Q1 2022 Wix.Com Ltd Earnings Call

Good day, Thank you for standing by and welcome to the <unk> first quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session to ask a question. During this session you will need a press star one on your telephone. Please be advised today's conference is being recorded you may require further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Emily Liu Investor Relations Analyst. Please go ahead.

Thanks, Michelle and good morning, everyone.

Welcome to weeks its first quarter 2022.

Joining me today to discuss our results are obviously, I Abra honey CEO and co founder.

So heart.

And C O M new.

New York's Shemesh, our CFO and Joe pillar, our GM of the U S.

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.

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 Center on the Investor Relations section of our website at investors <unk> Dot com.

Now I'm going to turn the call to Joe who'll be moderating Q&A with the team.

Thanks Emily.

So I have a shot.

You opened the shareholder letter this quarter with what you believe the Internet will continue to grow.

Can you explain a little bit more about your conviction around this growth. Yes. Thank you I think it's based on a few things.

First of all on one hand, if you look Brian in the United States in Q1, the GDP actually went down while the internet and it's still growing and we're growing at around 14% and we see that most of our peers are also broke right. So that's showing that they understood really probably when the GDP growth will go back to <unk>.

Towards 1% or a bit more than that.

We're going to see an acceleration of the internet.

And the other thing that is affecting the internet today is probably that Didnt COVID-19, we showed internet rather than get two or three times. The average phase of growth and I think now a digestion that's growth.

And probably it makes sense right for growth to revert back to the mean.

I think that is another part, but even look at the micro level right at the things that actually create that real from the internet.

Smbs right.

Almost.

50% of them are still not online and and that is a reason that you're going to see a lot of continuous migration from that thinking about your own life, but there's still so many things that we do.

Booking appointments in some places consulting learning so much more that we're doing every day that would make sense to do on the internet and it's not there yet so I think that is a not a path that we're seeing and a lot of the Congresses Democrat anymore. So yes, we are in a place where they're getting back to the main bank. Yes. There is.

Very heavy weights coming for me.

GDP going negative, but I think overall the internet I have my my belief is that the internet was impeded flow into future.

Yes.

And why do you think wix is well positioned to benefit from this growth well I think that there's a few factors at play in the play for US today, we are the largest platform consist creators right.

Yeah.

I think that the Zipcode is if people try it they build and manage your own website and I think that.

Every year you have more young people that are really been exposed to technologies, where theyre comfortable with technology and this road as a percent of the population those op Seth good industrial logic.

A lot of them want to be the one of them control their destiny in their marketing and their website I mean that trend just by itself. We continue to make our market growth rates on specific yet as well.

We have the Wuxi muscle Brooklyn partners agencies might that make websites, where I did and we started to market the weak.

Did that ground in about two years ago, when she must be broke that we'll disclose that as we've shown.

And I think continued product innovation like the biggest barrier when people use wix is if they can do it in which they'll do it in wickes. If they can they will not I think they have been conditioned to consistently proven over the years.

It really goes to that so we continue to innovate and continue to add functionality and by doing that I think you're seeing a market shocks.

So I wanted to talk a little bit about the competitive landscape. So we've had many different competitors over the years.

How do you view the competitive landscape today and what are you seeing in terms of any changes in market share. During this time, well, we don't see any significant change in the market and in the money. There's no new competitor. The next new big market share growing very quickly mostly.

The SaaS website builders are still growing faster than anything else and and and and pretty much in every metric that they are leading the growth in the category, which that building or what sort of content creation.

Within this Gotta go play SaaS website builder.

<unk> is growing the fastest.

In fact this quarter, we added close to double the number of net new subscribers as the next closest competitor. So I think we're I think very quickly right in the website builder and secs website builder and I think again you know the Q4.

Fishing and looking functionality for small businesses to move online.

And.

Historically, and I think it's going to continue innovating faster and more of our peers.

And I wanted to touch on online commerce, something that's that's obviously.

An area of growth for us, it's clearly slowed here after accelerating a lot during COVID-19.

But we benefit from we benefit from being a horizontal platform. So can you talk a little bit about.

Why that is a benefit for us rather than being just exclusively for one type of vertical.

Now of course, we see a slowdown in online shopping right and we've seen it all around.

