Website design and e-commerce platform provider Wix.com (NASDAQ:WIX) reported results in line with analyst expectations in Q1 FY2022 quarter, with revenue up 13.6% year on year to $341.5 million. However, guidance for the next quarter was less impressive, coming in at $344 million at the midpoint, being 3.45% below analyst estimates. Wix made a GAAP loss of $227.2 million, down on its loss of $121.7 million, in the same quarter last year.
Wix (WIX) Q1 FY2022 Highlights:
- Revenue: $341.5 million vs analyst estimates of $340.4 million (small beat)
- EPS (non-GAAP): -$0.72 vs analyst estimates of -$0.61
- Revenue guidance for Q2 2022 is $344 million at the midpoint, below analyst estimates of $356.3 million
- Free cash flow was negative $33.5 million, down from positive free cash flow of $7.33 million in previous quarter
- Gross Margin (GAAP): 60.5%, down from 61.9% 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.
As you can see below, Wix's revenue growth has been strong over the last year, growing from quarterly revenue of $304.1 million, to $341.5 million.
This quarter, Wix's quarterly revenue was once again up 13.6% year on year. We can see that the company increased revenue by $13.2 million quarter on quarter. That's a solid improvement on the $7.54 million increase in Q4 2021, so shareholders should appreciate the re-acceleration of growth.
Guidance for the next quarter indicates Wix is expecting revenue to grow 8.72% year on year to $344 million, slowing down from the 34% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 15% over the next twelve months.
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 60.5% in Q1.
That means that for every $1 in revenue the company had $0.60 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 we would like to see it start improving.
Cash Is King
If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Wix burned through $33.5 million in Q1, with cash flow turning negative year on year.
Wix has burned through $20.2 million in cash over the last twelve months, resulting in a negative 1.54% free cash flow margin. This below average FCF margin is a result of Wix's need to invest in the business to continue penetrating its market.
Key Takeaways from Wix's Q1 Results
With a market capitalization of $4.05 billion Wix is among smaller companies, but its more than $386.6 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.
We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, it seems to us that this was a complicated quarter for Wix. The company currently trades at $65.4 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 solid, though we don't expect it to maintain historical growth rates. Unfortunately, its customer acquisition is less efficient than many comparable companies, and 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 2.7x, 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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