Website design and e-commerce platform provider Wix.com (NASDAQ:WIX) announced better-than-expected results in Q2 FY2023, with revenue up 13% year on year to $390 million. Guidance for next quarter's revenue was also better than expected $388.5 million at the midpoint, 1.03% above analysts' estimates. Wix made a GAAP profit of $33.6 million, improving from its loss of $111.2 million in the same quarter last year.
Wix (WIX) Q2 FY2023 Highlights:
- Revenue: $390 million vs analyst estimates of $382.6 million (1.92% beat)
- EPS (non-GAAP): $1.26 vs analyst estimates of $0.60 (111% beat)
- Revenue Guidance for Q3 2023 is $388.5 million at the midpoint, above analyst estimates of $384.5 million
- The company lifted revenue guidance for the full year from $1.53 billion to $1.55 billion at the midpoint, a 1.17% increase
- Free Cash Flow of $32 million, up 27.9% from the previous quarter
- Gross Margin (GAAP): 67.2%, up from 61% 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.
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 steady over the last two years, growing from $316.4 million in Q2 FY2021 to $390 million this quarter.
This quarter, Wix's quarterly revenue was once again up 13% year on year. However, its growth did slow down a little compared to last quarter as the company increased revenue by $15.9 million in Q2 compared to $19 million in Q1 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 12.3% year on year to $388.5 million, improving on the 7.8% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 10.3% over the next 12 months.
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 Q2.
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. While its gross margin has improved significantly since the previous quarter, Wix's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.
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 $32 million in Q2, turning positive over the last year.
Wix has generated $73 million in free cash flow over the last 12 months, a decent 4.81% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.
Key Takeaways from Wix's Q2 Results
Sporting a market capitalization of $5.03 billion, Wix is among smaller companies, but its more than $468 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 great to see Wix improve its gross margin this quarter. We were also happy that its revenue growth outperformed Wall Street's expectations, even if just narrowly. Overall, this quarter's results seemed fairly positive and shareholders should feel optimistic. The stock is up 2.86% after reporting and currently trades at $91.03 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. And while its ability to generate free cash flow avoids a dependency on capital markets, unfortunately 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 3.4x, 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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