And we started some waste by research on Amazon Shopify pay popped pretty much everything today is online shopping and then it kind of makes sense. If you think about right for the last two years, we locked in the house and now we all get a feeling that we got this.

So you can get out of jail card right and when we actually go out and do shopping I find myself doing shopping that nobody else would do before we don't do anything or anything that just wanted to be out in the fresh air.

And so I think that's a big contributor to the slowdown in Commerce, I think lack of manufacturing in China and shipping Gundy.

Yeah, raising our inflation rising energy prices, one and all of those generating an additional.

So all of those combine to slow down in Congress.

It's something that most of those are temporary right China will open the war hopefully with finish hopefully no new wars are coming so.

I mean, that's a and some of them we've seen into regular commerce, Alibaba, which is very recent though like we have a lot of different things that we do is commerce and of course product like booking events drive the scheduling.

And those are less affected right and we can see that the I think the this duty litigation, while we offer also gives us stability on the long term.

Fantastic.

So I want to move over to some financial topics now we are.

Let's start with 2022, the rest of this year can you walk through the expectations that we provided this year for the rest of 2022.

Yes sure so.

If you guys remember at the beginning of the year, we thought we'd be at around 20% growth.

On a year over year basis, so actually excluding the impact from the headwinds knowing the reshape spoke about.

Revenue growth would've been 20% year over year.

So for Q1, we grew 14% from tobacco for 41% when year over year basis.

And some of the headwinds that we actually see the results from a slower payments as a result of lower GPC.

The slower near term growth in e-commerce.

And again, obviously I spoke about it a lot.

We feel top of funnel and changes in FX rates, which by the way he mostly affected the second parcel to be here.

We also see a higher level of uncertainty than earlier in the year.

Obviously because of the overall environment in.

In the world, but that said we are almost halfway through the year.

So we are also seeing a stable conversion I'm, assuming that stability continues we expect revenue growth of 10% to 17% for the full year.

I think that it's also important to mention that without the headwinds from Russia.

The changes in FX revenue would've been 12% to 15%.

On a year over year basis.

The fundamentals of our subscription business remains very strong with consistent conversion rates and retention rates.

Okay.

I've mentioned it in our materials that we adopted a plan that was approved by our board to reach 20% free cash flow margin and 20 by 2025 I know, we're going to talk a lot about this at the Investor and analyst day on Thursday, but just briefly give us a preview of how we're going to get there.

So Joe this is something that we're very excited about because as you know we invested a lot about the new initiatives in the last three years.

We see the fruits of it but.

But we also start to see the leverage from those investments.

So we do expect to generate about 20% cash flow margin by 2025, mostly driven by the continued profitability of <unk>.

We actually going to show you on Thursday.

First of all these businesses.

And leverage from positive business as it scales up I think that we also grew up on a year over year basis with partners. So we believe that this is something that will continue.

Since this will be this is already at this high level of profitability. So we expect it to continue.

And it's all part of the business scales, we will see increased margin, which also drive margin expansion for the overall business. So most of the leverage is actually going to come from the Boston business.

We will share more information around diesel and D&O. These days in general you should expect about five points of free cash flow margin expansion every year.

Okay.

Okay. A couple of topics I know investors are going to be focused on with our results gross margin. So how our gross margins is going to progress for the rest of this year.

Okay. So I'll try to explain at the beginning of the year. We did expect high revenue growth, which would have closed creative subscription gross margin to increase in 2022 versus 2021.

So despite the macroeconomic headwinds, we remain committed to driving profitable growth and margin expansion.

The high end of our guidance range, we anticipate creative subscription gross margin will modestly increased in the second half of the year. This is Q1.

And that business solutions gross margin will increase for the full year.

Of 2022.

If we are closer to the lower end of the guidance range, we expect creative subscription gross margin to be flat through.

Through the second half of the U and business solutions gross margin, we've seen an increase for the full year.

So to summarize it in Ito Synagro creative subscription gross margin will be at least flat through the year and business solutions gross margin will increase versus a year ago.

Okay, and do we still expect 5% free cash flow margins in 2022, and just on top of that then can you explain the bridge from the current free cash flow margins that were at to the 8% to 10% free cash flow margins, we expect in 2023.

