Q2 2022 Wix.Com Ltd Earnings Call

August 10, 2022

Yeah.

Ladies and gentlemen, thank you for standing by and walk through the Wix Q2, 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the especially the press star one on your phone I would now like to turn the call over to your host and when you live in Investor Relations that unless you may begin.

Thanks, and good morning, everyone.

Welcome to <unk> second quarter 2022 earnings call joining.

Joining me today to discuss our results are obviously other hanmi CEO and co founder Nir, Zohar, President and COO and New York's Shemesh our CFO .

During this call we may make forward looking statements and these statements are based on current expectations and assumptions. Please.

Please consider the risk factors included in our press release and most recent form 20-F that could cause our actual results to differ materially from these forward looking statements.

We do not undertake any obligation to update these forward looking statements.

In addition, we will comment on non-GAAP financial results and key operating metrics.

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.

<unk> dot with dotcom.

That I will turn the call over to Avi shy.

Thank you Emily and good morning, everyone.

Thank you for joining us today.

I wanted to start our call. This morning, with some comments about Q2.

And the highlight just some of the key points from our analyst and Investor day in May.

Neither will walk you through a few operational updates on our business.

And Leo when you wrap it up with the financial highlights and an update on guidance.

As you know Covid, obviously brought the massive surge of people and businesses for the Internet propelling our business beginning in early 2020, we were faster respond to the needs of our users helping them generate income.

Income was brought to a standstill.

As part of our exports to the high demand, we increased our hiring activity.

Now that we're post Covid. The addition of new users to the finals and came back to similar rates to 2019 levels and people are buying less on the internet and violence. Ultimately this is old and many of our users selling Louis Wichita RG PV.

This is not unique to us as many internet companies feel it.

So as the market continued to be volatile, which we obviously cannot control or predict we are increasing our focus on what we can control to achieve the profitability targets. We shared in the fees plan, we presented in May.

We committed to discipline and we are executing money.

So as we announced today, a $150 million cost savings plan to allow us to meet our profitability targets and accelerate gross margins and operating margins in 2023.

Even if market conditions remain unchanged.

Unchanged.

Nearly all walk you for more of those details now let's talk about a quarter. We are satisfied with how the fundamentals of our business remain strong in Q2.

<unk> revenue grew more than $345 million of 9% year over year about where we expected.

11% year over year on a constant currency basis.

Fundamental measure of our business performance remained very strong in fact.

Our average revenue per subscription is now 32% higher.

As of this quarter compared to Q2 2018. This is very positive.

Conversion and retention remained the same over this period. This tell us that users are finding much more value in our platform.

Our partners business also continued to perform well Glenn revenues, 31% year over year. This is on top of an incredible 87% year over year growth that we saw in the same quarter last year.

Transaction revenues grew 13% year over year, and we continue to see increased adoption of wix payment growing take rates.

Even with consumer spending slow here.

<unk>.

Continue to grow even more amazing is that since Q2 2019, our GPP has grown 360% which is incredible.

So even with the demand coming back to 2019 level.

Our key growth initiatives are producing strong results.

Stepping back I want to summarize some of what we shared at our analyst and Investor day, and expand more on our strategic strategy going forward.

Since the IPO, we have scale revenues from $80 million in 2013, nearly 17 times to one $3 billion over the last year was seven hundreds of millions of users across the globe.

Our focus on product innovation and development as well as marketing has been key driver of this growth.

The first stage of our growth was introducing an elegant simple website builder everyone anyone could use to create online.

Many of our innovation Dragon drove mobile designing AI design now.

Widespread across our competitors last month, we introduced a new wix editor.

Which I'm very proud of and.

And excited about the new Wix editor combine the best of our Wix editor and weeks Adi and.

And we will provide our user with an even better creation experience than before in addition, it will bring efficiency and increase velocity too.

Our product development.

This is the most significant update to our weak serotonin many years and we believe it will contribute significantly to increase conversion and user success online.

We have tens of millions of users and it was clear they wanted more so we moved into a second stage, which was an increased focus on businesses with.

We invested in what our users are telling us they want to manage and grow their business online over the last several years, we introduced many vertical.

Commerce application communication and marketing tools for businesses and payment capabilities to date, south creators business generate over $1 billion.

In annualized revenue.

<unk> is very profitable as we shared with you in may.

In fact, our self care business alone generate more revenues and is more profitable than the largest of our competitors.

Serving this end market.

We have now expanded into FID stage and that is addressing the online creation needs of partners professional creators agencies and enterprises. Our expansion has been informed by what we hear from our users.

We now have industry, leading infrastructure that deliver performance among the fastest in the industry robust security and high availability. We are now praise by partners for <unk>.

Ending SCO capabilities, we are massively approval commerce application to meet the needs of professional and agencies.

And we have available for application development and editor X, where advanced designing all of this development requires us to invest a significant amount of <unk>.

Resources and to not only R&D, but also on marketing to build and brand professionals. This expansion have grown our total addressable market significantly to eight times larger than it was in 2017 to over $200 billion today.

We believe it will scale up patent business to become profitable.

The museum is supported by a strong behavior and our partners cohorts, which grow bookings annually from three to four times. This first year within the first three years.

And the number of professional coming two weeks every day to continue to grow.

We shared our three years plan for achieving the scale and profitability and we are committed to it.

And despite the market volatility we are experiencing during this period I'm more excited about tweaks to date than I've ever been.

With that I wanted to add now to Neil.

Thank you Alicia.

I want to I want to start with a quick update on our cohorts and then talk more about the cost cutting measures we are taking.

As I mentioned.

Why do we see demand at the top of the funnel returning to 2019 levels.

Our core fundamentals continue to improve.

We continue to share with you the bookings of our Q1 user cohorts over the years as you can see on slide 12 of our earnings slide.

Our Q1 'twenty two cohort through the second quarter illustrates the strong performance.

This cohort is generated $40 million in bookings since it was created.

This figure is nearly as high as the Q1 'twenty cohort at $41 million.

Which benefited from increased online activity at the beginning of Covid and it's higher than the last peak pre Covid Q1 cohort from Q1, 19, which generated just over $38 million.

In bookings.

