WIX - Wix.com Q4 Earnings: Strong Traction On Accelerated Path To Profitability

Summary

• Wix.com has materially increased its cash from operations via cost reduction measures, which it has also increased ~33% from its previous baseline.
• As such, management has now made clear it is 2 years ahead of schedule and expects non-GAAP net income profitability for FY2023.
• This is credible due to the significantly improved FCF generation that the firm has put up, even though these numbers are decreased somewhat by temporary capital expenditures.
• WIX stock is up significantly pre-market and I think that the market is right, making it a buy.

Overview

Wix.com Ltd. (WIX) provides a suite of no-code tools for creating websites and embedding e-commerce capabilities such as payments. The company is a direct competitor of SquareSpace, and the two can be considered market leaders in low code/no code website creation. Wix allows its customers to build fully operational websites without knowing how to program, including the ‘full stack’ required for a live website: front end (what you see) and back end (the server infrastructure that actually stores and transmits data to users).

The company first conducted an initial public offering in Q4 2013 and has outperformed the NASDAQ Composite by a factor of 1.61x throughout that period. Generally, the stock maintains a high correlation with the tech-heavy NASDAQ index, but it notably saw a reversal in this pattern during 2022, wherein it sold off much more significantly than the NASDAQ along with the technology sector at large.

The company released its latest earnings report, covering Q4 2022 as well as the full fiscal year, today on February 22 ^nd 2023. This yielded a 13.81% uptick in pre-market trading as of this article, bringing the company’s shares to $92.04. This article will review the earnings report to see exactly what’s driving the appreciation as well as how the company is situated going forward.

Earnings Release

Wix released a confident earnings report that contains several important milestones for its business. The themes here are an accelerated path to profitability through cost-reduction measures as well as significantly improved cash flow generation. The firm significantly outperformed consensus on non-GAAP EPS while also posting marginally higher-than-consensus revenues for the quarter.

Wix successfully began to control its costs and generated record levels of cash from operations ($53.2M), handily reversing a trend towards cash inefficiency. The free cash flow figure here is somewhat lower, at $38.6M, due to the company allocating capital towards constructing a new HQ; of course we must keep in mind that this is not a structural cost and is expected to be completed by the end of 2023.

The firm was able to generate these improved levels of cash from operations through a successful implementation of its cost reduction plan, primarily centered around reducing headcount. The CEO made clear that the firm’s original cost savings plan of $150M yearly spend was now made even more lean, with $200-$215M in cost reduction to be achieved in 2023.

These decisions are now allowing for the firm to achieve milestones it had expected to achieve in 2025 sometime in 2023, which together represent the foundation for profitability. Management expects to now have positive non-GAAP net income for FY2023 while also achieving GAAP profitability in 2025. This represents a turning point for what has been a growth-focused and unprofitable company to date.

Another highlight here is Wix’s brand strength, evidenced by the company maintaining stable bookings even through a 50% reduction in acquisition marketing spend. While this appears to have brought it into the single digits as to revenue growth, the reduction is significant enough to make a difference for achieving profitability as per their timeline.

Looking at the results for the full year, we see that Wix still generated a significant net GAAP loss of -$424.9M. It's operations were cash-generative but FCF was also brought into the negatives here by capital expenditure. User registrations were up 10% YoY, a good number, but premium subscriptions were only up 2% - not a very good number. This will be an important metric to watch as the macroeconomic environment continues to evolve; Wix must ensure to capture customers even though the top of its customer acquisition funnel appears robust.

Conclusion

Overall I think that this is a strong showing for moving towards profitability and that management’s accelerated timeline is credible in this regard. Non-GAAP net earnings should swing into the positives in one or two quarters and consistently positive cash from operations should keep it there. While I would like to see double digit top-line growth, it speaks to the stickiness of the firm’s offering that they can still generate the same level of customer interest with the aforementioned reduced customer acquisition spend. This is the proper approach in the current macroeconomic environment.

An additional caveat here is the firm’s material share-based compensation expense, which was 17% of revenues ($231.2M) for FY2022 and expected to come in at 15% of revenues ($226.5M) for FY2023. Since the $300M share buyback program is more than 70% complete already, this will act as a dilution factor going forward for investors. At its current market capitalization of $4.75B, however, this share-based compensation expense will amount to a 4.8% dilution for investors over the following year. While this may crimp returns somewhat, I don’t think that it will make the difference between positive and negative price returns.

Taking all of this into consideration, I agree with the market movements that we are seeing and will call WIX stock a buy.

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