Wix.com's (WIX) CEO Avishai Abrahami on Q2 2016 Results - Earnings Call Transcript

| About: Wix.com (WIX)

Wix.com Ltd. (NASDAQ:WIX)

Q2 2016 Earnings Conference Call

July 27, 2016, 08:30 AM ET

Executives

Joe Pollaro - VP, US Operations, and Investor Relations

Avishai Abrahami - Co-Founder and Chief Executive Officer

Nir Zohar - President and Chief Operating Officer

Lior Shemesh - Chief Financial Officer

Analysts

Sterling Auty - J.P. Morgan

Bo Pang - Oppenheimer

Nat Schindler - Bank of America Merrill Lynch

Aaron Kessler - Raymond James

Ron Josey - JMP Securities

Deepak Mathivanan - Deutsche Bank

Kerry Rice - Needham

Mark Mahaney - RBC Capital Markets

Mitch Bartlett - Craig-Hallum

Tim Klasell - Northland Capital Markets

Operator

Good afternoon. My name is Dan and I will be your conference operator today. At this time, I would like to welcome everyone to the Wix.com 2016 Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Joe Pollaro, Vice President of Investor Relations, you may begin your conference.

Joe Pollaro

Good morning everyone. Welcome to our second quarter 2016 earnings call. During this call, we may make forward-looking statements and these statements are based on current expectations and assumptions. Please consider the risk factors included in our press release and most recent Form 20-F that could cause our actual results to differ materially from 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 the reconciliations between GAAP and non-GAAP results in our press release and presentation slides on the Investor Relations page of our website.

Today, we are going to try a new format for our call. Avishai is going to say a few quick words about the quarter and then we are going to go straight into Q&A. Earlier this morning, in addition to all of the materials we normally post for our quarterly earnings release, we posted an shareholder update. This provides some color on our results and replaces our management team’s prepared remarks. We will not be reading this on the call.

So with that, I will now turn it over to our Co-founder and CEO, Avishai Abrahami.

Avishai Abrahami

Good morning everyone. I just want to say that we had another fantastic – quarter. We added a record amount of new premium subscriptions. We accelerated our growth and had a record amount of collections and we generated over $10 million in free cash flow, both are records.

I am very happy with our results for the first half of the year and I am looking forward to a great second half. We are excited about the preliminary results of the Wix ADI which we’ve been testing and we are launching the full products globally later this quarter. On this call, we are trying a new format and I think all of you would like it, which is pretty much that, I am going to stop talking now and we are going straight to your questions.

Thank you.

Joe Pollaro

So operator, we will go ahead and have the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Sterling Auty from J.P. Morgan. Please go ahead.

Sterling Auty

Thanks, hi guys. I like the new format just my vote for that. But to start off, I am curious, traditionally the naming business has already seen the strongest uptake of subscriptions and names et cetera in the March quarter. But last year and now this year with the results looking at the premium subscription additions, June has suddenly become an even stronger quarter than March. I am curious what it is about the marketing programs or other things that you are doing there have changed the seasonality as compared to the traditional industry?

Lior Shemesh

Hi, Sterling, this is Lior. So, yes, I mean, you are right about it. Usually, the first quarter is stronger than the second quarter. This year the second quarter was a record quarter for us. I think that it’s worth mentioning that you know there are actually a few reasons, there is not one good reason why it happened. But essentially, we are talking about all those new products that we’ve launched a few months ago, specifically the newer verticals, the new editor, the e-commerce so on. So everything actually contributed to a really exciting conversion. So we had – we actually had an increase in conversion. We mentioned before that our brand is much stronger globally than it has ever been. So obviously, everything together took our collections, took our top-line apps, the same goes for the EBITDA and certainly for the number of premiums that we’ve seen.

Sterling Auty

All right. Great, and then, as a follow-up, looking at the uptick in monthly subscription, is there something that we should read into it. Do you think this is customers that are coming in looking at the Wix ADI and wanting to go monthly just to kind of test it and kick the tires or is there something out that’s driving the mix for the monthlies?

Nir Zohar

Hey, Sterling. It’s Nir. So, generally, the uptick in monthlies is I think, it’s due to some marketing initiatives we’ve been running in the first quarter, which kind of bode us – users that are basically just more price-sensitive and that’s why you see that uptick. In fact, if you look at the kind of – if we look at the absolute numbers of the pictures, we haven’t had a decrease in the non-monthlies and those monthlies are actually incremental in terms of kind of new kind of users who are slightly more sensitive to price and want to try it out and you said kick the tires. Obviously, for us, we are always very happy when we find new ways to being – that we can convert. I wouldn’t be too quick to call exactly how it will behave going forward. This is relatively new but we will definitely come back to it and report more next quarter when we know more about it.