This growth is impressive for a couple of reasons.

With $6 1 million users. The Q1 'twenty two cohort will slightly smaller in size than either Q1, 19 or Q1 'twenty courts.

Kent.

The growth also demonstrates that conversion and retention are at the same high rate as before.

And just as importantly.

Average bookings per subscription is increasing this.

This means we are monetizing our cohorts better.

Users are selecting business package is much more.

And more are adopting business solutions products and services.

If you recall at the Analyst day, we showed you the cord segmented between south creators and partners.

This performance in the Q1 'twenty two court is a result of the strong growth and bookings retention, we're seeing in both the south creators and partners Corp.

It's also worth noting that we are in much less favorable FX environment today compared to 2019, because we report in U S dollars, but collect cash in local currencies around the world. Many of which are are at or near historic lows against the U S dollars.

Finally, I also want to point out that while our marketing spend for this Q1 'twenty two cohort was indeed higher than either Q1, 19 or Q1 'twenty. Our returns are very much in line with our goals as you can see on the chart, we shared on slide 13.

In our slide deck.

I now want to shift gears and talk about the measures. We are taking to continue working towards achieving the profitability targets, we set forth at our analyst day in May.

The roots of this plan actually began in Q4 of last year as you were making plans for 2022.

You recall, we saw lots of volatility and uncertainty and chosen not to provide guidance at that time for the year because of it.

We began thinking more carefully about developing more operational efficiency.

We reduced our hiring activity and took a closer look at what was working and what was not.

As an example, we decided then that we should discontinue marketing weeks answers as an external product.

Volatility continued throughout the year.

<unk> in Ukraine with <unk>.

Leasing energy prices high inflation and currency fluctuation.

Moving through Q2, we did not see improvements to the environment and recognize we need to take the next step in our plan to help us achieve our profitability targets.

We are now executing executing this next step of the plan and announcing a series of cost reduction actions.

They include right sizing, our employee base, which unfortunately means asking some people to leave.

We are also making significant reduction in hiring activities for the remainder of this year and next year.

As a result, we expect to realize approximately $150 million of annualized savings across our cost of revenue expenses operating expenses and capex.

These cost savings are not onetime in nature, and we will continue to benefit the company on an ongoing basis with 20% of the annualized savings being realized already in 2022.

Also we are not reducing any investments in user acquisition marketing that is adjusted by our Cri thresholds, which we have not changed.

We expect that these cost savings will allow our free cash flow margin in 2023 to be consistent with the range provided in our three year plan, even if market conditions remains it remains challenged.

It will also accelerate gross margin and operating margin expansion next year faster than we do get presented.

We continue to work to identify additional areas of predicted productivity improvements across our care marketing and R&D functions as well as opportunities to rationalize our real estate footprint.

These measures will allow us to increase our investments in our highest conviction growth opportunities and we expect to see free cash flow margin expansion in 2023 and beyond.

I want to also add that our leadership made some very difficult decisions during decisions during this process.

We've always been laser focused on the growth of <unk> and this will not change. These changes allow us to continue to grow with a greater emphasis on profitability that is needed.

We believe that these changes will make us stronger and prepare us for an even better future once the market stabilizes.

With that I would like to hand, it over to the audience.

Thanks Neil.

Before I discuss guidance for the rest of the year.

Like to highlight some of our second quarter results.

Even against the market dynamics I wish I had mentioned earlier revenue in the second quarter grew to over $345 million, representing 9% year over year growth in towards the top end of our guidance range provided in may.

Revenue growth was 11% year over year on a constant currency basis.

Total bookings grew 3% year over year to nearly 355 million.

Which was 7% year over year on a constant currency basis.

This was in line with our expectations.

The headwinds that impacted revenue, mostly unfavorable FX changes as well as the resetting of demand for online services and e-commerce to pre COVID-19 levels.

As an even larger impact on bookings.

FX decreased bookings by approximately $10 million compared to the year ago period.

Both revenue and bookings growth was driven by strong fundamentals and continued successful execution against our key growth initiatives.

In the second quarter, we saw conversion of new users to paid subscriptions continue at a stable rate Lps increase and retention remains strong.

Following the end of the quarter, we began to see early signs of improvement in top of the funnel trends and higher return on marketing dollars in July into August .

Our efforts to grow the partner business continue as planned with revenue increasing 31% year over year in the second quarter as the investments. We've made in recent years to begin to pay dividends and are driving momentum across agencies.

Xylem and developers across the professional ecosystem.

Transaction revenue also continued to grow despite equivalents growth largely refitting to the frequently trade lines.

Was up 13% year over year, driven by better monetization of payments as adoption of wix payments increased as well as the <unk> growth of 6% year over year to $2 6 billion as a result of our diverse e-commerce platform.

On the expense front this quarter, we focus on executing on the targets we shared in may during our analyst day.

Driven and driving leverage from the investments made over the past two years.

As the business scales.

non-GAAP total gross margin was up sequentially to 62, 5%.

As a business solution non-GAAP gross margin increased to.

23, 2% driven by improved margin in our payments business.

We continued to slow hiring and adjusted down our direct marketing investments by nearly 40% on a year over year basis.

To align with what we are seeing at the top of the funnel in order to stay within our <unk>.

As a result, non-GAAP operating margin improved compared to the prior year period.

Finally free cash flow, excluding capex associated with our headquarter build out was negative $6 million in the second quarter. This was lower than what we anticipated neutral primarily to the unfavorable FX changes, which decreased free cash.

LOE by approximately $10 million on a year over year basis.

Turning now to guidance for both Q3 and full year of 2022, we expect third quarter revenue to be 341 $345 million.

7% to 8% year over year growth.

We now expect full year revenue to grow between eight and 10% year over year.

This growth figures account for additional year over year FX headwinds, we experienced throughout two July and the assumption that 2022 is a year of continued volatility as demand resets pre COVID-19 levels.

Free cash flow margin for the full year is now expected to be at 2%, 3% of the FX headwinds have deepened since may but still remain within the target range, we laid out during our analyst day.

On a year over year constant currency basis, our free cash flow for the full you would've been 4% to 5% of revenue in 2022, as we discussed back in February .

