inaudible) expense of our total collection and in the first quarter sales and marketing expense was approximately 58% of collection. This was better performance than we expected and it is an indication of the efficiency of our marketing expense.

The increase spends in marketing has been driven by increased spends in across all of our channels and in particular in TV and radio where we are focusing on both improve our position and branding.

G&A expenses for the first quarter were 2.5 million and 9% of revenue compared to 1.3 million or 8% of revenue in the prior period. The primary driver of incurred G&A expense is of cost associated with (inaudible) company. We have no doubt that we are excluding lastly $400,000 from our non-GAAP G&A which are mainly cost related to the follow on in (inaudible) in March.

Adjusted EBITDA for the first quarter was negative 10.6 million versus negative 4.2 million for the prior period. We exceeded our expectation on EBITDA to the resource performance and slightly less operating expenses during the quarter.

Net loss to the first quarter was 11.3 million translating to non-GAAP loss per share of $0.30 based on a share count of 37.5 million.

Capital expense for the first quarter was 1.4 million. Free cash flow during the quarter was largely negative $400,000.

Our liquidity remain strong as we enter the quarter with just over $100 million in cash and the profit and no debt. We ended the quarter with 648employees.

Now, I would like to turn to our outlook for the second quarter of 2014 and also provide an update on our improved full-year guidance. For the second quarter, we expect collection to be in the range of 38 million to 39 million and revenue in the range of 31 million to 32 million. Adjusted EBITDA for the second quarter is expected to be negative in the range of 12 million.

We are also updating our full year 2014 guidance and increasing our outlook for collection and revenue on the this trend of Q1 growth and continue momentum in the business.

We now expect collection for 2014 of 155 million to 160 million and revenue in the range of 130 million to 133 million. We expect adjusted EBITDA to be negative 38 million to 42 million which remain the same as the guidance we provided on our fourth quarter earning call.

And with that, I will turn it back over to Avishai to close. Avishai?

Avishai Abrahami

Thank you, Lior. To sum up, we maintain continuously the possibility can grow among our (inaudible) systems. We will continue to invest in the business for the year and we built our platform (inaudible) not only to create but also to managing both the business and organization on and across the globe. We will now take your questions. Thank you.

Question-and-Answer Session

Operator

Thank you ladies and gentlemen. [Operator Instruction] Our first question comes from Nat Schindler of Bank of America. Your line is open.

Nat Schindler - Bank of America

Yes, hi guys. Thank you very much and it looks like another great quarter. But I want to just though ask you a couple of questions. First on marketing efficiency, I know it's difficult to tell because we don't see the gross subscribers numbers in your numbers but as I look at it, it looks like you increased the amount per net subscriber increased over the last year by about 40%. Now it's turning of a much larger base and so that’s expected but how do you think of your marketing efficiency and how it has changed over the last year or so? And I have a follow-up question.

Lior Shemesh

Hi, Nat. This is Lior. So with regard to the marketing efficiency, as we mentioned in the past Q2, it used to be about 5.5 months in terms of time of total investment. We said that during the fourth quarter that we will increase it mainly in working with branding, in North America and other places and also penetrating to other region in the world. As a result of that, we actually result during the first quarter and we have time to investments in two to seven months. The 1.5 month increase in marketing exactly represents the branding strength and what we did during the first quarter. It's also important to mention that it was more efficient in one week what we predicted actually in the beginning of the quarter but I think (inaudible) event what we have said as a something that was very strategic for us to continue investing in marketing.

Nat Schindler - Bank of America

And Lior, as you switched more, it will added more branding spent, has that kind of created long tail in marketing efficiency and what I mean by that is Google Ads represent a very close one to one relationship between when you spend the money and when you get the revenue in, but as you spend money on TV, is there –is it a larger delay and is it possible that the spent here will actually over time get more efficient as you use it?

Lior Shemesh

So it's very hard to tell right now but clearly, you are right about the differences between Google and TV companies. This is why we actually increased the TRY from 5.5 to 7 months. We don't know exactly when the return is going to be. It can take like two or three or four even up to 12 months. But certainly on the medium and long term we will see the fruit for it as we are continuing to strength our branding.

