Website design and e-commerce platform provider Wix.com (NASDAQ:WIX) reported Q3 FY2023 results beating Wall Street analysts' expectations, with revenue up 13.9% year on year to $393.8 million. The company also expects next quarter's revenue to be around $402.5 million, in line with analysts' estimates. Turning to EPS, Wix made a non-GAAP profit of $1.10 per share, improving from its profit of $0.06 per share in the same quarter last year.
Wix (WIX) Q3 FY2023 Highlights:
- Revenue: $393.8 million vs analyst estimates of $389.7 million (1.1% beat)
- EPS (non-GAAP): $1.10 vs analyst estimates of $0.71 (55.7% beat)
- Revenue Guidance for Q4 2023 is $402.5 million at the midpoint, above analyst estimates of $399.3 million
- Free Cash Flow of $44.77 million, up 39.9% from the previous quarter
- Gross Margin (GAAP): 67.2%, up from 63% in the 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.
E-commerce Software
While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.
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 unremarkable over the last two years, growing from $320.8 million in Q3 FY2021 to $393.8 million this quarter.
This quarter, Wix's quarterly revenue was once again up 13.9% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $3.86 million in Q3 compared to $7.95 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Wix is expecting revenue to grow 13.4% year on year to $402.5 million, improving on the 8.1% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 11.1% over the next 12 months before the earnings results announcement.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 67.2% in Q3.
That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, sales and marketing, and general administrative overhead. Despite trending up over the last year, Wix's gross margin is poor for a SaaS business. We have no doubt that shareholders would like to see its improvements continue.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Wix's free cash flow came in at $44.77 million in Q3, turning positive over the last year.
Wix has generated $140.4 million in free cash flow over the last 12 months, a solid 9.2% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from Wix's Q3 Results
Sporting a market capitalization of $5.14 billion, Wix is among smaller companies, but its more than $504.8 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
It was an impressive "beat and raise" quarter. It was encouraging to see Wix slightly beat analysts' revenue guidance expectations. The company raised the full year revenue guidance which also came in ahead of Consensus estimates. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 2.8% after reporting and currently trades at $92.39 per share.
Is Now The Time?
When considering an investment in Wix, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of Wix, we'll be cheering from the sidelines. Its revenue growth has been weak over the last two years, and analysts expect growth to deteriorate from here. And while its strong free cash flow generation gives it re-investment options, 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 12 months is 3.1x, 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, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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