Regarding the cost reduction plan that you spoke about we still expect to achieve the 2022 into 2023 free cash flow targets. We shared in may despite timing of macro economic recovery.

Of the $150 million of annualized savings.

About 25% will come from cost of revenue, mainly our care organization.

Which will produce about 200 basis points of gross margin improvement in 2023 compared to our three year plan.

We also anticipate to see gross margin improve in 2022, as we start to recognize savings related to care.

The other 75% will come mostly from head count driven operating expenses.

These do not include any plans to reduce our user acquisition marketing investments that we adjust to match.

ROI threshold, which we have not changed.

This margin improvement will primarily be seen in our partners business.

In times like this there are certain things we cannot control. So we are focusing on what we can control by executing on our strategic priorities, while sustainably improving our cost structure.

The action, we are taking and decisions we are making today will help us emerge as a stronger and more resilient company. Once we're on the other side of this uncertain macroeconomic times with that we're ready to take some questions.

Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile our Q&A roster.

Okay.

Our first question comes from Kenneth Wong with Oppenheimer. Your line is open.

Great Fantastic. Thanks for taking my question.

Obviously, I guess I wanted to maybe dig in on the return to normalization. When you look at the different pockets of your business where are you seeing the biggest impact here is that the self creators who are our commerce customers is that across <unk> agencies.

Any color there would be extremely helpful.

Of course, so I think the first thing we're seeing is that the <unk>.

When.

Went down right in the last couple of months I think this is happening that day.

Every company has seen and we've seen Amazon experiencing similar stuff.

So I think that was probably the biggest thing that we see now.

In terms of the serve creators I think that the inflation actually influenced more the formation of new innovation in people investing in their business and I think that has created some effect.

In fact, we're pretty much there in the <unk> back to a similar.

State of 2018, so the demand is similar to 2019 of course, our output is better.

And of course, we also have <unk> as a source of income when it comes to designers and agencies, we see less of an effect I think that because a lot of them have the constant flow of.

Customers and so we see less there.

And so I hope that this answers your question.

Yes, that's fantastic and then maybe just quickly.

As far as the GTD Downtick would you say that that is just because consumer spend has obviously eroded or is there any maybe longer term impact from having that softer.

Premium subscription funnel over the last three four quarters.

Any help in terms of what youre seeing as far as kind of win win that might bounce back would be great.

So yes, it is mainly through two.

Less consumers spend more than anything we're 100% from less consumer spending that's what we're seeing.

Okay perfect. Thank you guys.

Okay.

One moment for our next question.

Ladies and gentlemen, we ask that you limit yourself to one question and fair enough. So everybody has a chance to participate.

Our next question comes from Brent Thill with.

With Jefferies. Your line is open.

Thanks, when you think about the assumptions, you're making in the back half and into 'twenty. Three what are you, making in terms of the euro assumption that for the overall economy are you seeing things youre going to be stable. The charity improving how would you characterize your guide obviously with the cut numbers everyone's just trying to calibrate our you baked.

In more conservatism here or how are you thinking about the overall environment.

So basically what we assumed debt.

The headwinds that we experienced snowfall simply will continue we also.

Assuming that the FX.

Impact will also continue throughout the year.

And.

This is pretty much what we have assumed and obviously you know we are also conservative because of that.

We prefer to be very conservative on the guiding next year. So we can build us free cash flow in a smart way to achieve the goals that we set for ourselves.

Of course, if things get a bit more positive that would be great.

And yes, and this is the main reason why we wanted to take control over the costs.

And this is something that is really important to do right now.

Our numbers have been coming down. So just wanted to follow up are you assuming any more conservative view than historically, because the numbers have been coming down lower.

Im just curious are you baking in that extra layer of.

Conservative in that in that pipeline conversions.

Okay.

Yes, I mean, yes, I mean, you know what.

We look at where we started the beginning of the year and whats happened. So it just makes sense to be extra conservative on via assumption with regard to the second half of the year.

Okay great.

Great. Thanks.

One moment for our next question.

Our next question comes from Brad Erickson with RBC. Your line is open.

Yeah. Thanks, maybe just a follow on there what do you think is driving this improvement to the funnel trends you mentioned a couple of times in the letter I guess July and into August here is that maybe just a little touch of seasonality is there something maybe improving on the margin macro wise and then.

Kind of a follow on to Brian's question, maybe what's baked into your guidance here relative to the near term trends, you're calling out thanks.

Let me try and take the first two parts and then and then we'll answer this in the latter part.

I think that we have.

When we look at it we compare seasonality to seasonality. So it's not this seasonality thing.

We did of course, a lot of product improvement because we always do so somewhat can be contributed to that the other thing is that.

It does look some recovery in the macro of our users I want to emphasize that if you remember last year. We were the first which was the first to actually notice the decline in <unk>.

I think our customers are.

The acting faster than most to changes because they are small and very agile and so maybe that's what we're seeing now it's very early to say, we'll keep you guys updated but I think if I have to take a guess I would say that our customers starting to ask differently. Okay. Again, it's very early and that's why we don't want to declare anything there.

And say anything big about it but we are seeing some positive changes.

With regard to the guidance as Avishai mentioned, it's still too early to call. It a trend.

Further new subscriptions bookings over the last quarter and the half of the year, we will have very little impact on revenue as we all understand because we recognize revenue over time.

Also I think that it's important to mention that we do not yet see an increase in commerce activity, which has a big impact on our revenue.

Got it thanks.

One moment for our next question.

Our next question comes from Ron Josey with Citi. Your line is open.

Thanks for taking the questions maybe I wanted to ask a little bit about the $150 million of savings and specifically, maybe you can talk a little bit more where they're coming from I think we heard call center or some capex, but I guess the focus here is any impacts to product development overall.

I think we talked at the analyst day, just being in a good spot.

Cadence for new products, so any insights on how you feel about product development given the given the cuts here and then and then the next question is just about the new editor experience and then the New York City like development, Dave Thats happening in a few weeks give any insights on the rollout plans for the new editor and what you expect for this developer conference. Thanks, guys.

So I'll start with that.

A description of the $150 million and then you know.

You can talk about.

Any impact at all if we have an impact on future <unk> growth.