Nat Schindler - Bank of America

Okay. And then one more question on a different topic, as you saw a nice rise in ARPU and you attributed partially to your app marketplace and mentioned that you had 110 million apps downloaded to-date. Is there any way -- could you give us kind of a both what is the most common app downloaded and what percentage of that represents or if it is a significant amount? And also what is the largest webnue contributing app because I assume that could be very different?

Avishai Abrahami

So Nat, this is Avishai. So the most used app as of today is the Google, the Google suit for email and office management and the next one would be website builder that was your first question, right? And the second question was….

Lior Shemesh

Just to answer that Nat, also the increase in outlook is not just due to the app market, it was also due to the fact that people are choosing our expensive packages and we have seen that up mainly on (inaudible), which actually is the line, what is going on right now with the market that people are buying more online. So actually we have seen that happening in the last few quarters and months and this is something that we really like.

Nat Schindler - Bank of America

Okay. And I was actually asking also on top of it the Google is the largest most downloaded app but what is the biggest webnue generating app and is that different?

Avishai Abrahami

I think that would be also Google.

Lior Shemesh

Yes.

Avishai Abrahami

Google.

Nat Schindler - Bank of America

Great. Thank you very much.

Operator

Thank you. Our next question comes from Sterling Auty of JP Morgan. Your line is open.

Sterling Auty - JP Morgan

Yes thanks. Hi, guys.

Lior Shemesh

Hi Sterling.

Sterling Auty - JP Morgan

So I apologize, it may our system I got cut off must be server reception but when I look at the premium subscribers in the quarter being better than expected, can you give us the sense, especially look at slide 10, with the 92,567 that came from what looks first time register, can you give us the mix of 108,000 new premium how much came from new versus converting the existing free base, because I know you have the factor in turn et cetera. So what is that mix look like in the quarter?

Lior Shemesh

Sterling, this is Lior. So we still – we are actually still increased there, so you can look how many conversions from the new users who are making (inaudible) it went up in 45% which we think is mainly not because of the any diminishing system, it’s all because (inaudible) a much higher efficiently in the same quarter Q1 2014. We treated that the two main causes, one will be the fact that we are introducing many, many improvement to the products all the time which is also driving satisfaction from the platform up and obviously all this grow will drive can be big enough. We also treated that for a better mix and optimizing the market mix, what kind of traffic we are bringing in making sure that we bring the best in the traffic possible.

Sterling Auty - JP Morgan

And then I guess the corollary to that would be what could you see in terms of converting the existing free base and is there other things that you can do to tweak and improve the conversion of those existing 46 million for registered users?

Lior Shemesh

So I would say that, in general the trend is positive. We can and we are what actually the (inaudible) thing that Avishai mentioned in terms of new product releases, I mentioned some of them are, I would say kind of more than (inaudible) growing including Avishai spoke about the Sonic mobile about its time, so all these tie together will improve the product over time and we will improve conversion both of the (inaudible) new users. We are also improving (inaudible) partnership and (inaudible) money that we should. We are improving our ability to build in new geographies which also drive the (inaudible) both geographies upward the growth.

Sterling Auty - JP Morgan

Okay. Last question for Lior. Looking at the upside and the other revenue, you mentioned the apps but can you give us a sense of how much of that upside came from even if you say qualitatively how much the upside came from the apps versus since you had such a nice upside in premium subscribers I would imagine you had an upside in kind of the main revenue as well.

Lior Shemesh

Yes of course. I think that the main revenue is in term of the growth is really the same as that collection from premium packages. So it's quite in line with that. With regard to the upside I guess you meant to be increasing ARPU, so about 30% of the increasing ARPU attributed to the app market and the rest of it was just because of the fact that people are choosing more expensive packages, as I mentioned before many due to the e-commerce.

Sterling Auty - JP Morgan

Great. Thank you guys.

Operator

Thank you. Our next question comes from Mark Mahaney of RBC. Your line is open.

Mark Mahaney - RBC Capital Markets

Thanks. Could you talk about the geographic spread of the registered users that you added in the premium sub, anything interest in there in terms of new markets or it is just more at the time of the existing market that you are in?

Lior Shemesh

So all in all I think that if we look at, (inaudible) we see this thing turn that we talked about before in terms of North America becoming more (inaudible) although it's been growing over 70% year-over-year. We see another very nice growth in Latin America going about 85% year-over-year this is reason with our revenue and see similar trend depends on how we registered users from those regions. We still see that North America it's only about 29% of our registered users, it’s still giving much more weight in terms of revenue growth. Naturally as you keep on expanding into new regions and it just keep on growing even faster than the US and North America we will see that share going down.