Sure. So why do we have undertaken some actions already D. C to reduce ongoing operating expenses revenue growth is a bit lower than we had anticipated.

Through the headwinds that we spoke about before.

If we were at the high end of the revenue guidance range, we would definitely have 5% of free cash flow margin. If we are at the lower end of the guidance range. We may not reach the 5% margin that being said free cash flow will absolutely be positive.

[noise] into 2020, three we will see gross margin expenses in boat.

Reactive substitution and business solution.

Accordingly, we have significantly reduced the pace of hiring an additional and additional investment, but we do observe a full view of those close in 'twenty to 'twenty two from housing 2021.

Despite the impact into Opex in 2022, we will see leverage in 'twenty, two 'twenty, three which will bring us to.

Approximately 8% to 10% of free cash flow this year and as I mentioned before you should expect to have about 5% improvement in free cash flow every year.

Now on to 2025, when we get to the 20% of free cash flow.

Okay. So I just wanted to I just wanted to kind of summarize just to recap. So the key takeaways here are that we are absorbing a full year of costs from our hiring activity in 'twenty. One this year and that's going to be a drag on margins this year.

But we're gonna see benefits from slower hiring in 2023.

Additionally, we're going to see benefits from margin and gross margin expansion and business solutions.

And that's really coming from efficiencies in hosting and just payments continuing to scale and additional revenue.

Yes exactly.

Okay.

Okay, So near let's move on to partners. Another another big growth area for US. So this has become a larger part of our business and I know that the team has spent a lot more time investing in this effort.

Why is partners the right direction for Wix, and how do you think it shapes the company over the next several years.

Sure absolutely.

We've you know we spent a decade basically of the investing.

Into a product and a brand around this easy to use affordable a platform that is serving at least you know at the beginning first and foremost the people we call south graders, the people who come to build a website and a business for themselves.

And you know over the years.

And as that business evolves and it's you know we do a very big and healthy business. We also figured out there. There's a lot of people who are coming to our platform, but they're actually using that as what we called partners. There. They are building websites for someone else, whether it's this but I've got independent designer or agency of any.

Kind of an even bigger companies.

And it was very evident for us a few years ago that this is another path of investment that will take us to the next level of grocery in our business because it's another segment of our business that he is probably at least as big as the one that we're serving.

74, awhile and probably even much larger.

So you know it requires an investment understanding how to expand that brand to also include what they're looking for which is more professional services than something that is that feature professional.

<unk>.

And we started making those those investments under the understanding that this can be another major driver for us.

In the years to come.

You know, we always know that he is going to be a multiyear effort in terms of both the perception into brand building.

And also on the product side.

But I think that first of all it's already paying off its growing on its own very very fast 41% year over year our recently.

If we look.

You look at the cohorts of the partners.

Versus the quarters the Susquehanna as does the bookings retention there is three times more than what you've seen on the south creators. That's that's that's that's big.

And actually one of the key things that I wouldn't want to try to do on Thursday on the analyst day, either to kind of separate and then give you more color on what is the difference between those two different.

Different segments of our business.

That's helpful. What you've met with investors a lot here in the last couple of months as we normally do well what do you think is most misunderstood right now bye.

By investors about this partners effort.

Well I think I think you know when we just started talking about partners.

Few years ago, I think are some of the investors thought that if theres going to be kind of an immediate result, where we knew that it's going to be a multiyear effort and and you know a lot of our product strategy was connected to that you know what.

We really think we scope, which was great for the sell scanners, but also was something that was very important for for the partners in order to be able to create websites that are more complex and cater for specific needs of specific clients editor X naturally which is our editing environment for professionals are the account management team that we built in New York and other.

To support.

To support the activity with the partner.

So we knew it's going to be it's going to be a longer thing I think that over the years Hum.

Let me just kind of a gap between what the investor communities understanding first of all is about the effort needed even though we did create some specifics things for for the partners.

The vast majority of our tech stack the vast majority of our of what do we do service both of the South creators and partners. So when you think about the investment when you think about our attention as a management and where our head is.

We don't have to really separate between completely different businesses, which are pulling from from different from a different angles.