So as we mentioned about.

70% of our $150 million.

Is mostly related to headcount and subcontractor.

And this is mostly in our operating expenses.

And I think that this is go the same way for the 30%, meaning the 30% is about <unk>.

All kind of.

Mostly head count related.

Out of our cost of goods sold mostly in the care organization.

So in the end of the day, we're talking about general operating expenses and headcount related expenses and subcontractors.

And it has all effect, obviously, you know the $150 million.

Hey, Ron in terms of kind of the impact and how we think about the <unk>.

R&D as well as marketing by the way so.

I mean as I mentioned in my comments before our focus on delivering growth has not changed so when we made this plan and look at these efficiencies we made sure that we're not impacting that.

The key.

Drivers that are going to generate our future growth.

Again relating to R&D and also to acquisition marketing.

And we believe that the way we're doing this will actually allow us to continue growing but to have greater it just greater emphasis on the profitability and I think thats. Moreover.

It's an opportunity for us to become even even stronger than kind of our future growth once markets stabilize and return and we can return to faster growth.

In regards to your last question, which actually two question right. It's about <unk>. So I think a little too is for me a very exciting product. We took two things that were separate that we knew we're working very well the classic editor and Adi and combine them into one product. So this is actually making that it's a complete experience you can use the power of AI design.

In a regular direct without weeks classic editor, we did some a lot of additional improvements that make them periods I think really smooth.

So that is it.

Very exciting it will be saving <unk> and it will be serving agencies of course.

The event that we have in New York is.

It's aimed for agencies and adjust as it is the most professional agencies. They wanted to actually do custom development on top of Wix and.

Releasing a lot of new products and talking a lot about new things that we think will allow us to extend that line of business tremendously in the future.

It's going to be really interesting more than welcome to come.

Thanks, guys I appreciate it.

One moment for our next question.

Our next question comes from Deepak <unk> with Wolfe Research Your line is open.

Hey, guys. Thanks for taking the question. So can you unpack the second quarter bookings growth maybe just on the.

South Korea side between what you saw on the.

Fiber growth and pricing I know you had pricing tweaks uncertainty as early in the year curious how much that's contributing to bookings right now. Thank you so much.

The question was pricing tweaks uncertainty as early in the year curious how much that's contributing to bookings right now. Thank you so much.

The question was about the price increase and how it's affected bookings.

Was the question.

Yes, yes, just curious.

Growth in subscribers right now.

Right now.

Yeah.

So.

We.

<unk>.

First I will start with the price increase in the contribution to bookings.

So we had the positive impact this is why.

That was the reason why we've made those changes in terms of the pricing.

But it was not a significant want to bookings.

It does have.

A positive impact, but it's not significant.

With regard to the overall subscriptions.

So it has a negative impact although it is positive in terms of dollar value. So it's important to mention that.

Thank you one of them are for next question.

Our next question comes from Elizabeth Elizabeth ported with Morgan Stanley . Your line is open.

Hi, Thanks, so much.

Really encouraging to see that the cost discipline help offset those revenue headwinds and the reiteration of the free cash flow margin targets.

My question is around kind of the revenue that we should be looking towards to opine as well.

Free cash flow targets and margin targets.

And with bookings kind of growing 3% year over year in the revenue guidance, implying Q4 revenue growth was about high single digits year over year exiting the year.

And understanding macro is challenging how has the outlook for fiscal 'twenty three revenue growth of that 20 plus percent changed over the last few months and kind of walk us through any of the puts and takes between bnb contribution and pricing versus maybe a more challenging macro. Thank you.

Hmm.

So obviously the macro has been more difficult.

Very hard to predict.

In terms of the top line, but we are fully committed.

So the free cash flow targets that we provided back in may during the analyst day. So I think that time you know.

I'm happy to say that.

In any almost in any given.

Scenario it is hard to say if any given scenario, but even if we are looking at.

Overall economics that continues or the macroeconomic continue into 2020 three.

The same way as we've seen in 2022, we believe that we will be able to achieve the free cash flow targets.

That we have in our analyst day.

I want to add something here I think that this year, we've seen a massive effect on things like of course.

FX, we've seen much effect from Russia, we actually closing a lot of accounts, we've seen in the <unk>.

The size of course, and the royalty basis tremendous from the Covid.

This year end.

And I think that we doubt if you neutralize all of them do is prophage dealer would've achieved this year close to 20% growth I think that the combination of all those factors together in one ear had massive effectiveness. So next year again, it depends when we see FX or not we will see some recovery or not but I think that the one thing we can't as a key.

Company can commit them as free cash flow and doing that by having discipline on how we spend our money.

Yeah.

Sorry, I was muted this whole time, one moment for our next question.

Our last question comes from Mark Mahaney with Evercore ISI. Your line is open great. Thanks, two questions could you just again quantified that Ukraine, Russia impact two weeks as business both on the incremental cost associated with.

With that this year and then and then if there is.

The extent of the revenue impact and then secondly, I know somebody already asked about this improvement to the top of the funnel activity you talked about inch line early August was that.

The new Wix editor product was that part of that or do you think that was completely separate and getting back to what would have driven that improvement in the top of the funnel activity. Thank you.

So I think that if you look at the.

And in Russia, Ukraine, and Ward right has a lot of effect on us.

Part of it is that we closed accounts in Russia, right and then we've seen a much less growth from accounts in Ukraine.

So this is the first part I would assume that this is around 5 million to this.

The addition of zinc was cost of helping our employees in the bank. We had about we have about 1000 people.

Steve has done they are not most of them announcing you've got anymore, but that used to be at the beginning of the war in Ukraine led to relocate Dan we had to support them. So this is a lot of influencing it also have a lot of influence of product releases.

Because obviously when people are running from what to what they normally do and Thats working and I think now most of it is in a place that we are in control of the situation with managed to take most of them most of our employees to have.

Safe locations, and we're pretty much back to normal.

The Ukraine, and Russia or on us and the bigger effect I think amongst companies yet because we're in a sustainable business in Russia growing ending at Crane, and because we had a lot of employees anyway.

As part of your question second question, which was.

And why.

Wow.

We understand why do you think your July August improvement. So it's very hard for us to say as I mentioned before this one.

