Wix (NASDAQ: WIX) recently held its investor day where it shared its plans for the future and the competitive landscape surrounding its business.
Here are some of the highlights from its presentation.
Software as a service (SaaS) content management solutions winning market share
In the early days of the Internet, coding was the only way to set up a website. This is time-consuming and requires technical know-how.
The second phase of the Internet saw the emergence of content management solutions (CMS-es), such as wordpress.org and Magneto. If you started a blog before, you might be familiar with such tools. In fact, The Good Investors blog – what you’re reading now – is made using wordpress.org. It is an easy solution and requires minimal coding skills.
However, wordpress.org still has its limitations as users still have to source for their own website hosts and use multiple plugins for different functions. All of which are time-consuming and require some education on our part. It is also a little challenging to build more complex websites, such as e-commerce sites, on legacy CMS platforms.
That is why full-stack SaaS CMS-es such as Wix and Shopify are becoming increasingly popular.
A SaaS CMS provides out-of-the-box solutions for hosting, security, deliverability, and performance. It also allows designers to easily input different functionalities such as online bookings, e-commerce, and payments etc.
In the last 10 years, the number of websites built using SaaS CMS-es such as Wix has grown 20X.
SaaS CMS sites now contribute nearly 10% of all websites globally, compared to only 0.5% a decade ago.
And there’s still plenty of market share that SaaS CMS providers can win over, especially when you consider that companies such as Wix and Shopify (NYSE: SHOP) are developing technologies that can seamlessly help businesses switch from their legacy CMS to a SaaS CMS.
Self Creators business already profitable
Wix’s business can be broken down into two main customer groups: (1) Self Creators and (2) Partners.
Self Creators are customers with whom Wix has a direct relationship. They go on the Wix.com website and build their websites by themselves. Partners are agencies or professional website builders that help their clients build a website using Wix’s solutions.
Wix started its business targeting mainly self creators who needed a simple website for their small businesses. Today, the Self Creators segment is already a highly profitable business, with a 20% free cash flow margin in 2021.
The Self Creators segment is also already a scaled business that generated US$1 billion in revenue in 2021. Wix expects this segment to grow by 5% to 8% this year after accounting for macroeconomic challenges. But management’s target for the segment over the next few years after this year is annual growth in the high-teens percentage range. Management also expects the segment’s free cash flow margin to improve to the mid-twenties percentage range in three years, and to around 30% in the longer term.
Partners segment growing faster than the Self Creators segment
The Partners segment is a fairly new business, and accounts for just 21% of Wix’s overall revenue.
However, the segment is growing fast. Partners build websites for their clients every year, which generates consistent subscription revenue for Wix. As such, partners generate more Wix revenue each year as long as they keep building and maintaining more clients’ websites. The two charts below illustrate this dynamic.
The chart on the left shows yearly booking retention for annual Self Creators cohorts each year. The lines are roughly flat which indicates that these cohorts spend roughly the same amount on Wix products year after year. The chart on the right shows the same information for Partners. The lines go up each year, which suggests that each cohort of Partners brings in more revenue for Wix over time. This demonstrates that Wix’s relationships with Partners are much more valuable over the long term due to the growth in bookings over time.
As such, Wix expects the Partners segment to grow faster than the Self Creators segment. Not only will existing Partners cohorts contribute more over time, but Wix is also spending heavily on marketing to win new partners each year. The table below shows the business profile of the Partners segment and management’s long-term projections for it.
In 2021, revenue for the Partners segment grew a whopping 75% from 2020. However, the unit economics was still poor as expenses were relatively high. But with scale, Wix expects the Partners segment to reach a free cash flow margin in the range of 30%.
Long term projections
Wix also provided its long-term targets for the overall company when combining both the Self Creators and Partners segments.
As a whole, management expects revenue to grow by around 10% this year and around 20% in the next few years with a long term free cash flow margin target of 30%.
What I’m watching
From what I’ve seen, Wix’s management is confident in the company delivering high free cash flow in the future. When you put the numbers together, management is targeting to around US$500 million in free cash flow by 2025.
If Wix can achieve that, its market capitalisation, which sits around US$3.5 billion at the moment, will likely be much higher by then.
However, there’s one thing I’m monitoring: The number of shares that the company is awarding to employees. This could significantly dilute investors.
Wix’s weighted average diluted share count rose from 35 million in the first quarter of 2015 to 57 million in the first quarter of 2022. This a 63% increase. Some of the increase was due to the issuance of convertible bonds, but most of it was because of stocks awarded to employees.
With Wix’s stock price falling to a multi-year low in recent times, the number of shares the company issues for employee compensation could increase. To attract talent, Wix may also need to offer pay packages that include more shares to make up for the fall in its stock price. This could potentially lead to an acceleration in dilution.
With a large untapped addressable market, best-in-class software, and a growing partnership business, Wix is well placed for long-term revenue growth and operating leverage. And with its market cap at just US$3.5 billion and the potential for US$500 million in free cash flow in three years, we could easily see double-digit compounded annualised growth in its market cap.
However, the amount of dilution could potentially dilute returns for shareholders. Although I think Wix’s long-term return looks very promising for shareholders, I’ll be keeping an eye on that weighted average diluted share count number.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia owns shares of Wix and Shopify.