I think there's also still a little bit to some misconception about understanding fully wireless market segment is so important.

And how are we going to keep on running.

The core healthy our vitamin business.

<unk> segment of the south graders versus the partners.

But I do believe that overtime as we started but starting to see more and more returns coming from partners that are theres going to be a convergence and alignment between what we see and why we were so excited about it and how investors think about it.

And we believe it is a big part of that that's what we can do on the first day is to try and really kind of tell the story of these two segments and give that cook and clarity to our investors and shareholders.

Okay, let's let's zoom back into the quarter here.

Obviously theres been some some uncertainty here in the first quarter as we've talked about.

Can you describe just right now our overall cohort behavior and what we're seeing.

Yeah absolutely.

Obviously, both the or and I wish I spoke about this kind of a reduced demand at the top of the funnel that we've seen.

And kind of the last few quarters, but when you look at the behavior itself once people come in once they're within uses within the cohort we see a very stable behavior, it's pretty.

Pretty much the same conversion rates. So we didn't have the same retention rates.

It's actually a bit of a higher.

Average revenue per subscriber.

And the overall I think.

Of all of the quarters together is still expected to generate almost <unk>.

$16 billion of revenue in the next 10 years.

Okay and just on court I mean, we spoke about this last quarter, but I think it's worth emphasizing again so <unk>.

Given the strength.

And the consistency in the cohort performance can you explain how the large cohorts from 2020 and early 2021 are impacting our growth now and through the end of this year and then how we lapped that in 2023, yes, absolutely. So so you have to kind of go back in time, a little bit and when.

Do you think about it you know sometime in Q2 of 2020, we started getting these let's call them. The Kobe cohorts the ones that came once our people started getting locked down in their houses and the demand for being transactional moving businesses online suddenly skyrocketed all at once.

And these cohorts were massive it's lasted throughout 2020 and into 2020 one.

And when you compare the size of those cohorts to the 2019. It was they were so much bigger they also by the way. They also behave in the bedroom I'm going to touch about it too because that'd be ever kind of outlasted the subsiding of coffee, but when you think about from a mathematical point of view you had these.

These massive amounts of subscriptions in a very large cohorts of $20 22, a 'twenty 2021 and they when they started to to renew going into 'twenty two.

The the rates were similar but the absolute numbers of cancellations were naturally higher.

And this is this is a behavior that is it makes perfect sense.

And it will kind of overlap for awhile and then Dennis will subside, it's affecting our net subscription, but we expect it not to last are for much longer and I think for US one of the exciting things that.

Induce coffee cohorts, we've seen a much higher intent towards.

Towards a business web site. So we've seen an adoption of higher price packages, which was the beans.

Our subscriptions, we have seen a higher GP V and better conversion and does that general behavior is even though the new cohorts are back to kind of more normalized sizes, we still seeing that kind of behavior, which we deem as a very good sign and obviously that delivers the value which continues.

And we will contribute to that $16 billion.

Of revenue over the next 10 years.

Okay, Great and lastly, before we wrap up our portion and open the call up I just wanted to circle back and get your view on <unk> commentary on on free cash flow.

And as you said, we're going to dive into this more on Thursday, but give us more insight into profitability and the way that you all are managing cash flow.

So as you said you were going to go much deeper into on Thursday, and I actually break apart the actual numbers. So it will be clearer, but says Peter is a pretty there is really a big margin business segment for us.

You know, it's highly profitable from a scale from a cash flow standpoint, which makes a lot of sense right.

And I think it's also important to remind everyone that.

We have managed weeks weeks towards being.

Being cash flow positive for a long time that.

We've been cash flow positive for seven years now we're going to be cash flow positive in 2022, and we have no intention of CIT.

What changes if that ever.

So we have this already one very big segment that is.

Operating and generating high margins.

And we have another segment, which is the partners, which is still operating at lower margins because of the more recent investments we didn't do it but we believe that those are going to also increase as we go into 'twenty three and beyond and then we're going to see a much stronger consolidated cash flow altogether.

And our plan on Thursday used to actually try and kind of a table those two segments separately.

Be very clear to understand.

Okay.

Emily let's go and take questions.

Thanks, Michelle you can open up for questions now.

Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.