I wouldn't call it a trend yet but its very early however, when you look at the numbers, we're seeing that data.

<unk> last year, we're actually seeing growth in some key areas.

I believe that it might be a signal that the mood of our customers have changed.

And that actually creates a place.

When they are starting to innovate really invest into their businesses create new business as we add new innovation.

However, as I said.

It is a.

Very very.

Very young trend the editor of the new editor editor to zero was launched last week. So I don't think that that has contributed in fact, a lot of the strategy.

Happening before we released in your vision.

Okay. Thank you Alicia.

And I would now like to turn the call back over to the company for closing remarks.

Great. Thanks, Mark and everyone else for those question. That's all the time, we have for today. Thanks, everyone on the call for joining us today.

Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Okay.

Yeah.

Go ahead during Q&A, you can dial star one one.

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Ladies and gentlemen, thank you for standing by and walk through the Wix Q2, 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the especially the press star one on your phone I would now like to turn the call over to your host Emily Liu Investor Relations Analyst you may begin.

Thanks, and good morning, everyone welcome to <unk> second quarter 2022 earnings call joining.

Joining me today to discuss our results are obviously other hanmi CEO and co founder Nir Zohar President and COO.

In New York Shemesh, our CFO .

During this call we may make forward looking statements and these statements are based on current expectations and assumptions. Please.

Please consider the risk factors included in our press release and most recent form 20-F that could cause our actual results to differ materially from these forward looking statements.

We do not undertake any obligation to update these forward looking statements.

In addition, we will comment on non-GAAP financial results and key operating metrics.

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 web site investors <unk> Dot com.

That I will turn the call over to Avi shy.

Thank you Emily and good morning, everyone.

Thank you for joining us today.

I wanted to start our call. This morning, with some comments about Q2.

And the highlight just some of the key points from our analyst and Investor day in May.

Neil will walk you through a few operational updates on our business and Leo when you wrap it up with the financial highlights and an update on guidance.

As you know Covid, obviously brought the massive surge of people and businesses to the Internet propelling our business beginning in early 2020, we will have faster respond to the need of our users helping them generate income while the offline income was brought to a standstill.

As part of our exports to the high demand, we increased our hiring activity.

Now that we're post Covid. The addition of new users to the finals and came back to similar rates to 2019 levels and people are buying less on the internet and violence. Ultimately this result in many of our users selling Louis Wichita GPP.

This is not unique to us as many internet companies feel it.

So as the market continued to be volatile, which we obviously cannot control optics, we are increasing our focus on what we can control to achieve the profitability targets. We shared in the fees plan, we presented in May.

We committed to discipline and we are executing money.

So as we announced today, a $150 million cost savings plan to allow us to meet our profitability targets and accelerate gross margins and operating margins in 2023.

Even if market conditions remain unchanged.

Unchanged.

Nearly all will walk you through more of those details now let's talk about our quoted we're satisfied with how the fundamentals of our business remain strong in Q2.

Revenue grew more than $345 million of 9% year over year about where we expected.

11% year over year on a constant currency basis.

Fundamental measure of our business performance remained very strong in fact.

Our average revenue per subscription is now 32% higher.

As of this quarter compared to Q2 2019. This is a positive.

Conversion and retention remained the same over this period. This tell us that users are finding much more value in our platform.

Our partners business also continued to perform well Glenn revenues, 31% year over year. This is on top of an incredible 87% year over year growth that we saw in the same quarter last year.

Transaction revenues grew 13% year over year, and we continue to see increased adoption of wix payment growing up take rate.

Even with consumer spending slow here.

Our GPP.

Continue to grow even more amazing is that since Q2, 2019, <unk> drove 360% which is incredible.

So even with the demand coming back to 2019 level.

Our key growth initiatives are producing strong results.

Stepping back I want to summarize some of what we shared at our analyst and Investor day, and expand more on our strategic strategy going forward.

Since the IPO, we have scale revenues from $80 million in 2013, nearly 17 times to one $3 billion over the last year was seven hundreds of millions of users across the globe.

Our focus on product innovation and development. This was marketing as being key driver of this growth.

The first stage of our growth was introducing an elegant and simple website builders everyone anyone could use to create online.

Many of our innovation Dragon drove mobile design in AI design and widespread.

Widespread across our competitors last month, we introduced a new wix editor.

I'm very proud of and excited about the new Wix editor combine the best of Wix editor and weeks Adi.

And we will provide our user with an even better creation experience than before in addition, it will bring efficiency and increase velocity too.

Our product development.

This is the most significant update to our weeks editorial many years and we believe it will contribute significantly to increase conversion and user success online.

We have tens of millions of users and it was clear they wanted more so and moved into a second stage, which was an increased focus on businesses. We invested in what our users are telling us they want to manage and grow their business online.

Over the last several years, we introduced many vertical.

Commerce application communication and marketing tools for businesses and payment capabilities to gain sales creators business generates over $1 billion.

Annualized revenue.

And is very profitable as we shared with you in may.

In fact, our self care business alone generate more revenues and is more profitable than the largest of our competitors.

Serving the same market.

We now have industry, leading infrastructure that deliver performance among the fastest in the industry robust security and high availability. We are now praised by partners.

Standing SCO capabilities, we have massively approval commerce application to meet the needs of professional and agencies.

And we have available for application development and editor X. We advanced design needs. All of this development requires us to invest a significant amount of resources and to not only R&D, but also on marketing to build and run for professionals. This expansion of growing total addressable market significantly.

Two eight times larger than it was in 2017 to over $200 billion today.

We believe it will scale up part of the business to become profitable optimism is supported by a strong behavior in our partners' cohorts, which grow bookings annually from three to four times. This first year within the first three years.

And the number of professional coming two weeks every day to continue growth.

We shared our three years plan for achieving the scale and profitability and we are committed to it.

And despite the market volatility we are experiencing during this period I'm more excited about tweaks to date.

With that I wanted to add now to Neil.

Thank you Alicia.

I want to I want to start with a quick update on our cohorts and then talk more about the cost cutting measures we are taking.

As Avishai mentioned.

While we see demand at the top of the funnel returning to 2019 levels.