Mark Mahaney - RBC Capital Markets

Then on Sonic mobile, the technology launch, is that change – is that you just adding that feature and functionality to the existing products? Is there a possibility for any premium pricing around that or is that have the strategy?

Nir Zohar

Well I think this time we have technology for free to all of our mobile users and we think that it's part of the commitment that we have to give the best possible web start, and so that’s one that we wanted to give everybody and it will may be slowly deployed over the next month in the United States and the rest of the world and it’s really an amazing technology, it will make (inaudible) faster than almost any (inaudible) other on mobile.

Mark Mahaney - RBC Capital Markets

And two more questions please. In terms of the guidance going forward, and maintaining EBITDA where it is, you had a boost in both engineering spent and marketing spent. Is the point that through the balance of the year we should see an equal increase in sales and sales and marketing and in R&D spent?

Lior Shemesh

So we haven’t changed the plan in terms of the R&D so let me start with that meaning that we are not going to spend more money in R&D due to the fact that we are collecting more money or having a bit of top line. With regard to the marketing, I think that it is important to note, if we look at the Full Year guidance, and the differences between collection to revenue, we actually see that it's growing. In 2013, the difference between collection to revenue was about $18 million, based on our guidance, we are going to increase from $25 million to $27 million. What does it mean is that we are actually growing and we are growing very fast? And we mentioned last quarter that the marketing spent are going to be as percentage of collection and specifically we mentioned that is going to be 58%, we also said that most of the increase is going to be during the first half of the year. I mentioned before that we are a better, even more (inaudible) than what we predicted because we actually predicted that it is going to be more than 60% during the first quarter and we ended up with exactly 58% of the marketing out of collection. So to answer your question even with the top line is increasing we are going to increase the spread in marketing because collection is increasing even much faster than revenue.

Mark Mahaney - RBC Capital Markets

And the last question on the app market and the path to that reaching 10% of revenue at some point. Can you help us think through when we could see that? It sounds like that’s becoming big enough to maybe already impact some level of the ARPU and I understand that there are other packages, broader packages that were purchased and if we think about the Wix app market is the standalone business, how far we away from are we from that being 10% of total revenue?

Lior Shemesh

So unfortunately, it's hard to tell right now at this point of time. I guess that within the next few quarter, we will know better when we are going to reach to these very important milestone but again as I told the end of the year, we can provide more information about it. Right now it's still not significant but we do state something which is very strategic and it's aligned with other product and everything that we introduce to the market this quarter.

Avishai Abrahami

I just want to add to what Lior stated, currently our priority is to actually provide as many applications that we can for free and while we assume that what we actually see and prudent from the data is that when we provide the those applications we actually get more subscribers going to premium and subscriptions and so we actually utilize the app market to encourage and enhance our convergent and converting this to premier subscriber. So that’s currently the current strategy we are thinking so it's kind of hard to differentiate between what the percentage will came from in the app because we know there to create total conversion and -- but I think (inaudible) already a large contribution to the overall performance of the Wix for the app market.

Mark Mahaney - RBC Capital Markets

Okay. Thank you Lior. Thank you all.

Operator

Thank you. [Operator Instruction] our next question comes from Kerry Rice from Needham. Your line is open.

Kerry Rice - Needham & Company

Thanks a lot. Great quarter guys. Maybe a high level question is that some of your competitors have been now raising a lot of capital these days and I was curious whether you have seen any impact there, whether they have become more aggressive or any change in the kind of the competitive environment there. The second question is little more on housekeeping, a lot talk about mobile apps but could you talk a little bit maybe about the tax rate, how many websites are now have downloaded app and maybe how that compares year-over-year and then the final question about Appixia, I missed what you said, has that been entirely integrated, is that available and rolled out by you now since the acquisition?

