WIX (WIX: US) 2Q17 results:
Strong numbers expecting more, Reiterating Hold;
After a few consecutive quarters of beat & raise, 2Q was "just” an in-line quarter, resulting with negative share reaction on the afterhours (-8 %). Collections of $117.1m were modestly above the high end of the company’s prior guidance ($116-$117m), and revenues of $103.5m slightly beat market consensus ($102m). Management reaffirmed its guidance for 2017. We expect negative share reaction today as we believe WIX share price reflects higher expectations for the rest of the year. We note that we don’t believe this quarter changes anything in WIX thesis, though we will be following more closely on a few key metrics over the coming quarters.
Results summary:WIX reported revenues of $103.5m and collections of $117.1m, an increase of 51% and 44% y/y. Growth was driven primarily by the U.S market and Europe, and by continued adoption of vertical offerings (the company noted on the call that ~30% of new subs now purchase vertical offering vs ~15% two years ago). Free cash flow for 2Q17 was $17.4m (+71% y/y).
Management reaffirmed its May guidance for revenues in the range of $421-$423m (+45.5% y/y at mid-point), Non-GAAP free cash flow of $67-$68m and Collections of $473-$477m (+38.5% y/y at mid-point). For 3Q17 management guided revenues in the range of $109m-$110m roughly in line with the street estimate (+47.5% y/y at mid-point), and collections in the range of $117m-$118m (+43% y/y growth at mid-point). Consistent with the end of 1Q, fully diluted share count is expected to be 57-58m shares. We note that the guidance implies collections growth will decelerate to 30% y/y in 4Q17 vs 46% in 4Q16.
Valuation and Rating:We maintain our $78 PT which is based on 7x EV/Non-GAAP revenues 2018E (collections). This multiple reflects a premium of ~20% to peers (SAAS companies) which we believe is appropriate, given WIX strong performance and its unique and innovative product offering. We also reaffirm our Hold rating as we believe large part of its future growth is already priced into the shares and following yesterday’s results and the launch of WIX Code (which supported the recent positive momentum), we don’t see for now near term catalysts for further multiple expansion.
WIX Code: Two days prior to the earnings release the company unveiled its new product WIX Code (in beta) – a new platform for web developers that will allow to easily build advanced web pages with complex functionalities such as dynamic pages, database connectivity, and application forms. The new platform aims to enter WIX into a whole new fragmented market which is currently dominated by open source technologies. Though WIX Code is probably not going to impact 2017 results (and its pricing is still not known), we believe it has a huge potential going forward.
Second quarter highlights:
- Subscriptions Add – WIX added 192k premium subscribers in 2Q compared to 208k in 1Q17 and 183k in 2Q16 making it WIX’s second highest quarter ever. We would like to remind that 1Q is traditionally the strongest quarter in terms of seasonality, and we didn’t expect subscription adds in 2Q to exceed the record number of 1Q17. However, 2Q adds reflect only ~5% increase y/y due to tough comps (+22% in 1Q) and brings the total number of premium subscribers to 2.9m (+35% y/y).
- Strong cohort retention – in 2Q 37% of new subscriptions were from users registered in the current quarter (vs 41% in 1Q17), while 63% came from prior quarter user cohorts, demonstrating continued cohort retention behavior. Registered users grew by ~5.5 million users to 109m total at the end of the quarter (+24% y/y). Collections per new annual sub in the U.S was consistent with 1Q17 and reflects an increase of 8% y/y (vs 11% y/y in 1Q17).
- Operational performance– Non-GAAP S&M expenses were 39% of collections, ~400 basis point lower y/y. Management reaffirmed sales and marketing spending of 40% to 41% of collections for the full year 2017, (vs 44% in 2016). R&D in the quarter was 25% of collections vs. 26% in 2Q16. The strong leverage resulted with free cash flow of $17.4m, (+71% y/y). As of June, the company has a net cash balance of ~185m.
- Annual vs monthly subscriptions - Annual (or longer) subscriptions accounted for 67% of new subscriptions (65% in 1Q17). Of the total subscription base, 82% are annual, consistent with 1Q17.
Main risks – Slowdown in subscriptions adds, increased S&M spending in order to add registered users and convert them to subscriptions (such as heavy promotional discounts), increased competition and currency fluctuations.
Full report attached!
Dafna Yagur | Head of Research (Israel)
Makor Capital
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