Our core fundamentals continuing to improve.

We continue to share with you the bookings of our Q1 user cohorts over the years as you can see on slide 12 of our earnings slide.

Our Q1 'twenty two cohort through the second quarter illustrates the strong performance.

This cohort is generated $40 million in bookings since it was created.

This figure is nearly as high as the Q1, 'twenty cohort at $41 million, which.

Which benefited from an increased online activity at the beginning of Covid and it's higher than the last peak pre Covid Q1 cohort from Q1 dollars 19, which generated just over $38 million in bookings.

This growth is impressive for a couple of reasons first with $6 1 million users. The Q1 'twenty two cohort will slightly smaller in size than either Q1, 19 or Q1 'twenty courts.

Second.

The growth also demonstrates that conversion and retention are at the same high rate as before.

And just as importantly.

Average bookings per subscription is increasing.

This means we are monetizing our cohorts better.

Users are selecting business package is much more.

And more are adopting business solutions products and services.

If you'll recall at the analyst day, we showed you the cord segmented between south creators and partners.

This performance in the Q1 'twenty two court is a result of the strong growth and bookings retention, we're seeing in both the south creators and partners Corp.

In our slide deck.

I now want to shift gears and talk about the measures. We are taking to continue working towards achieving the profitability targets, we set forth at our analyst day in May.

The roots of this plan actually began in Q4 of last year as we were making plans for 2022.

You recall, we saw lots of volatility and uncertainty and chosen not to provide guidance at that time for the year because of it.

We began thinking more carefully about developing more operational efficiency, we reduced our hiring activity and took a close look at what was working and what was not as an example, we decided then that we should discontinue marketing weeks answers as an external product.

Volatility continued throughout the year.

In Ukraine, with increasing energy prices high inflation and currency fluctuations.

Moving through Q2, we did not see improvements to the environment and recognize we need to take the next step in our plan to help us achieve our profitability targets. We are now executing executing this next step of the plan and announcing a series of cost reduction actions.

They include right sizing, our employee base, which unfortunately means asking some people to leave.

We are also making significant reduction in hiring activities for the remainder of this year and next year.

As a result, we expect to realize approximately $150 million of annualized savings across our cost of revenue expenses operating expenses and capex.

These cost savings are not onetime in nature and will continue to benefit the company on an ongoing basis with 20% of the annualized savings being realized already in 2022.

Also we are not reducing any investments in user acquisition marketing that is adjusted by our Cri thresholds, which we have not changed.

We expect that these cost savings will allow our free cash flow margin in 2023 to be consistent with the range provided in our three year plan, even if market conditions remains remained challenged.

It will also accelerate gross margin and operating margin expansion next year faster than we did we had presented.

We continue to work to identify additional areas of predicted productivity improvements across our care marketing and R&D functions as well as opportunities to rationalize our real estate footprint.

These measures will allow us to increase our investments in our highest conviction growth opportunities and we expect to see free cash flow margin expansion in 2023 and beyond.

I want to also add that our leadership made some very difficult decisions during decisions during this process.

We've always been laser focused on the growth of <unk> and this will not change. These changes allow us to continue to grow with a greater emphasis on profitability that is needed.

We believe that these changes will make us stronger and prepare us for an even better future once the market stabilizes.

With that I would like to hand, it over to the audience.

Thanks Neil.

Before I discuss guidance for the rest of the year.

Like to highlight some of our second quarter results.

Revenue growth was 11% year over year on a constant currency basis.

Total bookings grew 3% year over year to nearly 355 million.

Which was 7% year over year on a constant currency basis.

This was in line with our expectations.

The headwinds that impacted revenue, mostly unfavorable FX changes as well as the resetting of demand for online services and e-commerce to pre COVID-19 levels.

As an even larger impact on bookings.

FX decreased bookings by approximately $10 million compared to the year ago period.

Both revenue and bookings growth was driven by strong fundamentals and continued successful execution against our key growth initiatives.

In the second quarter, we saw conversion of new users to paid subscriptions continue at a stable rate arpus increase and retention remains strong.

Following the end of the quarter, we began to see early signs of improvement in top of the funnel trends and higher return on marketing dollars in July into August .

Our efforts to grow the parcel business continue as planned with revenue increasing 31% year over year in the second quarter as the investments. We've made in recent years to begin to pay dividends and are driving momentum across agencies.

Xylem and developers across the professional ecosystem.

Transaction revenue also continued to grow despite equivalents with growth largely refitting to the frequently trade lines.

Up 30% year over year, driven by better monetization of payments as adoption of wix payments increase as well as the GP growth of 6% year over year to $2 6 billion as a result of our diverse e-commerce platform.

On the expense front this quarter, we focused on executing on the targets we shared in may during our analyst day.

Driven and driving leverage from the investments made over the past two years.

As the business scales.

non-GAAP total gross margin was up sequentially to 62, 5%.

As business solutions non-GAAP gross margin increased to.

23, 2% driven by improved margin in our payments business.

We continued to slow hiring and adjusted down our direct marketing investments by nearly 40% on a year over year basis.

To align with what we are seeing at the top of the funnel in order to stay within our AOI growth.

As a result, non-GAAP operating margin improved compared to the prior year period.

Cash flow by approximately $10 million on a year over year basis.

Turning now to guidance for both Q3 and full year of 2022, we expect third quarter revenue to be $341 million to $345 million or 7% to 8% year over year growth. We now expect full year revenue to grow between eight and 10%.

Year over year.

This growth figures account for additional year over year FX headwinds, we experienced throughout two July .

And the assumption by 2022 is a year of continued volatility as demand resets pre COVID-19 levels.

Free cash flow margin for the full year is now expected to be at 2%, 3% of the FX headwinds.

<unk> since made but still remain within the target range, we laid out during our analyst day.

On a year over year constant currency basis, our free cash flow for the full you would've been 4% to 5% of revenue in 2022, as we discussed back in February .

Regarding the cost reduction plans that you spoke about we still expect to achieve the 2022 into 2023 free cash flow targets. We shared in may despite timing of macro economic recovery.

Of the $150 million of annualized savings.

25% will come from cost of revenue, mainly our care organization.