Avishai Abrahami

So maybe I will start from your last question because I think that’s easiest. So Appixia, as you know Appixia is not fully integrated, we are now piloting the product due to the product with just a few customers. This is the complete picture of that, so it is in the field but we have very limited space. Because of the Appixia, there we provide website and mobile website. Appixia provide native applications and so we are going to fully integrate that wanted to (inaudible) launch it. So that’s answering your last question. Answering your first question, historically if you look almost every time we raise money then a competitor raised money a couple of months after. So we kind of already are used to this phenomena. I think that on the internet, what they define the ability to spend marketing, the quality of the product and the convergence we would get per premium which directly reflected the time we take returning investment (inaudible) we can redeploy that money again and with superior product, I think that we are always have been able to do that much better than anybody else. I don't think that any of our competitors yet (inaudible) dramatically improve their product so that they can actually compete on marketing because we have. So I don't think that they – I don't see that it's something that changes the market anyway or should increase the dramatic way the competition I think to answer you it would it can probably do is that we will maintain a similar level of competition like the one we had before because proportionality if we can give the resolution applied in this market which is continuing to say what we have been doing before. And you second question which was…

Kerry Rice - Needham & Company

About tax rate.

Avishai Abrahami

So it's actually the mobile website tax rate and just for the reminder we released that product in Q2, starting to (inaudible) launch and rolling it out in Q4 of last year to date we have about 2.8 million mobile website that has been published, 1.3 out of them only just published in Q1 which means that this is basically it is in terms different acceleration in terms of the tax rate (inaudible) doing with it. We are also talking to our users about that product and see very high level of satisfaction, people are loving it. It is reason that we get a better, a much better representation of their website and their business on the mobile phone.

Kerry Rice - Needham & Company

If I can follow-on with that, though I was really talking about the app market and the apps being downloaded from the app market. If you have any tax rate data from that?

Avishai Abrahami

If you are looking for that number, also application that are being installed, so until the date over 30 million application has been installed and in Q1 2014 2.5 million application has been installed which kind of goes to (inaudible) in Q1 it was 29,000 application is installed and with five a day.

Kerry Rice - Needham & Company

Okay. Thank you.

Operator

Thank you. Our final question comes from Jason Helfstein of Oppenheimer. Your line is open.

Jason Helfstein – Oppenheimer

Thanks. Just two questions. One more go back to the market efficiency and then the second on free cash flow. So just can you talk about was the marketing efficiency in the quarter driven more by premium add or premium net add converting from free or from you guys are having more registered users or function of both I guess we think about different metrics and then secondly when would you expect to report consistent pre-cash flow growth on a year-over-year basis? So for example like in a first quarter free cash flow was down year-over-year because the investment front, you just think about over the next few quarters, do we get to a period of time where you are on a trajectory where just each quarter you are showing improvement in year-over-year free cash flow growth? Thanks.

Nir Zohar

So this is Nir, I will take the first question and hand it over to Lior for the second one. I say that it's the combination of both. In terms of the registered users, they definitely play a part but the absolute number and what we see from that (inaudible) KPI of registered users. And the way that we drive is actually by the quoting and changing the mix that not necessarily only by bringing more. So if we look we did grow in terms of users from Q4 to Q1 but we are much faster in terms of pulling subscription. And that is actually the second driver which is the conversion to subscriptions and so before we did a lot of product enhancements in order to drive that conversion upwards.

Lior Shemesh

This is Lior. With regards to the free cash flow, just to give a few words about 2013 and then we can move on to 2015 and go forward. If you guys remember in 2013, actually we didn’t earn any cash. Actually up-to-date including Q1 and Q2 2014, we were also at break even, even if you look at cash flow from operation it was positive. So we mentioned in the past and it was not something strategic for us in 2014 to be cash flow positive. Obviously, it is something very important for us and we aim to doing late 2015. We intend to increase investment in R&D and the marketing as we mentioned before but due to the fact if we look at the first quarter 2014, the collection is growing very fast, even faster than revenue. It means that actually we are generating cash flow from operation this is what happened in the first quarter of 2014. It means that if collection will continue to grow faster than revenue, it might happen in the next quarter but again generating free cash flow to be positive it's not something strategic for us this quarter or this year certainly for next year.

Jason Helfstein – Oppenheimer

Thank you.

Operator

Thank you. I am not showing any further questions in queue at this time. Ladies and gentlemen thanks participating in today's conference, this conclude today’s program, you all now disconnect. Everyone have a great day.

Nir Zohar

Thank you.

Lior Shemesh

Thank you everyone.

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