Our first question comes from the line of Elizabeth quarter with Morgan Stanley . Your line is open. Please go ahead.

Hi, Thank you so much the question first I just wanted to.

Asked on the top of funnel engagement it sounds like the fiscal 'twenty to guide is more a function of being further through the year, but are you seeing an improvement in demand. So can you just add some color on what youre seeing in the top of funnel engagement, how it changed versus last year and any comments to April . Thank you.

Of course, I think that the.

So we started to see slowdown right into second in Q2 last year and that was it.

And then things started to stabilize and we mentioned that actually towards the end of day, we started to see slow improvement.

Obviously this year is anything less timber REIT with the war and the inflation and other factors we saw a small decrease.

But now I assume again consistent so we don't see a decrease receipt and your steady state.

We are in the way, we think about it these debt.

We don't know to predict when these internet slowdown.

Internet precession right.

We'll stop so we have knowing that we don't try to predict that.

We didn't assume that guidance, but I would say that we would assume that end of the war in Ukraine, and probably opening of China again to manufacturing and delivery.

Probably the big factors in that so assuming that does really well.

No change, we're going to see improvement, but until then we like to assume that it's just steady state.

Because this is about the data is showing us.

Great and then as a follow up I wanted to ask on the price increases can you provide any color on just the magnitude and when we can see it start to flow through the revenue impacts and just given it's the biggest change in 2019 can you just quickly walk through kind of what happened in June 2019 in regards to the magnitude and any impact on churn.

Thank you.

Sure Hey, Elizabeth it's so you know.

You mentioned back in 2019, I think is the last time, we did a significant price increase.

We actually as the price increases rolled over through the.

The renewals and subscription and it takes time to take full effect and in fact, we stopped it at the end at the beginning of 2020 because of.

Because when Covid started we felt uncomfortable with to continue with those quite a few pieces that being said we always are.

Continued and always do continue to test different prices and different geographies to understand exactly what the what is the.

Hum.

Dvds or prices are and what are what should be the best one.

The best price voice geography and.

Coming end of 'twenty, one coming towards 'twenty two it was very clear to us that it's you know it.

It's a good opportunity in terms of what we're seeing from our former test results.

To start testing again in a more major way and go into a price increase which we enacted in 'twenty to 'twenty. Two is currently in place and in.

In the U S and Europe , and we obviously will extend it to other geographies based on the result.

It's just going to rollout the impact I think in 'twenty 'twenty. Two is is not significant I think most of it is going to be felt.

Felt after.

And it just shows the tests show us that it creates a long term increase in cohort value and therefore, we'd do it.

Okay.

Got it thank you.

Thank you and our next question comes from the line of Ron Josey with Citi. Your line is open. Please go ahead.

Great. Thanks for taking the question guys, maybe I wanted to follow up a little bit more on top of funnel either side, but but focus on conversion and retention rates are I think he said were steady for the past year, but cancellation rates are rising can you help us just to provide some more information on those cancellation rates are they from newer subs.

Haps from lower <unk> subscribers any details on those cancellation rates would be helpful. And then just on on newer private pricing or newer packages from from newer subs a L. P. S continues to improve just can you help us understand or talk about more about what what packages are our newer subscribers adopting that's leading to higher revenue.

<unk> and revenue per subscriber looking forward just product adoption comments. Thank you.

Hi, Thank you and Ron I think we might've been unclear because we don't see cancellation rates rising we see it pretty much stable. The only difference we do see is that the inflow into the fund the right to the people that joined Wix.

It's actually not as high as we would expected beyond that conversion rate, it's pretty much. The same we do show an improvement toward more people are buying business packages, which is part of the reason for it.

And driving a L. P S higher.

But in the cancellation rate is very stable conversion is very stable.

The only difference that we see is actually how many people.

Try to be on the website are links okay. So this is what the and I'm sorry, if there was some misunderstanding for awhile, we communicated it.

In regards to driving a L. P S. We see that.

We have more people to try to build business ecommerce scheduling things that require a higher and higher subscription. So that's one side of it that I decided we of course, we have a payment as part of it drives obviously because it gives us.

Part of the revenues generated in the last part right is that we see more of the business solutions being consumed by customers, so payment Esa and Facebook ads.