Which will produce about 200 basis point of gross margin improvement in 2023 compared to our three year plan.

We also anticipate to see gross margin improve in 2022, as we start to recognize savings related to care.

The other 75% will come mostly from head count driven operating expenses.

These do not include any plans to reduce our user acquisition marketing investments that we adjust to match.

Threshold, which we have not changed.

This margin improvement will primarily be seen in our partners business.

In times like this there are certain things we cannot control. So we are focusing on what we can control by executing on our strategic priorities, while sustainably improving our cost structure.

Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile the Q&A roster.

Okay.

Our first question comes from Kenneth Wong with Oppenheimer. Your line is open.

Great Fantastic. Thanks for taking my question.

Obviously, I guess I wanted to maybe dig in on the return to normalization. When you look at the different pockets of your business where are you seeing the biggest impact here that the self creators your commerce customer does that across key to be agencies.

Any color there would be extremely helpful.

Of course, so I think the first thing we're seeing is that the GP EV.

When.

Went down right in the last couple of months I think this is something that day.

Every company has seen and we've seen Amazon experiencing similar stop <unk> shop.

Shopify, So I think that was the.

Probably the bigger thing that we see now.

In terms of the serve creators I think that the inflation actually influence more the formation of an innovation in people investing in their business.

I think that has created some effect.

In fact, we're pretty much there in the <unk> back to a similar.

Yes.

State of 2018, so the demand is similar to 2019 of course, our output is better.

And of course now we also have <unk> as a source of income when it comes to designers.

Designers and agencies, we see less of an effect I think that because a lot of them have the constant flow of.

Customers and so we see less there.

And so I hope that this answers the question.

Yes, that's fantastic and then maybe just quickly.

As far as the GTD Downtick would you say that that is just because consumer spend has obviously eroded or is there any maybe longer term impact from having that softer.

Premium subscription funnel over the last three four quarters any any help in terms of what youre seeing as far as kind of win win that might bounce back would be great.

So yes, it is mainly due to.

Less consumers spend more than anything we're 100% formulary and consumer spending that's what we're seeing.

Okay perfect. Thank you guys.

One moment for our next question.

Ladies and gentlemen, we ask that you limit yourself to one question and fair enough. So everybody has a chance to participate.

Okay.

Yeah.

Our next question comes from Brent Thill with.

With Jefferies. Your line is open.

Yes.

Thanks.

You think about the assumptions, you're making in the back half and into 'twenty three.

Are you, making in terms of the euro assumption that for the overall economy are you seeing things youre going to be stable. The charity improving how would you characterize your guide obviously with the cut numbers everyone's just trying to calibrate are you baking in more conservatism here or how are you thinking about the overall environment.

So basically what we assumed debt.

Do you headwinds that we experienced snowfall simply will continue we also.

Assuming that the FX impact we will also continue throughout the year.

And.

This is pretty much what we have fueled and obviously you know we are also conservative because of that.

We prefer to be very conservative on the guiding next year. So we can build us free cash flow in a smart way to achieve the goal that we set for ourselves of course, if things get a bit more positive that'd be great.

And yet and this is the main reason why we wanted to take control over the costs.

And this is something that is really important to do right now.

Great.

Numbers have been coming down so just don't want to follow up are you assuming any more conservative view than historically, because the numbers have been coming down lower I'm. Just curious I was just curious are you baking in that extra layer of concerns.

Conservatism in that in that pipeline conversion.

Okay.

Yes, I mean, yes, I mean, you know when we look at where we started the beginning of the year and whats happened. So it just makes sense to be extra conservative Olympia assumption with regard to the second half of the year.

Okay great.

Great. Thanks.

One moment for our next question.

Our next question comes from Brad Erickson with RBC. Your line is open.

Yeah. Thanks, maybe just a follow on there what do you think is driving this improvement of the funnel trends you mentioned a couple of times in the letter I guess July and into August here is that maybe just a little touch of seasonality is there something maybe improving on the margin macro wise and then.

Kind of a follow on to Brian's question, maybe what's baked into your guidance here relative to the near term trends, you're calling out thanks.

Let me try and take the first two parts and then and then we'll answer this in the latter part.

I think that we have.

When we look at it will compare seasonality to seasonality. So it's not this seasonality thing.

We did of course, a lot of product improvement because we always do so somewhat can be contributed to that the other thing is that.

It does look some recovery in the macro of our users I want to emphasize that if you remember last year. We were the first which was the first to actually notice the decline and I think our customers are.

That can faster than most to changes because they are small and very agile and so maybe that's what we're seeing now.

Early to say, we will keep you guys updated but I think if I have to take a guess I would say that our customers are starting to ask differently. Okay. Again, it's very early and that's why we don't want to declare anything there and say anything big Nevada, but we are seeing some positive changes.

With regard to the guidance as Avishai mentioned, it's still too early to call. It a trend.

Further new subscriptions bookings over the last quarter and half of the year, we will have very little impact on revenue as we all understand because we recognize revenue over time.

Also I think that it's important to mention that we do not yet see an increase in commerce activity, which has a big impact on our revenue.

Got it thanks.

One moment for our next question.

Our next question comes from Ron Josey with Citi. Your line is open.

Thanks for taking the questions maybe I wanted to ask a little bit about the $150 million of savings and specifically, maybe you can talk a little bit more where they're coming from I think we heard call center, some capex, but I guess the focus here is any impacts to product development overall.

I think we talked at the analyst day, just being in a good spot of.

Cadence for new products, so any insights on how you feel about product development given the given the cuts here and then and then the next question is just about the new editor experience and then the New York City like development, Dave Thats happening in a few weeks just any insights on the rollout plans for the new editor and what you expect for this developer conference. Thanks, guys.

So I'll start with that.

A description of the $150 million.

Then you know you can talk about.

Any impact at all if we have an impact on future <unk> growth.

So as we mentioned about.

70% of our 150 million.

Is it mostly related to headcount and subcontractor.

And this is mostly in our operating expenses.

And I think that this is go the same way for the 30%, meaning the 30% is about <unk>.

All kind of.

Mostly head count related.

Out of our cost of goods sold mostly in the care organization.

So in the end of the day, we're talking about general operating expenses and headcount related expenses and subcontractors.

