Website design and e-commerce platform provider Wix.com (NASDAQ:WIX) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 7.79% year on year to $345.8 million. The company expects that next quarter's revenue would be around $351.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Wix made a GAAP loss of $47.3 million, down on its profit of $16.6 million, in the same quarter last year.
Wix (WIX) Q3 FY2022 Highlights:
- Revenue: $345.8 million vs analyst estimates of $343.4 million (small beat)
- EPS (non-GAAP): $0.06 vs analyst estimates of -$0.10 ($0.16 beat)
- Revenue guidance for Q4 2022 is $351.5 million at the midpoint, roughly in line with what analysts were expecting
- Free cash flow was negative $22.6 million, compared to negative free cash flow of $15.9 million in previous quarter
- Gross Margin (GAAP): 63%, up from 61.8% 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 two years, growing from quarterly revenue of $254.1 million in Q3 FY2020, to $345.8 million.
Wix's quarterly revenue was only up 7.79% year on year, which might disappoint some shareholders. But the growth did slow down compared to last quarter, as the revenue increased by just $581 thousand in Q3, compared to $3.62 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Wix is expecting revenue to grow 7.05% year on year to $351.5 million, slowing down from the 18% 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 9.25% 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 63% in Q3.
That means that for every $1 in revenue the company had $0.63 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Cash Is King
If you have followed 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 $22.6 million in Q3, increasing the cash burn by 159% year on year.
Wix has burned through $64.7 million in cash over the last twelve months, resulting in a negative 4.75% 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 Q3 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Wix’s balance sheet, but we note that with a market capitalization of $4.08 billion and more than $816.7 million in cash, the company has the capacity to continue to prioritise growth over profitability.
We enjoyed seeing Wix’s improve their gross margin materially this quarter. That feature of these results really stood out as a positive. On the other hand, revenue growth is slow these days and cash burn is increasing. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is down 0.73% in the premarket and currently trades at $69.01 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, 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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