Wednesday, June 11, 2014 Stock Still A Sell After Latest Quarterly Report

I've been following WIX since they went public not too long ago. If you are not too familiar with their business model, I write about it more here, and I'll give you a quick run-down now:

Basically anyone can setup a website using's "intuitive drag & drop" software. For free. If you don't mind your website domain being (and Wix ads running on your site), you can use Wix for free. The free service level is similar to what Google offers with Blogger and Yahoo offers with Tumblr.

If you want more advanced features for your website, like a regular .com name, no Wix branding/ads, a shopping cart for eCommerce, or the ability to host large files or photos - you are forced to pay Wix, in a similar fashion other hosting companies like GoDaddy, Hostgator, Rackspace and Amazon charge for server space. Essentially you pay for the space per month - so it's not a commitment that the average person needs.

Wix's primary way to make money, is by charging customers for website hosting and other website services. In essence, they offer a drag & drop website builder (that is proprietary) but only charge for it if you want features that other competitors offer as well. They have a goal of making the app store (more on that below) a meaningful contributor to earnings, but so far it's not.

Here are some key statistics from the latest quarter: (Source Of Data Q1`2014 PR)
- Bold Emphasis Added To Make Me Look Good

  • Registered Users: 46.2 Million - As of March 31, 2014
    45% YoY Increase + 4 Million added in quarter
  • Premium Subscription (Paying) Subscribers: 908,000
    65% YoY Increase + 118,000 added in quarter (record)
  • Q1 GAAP Net Loss: $14.9 Million

Three Months Ended
March 31,
Cost of revenue3,0155,240
Gross Profit12,50723,607
Operating expenses:
Research and development5,53411,966
Selling and marketing10,52622,178
General and administrative1,3413,960
Total operating expenses17,40138,104
Operating loss(4,894)(14,497)
Financial income, net26184
Other expenses --(3)
Loss before taxes on income(4,633)(14,416)
Taxes on income283501
Net loss(4,916)(14,917)
Basic and diluted net loss per share  $ (0.83) $ (0.40)
Basic and diluted weighted-average shares used to compute net loss per share  6,945,274 37,508,624

The company doubled R&D Expenses, Selling & Marketing Expenses and tripled General & Adminstrative expenses in the quarter but managed to increase revenue by roughly 46% too. That's the good news. Problem is, the loss for the quarter was roughly 1/2 of the revenue. (Loss was $14.9m and revenue was 28.8m). 

Year to date, WIX stock has fell off a cliff. The company was trying to let insiders sell even more shares into the public markets, but had to sheepishly take that plan off the table, after the stock price started to slide. 

I said I would talk more about the "app market" - where Wix allows 3rd parties (like Google) allow functionality to Wix users through "apps" similar to what Wordpress users know as plugins. WIX company brass has stated that they'd like the app market revenue to reach 10% of total revenues - but when pressed on it, they don't seem to have a plan in place to make that happen. Take a look at this recent exchange on the Q1 conference call:
Source: Seeking Alpha
Bold Added By Me

Mark Mahaney - RBC Capital Markets
And the last question on the app market and the path to that reaching 10% of revenue at some point. Can you help us think through when we could see that? It sounds like that’s becoming big enough to maybe already impact some level of the ARPU and I understand that there are other packages, broader packages that were purchased and if we think about the Wix app market is the standalone business, how far we away from are we from that being 10% of total revenue?
Avishai Abrahami - Co-Founder, CEO and Chairman
I just want to add to what Lior stated, currently our priority is to actually provide as many applications that we can for free and while we assume that what we actually see and prudent from the data is that when we provide the those applications we actually get more subscribers going to premium and subscriptions and so we actually utilize the app market to encourage and enhance our convergent and converting this to premier subscriber. So that’s currently the current strategy we are thinking so it's kind of hard to differentiate between what the percentage will came from in the app because we know there to create total conversion and -- but I think (inaudible) already a large contribution to the overall performance of the Wix for the app market.
So the App Market isn't going to generate revenues for this company with that strategy. and here's why the Wix "freemium" model doesn't work:

Most investors are familiar with the 'freemium' model by now. Zynga and other game makers use the model because games are addicting & in order to feed your addiction ... you need to pay to play at some point. Unless you live in the heart of Silicon Valley, you probably know many more friends who play games online or on their phone - and probably only a few friends with a blog or website they update regularly. The percentages drop even further when you talk about friends who pay for a website each month/year.

Building a website is not for everyone. While working on a website can become addictive, using WIX's free website option will likely suit the majority of users. Facebook (or LinkedIN) tends to be what the blog was in the early 2000's - so many potential WIX customers could just use those free options. The average person only needs a website when they get married, or have a passion they feel like posting more about. Paying even a nominal fee of $4.99/month isn't something the average person wants to commit to, not to mention domain name & renewal fees. Small businesses need websites - but most will shop around before committing to WIX long term, other are doing well enough to pay someone to do most of the work for them - or they have an existing employee handle it.

The WIX business model is going to face the same challenges the freemium video game makers have faced. If you're a video game maker and a game gets popular, you might be forced to add levels, or upgrades in order to keep the users engaged. More timeless games like Tetris, or one of my personal favorites 2048 - are essentially a code base that isn't developed on much .... but typically game makers are forced to come up with something new. WIX is going to have to scale it's customer service (and IT) department as the number of paying users increase. Given that WIX marketing strategy & software is targeted to the 'do-it-yourself' newbie ... the company is likely going to attract lots of customers who have questions about how things work. By the looks of things, WIX isn't handling customer service very well, and that will only hurt the brand as it attempts to scale the business into profitability. While the businesses are different, the freemium model always relies on the next 'big hit' and in WIX's case, converting members to paying customers which as we already discussed - is not something a large number of people need or want to pay for.

There are other ways for WIX to make money.

They do have a rather large user base. Who knows how many are duplicate accounts, or spammy/porn type webmasters who are just using WIX because it's free backlinks - either way, WIX can make money with the type of users they have access to.

  • They could offer to setup the site like competitor does. Or offer a 'premium' tier of support that is actually decent.
  • They could display 3rd party ads on the websites that don't pay a monthly fee. This could actually work in converting existing members into paying users too. Think about it - if I have a free website and the only ads that appear are ads ... what do I care? However, if my competitors, or ads I don't like start showing up, it might convert me into a paying customer for that reason alone.
  • They could e-mail blast customers with offers considering a good percentage are probably entrepreneurs of some sort. 
  • Personally, I think WIX gives you too much free use of their proprietary software - I would make the free service level very basic, and force more users to pay. 
  • Lastly, WIX could license it's software to other providers like GoDaddy or Hostgator in order to expand the WIX brand beyond it's own capabilities.

For now, it appears management is content with a strategy that is essentially this:
  • Run TV and media ads to attract customers (free or pay)
  • Invest in IT and give the software away for free
  • Hope people want to pay for something other than the WIX software (like a domain or shopping cart)
  • Otherwise you use WIX for free
It's not a very creative business model, and by the look of the balance sheet - it's not generating any profits for investors. Personally I would steer clear of this company until the dust settles even further on what the strategy will be going forward.. Additionally, further insider selling will happen as other realize this company is miles away from being profitable. 

Disclosure - I hold no position in WIX and have never traded the stock. I wanted to short it in March when it was trading in the $30's but since the stock was so new, the options were not liquid enough. I may short this company in the future, but have no plans to do so in the next 72 hours.

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