And it has all effect, obviously, you know the $150 million.

Hey, Ron in terms of kind of the impact and how we think about the <unk>.

R&D as well as marketing by the way so as I mean, as I mentioned in my comments before our focus on delivering growth has not changed so when we made this plan and look at these efficiencies we made sure that we're not impacting that.

The key.

Drivers that are going to generate our future growth.

Again relating to R&D and also to acquisition marketing.

And we believe that the way we're doing this will actually allow us to continue growing but to have greater it just greater emphasis on the profitability and I think thats. Moreover.

It's an opportunity for us to become even stronger in kind of our future growth once the market stabilizes and returns and we can return to faster growth.

In regards to your last question actually two questions right. So it's about <unk>. So I think a little too is for me a very exciting product. We took two things that were separate that when you are working very well the classic editor and Adi and combine them into one product. So this is actually making that it's a complete experience you can use the power of AI design.

In a regular direct without Wickes classic editor, we did some a lot of additional improvements that make the experience I think really smooth.

So that is.

Very exciting it will be saving sub theaters and it will be serving agencies of course the.

The event that we have in New York is.

It's aimed for agencies and not just as it is the most professional agencies. They wanted to actually do custom development on top of Wix and listing.

Releasing a lot of new products and talking a lot about new things.

That we think will allow us to extend that line of business tremendously in the future.

It's going to be really interesting more than welcome to come.

Thanks, guys I appreciate it.

One moment for our next question.

Our next question comes from Deepak <unk> with Wolfe Research Your line is open.

Hey, guys. Thanks for taking the question. So can you unpack the second quarter bookings growth maybe just on the.

South Korea side.

What you saw on the subscriber growth and pricing I know you had pricing tweaks uncertainty as early in the year curious how much that's contributing to bookings right now. Thank you so much.

The question was pricing tweaks uncertainty as early in the year curious how much that's contributing to bookings right now. Thank you so much.

The question was about the price increase and how it's affected bookings that was the question.

Yeah, just curious on growth in subscribers right now.

Right now.

Yeah.

So.

We.

First I will start with the price increase in the contribution to bookings.

So we had the positive impact this is why.

That was the reason why we've made those changes in terms of the pricing.

But it was another significant one two bookings meaning that have.

Positive impact, but it's not significant.

As regard to the overall subscriptions.

So it has a negative impact although it is positive in terms of dollar value. So it's important to mention that.

Thank you one of them before the next question.

Our next question comes from Elizabeth Elizabeth ported with Morgan Stanley . Your line is open.

Hi, Thanks, so much.

Really encouraging to see that the cost discipline help offset those revenue headwinds and the reiteration of the free cash flow margin targets.

My question is around kind of the revenue that we should be looking towards to apply this.

Free cash flow targets and margin targets.

And with bookings kind of growing 3% year over year in the revenue guidance, implying Q4 revenue growth was about high single digits year over year exiting the year.

And I understand the macro is challenging how has the outlook for fiscal 'twenty three revenue growth of that 20 plus percent changed over the last three months and kind of walk us through any of the puts and takes between bnb contribution and pricing versus maybe a more challenging macro. Thank you.

Hmm.

So obviously the macro has been more difficult.

Very hard to predict.

In terms of the top line, but we are fully committed.

So the free cash flow targets that we provided back in may during the analyst day. So I think that time you know.

I am happy to say that.

In any almost in any given.

Scenario it is hard to say if anything even scenario, but even if we are looking at.

Overall economics that continues or the macroeconomic continue into 2023.

The same way as we've seen in 2022, we believe that we will be able to achieve the free cash flow targets.

That we have in our analyst day.

I don't want to add something here I think that this year, we've seen a massive effect on things like of course.

FX, we've seen much effect from Russia, we actually closing a lot of accounts, we've seen in the <unk>.

The size of course, and royalty basis tremendous from the Covid and this year and.

And I think that without if you neutralize all of this will probably each delivered have achieved this year close to 20% growth I think that the combination of all those factors together in one ear and massive effectiveness. So next year again, it depends when we see FX or not we will see some recovery or not but I think that the one thing we can't as a cause.

Can commit to is free cash flow and doing that by having discipline on how we spend our money.

Okay.

Sorry, I was muted this whole time, one moment for our next question.

With that this year and then if there is.

The extent of the revenue impact and then secondly, I know somebody already asked about this improvement to the top of the funnel activity you talked about inch line early August was that.

The new Wix editor product was that part of that or do you think that was completely separate and getting back to what would have driven that improvement in the top of the funnel activity. Thank you.

So I think that if you look at the.

And in Russia, Ukraine, and Ward right has a lot of effect on us in the past.

Part of it is that we closed accounts in Russia, right and then we've seen much less growth from continued Greg.

So this is the first part and let's assume that this is on 5 million into this.

The addition of zinc was cost of helping our employees in the bank. We had about we have about 1000 people.

Steve has done they are not most of them announcing you've got anymore, but that used to be at the beginning of the war in Ukraine led to relocate them. We had to support them. So this is a lot of influencing it also have a lot of influence with product releases.

Safe locations and pretty much back to normal, but the Ukraine, and Russia or on us and the big effect I think amongst companies yet because we have a sustainable business in Russia, growing and integrate and because we had a lot of employees anyway.

As part of your question second question, which was.

And why.

We understand why do you think your July August improvement. So it's very hard for us to say as I mentioned before while we and I wouldn't call. It a trend yet but its very early however, when you look at the numbers, we're seeing that data and we compare them to last year, we're actually seeing growth in some key areas.

I believe that it might be a signal that the mood of our customers have changed.

And that actually creates a place.

They are starting to innovate really invest into their businesses and create new business as we add new innovation.

However, as I said.

It is.

Very young trend the editor of the New editor Eddie took two zero was launched last week. So I don't think that that has contributed in fact, a lot of the strain changes happening before we released in your vision.

Okay. Thank you Amit.

And I would now like to turn the call back over to the company for closing remarks.

Great. Thanks, Mark and everyone else for those question. That's all the time, we have for today. Thanks, everyone on the call for joining us today.

Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q2 2022 Wix.Com Ltd Earnings Call

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