Operator

Your next question comes from the line of Jason Helfstein from Oppenheimer. Please go ahead.

Bo Pang

Hey management, thank you for taking my questions. This is Bo asking for Jason. So in your slides, you imply that pricing is up 9% year-over-year. So can you just talk about the shift we have seen in the features or services that is driving this trend? And so, is the average new subscriber adding features that are causing them to choose a higher plan, higher priced plan? Or have you moved up all the pricing for all plans as you add more features? And secondly, are you seeing any changes in terms of the percentage of customers who also request a domain? So, I remember you probably talk about this previously around 15%. Can you just – like remind me this number please? Thank you.

Avishai Abrahami

So, first of all with regard to the ARPU, again it’s important to mention that what we try to show over there is the pure increase in ARPU that we have experienced and this is second from in terms of collections coming from new users. So I think that it would be the best indication for us in terms of the ARPU. And as you mentioned, most of it is actually coming from the fact that people adopt more and more vertical solution. It will also increase the thickness of our customers. It increase the conversion as we saw in terms of number of our premiums, but it also increases the ARPU meaning that people are taking more our features, more expensive packages based on the specific vertical. On top of that, we see more people actually taking and adopting our ecommerce solutions and the third thing, we see more than ever more people actually are taking more and more applications and upgrade and I think that you know for us it’s a really, really good indication for the fact that people actually are doing a really good use of the overall platform that we provide for a small business. So the percentage of customers selecting domain it hasn’t been changed. It really remains the same as you know actually the last couple of years.

Bo Pang

It’s helpful, thank you.

Operator

Your next question comes from the line of Nat Schindler from Bank of America Merrill Lynch. Please go ahead.

Nat Schindler

Yes, hi, guys. Thanks for letting me ask question and another great quarter. But I wanted to focus in on one number, you mentioned the 290,000 e-commerce subscriptions, can you one just tells us how fast this group is growing? How fast are you growing this core? And is there anyway you can compare it to, probably your most similar comps in this area, something like Shopify, you have a similar number of subscribers in that area. Can you talk a little bit about what are the differences between your product and Shopify releases at least a – some of the GMV that moves through their platform. Do you have a way to track that? And do you know how much and is that a number you could release in the future?

Avishai Abrahami

So let me – this is Avishai, let me see if I can just handle all the questions. So first of all the growth in the e-commerce is actually a bit faster than the growth on the Wix.com. So, we are not going to give the exact number, but it’s a bit faster and so that’s to answer your first question, right?

Nat Schindler

Yes.

Avishai Abrahami

The second question is about the differences between the products. So, I think that there is a lot, okay. In Shopify, we think it’s a great product and we think that the Wix platform is a fantastic product and we think that each one of them is benefit to different kind of customers in some cases or similar customers and in some places we do compete. We do notice that Shopify many times and for mid-sized level companies and one of the example is Angry Birds which is actually like a well-established company, right and so lot of merchandize. So we do have – and part of that is the reason that they published their GMV, because also in many cases they are taking the percentage of the GMV, on which we don’t take a percentage of the GMV and a not a big difference between us to Shopify will be that we have a wider international coverage. So Shopify is really well focused on Canada and United States. We have a lot of stores in Canada and United States but also a lot globally. And I think that’s not a major advantage that we have which is that, our platform is a bit better when it comes to support in international commerce. We do know the number of GMV, but we don’t disclose it at this time.

Nat Schindler

Great, thank you.

Operator

Your next question comes from the line of Aaron Kessler from Raymond James. Please go ahead.

Aaron Kessler

Hey guys, good quarter. A couple questions. First, do you have the normalized kind of ARPU growth in the quarter? I didn’t see that disclosed, or may have given it. On the accounting change for 2017 did you receive any specific feedback from SEC or is it just kind of getting in advance of potential changes they may make or other language as well? And thirdly, just any changes you are seeing in the competitive environment maybe specifically with regards to advertising from some of the competitors? Thank you.