And stuff like that so those are the reason for the Hyatt enbridge revenue per subscribers.

Got it thank you Jose.

Thank you and our next question comes from the line of Eke out ammonium with Wedbush. Your line is open. Please go ahead.

Good morning, guys.

Just one more on pricing we're getting.

Getting a decent amount of questions on this already this morning.

Just can you compare what are you doing now to what you did in 2019, a little bit more color.

In 2019, there were two phases one of them was.

Getting rid of your lowest priced tier and then I think in the second round your repackaging products.

This is more of a straight price increase are you doing anything similar to that at this time as well then you saw subs.

Net additions kind of slow as.

As you were doing that is that something you expect to happen. This time as well or is it different this time around.

Hey got it clear so in terms of what you were referring to in 19 actually.

The pathway, we removed the low priced package was backing 18 I think so it wasn't part of the 19 change the 19 change was a more straightforward.

Creasing price like you like you referred to and what we've done now is similar to that to 19 in terms of a effect on net additions yard there there will be some impact there always is because when you when you test pricing.

Basically you know that there will be some impact for people, who are very highly sensitive to the new to the new price and youre trying to balance it. So the overall financial impact will be positive or even significantly for positive towards you know between what you're losing on conversion to what's your gaming in terms of.

The higher price point manually, we only continue forward to be new prices, when we test and we see that that actually makes sense. So we will probably have some impact on net additions.

Okay. That's helpful. Thanks, and then not to front run Thursday too much on the free cash flow guidance, but.

Any more color you could share on the difference between the partner profitability and the DIY profitability.

In terms of magnitude or anything else. That's helpful for for investors and then understanding better revenue growth needs, the better better leverage and you're.

You're going to let the head count head count growth kind of rolled through.

What other cost areas or are there, maybe specifically on the marketing side.

That kind of build through from where we are today to the 20% margins. Thank you.

So with regard to the first part of the question well.

We are going to provide a lot of details on Thursday.

Talking about the different segments and the related costs and so on but you know I can tell you that the central creator is what you expect in term of our long term profitability from a SaaS business.

So we are going to show it on Thursday, I think that it will be very very clear.

With regard to the target of 20% free cash flow and in marketing expenses and so on so look of close win when you are done with the major build out expenses.

And if you start to see the leverage when you think that we're going to see every year that the growth of parcel is going to be a much higher than the growth in cost. So that will be deliver a you know a lot of leverage which will be resulted in a higher free cash flow, but it's mostly because of that.

Marketing is always access.

The P O y for the top line.

So, but most of the leverage is actually going to come from.

Mostly from from head count and also from infrastructure investment.

Thank you guys.

Thank you and our next question comes from the line of Trevor Young with Barclays. Your line is open. Please go ahead.

Great. Thanks.

I think you said that premium subs were up year on year in the quarter and two extra growth rate that peers. So would you just clarify whether premium subs were actually up Q on Q and then second question. The shareholder letter alludes to actions taken this year to improve gross margin and reduce opex could you expand upon that a little bit and are there any head count reductions.

And played it or not and if so what's the order of magnitude.

So the first thing is to the next job.

It's.

Okay.

We're net sub adds up sequentially.

Oh, yeah, yeah that that is it okay I missed that I thought you mean two times.

No. So yes. It is true I think that this is but why the reason that we're saying that we're seeing.

Steady state with small improvements.

This is the same.

I mean that I think.

Probably as a result that going back to the average of Internet growth is now slowing down and I think this is Jay.

Part of what we're experiencing now again today hard to tell what happened because most of these varieties outside of life Sciences.

The only reason we have some estimations, because we talk to customers or people that try to newsweek's.

And why I did mention is that we are close to two times the number of new net adds as to what next competitor right. So our next competitor.

Easy and website building right all of the categories, New SaaS website building.

Almost twice as fast so that was my main point there.

What was the second question I'm, sorry, I missed that.

Deborah.

Yes. The second question was just on the steps you've taken so far this year to improve gross margin and reduce opex just could you expand upon that a little bit.

Yeah sure. So look this year, we started obviously when we started to see the slowdown so we reacted.

Obviously some of the reaction is mostly you know.

