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Wix's (NASDAQ:WIX) Q3 Sales Top Estimates But Quarterly Guidance Narrowly Misses Estimates


Full Report / November 11, 2021
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Website design and e-commerce platform provider Wix.com (NASDAQ:WIX) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 26.2% year on year to $320.7 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $328.5 million at the midpoint, or 0.24% below analyst estimates. Wix made a GAAP profit of $16.6 million, improving on its loss of $56.8 million, in the same quarter last year.

Wix (WIX) Q3 FY2021 Highlights:

  • Revenue: $320.7 million vs analyst estimates of $315.1 million (1.77% beat)
  • EPS (non-GAAP): -$0.21 vs analyst estimates of -$0.41
  • Revenue guidance for Q4 2021 is $328.5 million at the midpoint, narrowly missing what analysts were expecting
  • Free cash flow was negative $14.7 million, down from positive free cash flow of $14.7 million in previous quarter
  • Gross Margin (GAAP): 61.8%, down from 68.5% same quarter last year

Founded in 2006 in Tel Aviv, Wix.com (NASDAQ:WIX) offers a free and easy to operate website building platform.

Brothers Avishai and Nadav Abrahami founded Wix.com with their friend Giora Kaplan. The founders wanted to build a website for a new start up, but were frustrated with how needlessly difficult it was to do that. At that time, Wix found a ready market because many businesses were building their first websites. Since then, millions have used Wix to build and manage the websites they need.

Today, businesses can use Wix.com to build just about any kind of website they need, whether it requires appointment scheduling, membership levels or even the sale of digital content like videos. Wix Business Solutions, which includes payment processing, gives Wix an opportunity to grow revenue as its customers grow revenue, by taking a small cut. Wix is essentially trying to become a one stop shop for businesses from hairdressers to hotels to set up their online presence.

Although the share of digital commerce is rising every year, the majority of the small and medium sized businesses have still not fully embraced it. Having a good looking, interactive website is becoming a must but most small and medium sized businesses don’t have expertise or resources to develop one from the scratch. That in effect drives demand for no-code website building platforms.

Because you can do so much with Wix.com, it could be said to compete with e-commerce companies like Shopify (NYSE:SHOP), as well as website building platforms like Squarespace, Wordpress and Webflow.

Sales Growth

As you can see below, Wix's revenue growth has been very strong over the last year, growing from quarterly revenue of $254.1 million, to $320.7 million.

Wix Total Revenue

This quarter, Wix's quarterly revenue was once again up a very solid 26.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.39 million in Q3, compared to $12.2 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 17.7% over the next twelve months, although estimates are likely to change post earnings.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Wix's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 61.8% in Q3.

Wix Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.61 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Key Takeaways from Wix's Q3 Results

With a market capitalization of $11.2 billion, more than $704.3 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

Wix delivered solid revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying more or less on target. The company is up 1.54% on the results and currently trades at $201.48 per share.

Is Now The Time?

When considering Wix, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Wix we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its ability to generate free cash flow avoids a dependency on capital markets, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Wix's price to sales ratio based on the next twelve months is 8.3x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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