Avishai Abrahami

Okay, I would start with the normalized ARPU growth. So basically as I mentioned before, we provided the pure ARPU growth which I think that it’s the most interesting data forms in order to understand better our business. But if you look at the normalized ARPU growth meaning that if you look at it in terms of revenue, so, there are a lot of noises over there, because we kind of take time for the revenue to catch-up with the collection. We also have all the currency effects still in terms of revenue. We see a slight increase in terms of the ARPU for – when you calculate it based on revenue, when you exclude the currency, you obviously see a higher increase in ARPU based on the revenue, but as I mentioned before, I think that the most interesting clause is about the ARPU coming from collections. With regard to the SEC change, so yes, there are specific new rules came out from the SEC with regard to the disclosure of non-GAAP metrics. So basically, the rule was – there is one rule about EBITDA and the fact that EBITDA which mean for earnings and obviously we cannot use deferred revenue when we calculate EBITDA because it’s based on earnings, meaning based on revenue. So I think that those new rules, overall they are good rules, because it kind of set the base that the same base for many companies and as a result of that, we’ve decided in 2017 to move and report on operating profit non-GAAP operating profit and at the same time, also to provide numbers with regard to the free cash flow, because essentially, adjusted EBITDA is more than anything is a liquidity measure, which is very, very similar to the free cash flow. As you notice, you know us, for example this quarter, so we are going to adopt the change and start to use it starting 2017.

Nir Zohar

Okay. It’s Nir. Aaron, in regards to the third part of your question about the changes around advertising, no, we haven’t seen any significant change around advertising income in terms of our recent competitors.

Aaron Kessler

Great. Thank you and good quarter.

Operator

Your next question comes from the line of Ron Josey from JMP Securities. Please go ahead.

Ron Josey

Great. Thanks for taking the questions. I wanted to ask about the Wix ADI. I know you said the global launch is coming this quarter. But I wanted to get a little more details maybe on your launch plans here, and then in areas where ADI has been launched or is being tested, are there any verticals that are adopting faster the new products to travel or e-commerce and now are you seeing a greater and faster adoption of paid modules for those users who are testing the platform? Thanks.

Avishai Abrahami

So, well, we have plan to release ADI more globally at the end of the second quarter. At this time, - sorry at the end of this quarter, at this time, what we’ve seen is that, we will listen to a small subset of our users who are pretty much randomly run election of a small percentage and the few things that notified is that, while we see that we see really great results. We are very excited about it and the fact that we get from users where they are – they are shocked to find out that this incredible website built for them in a matter of minutes completely providing and then if you just modifying it there using out at ADI platform with a small group of editors. So we are very excited about it and we think it’s going to have tremendous effects. Currently the ADI only supports certain verticals. Commerce being one of them, consultant is another one and I don’t believe that we’ve seen any significant difference between them. So it’s pretty much when it comes to the quality of conversion or the quality of websites that we get is pretty much identical. Of course, commerce is a bit more harder to do, because you have to edit and get well which is something that for any business takes a while, because you have to upload some of the – and then open a merchant account. But beyond that, we didn’t see anything significant, so, and we believe that this is a great time the power of the platform being equal and you replace we think the need, there is a need for it.

Ron Josey

Thank you. And then, are you still on track to release another undisclosed product later this year? And that’s it for me. Thank you.

Avishai Abrahami

Absolutely.

Operator

Your next question comes from the line of Deepak Mathivanan from Deutsche Bank. Please go ahead.

Deepak Mathivanan

Hey guys. Congrats on the solid quarter. Two questions for me. First, can you discuss about the type of customers we are seeing for the two year subscription packages, maybe with respect to categories or the business profiles? We noticed a small discounting on the pricing you are offering for two year subscriptions, but what other initiatives are you currently doing to drive the two year packages? And then second question, if you see over the last few quarters, you’ve seen new users convert into paid a little earlier in the life span partly due to new editor and the launch of several vertical offerings. It’s also evident in your 1Q 2016 cohort data, do you think there is some kind of a pull-forward effect with the conversion into paid subs or are you also seeing conversions higher over the life time or maybe over the next several quarters? Thanks.

Avishai Abrahami

So, the two year subscription is a plan that was added because we – from concession, we use as we felt that a lot of who them wanted the user is going to stay for a while and we are looking at mostly as a very strong signal for customers’ loyalty. We don’t push it with an intent to push it. Of course, it’s not a major – it’s not a significant amount of users and we are looking again, it’s not a benefit you can give to our most loyal users. So that’s currently the status we got. And I’ll ask Nir to take the second part of your question.

Nir Zohar

Hey, Deepak. So – in terms of the kind of improved conversions from analysis of a huge amount of data that we have, it is very clear to us that that product drives conversion. The biggest part of improvement of the conversions always been driven by products and such improvement in conversions have come from products is an actual improvement, so it’s not – it doesn’t pull the conversion forward but it has actually improved the conversion all across the cohort. And I think that actually if you look at the court lines, you see that over time, each cohort is better than the one before that and they stay better over time. So it doesn’t just drops out there two or three quarters. So, and definitely we know that, throughout the last summer and this fall we meet with the editors, we started seeing that improving the conversion and that is being ongoing throughout the first half of this year as we kept on increasing our products all across the board.