One thing that we do a plan to do for a long term meaningful example, you know not hiring as much as we did.

Ask you, but that was always part of the play and we wouldnt cargo finish we'd be.

Most of the build out of the business, we're still going to higher there's no doubt about it but obviously it will not be at the same pace in the second thing is about a lot of.

Benefits that we see in infrastructure.

Chile, leading to a higher gross margin.

The thing is about payments scaling up so we feel also a bit of margins around it.

And obviously you know you have all the related costs.

Which you know when you have less demand.

The Internet now in terms of traffic.

Traffic. So by definition, you have less marketing cost as a result of that remember that it's always about the <unk>.

So obviously, we are reacting accordingly, according to that.

So everything together.

Hum.

We managed to reduce the operational cost quite a bit this year, meaning that despite of the headwinds that we see.

If we hit the high end of the range of what we provided we still going to be at around 5% of free cash flow this year.

Thank you.

Thank you and our next question comes from the line of Matt Pfau with William Blair. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my question wanted to ask on the top of funnel activity, obviously, an improvement in the macro would help out there, but anything you guys can do on your end or that you are contemplating to help out the top of the funnel activity and you know get that 50% of smbs that still arent.

On line two to move online.

Yes, so I think that the.

There are a lot of thing.

Can do and we're doing some of them.

First of all it's a lot about marketing and adjusting marketing to the right be it in the way the messaging should be done. So this is the fishing. The second thing is an and.

Cushing.

The availability of the product in different places in this semi workloads. So the more channels, we have and.

So vistaprint as one example, legalzoom is another one but also allowing us the market like we couldn't.

Do marketing for weeks or say shopping cart three years ago and now we can because we have a good product with going into marketing for weeks. If there's really good scheduling solution and now we can so those are the other ways that we can do in order to increase our <unk>.

S exposure of course, there's always a limit right because.

The market slowed down okay. It will effect no matter how good your AUM actually engaged an hour just oh.

I would tell you our wood product development that will be some effect of that but I think that I'm very confident that if we are in and use status quo.

The growth rate of the Internet, we stay consistent.

And then we'll still going to be able to achieve a much more aggressive goal in the next couple of years and we're going to show you and walk you through that in the analyst day, but a lot of it really just about the thing I mentioned smarter marketing expanding broad capabilities, which allow us to address new markets and channels a lot of the way to go up.

In your markets.

Okay.

Okay, Great and I wanted to follow up on Commerce.

As you pointed out you have exposure to a lot of different areas. There what are you seeing in the parts of your commerce business that are more.

Related to in person activities are you seeing an uptick there as that portion are performing better than that in the ecommerce segment that you pointed out.

Well, yes, some of them do some of them are still very slow trials is still very slow, but we do see that thing that venture back and were not there before they are still not where they should be so I think there's still a lot of room for improvement there and obviously commerce has slowed down dramatically I think we're pretty much in line to the average of what everybody's seen.

And the shopping cart.

Catering meetings and we're also seeing that starting to recover. So this is another exciting thing for us.

Call It one on one meetings.

Meetings weren't going down and now we're seeing.

Again going upward.

Great. Thanks, guys I appreciate it.

Sure.

Thank you and our next question comes from the line of Naveed Khan with insurance Securities. Your line is open. Please go ahead.

Yes, Thanks a lot.

So one question on payments, if I just run the math, but to Q1 it looks like your take rate sake.

One 4% blended.

And just curious how we should think about that.

That as we go through the year and then you've got a question I have is just on the on the current commentary which is the one that.

You already gave.

On the fourth quarter call you said, you expect growth to accelerate.

The rest of this year and even if I, if I sort of adjust for FX for second quarter.

Is that.

<unk>, just because payments has slowed.

Oh, just kind of going after them out there. Thank you.

It's me I'll take the first part of the question and then hand.

Handing over to Europe .

So in terms of payments and the take rate.

Yes.

Yes, you've seen that kind of increase but I think that going forward throughout the rest of the year.

I would say that the expectations are that it should be roughly flat.

Throughout the rest of the year.

Joe you want to yes, so with regard to the growth of.

The second half of the year.

So obviously, yes, I mean, we see we do see the impact of.

Those headwinds that we talk about and do you know.

Have a big impact on the second half of the year, but let's also bear in mind that most of the FX.

<unk> is actually in the second half of the year.

If we actually going to hit the high end of the range. So that the growth in the second half of the year is going to be actually higher than the first half of the year.

So this is something that we also need to take into consideration and obviously seasonality usually first half is better than the second half.

That said you know there is a lot of uncertainty.

Provided a very wide range Rover, usually we don't.

Well for about 3% I mean think about it it's up almost $50 million.

But that's just to reflect the uncertainty that we see but you know one of the other end we are halfway through the year. So it just makes sense to provide because of the way that we know right now.

But certainly there is a lot of impact of the headwinds over the second half will do.

Yeah.

Okay. Thank you.

Thank you and our last question comes from the line of Andrew Boone with JMP Securities. Your line is open. Please go ahead.

Hi, guys. Thanks for fitting me in can you talk a little bit about the linearity in the quarter for Europe , how big of an impact once Ukraine, Brazil, there and then secondly.

Legal zoom partnership sounds exciting can you talk about any holes that you feel like you have in terms of your partnership strategy in terms of distribution, where are you investing there and what can we expect in the future. Thanks so much.

Yeah.

So Europe impact are you know the euro impact from Ukraine, Youre talking about the impact from Ukraine, Russia, just Ukraine I'm not sure I understand the first question.

Broadly speaking as we think about <unk> and as we head into April and May.

Did you guys see a substantial slowdown in Europe , as we kind of got it got it.

Back half of February March and April like can you just help us size the impact of the war within that region.

That makes sense. So yes, definitely we see a slowdown in Europe I think that is very similar also to the U S. Even.

Even slower than the U S.

But yeah definitely we see us.

In Europe , but I'm not sure we can tied down to the war necessarily right I think it's.

It's hot in the way it also has an impact.

The impact on gas.

Yeah, well, we've seen a few impact so and of course.

This first one was that we have about almost 1000 people working on it Greg.

And we have to do a lot to help them and evaluate them from Ukraine, mostly to pull in and then.

The other thing of course, it did some slowdown to wasn't up and product delivery not massive because most of them I went back to work.

When they could show that is saying a lot on their mentality and the strength to do that we saw slowdown of course in Europe is inflation drove prices higher and.

And then sell them and so we saw that and the last thing was that effort.

<unk> right, which is oh.

Of course, when you sell in euros and you come to <unk>.

Profit dollars that they did.

Had an impact overall I think that if you look at the impact from the all of the warrants. So we added about 1% because we stopped business activity in Russia, So that was about 1%.

And then we had two more 2% support coming from FX for me and.

Kind of like it's a bit harder to estimate what happened in terms of acquiring new businesses, but I would say that each also but between half a percent what percentage came from direct effect of the demand in Europe because of the war.

Yeah.

Uh huh.

In terms of legal zoom.

Again, obviously, we're very excited about it.

It is.

As the Vistaprint deal is maturing into a into reality and we're starting to see the beginning of the jaffe coming from there obviously are striking another a very big deal with another fantastic company like legal zoom and something that we're very excited about.

And I think we are working and start to <unk>, how to continue bringing like.

Mike.

Kind of a big sized deals to the table, while continuing to by the way also closing out of smaller deals that there are less.

Get to the same level of.

I would say don't get the same.

Exposure is something as big as legal I think that in terms of the distribution, there's always things to improve obviously, but to be recovering. Many many areas. We are strengthening the team there all the time.

And I think that's also the response time and our ability to to really get deals done. He has improved significantly and now is really a timeline, but I'm very happy about.

So I think this is another a great area of our business that is that is growing and maturing.

Thank you.

Thank you. This does conclude today's question and answer session and I would like to turn the conference back over to the company for any further remarks.

Thank you. So just before we go I wanted to obviously, thank everyone for being with US today, and we would really really hope that you will also join US this coming Thursday.

I think it will be a great review in much detail of this plan, we're putting in place.

Better understanding of how we think about our business in terms of those at least the core to core segments of the south creators and partners and also the kind of the path for the 20% free cash flow margin that are here by 2025 that I.

I mentioned before I'd love to see you there and to talk some more about it. Thank you everyone.

This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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