Deepak Mathivanan

Got it. That’s helpful. Thanks and congrats guys.

Operator

Your next question comes from the line of Kerry Rice from Needham. Please go ahead.

Kerry Rice

Thanks a lot. Just a couple questions. You talked earlier about the uptick in monthly subscriptions. Can you talk a little bit about the sustainability of that or anything you are doing to convert those into annual subscriptions? And maybe on a follow-on to that, were there any unique channels of marketing that you focused on in Q2 than maybe you hadn’t focused on before and that led to any of the improvement in record net adds? And then, finally, any – can you disclose what percentage of revenue related to apps was in the quarter? Thanks.

Nir Zohar

Hey, Kerry, this is Nir. I’ll take the first two questions and then Lior will handle the third. So, in terms of your monthly subs, yes, we do believe that it is sustainable as this is a change that it started happening throughout the quarter itself. We probably will leave a few more months in order to understand the full expense of the sustainability and we will then start understanding where there will be kind of how good guys move on to annuals, whether that actually happens organically. These are things that we will first concerned at Wix. Naturally, we love the annuals, bit it’s very clear from looking at what website it’s difficult to build and what those – that these are real businesses, real websites, real people who need the favor. That’s in terms of the monthly subs. And in terms of your second question, so, I can say that we – always we are working in many big initiatives around marketing and then it becomes experiments and opinions bake in. This is very much our conservative thought. I cannot elaborate more than that, but definitely we always are trying to optimize that.

Lior Shemesh

So, Kerry, with regard to the markets, we have still not disclosed the overall apps market out of the revenue. There are few reasons for that. Still see that most of the impact from the app market is actually comes in a way of better conversions. So the indirect effect is still very high. But what I can tell you that, in terms of the app market, if we look for example at the last six months, the overall – sorry, the overall revenue from the app market has almost doubled, meaning that, the increase in the app market is much, much larger than the increase that we see in the other business. And again, this is due to the fact that we kind of packaged it in a different way. People find exactly where they are looking for. They are using it more and more and more than ever it actually contributes more to the overall conversion of the thickness of our customers.

Kerry Rice

All right, thank you.

Operator

Your next question comes from the line of Mark Mahaney from RBC Capital Markets. Please go ahead.

Mark Mahaney

Thank you. You talked about seeing rising brand awareness on a global basis. Is there anyway you could quantify that? And then could you also relate that into how you think about your marketing spend? It looks like your previous guidance you are going to be looking to spend $150 million, $140 million, something like that on marketing this year. Do you think that the results that you’ve seen in the first half of the year make you want to increase that marketing spend as a percentage of collections in the future? Is it something you want to accelerate given the results? How do you just think about that marketing spend, your brand awareness and the – in the P&L results you’ve seen as a package going forward, is it seems like it’s worked well for you? Is it something that you just sustain for the next couple of years? Just any thoughts on that. Thank you.

Nir Zohar

Hey, Mark, it’s Nir. I’ll kick it off by saying that, first of all, I think it was easy to see the chart we saw, we showed you guys on the Analyst Day. The data we got from Google about the growth of our brand globally and you can see that in our space, we have the fastest growing brand in the US and outside of the US which has been – it’s a great news. We have the investment quantified by somebody from the outside especially we have such an amazing clarity and transparency in what’s going in the world like Google. And I think that the way we think about the marketing spend is, as we think about it as the mix, so it’s a combination of the effect that you can generate between the appliance of the branding money and the performance marketing together and believe that we keep on measuring that we are doing this the right way is that it’s sixth or seven to nine months the ROI. And you can see that even as we went into a much more kind of investment into branding and manage that over the course of time.

Lior Shemesh

With regard to the other question about investing more in marketing, so I just want to remind exactly how we run it. Basically, we are a full set of bucket for advertising. The first one obviously will be like the directory provision, everything that we do in marketing which is our bread and butter and this is something that we don’t budget in a way that we want to meet the target in terms of our P&L meaning that we maintain a seven to nine months of TROI. If we can invest more in marketing in order to generate a better growth while staying with the same KPI of seven to nine months of TROI, we will do that, because the returns on our investment is so quick, so it’s kind of no brain on that to do that and as you see during 2016 compared to 2015, the actual increase dramatically in dollar, the investment in marketing while maintaining the same TROI, I think that it’s good indication of what Nir described before about the fact that our brand is strong and still keeping the TROI while investing more in marketing. And we will continue to do that also in the future if we recognize that we can invest more in a specific channel or new channel and generate more growth while keeping the same TROI we are definitely going to do that. If you go to the second bucket, which is more kind of brand-wise investments, so this is something that we overall operate under a budget, a certain budget and based on that, we choose to do what makes sense to us in terms of the returns, in terms of the ROI and in terms of the overall budget that we set for it.

Mark Mahaney

Thank you, Lior, thank you, Nir.

Operator

Your next question comes from the line of Mitch Bartlett from Craig-Hallum. Please go ahead.

Mitch Bartlett

Yes, good morning. I have a couple of questions, one on incremental margin and the other on ARPU. So, you said at the very beginning of the year that you are going to spend an incremental $5 million on two new products and I just wonder, based on what might have been spent in Q2, so we can kind of look what I calculated the 30% incremental margin in the quarter and that is after the burden of this kind of one-off incremental spending on these products. And what might be spent in Q3 as well, if you could break that out? And the second question on ARPU which is, your revenue per new subs has been growing very nicely and part of the explanation is the move towards the vertical strategy and the vertical products that you are bundling at this point. What happens when the ADI rolls out to that – to the customer finding those vertical solutions? And that path towards subscription, does it affect or could it have an effect on ARPU?

Avishai Abrahami

We believe that, if I understand the question it’s, what will be the results of the ADI impact on verticals?

Mitch Bartlett

Yes. The ADI impact on ARPU, yes, for new subs.

Avishai Abrahami

Well, I think that, the way we look at it ADI is – to help you understand better how to – help you set up your website faster, right, that’s the first thing and then help you understand better what additional functions do you have that you can use, for some users will probably find that functionality, they always needed a grid now Wix actually offers is now available, but that majority of our customers in verticals already are able to find it. So, we don’t know is it, that’s going to be significant or not, but even if it will help everybody knows about all the functionality, the circle – probably be not that dramatic, but we will have to see. We are very excited about the fact that now as the total sort of come to Wix in a couple of clicks you will build amazing websites, we all do it’s a total good functionality. So long-term, I think that – if you look at the branding side and the quality of products that the users builds website at debut is the effect is very, very dramatic.

Mitch Bartlett

So just to clarify on that…

Avishai Abrahami

With regards to the first question, sorry, again?

Mitch Bartlett

Just to clarify on that, it might not lower the ARPU when the ADI comes out and it might actually raise it because people find the vertical solution faster.

Avishai Abrahami

Yes, absolutely. At least not that we see today or that we can think of a reason that’s why it should lower the ARPU. All the reason that we can think about exactly on a equal order, meaning similar ARPU to today or higher. With regard to the first question about the incremental investments in R&D, we mentioned at the beginning of the year that we will invest incremental plus million dollar in R&D in order to expedite the launch of those new products. I think that the best way to look at it, last year the overall R&D out of collection were about 28%. This year we are down to 26% and it basically how it showed the leverage that we have in our operating expenses, but if you exclude those $5 million, so we should have been approximately 24%. So it should have been a higher leverage. Obviously, you know this investment will generate an incremental growth obviously hopefully in the future but I think, this is the right way to look at it. Those $5 million were equally spreaded throughout the year and those are more incremental people that we hire at the beginning of the year in order to make sure that we meet our plans.

Mitch Bartlett

Great. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Tim Klasell from Northland. Please go ahead.

Tim Klasell

Yes, hey good morning everybody. Just a quick question getting back to the apps. Could you talk about conversion, but how about retention? I know it’s fairly early on with the whole application releases and what have you, but what are you guys seeing preliminarily around retention on application customers versus your typical customers? Thank you.

Nir Zohar

Hey, Tim. This is Nir. And it’s a fair question is that you said it’s possibly early that generally what we see as we can say to you that as customers get the benefit to manage to get the functionality they are looking for, then if they have a higher chance of converting, as well as a better chance of returning their way the website on time.

Tim Klasell

Okay, and is there any correlation between customers to maybe interested in a two year subscription and the applications, just sort of say, hey they’ve gone with the applications, they are much more likely to want a longer subscription?

Avishai Abrahami

I think that, with the two years, it’s just too early to say that from the number, it’s small in order to give a fair analysis and statistics on it. But it’s definitely something that we are going to keep on tracking the next few quarters in order to better understand.

Operator

And there are no further questions in the queue at this time. I turn the call back over to the presenters.

Avishai Abrahami

Thanks a lot for spending time with us. And this concludes our call.

Operator

This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!